Bigstock-Golden-Egg-In-Metal-Clamp--Ro-106073612

Roth IRA’s: Factors Even the Best Planners Forget to Consider

November 18, 2015

by David Zumpano with No Comment Uncategorized

Seems like everywhere you turn, there’s an article or recommendation to convert your traditional IRA to a Roth IRA. Why? It’s simple: unlike a traditional IRA, wherein you can take a tax deduction against your ordinary income for the amount contributed to it and it grows income tax free, a time eventually comes when you have to pay the piper.

Typically, at the latest, this happens at age 70½, when a minimum distribution is required from your IRA. All withdrawals from your traditional IRA are then taxed at your then income tax rate. On the flipside, a Roth IRA permits you to put money into a Roth now, without receiving any income tax deduction now, but as the Roth proceeds grow income tax free, they are also income tax free when you take your Roth IRA proceeds. This is very appealing to people who want to minimize their taxes later in life. In my experience, however, most people who do Roth IRAs are not doing them for themselves, but merely to have the protection of an IRA, and to be able to pass the assets to their beneficiaries without having to pay income tax. So what's the downside? Sadly, most promoters of Roth IRAs are not aware of the downside.

The primary risk of investing in a Roth IRA is the possibility of it being lost should the need for long-term care arise. The question that centers the risk is whether an IRA is included as an available resource in determining an individual’s eligibility for Medicaid benefits to pay for long-term care. Federal law is clear: an IRA is an available resource in determining eligibility for Medicaid unless it is “annuitized.” Federal law permits states to enforce the federal law as they determine, as long as it’s not “more restrictive” than the federal law. Many states exempt an IRA from being considered available as long as it is in “payout status.” Accordingly, payout status has been interpreted as the IRA owner is receiving regular payouts equal to the required minimum distribution. The greatest risk, however, is that the less restrictive approach is merely a “policy” decision, and the state medical department can change its policy to the more restrictive federal law at any time without notice. There has been a trend in that several states have done this over the past few years. Will your state be next?

Another risk of a Roth IRA is that in many states, it is treated like a regular investment account and is considered “available” because there is no required minimum distribution. As an available resource, it must be spent down to qualify for Medicaid benefits. This obviously is counterproductive to the original intention of creating the Roth IRA. Instead of being able to accumulate assets income tax free, seniors are forced to liquidate them to pay for their long-term care cost, which is not ideal because there is no tax advantage to doing so. If a traditional IRA is used to pay for long-term care costs, the offsetting Medicaid tax deduction enables 98 percent of the IRA to be utilized by the IRA owner when used to pay for long-term care costs, rather than the typical 70 percent after the benefit. Not so with a Roth. So what is one to do? It’s easy – use an IPug®.

IPug is an irrevocable pure grantor trust that allows the grantor to maintain control of the trust assets as trustee and modify the trust as to the timing, manner and method of distribution and as to the beneficiary. The one exception is that the grantor could never change ownership of the assets or permit principal back to themselves, which acts to protect the trust proceeds from predators and creditors, similar to an IRA. An IPug, however, also has the distinction in that its trust assets are not considered available in determining the grantor’s Medicaid eligibility.

An IPug trust essentially works like a combination of a Roth and a traditional IRA, but better. Once you put money into an IPug, if you invest in long-term growth assets, those assets are not taxed until you withdraw them. But, unlike a traditional IRA, if withdrawn, they are taxed at the preferred capital gains tax rate, rather than at the ordinary income tax rate. Most importantly, for most people who never intend to withdraw from their Roth prior to death, the IPug provides the same benefit as a Roth of providing the assets a full “step up” in basis. The primary advantage of an IPug, however, is that the trust assets are passed onto your heirs income tax free and fully asset protected for the rest of their lives.

The predominant benefit of an IPug over a Roth, however, is that it is protected from the nursing home during the grantor’s life! That’s a substantial difference that a Roth cannot provide. So, IPug or Roth, you decide – but it’s a great option to offer your clients.

Have you been considering becoming a Lawyers With Purpose member? Did you know one of the benefits of being a member is exclusive members only opportunities? One example is to co-author a book with Victoria and I. If you want to learn more about this opportunity consider participating in our FREE WEBINAR "Writing Your Way To Success" TOMORROW, Friday, November 20th at 12 EST.

There is no better tool that says, "I am the expert" than a book with your name on it. Two LWP members attended Victoria's "How to Write a Book Training" in 2010, went on to write a book and saw their practices surge because of it. Even if you don’t enjoy writing or think you can't write, attend this session to see how easy it can be. And learn how to market your book as well! Click here to reserve your spot for this webinar. If you're not a member, you can still join and shoot us an email after to let us know what you think to: info@lawyerswithpurpose.com

If you're a member and are already joining us – we'll see you there!

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

iPug As A Prenup?

November 11, 2015

by David Zumpano with No Comment David J. Zumpano Estate Planning Drafting Software

On occasion, we have clients in their 50s and 60s who are considering remarriage after the kids have grown up, or after they are ready to finally recommit to someone. As an estate planning attorney, what options can we offer them with regard to a prenuptial agreement? Perhaps the answer is an Irrevocable Pure Grantor Trust® (IPug®).

Typically, older clients have accumulated some assets, and getting married again creates a whole new dynamic for them. It could be that they lost their spouse or are divorced. The question is, how do you ensure that your client's assets are protected from a second marriage but still ensure that the marriage is whole – that is, both husband and wife participate in the financial responsibilities? An IPug may be your answer. An irrevocable pure grantor trust allows the grantor to maintain full control as trustee. The grantor can modify the trust in any way for the rest of his life, other than to convey the assets back to himself; and can even retain some benefit from the trust, including being able to live in the real estate and retain all of the income from the trust assets.

