Dale's Blog

Required Minimum Distributions Are Back

kendrabishop@medicaidannuity.com — Fri, 23 Jul 2010 14:54:31 GMT

As we all know, the Worker, Retiree, and Employment Recovery Act of 2008 ("WRERA") temporarily suspended required minimum distributions ("RMDs") in 2009. Thus, many taxpayers chose not to take a RMD in 2009. However, in 2010, the RMD is back, and taxpayers required to take a distribution for 2010 must take it by the end of the year.

Assuming that a taxpayer did not take a RMD in 2009 as a result of WRERA, does the taxpayer have to calculate the 2010 RMD in a different manner? No! Nothing has changed with respect to the way that RMDs are determined.

When RMDs are calculated for a particular year the calculation is based on the December 31^st balance from the prior year. Thus, taxpayers required to take a RMD for 2010 will use the value of their retirement account as of December 31^st, 2009.

For example assume that Richard White, a 75 year-old retiree, has a retirement account. On December 31^st, 2008, his retirement account had a balance of $155,624.35. By December 31^st, 2009, as a result of depressed stock holdings, his retirement account balance had decreased to $134,510. After reviewing his 2009 income tax consequences with his accountant, Richard decided that it did not make any sense to take a RMD for 2009, in that any amount that he would have taken would have had to come out of the market - reducing his ability to recover his unrealized losses, and would be subject to excessive income taxation.

For 2010, as a result of Richard being 75 years of age in 2010, and having a RMD divisor of 22.9, he understands that by the year's end he will have to take a RMD of $5,873.79.

Pre-Planning with Tax-Qualified Funds

kendrabishop@medicaidannuity.com — Mon, 12 Jul 2010 16:21:02 GMT

When trying to pre-plan with tax-qualified funds, whether the planning is for Medicaid or VA benefits, we all know that the primary goals are to get rid of excess assets, while minimizing tax liabilities. A balance must be created between program eligibility and tax consequences, a task with which very little text and guidance is provided in order to accomplish. In a handful of states, retirement funds owned by an ineligible spouse or even an institutionalized individual are simply considered exempt from resource limits for Medicaid purposes, thus pre-planning arrangements may not be required. But, what can be done in the states that are not afforded this luxury?

In crisis Medicaid planning, the most advantageous option is usually clear - convert the retirement funds into a Tax-Qualified Medicaid Compliant Annuity. However, in pre-planning, the decision is not as simple, and the pros and cons of the available options must be carefully weighed prior to proceeding.

If the tax-qualified funds are to be gifted away, the applicant will need to subject the entire account to income tax before any gift can take place. The net result, in that a large amount of income in any one year can be subjected to higher tax brackets, is that the gift amount will be significantly reduced.

What if the applicant transfers the tax-qualified funds to an intentionally defective grantor trust, which is not a completed gift for tax purposes? Based on the Internal Revenue Code ("IRC"), particularly IRC 408(e)(2) and IRC 4975(c), it is clear that the Internal Revenue Service will treat the transfer as a "prohibited transaction." As a result, the applicant will be forced to recognize a taxable event of his or her entire account value as of January 1^st in the year which the prohibited transaction occurred. The end result is nothing short of total devastation.

So what is the best pre-planning strategy when tax-qualified funds are involved? In my opinion, the most advantageous option is an Irrevocable Life Insurance Trust ("ILIT"), which is controlled by the grantor's children - as Trustee. The ILIT purchases a life insurance policy on the life of the owner of the tax-qualified funds, and the face value of the policy is equal to the account balance. In order to give the ILIT sufficient assets to pay future life insurance premiums, it is best if the applicant makes a large gift at the commencement of the plan. If the gift amount exceeds $13,000 per person, it will be necessary for the applicant to file a gift tax return - IRS Form 709.

For example, if a 75 year old male with preferred health and no history of tobacco use has an IRA valued at $500,000, the Trustee could purchase a 20-year level term life insurance policy with a $500,000 face amount for an annual premium of $20,003. According to the National Center for Health Statistics, a 75 year old male is only likely to reach 85 years of age. Thus, the likelihood that a 75 year old male will reach 95 years of age has a less than 3% chance. By age 85, the value of the IRA account will be reduced to $281,650 - his 2010 required minimum distribution requirement is $21,835, but the ILIT will still have a net of $500,000. If the 75 year old male were able to gift away $200,030 at the commencement of the plan, and stay out of a Medicaid situation throughout the 5 year look-back, the plan is a home run!

