Emergency Planning for Seniors: Simple to Do, Critical in a Crisis

What if a crisis should strike an elderly person living alone, or a senior couple who lives in their own home? No one likes to think that it will happen, but inevitably it does, says WRAL in a useful article titled “Having an emergency plan critical for safety and health of seniors.” It’s good to stay calm—and it’s even better to stay calm and quickly access the information and resources that could make the difference between life and death.

Sounds dramatic, but it’s true.

Why should you know how you’ll react in a crisis? The best way, say aging experts, is to think about the situation and the different parts in advance. Knowledge is power, and nowhere is this truer than in emergency situations.

Start by discussing health concerns with your doctor. When should you call the office, and when should you call 911? What is a normal ache or pain, and what kind of pain or sudden change signals an emergency?

If you are not sure what you or a loved one is feeling, call 911. There’s no need to hesitate because you’re not sure about whether it’s an emergency. Dispatchers are trained to identify emergencies and they can assess the situation quickly, even if you can’t.

One thing we should all have, regardless of our age, is a printed-out list of medications, diagnoses, names and phone numbers of medical providers and family contact information. This should be kept in a place where emergency responders and family members will have access to it quickly. EMS workers may not have time to review your medicine chest or a stack of bottles on the night table, but they will need to know what medications you are taking. A list—and one that you keep current—could save your life.

As a crisis unfolds, another list becomes important: documents from your estate plan. That includes your general power of attorney, health care power of attorney, and DNR (Do Not Resuscitate, if that is appropriate in your situation). The health care power of attorney will cover any health care decisions that arise, and the general power of attorney will cover financial, business and personal decisions.

Copies of these designations should be kept easily at hand at home. Make sure to tell the people you have appointed that you have done so, and what the expectations are for them.

Plans for what happens after the emergency has passed the crisis stage should be discussed, also preferably in advance. If the emergency was a fall or the senior is no longer capable of living independently, there may need to be changes made to the senior’s living situation. Rather than being forced to make a fast decision about a new living situation after an emergency, devote time to touring independent or assisted living communities to make a transition to a new home easier, than doing so in haste.

Identifying possible future living arrangements in advance also provides the opportunity to make the necessary financial arrangements. The hope is to prevent the senior from feeling like they’ve abruptly gone from the comfort and familiarity of their own home to a new and unwelcoming environment with no advance notice.

Preparing for a crisis in the short and long term may require some difficult conversations, but with the right care and planning, it may make life easier and more pleasant for the senior and the family.

Reference: WRAL (Jan. 2, 2019) “Having an emergency plan critical for safety and health of seniors”

 

Thinking about Giving It All Away? Here’s What You Need to Know

There are some individuals who just aren’t interested in handing down their assets to the next generation when they die. Perhaps their children are so successful, they don’t need an inheritance. Or, according to the article “Giving your money away when you die: 10 questions to ask” from MarketWatch, they may be more interested in the kind of impact they can have on the lives of others.

If you haven’t thought about charitable giving or estate planning, these 10 questions should prompt some thought and discussion with family members:

Should you give money away now? Don’t give away money or assets you’ll need to pay your living expenses, unless you have what you need for retirement and any bumps that may come up along the way. There are no limits to the gifts you can make to a charity.

Do you have the right beneficiaries listed on retirement accounts and life insurance policies? If you want these assets to go to the right person or place, make sure the beneficiary names are correct. Note that there are rules, usually from the financial institution, about who can be a beneficiary—some require it be a person and do not permit the beneficiary to be an organization.

Who do you want making end-of-life decisions, and how much intervention do you want to prolong your life? A health care power of attorney and living will are used to express these wishes. Without these documents, your family may not know what you want. Healthcare providers won’t know and will have to make decisions based on law, and not your wishes.

Do you have a will? Many Americans do not, and it creates stress, adds costs and creates real problems for their family members. Make an appointment with an estate planning attorney to put your wishes into a will.

Are you worried about federal estate taxes? Unless you are in the 1%, your chances of having to pay federal taxes are slim to none. However, if your will was created to address federal estate taxes from back in the days when it was a problem, you may have a strategy that no longer works. This is another reason to meet with your estate planning attorney.

Does your state have estate or inheritance taxes? This is more likely to be where your heirs need to come up with the money to pay taxes on your estate. A local estate planning attorney will be able to help you make a plan, so that your heirs will have the resources to pay these costs.

Should you keep your Roth IRA for an heir? Leaving a Roth IRA for an heir, could be a generous bequest. You may also want to encourage your heirs to start and fund Roth IRAs of their own, if they have earned income. Even small sums, over time, can grow to significant wealth.