In most states, for a prenuptial agreement to be valid, each spouse must declare their assets to the other and have the other sign off on their rights to those assets after the marriage. Prenuptial agreements are a common practice to ensure that the assets of each spouse are protected from the other if the marriage does not last, or if one spouse later dies. Prenuptial agreements can be quite dicey to bring up in a new relationship, as it calls into question the very act of marriage, which is supposedly "forever," and it also raises the question of whether one “trusts” the other.

A solution that can manage all of this is to use an IPug. As an irrevocable trust, once funded, the grantor can never again take ownership of the assets, but the grantor can still control all of the assets and maintain basic benefits. Since you irrevocably give up your right to even get out the assets you put into an IPug, your spouse can’t own them in a divorce and will have no dowry or right of election. Having an individual create an IPug and put the majority, if not all, of their assets into it is a proper way to protect their assets from creditors and predators. Is a spouse not a potential creditor or predator? So utilizing an IPug trust might be an ideal way to have the same legal effect as a prenuptial agreement. The question becomes determining the powers of appointment language to ensure that your assets are protected, but also so you have the option to benefit those you intend, including your new spouse if you so desire.

Allowing your spouse to be a beneficiary of your power of appointment would subject the trust principal to being an available resource if the spouse needed long-term care. Alternatively, if the client has long-term care insurance and other means to pay for long-term care, one could consider allowing the grantor to include a spouse in the powers of appointment. Obviously, the power is retained by the grantor, and only he or she would decide if and when a new spouse may be able to benefit from the IPug.

So, prenup or IPug? And, if IPug, what are the provisions? That's where the Lawyers with Purpose, client-centered software will help you. Contact us now for a live software demo.

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Bigstock-Happy-Senior-Couple-From-Behin-47944529

Protecting The Home When Medicaid Planning

October 26, 2015

by David Zumpano with No Comment Asset Protection Estate Planning Drafting Software

Many people who are seeking to qualify for Medicaid are concerned about protecting their assets from long-term care costs. For most people, their primary asset is their home. So what are the options to protect it when considering Medicaid planning?

First and foremost, it is essential to be clear that Medicaid law provides that the home is an exempt asset from being included in determining one's eligibility for Medicaid. A core distinction comes into play, however, when considering whether the Medicaid applicant is married or single. If married, the Medicaid law provides that any transfer between spouses is permissible and does not trigger any ineligibility. Therefore, if a husband and wife own a home, and one of them goes into the nursing home, the nursing home spouse can convey their interest to the community spouse and no penalty will result, and the house will remain exempt under the community spouse's exemption. The question as to whether Medicaid can access the equity in that home after the death of the community spouse is a question of who dies first – the institutionalized spouse or community spouse.

The bigger challenge, however, is in protecting the home for single applicants, or after one of the spouses has entered a nursing home or dies, thus leaving the remaining spouse single. Accordingly, there are additional challenges for single individuals who own a home. While the home is exempt in determining eligibility for Medicaid benefits, it is not exempt from estate recovery for single Medicaid recipients. So, for single people or those who are married, with one spouse at a nursing home, the mechanism to protect the house requires an outright transfer of it to ensure its protection. Retention of the house by a single individual subjects it to estate recovery after death, thus delaying the loss, but not eliminating it. The question as to whether a house is subject to estate recovery is dependent on each individual state, estate recovery rule and Medicaid.

The next challenge is, if a single individual or the community-based spouse transfers the home to a third party or irrevocable trust, it will trigger an "uncompensated transfer" and lead to a period of ineligibility. The period of ineligibility depends upon the value of the conveyed house divided by the regional divisor (the average cost of one month of nursing home care in the region).

For example, a $200,000 house conveyed away in a jurisdiction where the regional divisor is $10,000 would create a 20-month ineligibility period. In order to mitigate this penalty period, one may consider transferring the home and reserving a life estate. By reserving a life estate, the underlying transfer is reduced by the value of the life estate. For example, transferring the same $200,000 house and reserving a life estate to an individual who is age 72 provides for a .2369 interest being retained. In this case, the remainder of .7134, or 71 percent of the $200,000, is deemed to be the uncompensated transfer (S. 142,680). By reserving the life estate, this particular client will have reduced the penalty period by 5.73 months (penalty of 20 – new penalty of 14.27). Obviously, reserving a life estate provides for a discount in the uncompensated transfer, which in most states disappears at death because there will be no value to the life estate as it extinguishes at death. Some states have begun pursuing life estates after death. For example, in Ohio, the discount really has no advantage because the state could pursue the remaining beneficiary for 5.72 months differential.

The question of how to protect the home is prominent in most people's goals. Another way to protect the home is to sell it. The question is how best to do it to achieve the best result in the shortest period of time. Utilizing the LWP Medicaid qualification software will allow you to determine the best approach and the cost benefit analysis on each choice you make. If you would like a free demo of our estate planning drafting software, click here now to schedule a call. We'll show you first hand how it can help you grown your estate or elder law practice.

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Bigstock-Debate--Two-People-Speaking-D-14929292 (1)

Can A Grantor Be Trustee Of His Irrevocable Trust?

October 21, 2015

by David Zumpano with 8 Comments Asset Protection Estate Planning Drafting Software

Many lawyers shudder at the idea of allowing the grantor of an irrevocable trust to be the trustee. But the primary reason for this fear is long-rooted in traditional estate tax planning principles. Particularly, § 674 of the Internal Revenue Code provides that any trust wherein the grantor retains the power to control the beneficial enjoyment of the income or principal of the trust will make all of the income on that trust taxable to the grantor, and Internal Revenue Code § 2036 provides that any trust where the grantor retains the right to possess or enjoy the property or designate who will possess and enjoy the trust property will make the principal of the trust includable in the grantor's estate at death for estate tax purposes. Prior to 2001, irrevocable trusts were predominantly utilized for estate tax protection. Triggering code Section 2036 would violate estate tax planning goals.