American Billionaire's Death in 2010

kendrabishop@medicaidannuity.com — Thu, 01 Jul 2010 19:31:40 GMT

According to a recent article in the New York Times, as a result of a Congressional lapse, the descendants of the 74^th wealthiest person in the world were able to receive his entire estate, free of any federal estate tax.

Dan L. Duncan, a Texas natural gas tycoon, died in March of 2010. Had his life ended in 2009, his estate, estimated a $9 billion, would have been subject to a federal estate tax of at least 45%. In 2011, the rate would be even higher - 55%. Instead, because Congress allowed the federal estate tax to lapse for 2010, Mr. Duncan's four children and four grandchildren will receive billions in net worth that would have been otherwise earmarked for the United States Treasury.

The only downside of having no estate tax in 2010 is that if the Duncan children/grandchildren ever decide to sell their inherited assets, they will have to pay capital gains tax on the difference between their selling price and father's/grandfather's cost basis. As part of his estate, Mr. Duncan passed on 100 million shares in Enterprise GP Holdings, which closed at $43.23 the last trading day before Mr. Duncan died - the asset alone could have resulted in a $2 billion estate tax. However, with the capital gains tax capped at 15%, the finality of the situation is insignificant in light of the big picture. Finally, if the children/grandchildren never sell the assets, retaining them until death, the assets will get a stepped basis and avoid a capital gains tax.

As a result of no estate tax being paid, and being able to retain all the wealth, the Duncan heirs now have an extraordinary opportunity to become the wealthiest family in the world - at the expense of the federal government.

Determining the Maximum Allowable Pension Rate: Part II

kendrabishop@medicaidannuity.com — Thu, 17 Jun 2010 16:34:15 GMT

My prior post, Determining the Maximum Allowable Pension Rate: Part I, outlined the maximum monthly benefit amount for a veteran with a spouse, a single veteran, or a single surviving spouse of a veteran; and the rating of the particular claimant. As most VA practitioners know, the VA pension benefit will range from zero dollars up to the category's maximum allowable pension rate ("MAPR"). However, I did not go into detail as to the calculations used to determine the anticipated pension rate for a potential claimant.

The VA "Income Test" states that the household income of the claimant cannot exceed the MAPR for the applicable category. Many are familiar with the term IVAP, or "income for VA purposes." For VA purposes, income includes just about anything that the veteran or the veteran's spouse in the household receives in the form of payment - unless specifically excluded or deductible by regulation. The most popular deduction of income is unreimbursed medical expenses paid by the claimant. Unreimbursed medical expenses are expenses not covered by Medicare, or any other health insurance plan. Unreimbursed medical expenses may include, but are not limited to: doctor and dentist bills, prescription glasses, hearing aids, Medicare premiums, prescription drug costs, health insurance premiums and co-payments, transportation to health care providers, durable medical equipment, and invoices from professional home health care agencies, assisted living facilities, and nursing home facilities.

Gross Income
- Unreimbursed Medicaid Expenses
IVAP

The primary goal is to possess an IVAP of zero dollars or less. If this is the case, the claimant is eligible for the applicable MAPR - as provided in my prior post. For every dollar greater than zero, the MAPR is reduced dollar for dollar until the claimant is no longer entitled for a VA benefit. Finally, if the calculated IVAP is greater than the applicable MAPR, the claimant is not eligible for benefits.

IVAP < $0                         =    Claimant is entitled to the full MAPR
IVAP > $0 but < MAPR    =    Claimant is entitled to the MAPR less the IVAP
IVAP > MAPR                   =    Claimant is not entitled to the VA benefit

Case Facts #1.
For example, assume a single veteran in need of aid and attendance has monthly unreimbursed medical expenses of $3,500 and monthly income from social security and pension of $1,500. The veteran's IVAP is ($2,000). With an IVAP less than zero, the veteran is entitled to the full MAPR of $1,644. Assuming the same set of facts applied to a single surviving spouse of a veteran in need of aid and attendance, he/she would be entitled to the full MAPR of $1,056.

Case Facts #2.
Assume now the single veteran only has monthly unreimbursed medical expenses of $500 and monthly income from social security and pension of $1,500. The veteran's IVAP is $1,000. With an IVAP greater than zero, the MAPR of $1,644 is reduced by the IVAP. In this case, the veteran is entitled to $644 ($1,644 - $1,000). A single surviving spouse of a veteran in need of aid and attendance would be entitled to $56 ($1,056 - $1,000).