Are you giving money to reputable charities? Make sure the organizations you are supporting, while you are alive or through your will, are using resources correctly. Good online sources include GuideStar.org or CharityNavigator.org.

Could you save more on taxes? Donating appreciated assets might help lower your taxes. Donating part or all your annual Required Minimum Distributions (RMDs) can do the same, as long as you are over 70½ years old.

Does your family know what your wishes are? To avoid any turmoil when you pass, talk with family members about what you want to happen when you are gone. Make sure they know where your estate planning documents are and what you want in the way of end-of-life care. Having a conversation about your legacy and what your hopes and dreams are for family members, can be eye-opening for the younger members of the family and give you some deep satisfaction.

Reference: MarketWatch (Oct. 30, 2018) “Giving your money away when you die: 10 questions to ask”

 

Stay in Control: Good LLC Governance

The LLC is a popular way to structure a business because it provides personal liability protection to the members– like a corporation does to its shareholders–but without as many administrative formalities. But if you’re an LLC member, don’t let this lull you into complacency.

As a business owner, you’re responsible for the proper governance of the LLC.  If a conflict arises—either among LLC members or between the LLC and a third party—the governing documents and methods through which the owners govern the LLC may help prevent a conflict from escalating into litigation. Even if a dispute reaches court and you are unable to control the outcome, you can ensure that the LLC presents clear evidence of its intent and purpose by practicing good governance.

Good LLC governance hinges on four key practices:

  1. Practice good recordkeeping.
    Document key business decisions.
    -Store records in a secure and fireproof location.
    -Provide members with access to records as required by the LLC’s operating agreement.
    -Keep the list of members and their ownership interests current.
    -Keep the LLC records organized. 
  2. Don’t commingle LLC and member assets.
    Keep all member and LLC assets completely separate. The initial contributions that members make to the LLC and any later contributions made after a capital call should be clearly documented as such.
    -Make sure any loans to the LLC—and the repayment terms—are clearly documented.
    -All distributions and any advancements to members should be documented as such.
    -Members who are also employees of the LLC should receive a paycheck from the LLC payroll account like any other employee would.
  3. Follow the operating agreement.
    Do what you say you’re going to do. Your LLC should have an operating agreement even if your state’s LLC statutes don’t require one.  A well-drafted operating agreement provides a written record of owner expectations in terms of LLC structure and ownership, as well as business, operations.  The agreement is an essential tool for keeping the peace among LLC owners and restoring the peace if a disagreement arises.  And, if a dispute arises between the LLC and a third party, the operating agreement may become evidence the fact finder considers to resolve the dispute.
  1. Amend the operating agreement if the LLC is acting inconsistently with it.
    -If the LLC ends up in court and the intent of the LLC or its members is at issue, the fact finder will look at three main factors to make a determination: the LLC documents (the articles of formation filed with the state, the buy-sell agreement, if any, and the operating agreement), and the actions of the LLC and its members. 
    When the actions of the members and of the LLC are in sync with the governing documents, a court is more likely to find an intent that corresponds to the original intent of the members when they formed the LLC.  But when the operating agreement says one thing and the LLC or its members behave differently, intent is wide open for interpretation.  If that happens, a court may place greater weight on the actions of the members or LLC and make findings of fact vastly different from what is found in the LLC documents, resulting in a potentially disastrous outcome.

 Practicing good governance of the LLC helps make the intent and purpose of the LLC clear to its members and to outside parties.  And, if a conflict goes to court, good governance provides the judge or jury with a clear picture of what the members intended for the LLC.

We work closely with business owners to create and implement forward-thinking business-planning strategies.  We anticipate what can go wrong and counsel our clients on how to best maintain their businesses so that they are well prepared to weather any storm.

If you are interested in learning how we can assist you and your family with business planning, please contact Legacy Law Firm, P.C. at (605) 275-5665 to schedule a free consultation today!

 

 

Impact of Tax Reform on Small Businesses

Now that it’s tax season, you may be concerned how the Tax Cuts and Jobs Act, enacted in December 2017, will impact your small business. The reforms represent the most sweeping tax overhaul in 30 years and could have a positive impact on your business’s bottom line—but they may have left you feeling a little confused. Here are some of the most important changes.