However, after the Tax Act of 2001, wherein the estate tax exemptions were increased to in excess of $5,000,000, the traditional tax planning rationale was no longer valid. Currently, the estate tax rule is triggered only on individuals who have assets greater than $5,430,000, and on married couples who have twice that amount. Recent statistics indicate that only two in 1,000 Americans have assets that exceed the federal estate tax exemption limits, which represents .2 percent, leaving 99.8 percent of Americans without an estate tax concern. The key question is, why do lawyers continue to hold 99.8 percent of clients prisoner to the rules meant for the .2 percent?

The Restatement Second of Trusts § 99 – and the cases cited thereunder, particularly Markham v. Faye, 74 F.3d 1347 – clearly states that creditors can only access the assets of a trust to which the grantor has retained rights. The question as to what rights the grantor has to access income or principal is a designing issue related to the beneficiary designations in the trust, not the trustees. The Baldwin case goes on to clarify that a grantor, as trustee, has the same fiduciary duties to the beneficiaries as any other trustee. Restatement Second of Trusts § 266 and the cases thereunder further clarify that it is well-established law that assets of a trust are not subject to personal claims against the trustee, even if the liability arises out of his trustee capacity. Further, Restatement Second of Trusts § 170 provides that a trustee is prohibited from self-dealing or acting in his or her own best interests. Nothing in the law is better settled than the provision that a trustee may not advantage himself or herself in dealings with the trust estate. Gibson v. Sec. Trust Co., 107 F.Supp. 766. A grantor's creditors are only entitled to income or assets available to the grantor, as is well-established under Uniform Trust Code § 505, and as further clarified under the Restatement Second of Trusts § 156. So in order to properly provide asset protection, the trust by its terms must prohibit distribution of the principal and/or income to the grantor, and no discretion shall be permitted to the trustee or anyone else to distribute it to the grantor. This will ensure asset protection.

The key question then becomes what the grantor is seeking protection for. If one wants to protect income and principal, then no benefits should be retained, but the right to be trustee is still permitted. The only adverse consequence is that all of the income is taxed on the personal income tax returns of the grantor, and they are responsible for the income tax on the trust income. Further, all of the trust principal is included in the estate of the grantor at death, but for the 99.8 percent of Americans who are not subject to estate tax, this is not an adverse result; in fact it's usually a preferred result. If there is any question as to whether the grantor has the ability to pay the income taxes, then the trust can contain a provision that allows the trustee to pay any income tax due to the taxing jurisdiction exclusively (not the grantor) by reason of the inclusion of the income from the trust on the personal tax return of the grantor. This restricts distributions to the grantor, and only allows the trustee to distribute to the taxing jurisdiction, and only as to the income tax caused by the inclusion of the trust income on the tax return of the grantor.

The key benefit of letting the grantor be trustee, and the one most important to clients, is maintaining control. Most people who have worked their whole lives accumulating assets are not ready to just turn them over to the kids or other third parties. Doing so not only puts the assets outside of the control of the grantor, but it also creates a risk of losing the assets to the creditors, predators, and lawsuits of the individual to whom they are transferred. Nothing could have a more adverse impact or be a greater risk to a client than that. Whereas the ability to control the assets, and to continue to manage the investments of the assets and keep them in the form they are currently in or change them as they desire along the way, is one of the greatest benefits to grantors when serving as trustee of their irrevocable asset protection trust. All of these provisions are permitted in the Lawyers with Purpose iPug® Trust system. The iPug Trust system monitors all of the various legal provisions to ensure the trust being utilized is proper to benefit clients in the ways they desire. So being a trustee and grantor of your trust does not subject it to risk. There is no legal authority anywhere that indicates being a trustee of your own trust makes it subject to your creditors. There is an entire line of cases where courts have invaded trusts where the grantor is the trustee, but in every case it is due to the grantor's “fraudulent conveyance and management” of the assets where the trust was invaded, not because the grantor was trustee. So, be informed and be conscious of your clients' needs, and share with them the many advantages of having them stay in control of their assets.

If you want to learn more about iPugs and in particular about iPug business planning, register for our FREE webinar this Tuesday at 4 EST. Click here to register now and check out the bullets below for just some of what you'll discover…

Learn the difference between General Asset Protection, DAPT Protection, Medicaid Protection and iPug® Protection
Comprehensive outline of the 2 primary iPug® Business Protection Strategies
Learn why clients choose single purpose Irrevocable Pure Grantor Trusts™ over LLCs
Learn how it all comes down to Funding
And much much more…

Just register below and reserve your seat… it's 100% FREE!

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Bigstock-To-Discuss-Negotiations--32214626

Distinguishing Between Irrevocable Trusts When Planning for Public Benefits

October 19, 2015

by David Zumpano with 2 Comments Asset Protection Estate Planning Drafting Software

A question comes up for many practicing lawyers and allied professionals as to what trust to use when clients want to protect their assets and ensure eligibility for Medicaid and other needs-based benefits, should the need for long-term care arise. The Irrevocable Pure Grantor Trust (iPug®) has long been a trust of choice in providing clients with the most flexibility, the greatest protection and the greatest amount of control. Understanding the distinctions between the various iPug Trusts, and how to use them to accomplish your client's goal, is essential.

There are three iPug protection trusts utilized for clients, and each of them are Medicaid compliant, ensuring the assets within them are not considered available resources in determining their eligibility for Medicaid benefits.

The three iPug Trusts are the MIT, the FIT and the KIT. Let's cover each of them separately.