Case Facts #3.
Finally, assume the single veteran has monthly unreimbursed medical expenses of $500 and monthly income from social security and pension of $2,500. The veteran's IVAP is $2,000. With the IVAP exceeding the MAPR of $1,644, the veteran is not entitled to a VA benefit.

Community Spouse Medicaid Compliant Annuity Purchase Sequence

kendrabishop@medicaidannuity.com — Mon, 14 Jun 2010 17:18:28 GMT

Several of the most popular inquiries I typically receive in the Ask Dale section of this web site revolves around the community spouse Medicaid Compliant Annuity planning process. When is the right time to make the investment? How much should the community spouse invest? What benefit period should the community spouse opt for?

In that community spouse are typically not required to adhere to as strict income and resource requirements as their institutionalized counterparts, much uncertainty and unclear guidelines exist surrounding community spouse Medicaid Compliant Annuity planning. The most common question I receive applies to the timing of the purchase of the community spouse's Medicaid Compliant Annuity. The timing will heavily depend on how the respective Medicaid agency determines the community spouse resource allowance ("CSRA").

Step One: Complete a Resource Assessment.

In the 37 states¹ that impose a minimum and maximum CSRA, a resource assessment must be performed in order to determine the actual CSRA. The resource assessment is performed by:

Determining the first date after which the Medicaid applicant first spent 30 days of consecutive institutionalization²;
Determining the total countable resources on that date, then dividing the total countable resources amount by half;
Utilizing the resulting figure as the actual CSRA, keeping in mind that the resulting figure should never be less than the minimum CSRA, and never be more than the maximum CSRA.

The resource assessment completes two tasks. One, it ensures that all assets are counted as of the date of continuous institutionalization, not the date of the Medicaid application. Two, it informs the couple as to what assets the Medicaid agency considers available to the institutionalized spouse.

For the 14 states that do not impose a minimum and maximum community spouse resource allowance, the community spouse is entitled to a standard allotment regardless of the amount of countable resources. As such, in those states, a resource assessment is not necessary.

Step Two: Determine the Medicaid Spend-Down.

If a couple has countable resources in excess of the CSRA and individual resource allowance, the excess amount is deemed the "spend-down amount."

After determining the CSRA and individual resource allowance, those amounts are deducted from the total countable resources. The remaining countable resources are considered available to the institutionalized spouse to pay for his or her care, and must be "spent-down."

Step Three: Begin Spending-Down.

The easiest way to eliminate the spend-down amount is to convert the countable resources into non-countable resources. This conversion can be easily accomplished by any one, or more, of the following:

Purchasing a prepaid funeral plan;
Paying off an existing mortgage;
Making home improvements;
Purchasing a new automobile;
Purchasing furniture, clothing, and other personal property; and
Paying off existing bills.

Step Four: Purchase a Medicaid Compliant Annuity.

On the assumption that the entire spend-down amount was not eliminated by one, or more, of the aforementioned techniques, the remaining spend-down amount can be totally eliminated through the purchase of a Medicaid Compliant Annuity. In a community spouse case, purchasing the Medicaid Compliant Annuity is the final step prior to making the Medicaid application.

Note: The current trend in community spouse planning has been to utilize a short-term Medicaid Compliant annuity - less than 12 months, in order to avoid a potential pay-back to the state. However, it has always been the opinion of Krause Financial Services that this type of planning will lead to increased restrictions in community spouse planning (e.g. the recent NASMD letter). As such, it is not always best to simply "go short."

Several factors need to be taken into consideration when determining the appropriate length of a community spouse's Medicaid compliant Annuity. Above all else, it is highly recommended that the length should not be so short as to create an unreasonable amount of monthly income. The total monthly income received should be reasonable in light of the annuitant's current and future monthly needs.

________________________

¹ Alabama, Arizona, Arkansas, Connecticut, Delaware, District of Columbia, Idaho, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Minnesota, Missouri, Montana, Nebraska Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee Texas Utah, Virginia, Washington, West Virginia, and Wisconsin.

² The term institutionalization includes a hospital stay period for those individual who received skilled nursing home care benefits under the Medicare program.

³ Alaska, California, Colorado, Florida, Georgia, Hawaii, Illinois, Louisiana, Maine, Massachusetts, Mississippi, South Carolina, Vermont, and Wyoming.