Qualified Business Income Deduction

Under the new tax law, many owners of pass-through businesses, such as sole proprietorships, partnerships, and S corporations, may deduct up to 20% of their qualified business income. This new deduction—known as the qualified business income deduction or Section 199A deduction—can be claimed by eligible taxpayers on their 2018 federal income tax returns, lowering their taxable income. One notable exception is that married owners of service-based businesses like accounting firms or doctors’ offices, can only claim the deduction if they have an annual income below $315,000 ($157,500 for single business owners). This deduction replaces the domestic production activities deduction, which allowed business owners to write off 9% of income derived from qualified domestic manufacturing and production.

Lower Corporate Tax Rate

The centerpiece of the new tax law is the reduction of the corporate tax rate from a top rate of 35% to a flat rate of 21%, a substantial cut for many businesses structured as C corporations. However, because the reforms eliminated the 15% rate on the first $50,000 of taxable income, some small C corporations could end up with a bigger tax bill. For example, a C corporation with $50,000 of taxable income that would have owed $7500 under the prior law will owe $10,500 when it files its 2018 federal tax return.

100 Percent Expensing for Qualifying Business Assets

Businesses can now write off the entire cost of most depreciable business assets in the year the business places them in service, resulting in reduced current income tax liability. This break generally applies to depreciable assets with lives of 20 years or less–items such as, machinery, computers, and furniture. This part of the tax reform law is temporary, lasting until 2022 and then phasing out over several years.

Increased Depreciation Allowances for Vehicles

Businesses that purchased new or used vehicles after September 27, 2017 and placed them into service in 2018 can claim an increased maximum allowance of $10,000 for Year 1 or $18,000 if first-year bonus depreciation is claimed.  For year two, the cap is $16,000 and for year three, $9600. For year 4 and all subsequent years until the vehicle is fully depreciated, the cap is $5760. For 2019 and beyond, the allowances will be indexed for inflation. In addition, for qualified new and used heavy SUVs, pickup trucks and vans purchased for the business, 100% of the cost can be written off, a significant improvement over the prior law.

Family Paid-Leave Credit

Under the new law, certain eligible employers who provide paid family and medical leave to their employees during the 2018 and 2019 tax years may qualify for a new business tax credit. To be eligible, employers must comply with a laundry-list of conditions, including having a written policy, providing at least two weeks of leave, and paying at least 50% of the wages normally paid to the employee. The credit is equal to 12.5% of the amount of wages paid during the employee’s time of leave. However, a larger credit is available for employers that pay over half the employee’s normal wages while they are on leave.

Some Deductions Eliminated or Reduced

Although many of the reforms result in tax savings for small businesses, some, like the elimination or reduction of certain deductions, could have a negative impact on their tax bills. Although there are many changes, here are some of the most impactful.

  • The tax write-off for business-related entertainment expenses was eliminated in the new tax law. However, business owners can continue to deduct 50% of the cost of business meals if certain conditions are met, and the cost of holiday parties can still be fully deducted.
  • Qualified transportation. Under the new tax law, a business owner generally can no longer deduct the expenses of providing tax-free transportation fringe benefits (like the cost of parking or transit passes) or expenses incurred providing employees with transportation for commuting.
  • Net Operating Losses (NOLs). The new law does not eliminate but does lower the deduction for net operating losses, which are losses taken in a period where a business’s allowable tax deductions are greater than its taxable income. NOLs can now offset only 80% of taxable income in the future, and carrybacks are generally no longer permitted. However, NOLs can be carried forward indefinitely under the new tax law, which is an improvement over the 20-year limitation under the prior law.

Estimated Taxes

The owners of pass-through entities such as sole proprietorships, partnerships, and S corporations may be required to pay estimated federal taxes each quarter unless they had no tax liability the prior year or owe less than $1000 when they file their tax return.  Because of the changes in the income tax rates,  changes to deductions, credits and exemptions, the amount of estimated taxes that should be paid is a trickier question than in previous years.

What to Do Next

The new tax reform legislation is complex and sweeping.  Make sure you are getting proper guidance about how to maximize your tax savings by visiting with your accountant.   It is important to have a tax planner, rather than just a tax preparer with tax season upon us.

 

 

7 Reasons to do Estate Planning in 2019

7. We haven’t found the Fountain of Youth…yet!
6. Accidents are called accidents for a reason.
5. Cancer and many other health issues don’t discriminate.
4. Some days you may feel like you are losing your mind, but one day you really might!
3. Men may age better, but women live longer: Ladies, let’s be prepared!
2. Every tax bracket will face the unexpected and eventually death; it’s not just for the top 1%.
1. To protect and take care of the people you love – even when you can’t.

We’re Hiring! – POSITION FILLED

POSITION FILLED

To continue providing superior client service, we are looking to add a Social Worker to join our Legacy team at our growing elder law practice.

