Community Spouse Owned Annuities are no longer available resources for Medicaid Purposes

In a decision on April 20, 2010 out of the Western District of the Missouri Court of Appeals, the appellate court reversed the trial court and barred the Missouri State Family Support Division from counting a community spouse's ownership of a commercial annuity as an "available resource" to disqualify an institutionalized spouse from Medicaid assistance. The court found that treating a community spouse's income stream from a commercial annuity as an available resource which denied coverage for the institutionalized spouse for Medicaid assistance was a violation of federal Medicaid law.

Creditor Protection Benefit of the Stand Alone IRA Beneficiary Trust

In a recent bankruptcy court decision out of the Eastern District of Texas (In re: Chilton) the court found that an inherited IRA is not the equivalent to an IRA for purposes of determining whether the account contains “retirement funds” that may be exempted from the bankruptcy estate under U.S.C. §522(d)(12).

Courts have listed several reasons for distinguishing an inherited IRA from an IRA which allows the creditors to reach the inherited IRA assets:

• The state exemption was for retirement benefits to be available to the retired person, not a child who was still earning a living;
  
• The beneficiary of an inherited IRA has an unrestricted right to withdrawal of the IRA at any time without any penalties;
  
• And, the IRA is significantly different than an inherited IRA under the Internal Revenue Code.

The Chilton case highlights the dangers of relying on the bankruptcy code to provide protection for an inherited retirement accounts. To obtain solid asset protection we recommend that retirement plans be payable to a Stand Alone IRA Beneficiary Trust that is drafted to qualify as a designated beneficiary under Internal Revenue Code Section 401(a)(9) and that contains spendthrift language. The incremental cost of creating a Stand Alone IRA beneficiary trust is more than offset by the benefit of protecting the inherited IRA assets during the lifetime of the beneficiary from creditors, predators and spouses.

Patient Protection and Affordable Care Act (H.R. 3590)

On March 23, 210 President Obama signed into law sweeping and historical health care reform legislation, H.R. 3590, the Patient Protection and Affordable Care Act. Lawmakers are debating H.R. 4872, the Health Care and Education Reconciliation Act of 2010, a reconciliation bill that would amend H.R. 3590. The House passed H.R. 4872 on March 21, 2010 and the Senate must take up the measure.

H.R. 3590 as a stand alone measure provides the following:

• For group health plans and individual health insurance coverage: prohibition from establishing unreasonable annual limits or lifetime limits; restricts rescissions; requires minimum coverage for preventive health services; continues dependent coverage until age 26.
• Creates exchanges for purchasing health insurance coverage.
  Establishes a refundable tax credit to provide premium assistance for coverage under a qualified health plan.
• Provides businesses with a tax credit for the premium cost of health insurance coverage.
• Requires individuals to maintain minimum essential coverage or be subject to a penalty.
• Requires automatic enrollment for employees of large employers.
• Imposes a 40% excise tax on health coverage above certain dollar amounts.
• Raises the HI tax on wages and self-employment income in excess of $200,000 ($250,000 for joint filers) by 0.9%.
• Imposes annual fees on manufacturers and importers of branded drugs, manufacturers and importers of certain medical devices, and health insurance providers.
• Raises the Adjusted Gross Income ("AGI") floor for deducting medical expenses from 7.5% to 10% (7.5% remains in effect for individuals over 65 and their spouses through 2016).
• Implements a $500,000 deduction limitation on taxable year remuneration to officers, employees, directors, and service providers of covered health insurance providers.
• Requires employer W-2 reporting of the value of health benefits.
• Increases the penalty for nonqualified health savings account distributions from 10% to 20%.
• Limits health flexible spending arrangements in cafeteria plans to $2,500 (indexed for inflation after 2011).
• Requires information reporting on payments to corporations.
• Imposes additional requirements for Sec. 501(c)(3) hospitals.
• Conforms the definition of medical expenses for HSAs, Archer MSAs, health FSAs, and HRAs to the definition of the itemized deduction for medical expenses (excludes over-the-counter medications, except if prescribed by a physician).
• Imposes a 10% excise tax on indoor tanning services.
• Makes the adoption credit refundable; increases the qualifying expense threshold; and extends the credit through 2011.

Meanwhile 13 state attorneys general have filed a lawsuit challenging the constitutionality of the Act. A copy of the complaint is here. It appears the judicial branch will get a chance to weigh in on this legislation.

Estate Planning is a Loving Act

There is no question that estate planning understandably takes an emotional toll on clients. In addition to facing the emotionally charged issues associated with handling money, clients must face their own mortality. Clients may also have to come to grips with strained family relationships, and address how best to provide for the future well being of children or other loved ones. Often, clients "gag and choke" with the gut-wrenching choices that surround the estate planning process. Fear of planning often leads to the paralysis of analysis.

A Loving Act

We believe that estate planning can be a proactive, positive influence. Planning for loved ones is a loving act. It really boils down to "Do you want to determine where your money goes; or, do you want the government (in its infinite wisdom) to do that for you?" We handled an estate of a woman who wrote a will and left everything to her two brothers and sister. Unfortunately, all of her siblings predeceased her without leaving any surviving descendants. When she passed away, she left a sizable estate to unknown cousins who lived in eastern Europe with whom she had very little, if any, contact. These sorts of scenarios do not have to happen. However, statistics tell us that 7 out of 10 Americans will never get around to making an estate plan before they die.