Trust Owned Tax-Deferred Annuities

kendrabishop@medicaidannuity.com — Wed, 09 Jun 2010 15:42:04 GMT

In my practice of advising elder law attorneys regarding their clients' Medicaid and VA needs, if a case involves a trust and the need to accumulate income - no annual distributions, I typically recommend using a non-qualified fixed annuity as the investment vehicle.

The primary reasons why I make such a recommendation are that a fixed annuity offers safety of principal, a guaranteed return over a guaranteed period, and income tax deferral. Unlike a variable annuity which is subject to market risk and can lose principal very quickly, a fixed annuity will never be worth less than the original investment amount, except in the case of an early surrender. At the same time, a fixed annuity can offer a multi-year guaranteed rate of return which ensures growth. Finally, in that the income tax rates associated to trusts that retain income are excessive in light of the same rates for individuals, the growth within an annuity accumulates on an income tax-deferred basis until the trustee either takes a distribution, annuitizes, or surrenders the contracts.

With the first two reasons being very clear, it is the last reason of "tax-deferral" which causes the bulk of the confusion when an annuity purchase is being contemplated within a trust. Under IRC Section 72(u), if an annuity contract is held by an entity which is not a "natural person," the contract shall not be treated as an annuity contract for income tax purposes and shall lose its tax-deferral status. However, under IRC Section 72(u)(3), if an annuity contract is held by a trust or other entity as an agent for a natural person, the contract shall not lose its annuity contract status and shall be entitled to receive continuing tax-deferred status.

As for non-natural persons, since IRC Section 72(u) was enacted to deny tax-deferral for corporate owned deferred annuities, it has been stated that partnerships, S corporations, family limited partnerships, and limited liability companies would be qualified as such. So why and how is a trust different than one of the aforementioned entities? The difference relates to the fact that the entities have independent business purposes and do not simply hold title like a trust. Thus, any trust - whether revocable or irrevocable, grantor or non-grantor, which owns an annuity and only benefits natural persons shall be entitled to maintain tax-deferred status for the investment vehicle.

Krause Financial Services offers such a product that I have outlined above, with rates that are typically better than comparable certificates of deposit. For more information on the product and the current rates, just click here.

Private Letter Ruling: When do I Need One?

kendrabishop@medicaidannuity.com — Thu, 27 May 2010 16:34:57 GMT

Most taxpayers will never need private letter ruling from the Internal Revenue Service ("IRS"). However, for those taxpayers who have a tax issue that is unclear and might involve a significant amount of tax, before the taxpayer takes the intended action, it makes perfect sense for him or her to request an IRS private letter ruling.

For those not familiar with an IRS private letter ruling, it is a request to the IRS to rule on a particular tax issue for a particular set of facts. Once issued, the private letter ruling will specifically state the IRS' position on the particular issue, eliminating the need to second guess what might happen in the even of a later tax audit. In that the letter ruling is private, this means that it can only be used by the taxpayer who made the request, and cannot be relied upon by any other taxpayer, even though their case might include identical facts, issues, etc.

Private letter rulings, or PLRs as they are often referred to as, can address all sorts of tax matters, such as whether a non-profit corporation is entitled to non-profit status, whether an IRA retirement contribution or account qualifies for tax deferral, whether a trust is exempt from generation skipping transfer tax, and whether a taxpayer is entitled to deduct certain business expenses or claim certain tax credits.

To help you understand the importance of a private letter ruling in the area of Medicaid planning, consider Private Letter Ruling 200620025. In that case, a disabled son was one of four designated beneficiaries of the decedent's IRA. Because the disabled son was eligible for Medicaid, his guardian sought permission of a local court to create a special needs trust ("SNT") for the son and to transfer his interested in the IRA to the trust. The IRS ruled that the SNT that was created by the court for the benefit of the decedent's son was a grantor trust under IRS Code Sections 671 and 677(a), and that the transfer of the IRA to the SNT was not a taxable disposition under IRS Code Section 691(a)(2). The IRS also ruled that the disabled son's life would be the measuring life for the minimum required distributions that would flow from the IRA.

Client Deaths in 2010: Good or Bad?

kendrabishop@medicaidannuity.com — Fri, 21 May 2010 13:08:32 GMT

If you represent the super-wealthy, who have long-standing family businesses that may never be sold, a death in 2010 could bring unprecedented tax relief. Why is that? When the Economic Growth and Tax Relief Reconciliation Act was passed in 2001, it contained a provision that eliminated estate taxes for 2010, and only 2010. No one thought that Congress would just forget about it. But, they did!