Why Join our Legacy Team?

Legacy Law Firm, P.C. provides a collaborative and positive environment that promotes professional and personal development.  We are highly selective and protective of our team members, so candidates must reflect high ethical standards and embrace the philosophy that there is no “I” in “Team.”  Moreover, we share an abiding belief that serving our clients is sacrosanct and a calling that we take seriously.  Have we mentioned that we think going to work should be fun?

Would You be a Good Fit? –

We are looking for someone to act as an advocate for our clients and their families while assisting them to gain access to resources and services.

The candidate must be able to demonstrate the following:

  • Licensed Social Worker
  • Has experience with Medicaid applications and working with the Department of Social Services.
  • Ability to draft and prepare relevant documents and correspondences.
  • Has demonstrated a high level of accuracy in preparing and reviewing documents.
  • Is familiar with home health care, assisted living and skilled care facilities.
  • Is able to develop a network of referral resources and serve as a community liaison.
  • Is able to attend meetings of professional organizations and perform various other marketing tasks.
  • Demonstrates professionalism and efficacy in critical thinking.

Candidates should have at least 1 year of relevant experience of service in the above areas.

Compensation will be commensurate with experience.

Contact Us!

Email your cover letter, resume, and any references to Felan Link at [email protected].  All applications will be kept confidential. We look forward to meeting you!

Are Your Trade Secrets Really Safe? 4 Steps To Safeguard Your Competitive Edge

A trade secret is a piece of information which is confidential, can be legally protected, and gives your company a competitive edge.  Lots of the most famous examples involve recipes: the formula for Coca Cola, McDonald’s Big Mac “secret sauce”, or that Mrs. Field’s chocolate chip cookie recipe that caused such a legal stir in the 90s.  But you don’t need to be a food purveyor or a mega-corporation to have a unique approach that sets you apart from your competition—and if you can legally keep it a secret, you should.

 

 

Here are four steps you can take to keep trade secrets safe:

  1. Make a list: The first step in protecting trade secrets is knowing that you have them.  Look across your business and think about any types of information you possess that are both confidential and critical to your success.  Trade secrets could be product designs, customer lists, marketing plans, sales forecasts, or processes.  For software developers, proprietary code obviously needs protection and for restaurants and food stores, it’s the secret recipe.  Conduct a “trademark audit” to identify the information you have a legal right to keep private and wouldn’t want your competitors to find out.
  2. Stake your claim: Once you know what your trade secrets are, it’s essential to start treating them like secrets.  Stamp or watermark “confidential” on sensitive documents.  Get confidentiality and non-disclosure agreements in place with employees and vendors.   These will put the people who learn your secrets on notice not to usurp them and lay the basis for a legal claim, if necessary.
  3. Lock it up:  Take whatever steps are reasonably available to you to secure your trade secrets from access.  Digital files and systems should be encrypted and password protected. Physical files should be kept locked.  Establish rules around access to sensitive files.  If possible, use a badge system to control access to your facility and posted signs to designate areas where access is controlled.
  4. Train your troops:  Many disclosures of trade secrets are inadvertent slips by an employee who simply did not know better.  That may make it easier to forgive, but the negative impacts on your business are still there.  Prevent this with good training and education for your employees on what your company considers confidential and what employees’ obligations are.  Back the training up with strong written policies.  And when an employee leaves, take steps to shut down their access to your files and systems right away to ensure that your secrets don’t leave with them.

Whether your trade secret is a treasured family recipe, a brilliant string of code, or a closely guarded customer list, it won’t be a secret for long unless you are careful.  Taking the steps above is a great first step toward a solid trade secret strategy.  For even further assurances of security, consider retaining counsel for a professional security audit.  Business attorneys like us can be great partners in protecting your trade secrets and your business.

If you are interested in learning how we can assist you, your family, and your business dreams with comprehensive business planning, please contact Legacy Law Firm, P.C. at (605) 275-5665 to schedule a free consultation today.

 

 

The Value of Using Irrevocable Trusts in Medicaid Planning

The Value of Using Irrevocable Trusts in Medicaid Planning

People often wonder about the value of using irrevocable trusts in Medicaid planning. Certainly gifting of assets can be done outright, not involving an irrevocable trust. Outright gifts have the advantages of being simple to do with minimal costs involved, including the cost of preparing and recording deeds and the cost of preparing and filing a gift tax return. Many financial institutions have their own documents they use for changing ownership of assets so there are typically no out-of-pocket costs for the transferor.