The MIT, My Income Trust, is an income-only trust that allows the grantor to be the trustee to manage and distribute the assets as the grantor desires, other than to themselves or their spouse. Under Medicaid law, any trust created by an applicant or a spouse shall be deemed an available resource to the extent the applicant or spouse is able to benefit from it. That's why it is essential in all three trusts that the grantor does not have access to the principal directly or indirectly by any means.

For example, the court in Doherty held that a trust that contained the provision that allowed the trustee to terminate the trust if they deemed it appropriate and return the trust to the "beneficiary" was an available resource because, even though the trustee did not terminate the trust, the authority for them to do so would have resulted in the assets being re-conveyed back to the grantor. This incidental approach was enough to have it be considered an “available resource.” That's why it's essential that attorneys be certain that within the four corners of the trust document, there is no authority in any person or any condition which could occur so as to permit the grantors to access principal.

The Doherty discussion has no impact on iPug Trust use because iPug protection trusts have long stated that if the trust is terminated for any reason, the proceeds go to the "remainder" beneficiaries. This is an example of how to ensure that there is no way for the trust assets ever to get back to the grantors. iPug Trusts also permit the grantor the power to change the beneficiaries of the trust and the time, manner and method of distribution of trust assets at any time but without the right to change it back to the grantor or their spouse. This gives the client the maximum control available under the law. While the grantor as trustee and the retained powers and protection for beneficiaries are unusual to all iPug Trusts, let's examine the distinctions between these iPug Trusts. The MIT permits the grantor to retain a right for their life to the income from the trust. This ensures that the grantor can still control all of the assets and retain all of the beneficial interests from the assets, such as the interest on the bank income and the dividends from the brokers' accounts and right to live in or use the trust real estate, all without subjecting the assets to risk, and ensuring the assets are not included as an available resource in determining Medicaid benefits. The second iPug Trust is the partial MIT, wherein the grantor retains a right to only part of the income, not all of it. In that case, only the income right retained will be at risk to creditors, predators, and long-term care costs. The MIT is commonly referred to as the income only version of the iPug.

The second trust in the iPug trilogy is the control-only version, which is known as the Family Irrevocable Trust (FIT). In the FIT, the grantor retains all the rights to control and manage the assets, and has full 100 percent authority to distribute the assets to anyone they determine other than themselves or their spouse during their lifetime, but the grantor retains no right to the income or principal. The primary use of a FIT is when the client does not need the income from their assets to maintain their lifestyle because they have sufficient other income to meet their needs. The predominant benefit to the FIT Trust is allowing the grantor to remain in full control of their assets and to distribute them to the beneficiaries they choose, when they choose to distribute them (during life or after death).

In addition, the assets accumulated and held in the FIT can be held and delivered to the beneficiaries at a "step-up" in tax basis at death, which ensures the beneficiaries inherit it at the tax value as of the date of death. This will eliminate any capital gains tax to the beneficiary if they were to sell it. [All iPug Trusts ensure the assets transferred to the beneficiaries after the death of the grantor can continue in an asset protection trust for the beneficiaries for their lives, wherein the beneficiaries can have full control of the trust and full rights to the income and principal of the trust. But creditors, predators, and lawsuits will not have access to it, nor will the principal of the trust be considered an available resource for the beneficiaries' Medicaid intentions and it will not be considered a resource for purposes of the application for financial aid for children who may be in college.] The FIT is a great trust for clients who are successful and no longer need the benefits of their money but want to continue to manage and grow it during their lifetimes for their beneficiaries.

Finally, the third trust in the iPug trilogy is the KIT, this is the Kids Irrevocable trust. This trust is typically utilized to undo improper transfers done by the grantor during their lifetime. Many times clients come to attorneys having already transferred the farm to the kids. Transferring this farm or other assets such as bank accounts or brokers' accounts not only puts the assets outside the reach of the grantor's control, but more horrifically, subjects them to the risk of the transferees' creditors and predators. For example, if the child of the grantor who received the asset got divorced, died, got sued, or went bankrupt, the very assets transferred to the child by the parent will be subject to those liabilities, thereby putting at risk the parent who initially transferred them. The way to protect assets already transferred to third parties is to use the KIT. The KIT is an irrevocable trust created by the children who receive the assets, who then agree that, during the lifetime of their parent(s), they give up all right to control and access to those assets, so as to ensure they are protected from their creditors and predators at least during the lifetime of the parents. A properly drafted KIT will also ensure that the assets are protected after the death of the parents and are given back to the kids in a separate share MIT or FIT, depending upon the individual goal of each child. LWP is the only organization in the industry that provides a KIT trust that permits this type of drafting. The Kids Irrevocable Trust is also a usable tool when doing planning to ensure that a client is eligible for veterans aid and attendance and housebound pension benefits.

So utilizing irrevocable pure grantor trusts is essential in today's estate planning environment. The use of MITs, FITs, or KITs further distinguishes your skills as an attorney to meet the individual needs of clients. The LWP iPug Trust Drafting system carefully identifies each of these trusts and triggers warnings and instructions when choices are made that can be better served in one of the other trusts. Don't go it alone. Trust the technology and support LWP gives you to provide the best options for your client. To request a complementary live demo of our Drafting Software, click here now.

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Bigstock-Problem--Analysis--Idea--So-85356104

Understanding Grantor Trusts

October 7, 2015

by David Zumpano with No Comment Estate Planning Drafting Software

Many lawyers are perplexed when utilizing grantor trusts in estate, asset protection and benefit planning. It is easy to become confused when comparing grantor trusts with pure grantor trusts. Let's review these issues systematically.