Thus, if Robert Smith, the sole owner of a $50 Million national food chain, passes away in 2010, leaving his entire net worth to his only child, Robert's estate would have owed $20,925,000 in federal estate taxes, and the payment would have been expected to be made within the nine months following Robert's death. A payment of that size could have put the national food chain in grave jeopardy, in light of our national recession.

So if no estate tax is good, what, if anything, is bad about it? The only downside of not having a federal estate tax is that Robert's son gets a limited carry-over basis on assets that he receives from his father's estate of no more than $1.3 Million. Thus, if he later decides to sell the assets he will be subjected to an income tax liability on each sale. However, in his son's case, in that he is currently running the family business and has no plans to sell it, it is a win-win situation - the business stays intact and is not weighed down by a huge federal estate tax liability. In the end, the only entity that loses is the federal government.

Determining the Maximum Allowable Pension Rate: Part I

kendrabishop@medicaidannuity.com — Thu, 13 May 2010 20:47:38 GMT

When assisting a VA claimant with a nonservice-connected pension claim, determining the maximum benefit amount the claimant is entitled to can become perplexing.

The Veterans Administration ("VA") offers nine maximum benefit amounts based on whether the award is for a veteran with a spouse, a single veteran, or a single surviving spouse of a veteran; and the rating of the particular claimant. The calculation for the respective category of pension income will provide a VA pension benefit ranging from zero dollars up to the category's maximum allowable pension rate.

In accordance with 38 CFR, the VA has defined the requirements of each claimant category referenced above, to-wit:

A "veteran" is a person who served in the active military, naval, or air service and who was discharged or released under conditions other than dishonorable. The above entitlements exist if a veteran:

1. Served in active military, naval, or air service for 90 days or more during a period of war;
2. Meets the net worth requirements and does not have an annual income in excess of the applicable maximum annual pension rate; and
3. Is age 65 or older, or is permanently and totally disabled from nonservice-connected disability.

A "spouse" is a person of the opposite sex whose marriage to the veteran is valid under the law of the place where the parties resided at the time of marriage, or the law of the place where the parties resided when the right to benefits accrued. (38 U.S.C. 103(c))

A "surviving spouse" is a person of the opposite sex whose marriage to the veteran meets the requirements of §3.1(j) and who was the spouse of the veteran at the time of the veteran's death and:

1. Who lived with the veteran continuously from the date of marriage to the date of the veteran's death except where there was a separation which was due to the misconduct of, or procured by, the veteran without the fault of the spouse; and
2. Except as provided in §3.55, has not remarried or has not since the death of the veteran and after September 19, 1962, lived with another person of the opposite sex and held himself or herself out openly to the public to be the spouse of such other person.

The subsequent blog post, Part II, will assist in determining the calculations utilized in each category of pension income, and how to establish the expected pension rate for a potential claimant.

Missouri Community Spouse Annuities - Favorable Decision

kendrabishop@medicaidannuity.com — Wed, 21 Apr 2010 15:58:16 GMT

I recently reviewed a Missouri Circuit Court of Appeals decision involving four community spouse and their purchases of post-Deficit Reduction Act of 2005 Medicaid Compliant Annuities as a means of spending down for Missouri's Medicaid program, MO HealthNet. The decision in the matter of J.P. et al v. Missouri State Family Support Division is dated April 20^th, 2010.

The Missouri case revolved around Missouri legislature that was adopted in July 2007. Prior to the 2007 amendment, when determining Medicaid eligibility the Missouri State Family Support Division ("the Division") treated Medicaid Compliant Annuities which paid income to a community spouse as excluded from a calculation of resources available to the institutionalized spouse - assuming all other annuity requirements were met. In November 2007 the Division amended the legislature to exclude the income stream from a Medicaid Compliant Annuity as a resource only if the income was paid to the institutionalized spouse.

The Division's application of the legislature was clearly in violation of existing federal Medicaid eligibility rules. Consequently, the four cases progressed to the Missouri Western District Court of Appeals ("the Western District").

The Western District ruled in the couples' favor, stating that the Division's policy violated federal law. The decision heavily relied on the James, Weatherbee and Vieth opinions from other states that preceded Missouri in this matter.

To review the Western District's decision regarding the aforementioned case click here.