So, why complicate things with a trust? Why not just keep the planning as simple and inexpensive as possible? The short answer is that gift transaction costs are only part of what needs to be considered. Many important benefits that can result from gifting in trust are forfeited by outright gifting. These benefits are what give value to using irrevocable trusts in Medicaid planning.

Prior to state implementation of the federal Deficit Reduction Act of 2005 (DRA) in recent years (with the exception of California), federal Medicaid law contained a bias against trusts: Most transfers of assets to trusts had a 5-year lookback period, whereas there was a 3-year lookback period for non-trust transfers. This different standard induced many clients to elect outright gifting in preference to gifting in trust. The DRA leveled the playing field by imposing a 5-year lookback period for ALL transfers. Removal of the bias against trusts shifted the discussion of elder law attorneys with clients to the real benefits of gifting in trust versus gifting outright.

Key benefits of gifting in trust are:

  • Asset protection from future creditors of beneficiaries
  • Preservation of the Section 121 exclusion of capital gain upon sale of the settlors’ principal residence (the settlor is the trustmaker)
  • Preservation of step-up of basis upon death of the settlors
  • Ability to select whether the settlors or the beneficiaries of the trust will be taxable as to trust income
  • Ability to design who will receive the net distributable income generated in the trust
  • Ability to make assets in the trust noncountable in regard to the beneficiaries’ eligibility for means-based governmental benefits, such as Medicaid and Supplemental Security Income (SSI)
  • Ability to specify certain terms and incentives for beneficiaries’ use of trust assets
  • Ability to decide (through the settlors’ other estate planning documents) which beneficiaries will receive what share, if any, of remaining trust assets after the settlors die
  • Ability to determine who will receive any trust assets after the deaths of the initial beneficiaries
  • Possible avoidance of need to file a federal gift tax return due to asset transfer to the trust

We will briefly discuss each of these potential benefits in sequence. Each of these potential benefits depends on the specific language selected in the design and drafting the trust. None of them is automatic or inherent in every trust. Thoughtful planning and careful drafting is necessary to take advantage of the benefits available, thus it is important to understand how and why each benefit comes about. This ElderCounselor™ newsletter is just an introduction to these topics, not a specific drafting guide. We are available to discuss any of these issues in more detail.

Asset Protection from Future Creditors of Beneficiaries

A central benefit of gifting in trust is to protect the gifted assets from the creditors and predators of the beneficiaries. This is accomplished by means of a spendthrift provision – special provisions in the trust that make trust assets not subject to attachment, foreclosure, garnishment, or a laundry list of undesirable actions by the creditors of the beneficiaries.

Preservation of Section 121 Exclusion of Capital Gain on Sale of Principal Residence

Section 121 of the Internal Revenue Code (Tax Code) creates an exclusion from capital gains tax of up to $250,000 of capital gain in the taxpayer’s principal residence when it is sold if the taxpayer owned and lived in it at least two of the past five years before the sale (only one of the past five years if the homeowner had to move to a nursing home). If there are two qualifying co-owners, they can each exclude $250,000 of gain upon sale in such circumstances. This is a very valuable benefit that has been in the Tax Code since 1997. A trust can preserve this benefit if it is a “complete grantor trust” – a grantor trust as to both income and principal. On the other hand, a residence gifted outright to someone and then sold by the successor would need to qualify for the Section 121 exclusion based on the ownership of the donee to avoid capital gain in excess of the adjusted cost basis of the donor. Our senior population often has owned their home since the late 1940s, 1950s or 1960s, so a huge amount of appreciation in value has occurred since then.

Preservation of Step-Up of Basis

When an appreciated asset is included in a decedent’s taxable estate for federal estate tax purposes, it receives step-up (or down) of basis to the date of death value under Section 1014 of the Tax Code. Normally gifted assets pass to gift donees with “pass through basis”; that is, the donees receive the assets with the donor’s adjusted cost basis, rather than the date of gift value of the assets. If, however, something pulls the assets back into the taxable estate of the donor upon the donor’s death, the donee will own the asset at that point with the donor’s date of death value as his or her basis, rather than the donor’s original adjusted cost basis. For highly appreciated assets, such as the donor’s home or stocks that he or she owned for a long time, obtaining step-up of basis can be a huge benefit for minimizing or eliminating capital gains tax when the donee later sells the assets. This benefit of step-up in basis can easily be forfeited by outright gifting. However, a provision in an irrevocable trust that pulls the property back into the taxable estate of the settlor upon the death of the settlor can preserve step-up of basis for benefit of the donee. With the amount of assets that can pass free of federal estate tax being well beyond the value of most Medicaid planning clients’ estates, estate inclusion and step-up of basis is generally a great benefit to design into the trust, without any actual tax liability. A Limited Power of Appointment retained by the settlor can accomplish this. Other provisions can also cause taxable estate inclusion.