The Internal Revenue Code provides that if a trust triggers any of the provisions identified in Sections 671 through 679 of the Internal Revenue Code, all income from that trust will be taxed to the grantor regardless of who receives it. The most typical provisions in a trust that trigger grantor trust status are if the grantor retains an interest in the income or principal from the trust, the power to control who gets the income or principal, the power to revoke the trust, or the right to borrow money from the trust without adequate interest or security. Grantor trust status also occurs if the grantor has the right to pay premiums on life insurance on the grantor. Interestingly, triggering a "grantor trust" status does not necessarily trigger the principal of the trust to be included in the estate of the grantor at death. It's merely an income tax impact.

To determine if assets in a trust are included in the grantor's estate at death for estate tax purposes, one must look to the provisions of Sections 2035 through 2042 of the Internal Revenue Code to determine whether estate tax inclusions are triggered. Inclusions are typically caused by provisions that allow the grantor the right to possess or enjoy the property of the trust or receive the income or principal of the property from the trust, or to be able to designate who will.

Other provisions include maintaining a revisionary interest to the grantor in excess of 5 percent, or permitting the grantor to have any other interest in the trust at death. While some of the grantor trust provisions can also trigger estate tax inclusion, one can often craft a trust to ensure that the principal of the trust is not included in the estate of the grantor, but the income tax is. This strategy of “Grantor Trust” status allows additional gifts by the grantors that are not subject to the annual gift tax exclusion. Restated, the additional income tax being paid by the grantor is money that would otherwise have been paid by the trust to beneficiaries who received the proceeds. Having the income taxes come out of the grantor's assets, and not the trust principal, permits the additional accumulation of funds for the beneficiaries without any gift tax consequence for the grantor. Most typically, irrevocable life insurance trusts are grantor trusts for income tax purposes, but are not included in the estate of the grantor at death.

So then, what is a Pure Grantor Trust? That is a term of art to describe a trust that taxes the grantor on the income (grantor trust) and ensures that the assets of the trust are included in the estate of the grantor. A Pure Grantor Trust is both a grantor trust for income tax purposes and is included in the estate of the grantor at death. Fifteen years ago, many would consider such a trust as malpractice, but since the change in the estate tax laws in 2001, this has become the preferred plan of 99.8 percent of Americans.

Why?

Because they are not subject to federal estate taxes, and including the assets of the grantor in their estate provides for a "step up" in tax basis after death. This ensures that their heirs inherit the property at the fair market value determined at the grantor's date of death, rather than carry-over tax basis, in which the heirs inherit the property at the cost the grantor paid for it. Unfortunately, many lawyers are still stuck in the pre‑2001 mindset and restrict clients to plans based on the estate tax avoidance rules. The key now is understanding when to use each type of trust.

Typically individuals with more than $5,430,000 or couples with more than $10,860,000 are concerned with the estate tax and would be more likely to use the traditional irrevocable trust that avoids estate tax inclusion in the grantor's estate at death. Individuals with less than $5,430,000 are better served using the Irrevocable Pure Grantor Trust™ (iPug®) to achieve asset protection from creditors, predators, and long-term care costs, and to ensure they remain eligible for needs-based benefits such as Medicaid.

Distinguishing the different trusts and their uses comes down to identifying the need of the individual client. Obviously, revocable trusts are pure grantor trusts and have all income taxed to the grantor, and all of the principal is included in the estate of the grantor. Revocable trusts are traditionally used to provide for the proper distribution and management of assets during the life or after the death of the grantor. Alternatively, if an individual has a taxable estate under federal or state law, then a non‑grantor trust is typically the trust of choice to ensure that the principal of the trust is not included in the grantor's estate. Whether the income is taxed to the grantor or not is also client goal specific. Notwithstanding, in most cases practitioners will choose to make irrevocable trusts grantor trusts to take advantage of the additional reduction in the grantor's estate and to benefit the beneficiaries by having income tax paid by the grantor.

Individuals who are not subject to estate tax and who are concerned about asset protection are better served with the iPug Trust, which allows them to be the trustee and maintain full control of the trust assets, and even allows them to retain benefits from them to the extent they are willing to risk them. For example, an income-only iPug Trust will allow the grantor rights to all of the income, which also makes the income available to the grantor's creditors and predators. These trusts have become the trusts of choice when doing Medicaid benefits planning, because they are compliant with federal and state Medicaid laws so as to ensure that the assets in the trust are not considered an available resource in determining the Medicaid eligibility of the grantor.

Finally, when planning for veteran's benefits, particularly Aid and Attendance Pension Benefits, the traditional Irrevocable Non-Grantor Trust is the trust of choice that provides the grantor is not deemed to be the owner for income tax purposes, and it is not included in the grantor's estate at death. While often these individuals are not concerned about estate taxes, the current policy of the Veterans Administration is that if any trust created by the applicant provides any benefits to the grantor, all assets in the trust are deemed available to the grantor in determining eligibility for Aid and Attendance Benefits. Therefore, when doing veteran benefits planning, the same trust is used as if doing advanced estate tax planning.

So which is the best trust for your client? All of them depend upon your client's needs. It is your responsibility to ensure how to draft the trusts in regards to the provisions of IRA Sections 671 to 679 and 2036 to 2042 and the resulting impact of Non-Grantor Trusts starters, Grantor Trust starters, or Pure Grantor Trusts starters. That's why the Lawyers with Purpose client-centered trust software system is your answer to keep it all straight, because it warns you if you choose inconsistent options that may trigger different results based on the client's intentions. Don't go it alone, let Lawyers with Purpose show you how.

If you want to know more about our estate planning drafting software, schedule a free live demo by clicking here and discover the most powerful, flexible and easy to use software that will help your grow your practice.

