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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

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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

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Don’t Appeal the VA – Find Another Way!

September 14, 2015

by Lawyers With Purpose with One Comment Asset Protection Estate Planning Drafting Software VA

When a claimant has received an unfavorable decision from the Veterans Administration, the first inclination is to appeal. The appellate process can take years to resolve. Elderly seniors seeking the wartime pension do not usually have years to wait, as death could occur at any time. When a claimant dies, the claim usually dies too. Thus, it is critical to speed up the process to get an approval sooner rather than later.

A preferable alternative to appealing is seeking a Request for Consideration. This is when a claimant requests that the VA reconsider one of its decisions that has not yet become final. A decision becomes final one year after it is issued. Thus, you must file a request for reconsideration within a year of the original decision. There is no specific form to file a request for reconsideration; however, we recommend using VA Form 21-4138, Statement in Support of Claim.

Common reasons to request a reconsideration of a decision for a pension claim include, but are not limited to, the following:

Denial of Pension claim for excess income (or only partial approval)
Denial of Pension with Aid and Attendance
Denial due to excessive net worth
Incorrect effective date of the award

Denial of pension claim for excess income (or only partial approval). To qualify for VA pension, the claimant must meet income limitations. Often, in order to meet the limitations, the claimant has recurring out-of-pocket medical expenses that can be deducted from the income, which then reduces the income for eligibility purposes. When the claim is denied or approved for less than expected, it is usually because either the claimant does not have enough medical deductions or the VA did not properly deduct permissible medical expenses. For example, the VA is to deduct all medical expenses for both a veteran and the veteran’s spouse; yet, the VA often does not deduct the spouse’s medical expenses. In that case, a request for reconsideration is a useful strategy to submit the expenses (again) and request that the VA recalculate the award.

Denial of pension with aid and attendance. When a claimant needs the assistance of another person to help with at least two activities of daily living (bathing, dressing, transferring, eating, incontinence/toileting), or needs the regular supervision of another due to dementia (memory loss), then the claimant can receive a supplemental monthly income called aid and attendance. But, before aid and attendance can be granted, the claimant must submit VA Form 21-2680, Application for Aid and Attendance, completed by their treating physician, to the VA. The form must be filled out with very specific language to meet the VA’s standards. When a claim is denied for aid and attendance, it is usually because the claimant either did not submit this form or the physician did not fill it out sufficiently. Getting a new form filled out properly and submitting it with a request for reconsideration will generally garner an approval by the VA.

Denial due to excessive net worth. To qualify, the claimant must have limited resources. If the VA denies a claim due to excessive net worth, once the assets are no longer excessive, the claimant may submit verification of the reduced assets and request the claim be adjudicated again.

Incorrect effective date of award. When filing for pension benefits, it is important to obtain the earliest effective date possible. The sooner the date, the more money the claimant receives. Under the fully developed claim process wherein the VA requires that the claimant submit all application forms and supporting documents simultaneously, months can go by while waiting to obtain a divorce decree, death certificate or the physician’s affidavit for aid and attendance. Instead of waiting in vain (without getting benefits), the claimant can file an Intent to File a Claim on VA Form 21-0996 to “lock in” the eligibility date. This form should only be filed when the claimant meets all financial and medical criteria but is waiting on supporting documents. Once the supporting documents are in hand, then, subsequent to filing the notice of intent, the claimant will file the fully developed claim. There may be months between the two. Once the VA issues its decision, it may have overlooked the intent to file a claim locking in the effective date and instead award the date from the filing of the fully developed claim. So as not to lose the intervening months, you should file a request for reconsideration with a copy of the intent to file a claim that was previously filed.

Although appeals can take several years to resolve, we are seeing that requests for reconsideration are taking less than six months, often only 30 days, to resolve. This is a much better outcome for the client.

If you want to learn critical information on building a thriving practice while serving those who serve our country, register for our FREE WEBINAR this Wednesday at 12 EST.

Here's Just Some of What You'll Discover During this Complimentary Event…

How and Where to Obtain Quality Clients
How to Present the Value Proposition
What to Charge for Planning
What to Include in Your Engagement Agreement

Victoria L. Collier, Co-Founder, Lawyers with Purpose, LLC, www.LawyersWithPurpose.com; Certified Elder Law Attorney through the National Elder Law Foundation; Fellow of the National Academy of Elder Law Attorneys; Founder and Managing Attorney of The Elder & Disability Law Firm of Victoria L. Collier, PC, www.ElderLawGeorgia.com; Co-Founder of Veterans Advocates Group of America; Entrepreneur; Author; and nationally renowned Presenter.

Lawyers With Purpose Unites With Life Care Funding

September 10, 2015

by Lawyers With Purpose with No Comment Asset Protection VA

Do you ever feel like you don’t know how to help a client? That the traditional planning strategies just won’t work in the situation presented? Here is a common scenario:

Jane, a widow who lives in an assisted living facility, has two adult children who are independent with no disabilities. When Jane’s husband, David, died two years ago, Jane gave each of her children $100,000 without consulting a lawyer. At that time, Jane was living at home and doing well. About six months after David died, Jane began experiencing a series of mini-strokes. The cost of her care is depleting her resources rapidly. The children really want to avoid putting her in a nursing home but are concerned she will need one soon. During your meeting, you naturally raise the possibility of a transfer of assets penalty due to the prior transfers.

If you are like many elder care attorneys, you will likely try to find ways for the remaining funds to stretch out during the penalty period. You may even propose that the children return the gifts if possible. It is not possible.

Is there anything you are overlooking? Maybe a dormant asset you can utilize?

There may be. Have you asked your client if she has life insurance?