Ability to Select Whether Trust Income is Taxable to Settlors or Beneficiaries

This brings us to the topic of “grantor trusts.” Grantor trusts are treated by the Tax Code as “owned” by the settlor (also called the grantor) for income tax purposes. As mentioned above, preservation of the Section 121 exclusion of capital gain upon the trustee’s sale of the settlor’s primary residence that was earlier funded into the trust requires that the trust be a “grantor trust” as to both income and principal. The creation and significance of grantor versus nongrantor trust status takes an entire seminar or article unto itself, so can only be touched upon lightly here. But the choice of whether a trust will be a grantor or nongrantor trust and how that will be accomplished are key design decisions. For example, it may be important that income generated in the trust not be taxed to the settlor. This requires nongrantor trust status, which necessitates that every trust provision that would cause grantor trust status be avoided in the drafting of the trust. In other examples, however, grantor trust status is important as a goal for tax reasons, or if the settlors are to receive income from the trust.

Ability to Design Who Will Receive Trust Income

Unlike an outright gift, by which the donor gives up the right to receive income generated by the transferred assets, an irrevocable trust can be designed so funding constitutes a completed gift for Medicaid purposes although the settlor reserves the right to receive income from the trust. This is an attractive option for some seniors, although it does result in an inherent downside for Medicaid planning purposes: Any income that the trustee has the power to distribute to the settlor will be counted for Medicaid eligibility purposes, even if the trustee decides not to actually distribute the income to settlor. Some seniors avoid trustee discretion by making distribution of all trust net income to them mandatory, rather than discretionary. In this case, the income would also be counted for Medicaid eligibility purposes as well. Others go the entirely opposite direction by prohibiting the trustee from distributing any income to the settlor, thereby ensuring that trust income will not be part of the settlor’s cost of care budget when the settlor is on Medicaid. There are several factors to weigh in such decision-making, but the key point for this discussion is that use of an irrevocable trust in Medicaid planning gives the client these design choices, whereas an outright gift does not.

Ability to Make Trust Assets Noncountable for Beneficiaries’ Medicaid or SSI

It is a sad fact that an outright gift or bequest from a donor, such as a parent, to a disabled donee can result in the donee becoming ineligible for means-based governmental benefits that he or she was eligible for before the gift or bequest, or soon would have become eligible for. In such situations, unless irrevocable trust planning is then done to establish a “self-settled special needs trust,” the gifted or bequeathed assets typically get consumed for the donee’s care and once they are gone, the donee goes onto the governmental benefits from which the gift or bequest disqualified him or her until consumed. One way of looking at this outcome is that the indirect recipient of the gift or bequest was the governmental benefit program from which the gift disqualified the disabled person for a period of time. This is generally considered poor planning.

Better planning is for the gift or bequest to be made in an irrevocable special needs trust for benefit of the disabled beneficiary, so the gift or bequest will be managed to enhance the living conditions of the disabled beneficiary by paying for things that the governmental benefits do not pay for. If a disabled person becomes entitled to an outright gift or bequest, or an outright gift or bequest recipient later becomes disabled, depending on the age of the disabled person, it may be possible to establish a “self-settled special needs trust” for the disabled beneficiary. Such trusts (funded with assets of the disabled person) must contain a provision stating that upon the death of the disabled beneficiary any remaining trust assets must pay back the state up to the full amount of Medicaid benefits received by the beneficiary, and only after the state is reimbursed may any excess pass to other beneficiaries such as other relatives. The payback provision requirement is Congress’s “quid pro quo” – the balancing deal that makes it fair for the disabled person’s otherwise disqualifying assets to be set aside in a Medicaid- and Supplemental Security Income-noncountable trust that is nonetheless able to be consumed by the trustee for benefit of the disabled person to supplement but not replace the governmental benefits.

Ability to Specify Terms and Incentives for Beneficiaries’ Use of Trust Assets

Many parents or grandparents desire to infuse their planning for their children or grandchildren with positive aspirations. Such goals may be as simple as that the gifts or bequests may only be used for the recipients’ education, to finance a career change or buy a home. Or the goals may be more serious, for example, establishing that the intended recipient will only become eligible to receive the gift or bequest if he or she participates in a drug or alcohol rehabilitation program or gives up some other behavior that the donor wants to create an incentive for the donee to abandon. Such planning goals of a client almost always indicate an irrevocable trust with beneficiary incentive provisions as the vehicle to implement the plan. This is completely compatible with Medicaid asset protection planning for seniors at the same time.