Our Approach

We strive to make your estate planning a life affirming experience. We believe that when a client shares his or her hopes, dreams and goals with us, we can create a plan that will design a legacy which reflects the client's values for years to come. When clients capture the vision of creating something that will survive them, it can actually be "fun"!

A number of years ago a married couple with no children came to me to plan their estate. They were in a serious quandary as to what to do with their wealth. We discussed the idea of establishing a plan that would reflect the values that they supported. They ended up leaving their estate to a series of charitable institutions. One of those institutions was the Ronald McDonald House. I suggested that they allow me to initially contact the various charities on an anonymous basis to let them know that they had been named as a beneficiary. At first, the couple was reluctant. However, after considering our advice , they allowed me to put them in touch with the various charitable entities. The staff at the Ronald McDonald House invited our clients to spend a day touring their facility and visiting with families staying at the house. Not long thereafter the wife passed away. Her husband contacted me after her death to thank me. He told me that the one of the best days of their life together was the day they spent touring the Ronald McDonald House. He was so appreciative that we had helped them to create an enduring legacy for them with their estate plan. The husband has since passed away and now a number of charities have substantially benefited from this couple's estate plan.

An Alternative Approach

We do not profess to have all the answers and solutions. Sometimes bringing in other professionals can help families dealing with some of the emotional problems. We can work with licensed marriage and family therapists who can provide additional family services to assist in dealing with family issues in a legacy context. Often, coming up with a family financial philosophy, something akin to a Family Mission Statement, can create a guide for the making of estate planning suggestions.

Procrastination

The problem for most Americans when it comes to doing an estate plan is the "P" word. The "P" word does not stand for "Probate"; but,for "Procrastination". Most people think that Estate Planning is always something that one will get around to tomorrow. It is never urgent....until something happens.

According to a recent survey by Lawyers.com, the number of Americans with some type of estate planning document has dropped from 64% in 2007 to 51% in 2009. I have heard of other surveys that suggest that fewer than 30% of Americans have properly drafted and funded estate plans in place. I suspect that in these rough economic times, people are simply testing fate to put off the expense of creating their estate plan. What people do not understand is that a good estate plan helps one avoid probate and saves significant wealth for the benefit of one's family. A good estate should have the ability to benefit the beneficiaries many times over the cost of the initial plan. For example, while the cost of a will is rather inexpensive up front, the cost of administering a will through the Probate process [all wills go through probate] can be as much as 6-8% of the value of the entire estate. While one is alive, a will is meaningless. A will only speaks at the date of death. If one becomes incapacitated and a guardian or conservator has to be appointed while one is still living, the annual cost of such probate administration can be literally thousands of dollars. A simple living trust can avoid both the cost of disability probate and death probate.

We often get calls like "Mom is in the intensive care unit having just suffered a stroke. Can you do her estate plan now?" The answer is: NO. The time to do one's planning is long before the crisis of disability or death. If you are loved one has not effectuated an estate plan, do something about it today. Do not procrastinate! It is not a question of "if" you will need this. The only question is "when" you will need it.

A Suggestion for Congress

There is a lot of talk these days about "bipartisanship" in Congress. Perhaps Congress needs to find some baby steps for the concept of putting the American taxpayer ahead of politics. Here is a suggestion for our legislators. Since we are waiting on a new Tax bill to straighten out the debacle of the repeal of the Estate Tax and Generation Skipping Transfer Tax, fix the imposition of the new "Modified Carryover Basis" tax regime that became effective on January 1, 2010. These new income tax rules dealing with basis are a nightmare for the heirs of those who have lost loved ones after January 1 of this year. Assuming the new tax bill will take a while to work out, at least spare those who were unlucky enough to die in this calendar year from the headache of trying to figure out all the new modified carryover basis rules. Surely both sides of the aisle can agree that the imposition of these taxes at this time are patently unfair. A simple bill to repeal the modified Carryover basis rules should be a slam dunk to sail through the House and Senate.

Estate Tax Battle Resumes

Secretary of the Treasury, Timothy Geithner, and the Senate Finance Charmian, Max Baucus agree on one thing. Both want to extend the 2009 estate tax rate and exemption amount to 2010 and make it retroactive to January 1, 2010. In the 2011 budget released Feb. 1 by President Obama, the administration is backing the legislation passed by the House last December to repeal the repeal of the Estate Tax in 2010. Too bad nobody has explained to them the due process clause of the Constitution has been interpreted such that the tax code in effect as of the date of a person's death is the law that is to be imposed. Anyone who has a relative who has died in 2010 and who inherited amounts in excess of the proposed $3.5M exemption may wish to contest such retroactive application of any new estate tax law.

Some insiders suggest that the estate tax bill could be linked to the proposed jobs bill being submitted to boost the economy. All we can say is "stay tuned". The final chapter in this area has not yet been written.