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Bigstock-Law-Legal-Rights-Judge-Judgeme-95353457

Analyzing the Zahner Holding: Moving Forward Using Short-Term Annuities as Successful Planning Tools

October 1, 2015

by David Zumpano with No Comment Asset Protection Estate Planning Drafting Software

In 2014, the U.S. District Court for the Western District of Pennsylvania held that three separate Medicaid Compliant Annuities with "short" term repayments were sham transactions for less than fair market value, as the intentions of these annuities were to shield resources from Medicaid eligibility. The claimants appealed the decision. This month, the United States Circuit Court of Appeals for the Third Circuit issued their decision regarding the claimants’ appeal. The Third Circuit’s decision sets a precedent is important for Elder Law practitioners, not only in Pennsylvania, but potentially in our field at large.

The Holding

Each case involved Medicaid claimants who purchased annuities after making uncompensated
transfers to qualify for Medicaid benefits. Two of the purchasers were married at the time of purchase and one was not. One case involved an 18-month annuity purchase, while the applicant's life expectancy was 9.5 years. The second appellant purchased a 14-month annuity, with a life expectancy of almost 7 years. The third appellant purchased a 12-month annuity, with a life expectancy of 11.3 years.

The District Court made two holdings in the Zahner case. First, the District Court held that federal law preempted the Pennsylvania rule stating all annuities held by a Medicaid applicant and / or his spouse are not assignable, and thereby countable resources, as the Pennsylvania rule was in direct conflict with federal Medicaid law. The Third Circuit upheld this portion of the District Court decision. Second, the District Court ruled that the purchases of the annuities were sham transactions for less than fair market value. The District Court reasoned that because the annuity terms were not correlated closely enough to the life expectancies of the claimants, they were actuarially unsound. The Third Circuit overturned this portion of the District Court’s decision, opining that an annuity is actuarially sound if its term is less than the annuitant's reasonable life expectancy under the safe harbor provision.

What We Have Learned as Practitioners

By examining in detail the Third Circuit’s Zahner holding, we can get a much better picture of what to look for in annuities moving forward, and how to protect our clients in their purchases of Medicaid Compliant Annuities. It is exciting knowing that short-term annuities are a valid planning tool, in accordance with the Third Circuit’s decision.

The Safe Harbor Provision

The Safe Harbor Provision, 42 US §1396p(C)(1)(F), (G)(ii), states that certain annuities do not disqualify those otherwise eligible from receiving Medicaid benefits. The federal Medicaid law, through the Deficit Reduction Act (DRA), establishes a four-part test for annuities to fall within the Safe Harbor Provision. An annuity must (1) name the State as remainder beneficiary; (2) be irrevocable and non-assignable; (3) be actuarially sound; and (4) provide for payments in equal amounts, during the term of the annuity with no deferral or balloon payments. The Pennsylvania Department of Human Resources (DHS) attacked the annuities on two separate grounds. The first ground was that the annuities were not irrevocable, and the second ground was that the annuities were not actuarially sound. These are the prongs of the Safe Harbor Provision that we will look to in analyzing the Third Circuit’s decision.

Assignability

Pennsylvania Statute Sec. 441.6(b) states that "any provision in any annuity … owned by an
applicant or recipient of medical assistance … that has the effect of limiting the right of such
owner to … assign the right to receive payments thereunder … is void." Pennsylvania DHS argued that this law caused all annuities purchased by Medicaid applicants in Pennsylvania to fail the safe harbor test. The District Court and the Third Circuit held that this is untrue. The Third Circuit opined that all states that wish to participate in the federal Medicaid program must comply with federal eligibility requirements. The Federal Medicaid Act allows states to establish more liberal requirements than the federal rules when implementing the State Medicaid plans, but they cannot provide more restrictive ones. Therefore, citing the Supremacy Clause, the Third Circuit said that the state rule was pre-empted by the federal law and the state must acknowledge the assignability of an annuity in accordance with the intent of Congress. The Third Circuit went on to further express Congress' intent by stating that in married cases any annuity that was payable to the community spouse would count as an income source to the community spouse and could not be a resource for the institutionalized spouses.

Actuarially Sound

The Pennsylvania DHS made two arguments that the annuities were not actuarially sound. First, they argued that the annuities were trust-like in that they were transfers made to a trustee or trustees with the intention that the annuity be held, managed, or administered by the trustee(s) for the benefit of the grantor or certain designated individuals (beneficiaries). Pennsylvania Transmittal 64. The Third Circuit stated strongly that there is no fiduciary relationship between the insurance company and the annuitant like that of a trustee and a beneficiary, as the insurance company has no duty to invest for the benefit of the annuitant, as long as the payments are made on schedule.

Second, the Pennsylvania DHS argued that the annuities were not actuarially sound because the annuity terms were shorter than a "term of years," and the annuitants lost money in each fact pattern presented to the Court. The Third Circuit held that as long as annuity terms are not longer than the reasonable life expectancy of the individual, the transfer is not being made for less than fair market value and the trust remains actuarially sound. The Third Circuit further interpreted "term of years” to be any reasonable time period, and while minutes or days may be a sham period of time, that was not the case here, as the term of months comported with the annuitants’ life expectancies.

National Impact

As Lawyers with Purpose attorneys desiring to use the best planning tools for our clients moving into the future, this ruling is important in many of its findings. The ruling holds that while the state may allow more liberal interpretations of the federal Medicaid rules, it is against the U.S. Congressional intent and in violation of the Supremacy Clause for the state to be more restrictive on Medicaid eligibility than the federal rules allow. The holding further makes a clear distinction between annuities and trusts on the federal level, stating that there is no fiduciary relationship between the annuitant and the insurance company as the insurance company has no obligation to invest in any way in the best interest of the annuitant. The Third Circuit also offers a more clear definition of what a period of time is for purchases of Medicaid Qualified Annuities, allowing purchases for less than a term of years if the time period of payout is in proportion to the annuitant’s life expectancy. In conclusion, the Zahner decision provides solid legal precedent for the continued use of short-term annuities in Medicaid planning.