Ability to Decide Which Beneficiaries Will Inherit Upon Settlor’s Death

The retained Limited Power of Appointment referred to above (sometimes called a Special Power of Appointment) preserves for the settlor the power to decide who within a designated class of recipients will receive the benefits of the trust, how much they will receive, and in what way they will receive it. The class of potential recipients can be as broad as everyone in the world except the settlor and his or her creditors, and the settlor’s estate and its creditors. Most often, however, the class of potential appointees consists of the settlor’s descendants, certain other relatives or in-laws, and/or certain charities. Such a Limited Power of Appointment (LPOA) can determine whether the trust is a grantor or nongrantor trust, as well, so the specific language of the LPOA must be crafted carefully with regard to the grantor trust rules of the Tax Code. As an aside, a power of appointment is sometimes referred to jokingly as a “power of disappointment” because it truly retains for the settlor or other power holder the power to disinherit someone who acts badly.

Ability to Determine Successor Beneficiaries

A major concern in Medicaid asset protection planning and estate planning in general is who will be the successor beneficiaries of anything a client leaves to someone. If the gift or bequest passes outright, the recipient has control through lifetime consumption of assets and income or through his or her estate plan, to determine who will receive anything that the initial recipient doesn’t use up. Of course, the recipient’s creditors or predators also may gain control over the assets and income gifted outright to the initial recipient. If the client would prefer to designate that only blood descendants, or descendants and their spouses, and/or certain charities will receive what is not consumed by the initial recipient, an irrevocable trust is a key instrument to create such a plan. This is true almost regardless of the initial size of the gift or bequest – if a modest amount of funds are left in trust, there may nevertheless be a remainder to pass to a successor beneficiary or even another successor beneficiary. This sounds like a “dynasty trust” and it actually is, even though it is of modest size. The point is that by use of an irrevocable trust, the client has the option to decide who the possible recipients will be, and even to grant limited powers of appointment to the named recipients in order to give them some control as well.

Analysis of Need to File a Federal Gift Tax Return for Year of Funding

A goal of many planners in design of irrevocable trusts is to make the initial trust-funding gift(s) “incomplete” for tax purposes. The purpose is generally to prevent the settlor from having to file a federal gift tax return for the year(s) of the funding transaction(s), assuming that the taxpayer makes no other “taxable gifts” in any such year.

There is a split of authority with the Internal Revenue Service concerning when transfers to an irrevocable trust are considered “complete,” thus requiring the filing of an income tax return. Normally there will not be any gift tax due (the current laws allow an individual to give away $5 million in assets during her lifetime without paying any tax on the gift) but it is important to follow the rules that do require filing a gift tax return, even if no tax is due. We are happy to assist with this analysis.

Conclusion

The above discussions demonstrate that use of irrevocable trusts in Medicaid planning, as in other fields of estate planning, provides many opportunities to create great benefits beyond simply transferring assets. Some or most of these benefits may be achieved through the use of an irrevocable trust. If care is taken to include the desired provisions, an irrevocable trust can greatly enhance the value of the clients’ Medicaid planning beyond what can be accomplished through outright gifting.

We are happy to assist seniors and their loved ones with considering whether an irrevocable trust may be appropriate for them. Please contact Legacy Law Firm, P.C. at (605) 275-5665 to schedule a free consultation today.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Why We Fail to Plan for Long-Term Care

Why We Fail to Plan for Long-Term Care


Introduction

Most Americans do not know, or refuse to accept, the facts surrounding their potential need for long-term care and the costs associated with it.  This was reconfirmed recently in a telephone survey of 1,735 Americans over the age of 40, funded by the SCAN Foundation and conducted by the Associated Press (AP) – NORC Center for Public Affairs Research (“survey”).[1]  This survey highlights many of the misconceptions Americans have about long-term care, including: the potential that a loved one may need some sort of long-term care within the next five (5) years; lack of knowledge of the positive impact of “person-centered care” practices; lack of understanding of coverage of long-term care services by Medicare, Medicaid and private insurance; and an increase in lack of concern over failure to plan for the costs associated with long-term care.

Who Will Need Long-Term Care

According to the Genworth Cost of Care Survey of 2015 (“Genworth Survey”)[2], seventy percent (70%) of Americans over the age of sixty-five (65) will eventually need some type of long-term care.  In addition, by the year 2040, twenty-two percent (22%) of the population will be over the age of sixty-five (65), which is a ten percent (10%) increase from the year 2000.  Yet, this survey showed an increasing number of people over the age of forty (40) refusing to believe they will ever need long-term care.