Please join Dave and me in Phoenix as we discuss the potential implications of the ruling on Medicaid Compliant Annuities in our focus session on Wednesday, October 21st at the Tri-Annual Practice Enhancement Retreat. There are only a few spots left and the doors close TODAY at 5!

Kimberly Brannon, Legal-Technical and Software Trainer at Lawyers With Purpose

Is Your Practice … Uhmmmm, Easy?

September 28, 2015

by David Zumpano with No Comment Coaching & Implementation Estate Planning Drafting Software Systems & Processes Team Building

Many lawyers are frustrated when it comes to operating the "business" of their practice. Law school taught us how to think critically and help people, but it did not teach us how to run a business. As a result, much pain and long hours of work and frustration are created. Balancing the needs of your clients and operating your business is one of the most frustrating elements of running a law practice. The good news is, fixing it is not hard, it just requires a basic understanding you never got in law school. Let's begin by identifying whether you have effective employees.

In coaching hundreds of law firms over the past 15 years, I have a question I ask consistently: "Is it occurring?" What does that mean? Essentially, if what you want to be happening is happening, then it's occurring. If what you want happening is not happening, then it's not occurring. Simple enough? So let's analyze this in your practice. If you're frustrated with a certain part of your business, like hiring employees, because it's not being done effectively, then it's not occurring. If it's not occurring, then the person responsible for doing it does not have the proper skill set. Unfortunately, in a small practice that's usually you. So you must find others who know how to do it so you can get the employee hired effectively. This can be someone in your firm, or you can reach out to others and outsource your need. (LWP has many system services for estate planning attorneys; that’s what distinguishes this organization from most others.)

The interesting thing is, for those individuals you reach out to for help, it's really easy for them, which amazes most attorneys because we don't get it and it's so frustrating to us. (I personally hate it.) But for those who have the skill set, it's easy and it occurs! So as you look around your practice, if there's an area causing you pain, it is a clear message that you lack someone with a natural skill set to perform that task or duty. If drafting is not happening effectively, then you need to get someone who does it easily. They're out there and you can't stop until you find someone, because once you do, your life and your practice will change dramatically.

In building companies over the last 15 years, the level of pain I have endured along the way sometimes was unbearable. But now, as I have reached a point where many of those companies are operating without me, I look back at what the key issues were that I had to overcome. The answer? It all came down to skill set and ease!

What was difficult and frustrating for me was very easy for other people with the right skill set. To identify what five skill sets you need, your role and what roles you need to fill to support you, join us at our Tri-Annual Retreat in October. So the stress of running your business can subside and you can focus on what you do best and what is "easy" to you, and leave the other roles to the people who find them "easy" to do. Doors close October 2nd and we will NOT have any seats remaining, I promise you that!. It's not hard. Let Lawyers with Purpose show you how. Click here to register now.

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Bigstock-Debate--Two-People-Speaking-D-14929292

Annuity or Promissory Note?

September 23, 2015

by David Zumpano with One Comment Asset Protection Estate Planning Drafting Software

I'm intrigued with how many lawyers use Medicaid-qualifying annuities when doing crisis Medicaid planning. Medicaid-qualifying annuities address a core issue in crisis Medicaid planning for applicants with excess resources. The annuity acts as a “spend down,” which often leads to immediate eligibility for the client. The promissory note has the exact same impact and use in this fact pattern, but interestingly, it is used less often, even though it’s much easier to achieve eligibility, which will disqualify the individual for benefits for a period of time. The question becomes which to use and why.

The Omnibus Reconciliation Act of 1993 (OBRA) was the first legislation that began to set parameters for annuities to be Medicaid-qualifying. Essentially, it requires the annuity to be irrevocable, non-assignable, to have no cash value, and to be payable over the life expectancy of the annuitant. The Medicaid-qualified annuity rules are further enhanced by the Deficit Reduction Act of 2005 (DRA), wherein it also required that all annuities must have equal monthly payments with no delay in or balloon payments, and the annuity must name the state as the irrevocable beneficiary after the death of the annuitant. This significantly reduced the use of Medicaid annuities as a spend-down strategy to only married applicants, but it still allows them to be used in a crisis case to become “otherwise eligible” and use the annuity funds to be used for payment of long-term care costs during any disqualification period created by any uncompensated transfer.

DRA 05 also provided the first legislative permission for Medicaid-qualified promissory notes. DRA specifically provides that a loan to a third party by a Medicaid applicant will be deemed as a compensated transfer if it is irrevocable and pays over the life expectancy of the applicant. Essentially, DRA 05 permitted every individual to create a private annuity. The one risk, however, is that the statute does not require a promissory note to be non-assignable, so if it is assignable, it will be a countable resource in determining Medicaid eligibility because it is saleable and has a value. To avoid this, ensure that your promissory note is non-assignable.

So the question becomes, if you can do your own promissory note, why would you ever use a Medicaid-qualifying annuity?

The answer comes down to your state's application of the DRA 05 laws regarding promissory notes. While the federal law is clear that they are permissible, some states still don't permit them and count them as an available resource in determining the eligibility of a Medicaid applicant. This perplexes me, as federal law is clear, and under federal law, the state law cannot be more restrictive than the federal law. Most states that have taken a position against promissory notes have seen that position overturned by legal proceedings, whereas many states that do not permit promissory notes have not been effectively challenged.