Quality of Long-Term Care

The survey defined person-centered care as “an approach to health care and supportive services that allows individuals to take control of their own care by specifying preferences and outlining goals that will improve their quality of life.” This approach points to the consideration of coordinated care.  Coordinated care involves communication among various medical providers to reduce overlap, misdiagnosis or other medical oversights.  Because many people are avoiding thinking about their golden years, they are missing out on the benefits provided by this approach and the survey shows a lack of appreciation for the improved quality of life it can provide.

According to the survey, over sixty-five percent (65%) of adults over the age of forty (40) have two or more doctors that they see on a regular basis.  Twenty-nine percent (29%) of those report that their providers do not communicate well or at all.  Further, the lack of understanding of the person-centered care approach is evident in that twenty-three percent (23%) of those individuals who don’t participate in it reported that it would not improve their quality of care

Cost of Long-Term Care

The study showed a lack of understanding by many of coverage for long-term care by Medicare, Medicaid and private health insurance.  The truth is that Medicare does not pay for ongoing long-term care (although it will pay for intermittent stays at nursing facilities).  Yet, thirty-four percent (34%) surveyed thought Medicare would pay for long-term care while twenty-seven percent (27%) were unsure.  Furthermore, Medicare doesn’t typically pay for care in the home.  However, thirty-six percent (36%) of those surveyed thought it would and twenty-seven percent (27%) reported that they were unsure.

As for private insurance, most health insurance plans will not cover long-term services like a nursing home or ongoing care provided at home by a licensed home health care aide.  Yet, eighteen percent (18%) of Americans age 40 and older believe that their insurance will cover the costs of ongoing nursing home care.  While, twenty-five percent (25%) believe their plan will pay for ongoing care at home. About 1 in 5 people surveyed were unsure of the coverage provided for these types of long-term care services.

Medicaid is the largest payer of long-term care services.[3]  Medicaid is a federally and state funded needs-based benefit that will provide for various types of long-term care depending on the state’s regulations.  In 2013, Medicaid paid for fifty-one percent (51%) of the national long-term care bill totaling $310 billion.  However, fifty-one percent (51%) of Americans age 40 and older reported that they don’t expect to have to rely on Medicaid to help pay for their ongoing living assistance expenses as they age.

The actual costs for long-term care are staggering.  The Genworth Survey reported that, nationwide, the average bill for a nursing home is approximately $80,300 and for home health care, approximately $44,616 with a variety of options among and in between these levels of care

Planning for Long-Term Care

Despite the availability of this information, most Americans are unprepared for the costs associated with long-term care.  For example, the results of the survey showed that only one-third of adults were “very or extremely confident” in their ability to pay for long-term care.  Fascinatingly, while many individuals reported being concerned over leaving family with debt or becoming a burden on loved ones, many do little to alleviate their concern in the way of planning. In fact, just over thirty percent (30%) of those over the age of sixty-five (65) reported being concerned with this.  And, finally, two-thirds of Americans over the age of forty (40) reported doing no planning for long-term care.

The survey results lead to the conclusion that many Americans are reluctant to face the possible loss of independence related to aging.  Apparently, this plays a role in the unwillingness to plan for the possibility of needing assistance later in life. As an example, there was an interesting difference in the number of people surveyed who had planned, or talked to loved ones about, their funeral arrangements (nearly sixty-five percent (65%)), in those who had discussed care preferences with family (about forty-two percent (42%)) and in those who had saved money for long-term care (approximately thirty-three percent (33%)).  Some things, including how we want to be memorialized are just easier to think about than how we may end up dependent on others.

Conclusion

Although not a popular topic among Americans over the age of forty, long-term care is an increasingly important one.  We are in the business of providing options for people in planning for their potential long-term care needs.  If you, a loved one or a client needs help figuring out their options, please think of us.  We are always happy to hear from you.

If you are interested in learning how we can assist you and your family with estate planning, elder law or business planning, please contact Legacy Law Firm, P.C. at (605) 275-5665 to schedule a free consultation today.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

[1] http://www.longtermcarepoll.org/PDFs/LTC%202015/AP-NORC-Long-Term%20Care%20in%20America%202015_FINAL.pdf

[2] https://www.genworth.com/corporate/about-genworth/industry-expertise/cost-of-care.html)

[3] http://kff.org/medicaid/report/medicaid-and-long-term-services-and-supports-a-primer/