Notwithstanding, as estate planners we are not litigators, and we strive to avoid litigation. So if your state does not permit promissory notes, then the path of least resistance is using Medicaid-qualifying annuities. When given the choice, a promissory note is easier, it can be done within the confines of your own office and it can be customized to the individual needs of the client, whereas Medicaid-qualifying annuities are typically restricted by the minimum period of time required by the insurance companies (typically a 24-month payout). To learn how to effectively use a Medicaid annuity versus a promissory note, let LWP show you.

We still have a few spots left in the room at the Tri-Annual Practice Enhancement Retreat but register now. Registration closes October 2nd and we WILL reach capacity … (we always sell out)! If you're an estate or elder law attorney, you don't want to miss this! Click here to register now.

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Bigstock-Illuminated-light-bulb-in-a-ro-85128830

When to Use the KIT™Trust

September 9, 2015

by David Zumpano with No Comment Asset Protection Estate Planning Drafting Software

Over the years, LWP has become known for its MIT, FIT and KIT trusts for asset protection and long-term care benefits planning, but few understand the KIT and its flexibility. Let's do a quick review…

A MIT Trust, or “My Income Trust,” is an income-only irrevocable IPUG asset-protection trust that allows the client to maintain control of assets, benefit from them to the extent they're willing to put them at risk, and modify or change the trust in all regards at any time other than in regards to the protection of which they seek.

The FIT Trust, or “Family Irrevocable Trust,” is an irrevocable IPUG asset-protection trust that allows the client to be in control of the assets, manage them and identify who gets distributions from it and when, but the client does not retain any rights to the income or principal.

Finally, the KIT Trust, or “Kids Irrevocable Trust,” is created by the children of the benefit of the MIT or FIT client where assets have already been conveyed to the children prior to being educated as to the benefits that the MIT or FIT could provide for the client's assets. The typical use of the most difficult form of KIT Trust is when mom and dad transfer the family farm (or other major assets) to avoid losing them to the nursing home. The KIT Trust is a strategy to protect assets that have already been conveyed to the kids (or others) before the client got to you.

How do KIT Trusts work?

A transfer of assets by individuals to their children may protect the assets from their long-term care costs and other risks, but it puts them squarely at risk from the creditors and predators of the children to whom they were transferred. For example, if one of the children that the farm was transferred to gets divorced, sued or dies, that child's ownership interest is no longer subject to the client’s influence, but rather is subject to the child's estate plan, or worse, lack of an estate plan.

That's why the KIT Trust is a great tool to use when assets have already been conveyed to the children. A properly designed KIT Trust will be created by the children as co‑grantors, and it will be an irrevocable IPUG asset protection trust, which allows the children to be a sole trustee or co‑trustee with their parents in the management of assets transferred to the trust.

Once it is created and the assets are transferred to it (typically the assets the children received from their parents), the assets are protected from the children's creditors and predators. In fact, as a third-party trust, it is not even countable in mom and dad's Medicaid eligibility calculation if they were named beneficiary of the trust. The question is how to properly create a KIT irrevocable trust.

The key point when creating a KIT Trust is understanding that the children become the client in the context of the trust creation. The KIT Trust is a grantor trust, but to the children. Therefore, all income generated by the trust, regardless of whom it’s distributed to, will be passed to the children who created it, so ensuring a proper investment strategy that works well with the children's tax planning is essential.

Another key element with a KIT Trust is identifying the beneficiaries. Can you make mom and dad the income or principal beneficiary of the KIT Trust? Well, the answer is yes, but it's up to each attorney and their comfort level. I have successfully named parents beneficiaries of the income and principal of a KIT Trust for years without it becoming an available resource when determining their Medicaid eligibility.

The key distinction is the fact that it is a “third-party trust,” not a trust created by the parent as Medicaid applicants, but rather, by a third party, their children. Many raise the issue of it being funded with assets that were the parents', but that is not a fact at issue, as the children are not applying for Medicaid and the assets of the irrevocable trust are not subject to the look-back period related to parent eligibility.

Again, although it is permissible, some attorneys are not comfortable naming the parents principal beneficiary. In reality, it may not be necessary to name the parents as principal beneficiary, since it was evident by the giving up of the asset to the kids that they no longer needed to have access to them. A more conservative approach is to allow them access to income only, but it is in no way reckless to permit access to principal.

The final question in creating a KIT Trust is what to do when mom and dad die. Since the trust is created by the children (siblings), there can be an inherent gift upon the funding of the trust if the children transfer the asset from the parents to the KIT Trust, depending on how it’s created. Presumably, upon mom and dad’s death, the kids get back their share of the remaining assets, but a complete gift will occur during the parent’s lifetime whenever a distribution is made from the trust. In addition, even if the children receive equal shares upon the death of mom and dad, under tax law it is not presumed that the share they receive was the share they put in.

So, by creating a KIT Trust, if it is not properly designed, there could be inherent gift tax issues between the children upon the funding of the trust and upon the termination of the lifetime trust after the death of the parent. One way to alleviate this concern is to set up separate shares and ensure that all distributions to any beneficiary are made equally from each separate share, and at the termination of the lifetime trust, each child gets their separate share balance back. This should mitigate any risk of gift tax issues and offer the opportunity to convert the KIT Trust to a separate MIT Trust or FIT Trust for each of the children's separate shares upon the death of the parent. It all requires a clear knowledge of the subject and a software system to keep your practice aware of the key issues.

If you want to learn more about Lawyers With Purpose and in particular would like a free demo of our estate planning drafting software, click here now to schedule a call.

Our Tri-Annual Practice Enhancement Retreat registration is open. If you want to experience what it's like to be a Lawyers With Purpose member consider experiencing it first hand by being in the room with us October 21-23 in Phoenix, AZ. But register soon and save – the price goes up 9/19! We are half way at capacity and the first few days are completely SOLD OUT!

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center