Term life, universal life, and whole life insurance policies can be sold to pay for care. In Jane’s case, she has a $300,000 policy. She was considering letting it lapse because she can no longer afford the annual premiums. Instead of letting it lapse, let it work for her to pay for care during the Medicaid look-back period. Assuming a company purchases the policy for 40% of its face value, Jane would then have a fund of $120,000, or $3,333 per month for 36 months, to pay for care during the remaining five-year look-back. Jane’s income, added to these additional funds, will be sufficient to cover the cost of the assisted living facility for three years. At that time, the family can feel comfortable and confident about transitioning Jane into a nursing home and applying for Medicaid, if necessary.

Lawyers with Purpose is proud to announce that we have teamed up with Life Care Funding to assist lawyers and clients in identifying good situations to fund care!

To learn a little more about Life Care Funding for yourself, your team and your clients click here. If you have clients that could benefit from converting a life insurance policy into a long term care benefit click here for the Long Term Care Benefit Qualification Form. Or to learn more this new planning option for seniors, go to www.LifeCareFunding.com. Never hesitate to contact Life Care Funding directly at 888-670-7773 or email info@lifecarefunding.com.

Chris Orestis, CEO, will be sharing more information at the Lawyers with Purpose Tri-Annual Retreat, October 21-23, in Phoenix, Arizona. If you haven't registered yet – we are reaching capacity! Register today before pricing goes up and all seats are filled.

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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

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Maximizing the Benefits of a Well-Planned IRA Beneficiary Designation

September 1, 2015

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

Many attorneys and financial professionals struggle over how to properly designate the beneficiary of an IRA. While it can be confusing, understanding the core elements of the procedure greatly simplifies the designation process and offers multiple solutions. The three key elements one must analyze before designating the beneficiary are as follows: first, what is the overall intention of the IRA owner; second, who is the intended beneficiary; and third, what is the proper language to use on the IRA beneficiary designation form. As we examine and grow to understand these three issues, great practice opportunities will emerge.

The most important element in determining the proper IRA designation is the overall goal of the IRA owner. If the owner’s goal is simply to transfer the IRA interest to someone else at death, then a simple designation to the individual will suffice. The challenge comes when we start to identify more advanced goals. What happens if the IRA owner intends for the beneficiary to receive the IRA protected from the beneficiary’s predators and creditors? What if the owner wants the beneficiary to receive the IRA over a lifetime rather than all at once? These are situations in which a mere direct designation to the beneficiary will not accomplish a client’s goal.

The U.S. Supreme Court, in Clark v. Remeker, ruled that funds held in an inherited IRA do not constitute “retirement funds” and thereby do not derive the same protection benefits as the original IRA. (573 US, 2014). The one exception to this ruling occurs if the beneficiary is the surviving spouse and the surviving spouse rolls the decedent’s IRA into his or her own IRA. However, although the surviving spouse may be permitted to make distributions from the IRA over his or her life expectancy, such withdrawals will not necessarily be protected. Further, while a surviving spouse can maintain the protection of the original IRA owner, the surviving spouse can lose the IRA proceeds to his or her long-term care costs.

If the goal of the IRA owner is to preserve the IRA for the benefit of his or her beneficiaries and protect it from said beneficiaries’ creditors and predators, then a direct designation of the beneficiary must not occur. Currently, the only way to absolutely protect an IRA from the creditors and predators of the beneficiaries is to designate an irrevocable trust as the IRA beneficiary and designate the intended IRA beneficiaries as the beneficiaries of said trust. This two-step approach assures continued protection of the IRA funds after the death of the original plan holder and for the lifetime of the trust. The challenge for practitioners now becomes how to effectively name a trust as the IRA beneficiary and how that designation impacts the individuals intended to benefit from the IRA.

A trust can be a qualified designated beneficiary of an IRA without violating the IRS rules that require a “stretch out” of the payments from the IRA over the lifetime of the beneficiary. The four criteria to ensure compliance with the “stretch” rule necessitate the trust (1) to be valid under state law, (2) to be irrevocable at the death of the grantor, (3) to have all beneficiaries clearly "identified" within the statutory time period, and (4) a copy of the trust must be provided to the IRA plan administrator. These conditions can easily be met, but the most common violation is in having a qualified beneficiary that is identifiable.

An identifiable trust beneficiary must be clearly identified by the terms of the trust prior to September 30 of the year following the IRA owner's death. While this seems simple, it typically is violated in two fashions. First, a nonhuman beneficiary is named, creating a situation where there is no measurable life in being (i.e. a charity). Second, the terms of the trust do not clearly identify a beneficiary that can be named within the statutory time period. This violation typically occurs when the terms of the trust require some condition precedent to the vesting of the beneficial interest. While appearing complicated, once a practitioner has an understanding of these two issues, language can easily be inserted into the trust to ensure that those provisions are not violated. As Lawyers with Purpose members, our client-centered software system has all necessary language to ensure that the provisions are not violated by providing clear and proper warnings when an attorney makes choices that could put the stretch out in danger. Once the trust beneficiaries are properly identified, a trust can be named as beneficiary to maintain the asset protection for a non-spousal beneficiary (or spousal beneficiary if long-term care costs are an issue).

The final step lies in properly naming the trust as the beneficiary of the IRA. This requires an attorney to have a clear understanding of the distinction between outside beneficiary designations and inside beneficiary designations. Outside beneficiary designations reference beneficiary designations made outside of the trust on the beneficiary designation form of the IRA itself. Typical outside beneficiary designations are the trust, a specific article within the trust, or a particular beneficiary within the trust pursuant to a particular article. Examples of these outside designations could be as follows: “Pay to the trustee of the ABC trust dated 1/1/2015,” “pay to the trustee of the family trust under Article Four of the ABC trust dated 1/1/2015,” or “pay to the trustees of each separate share trusts under Article Five of the ABC trust dated 1/1/2015.” These three outside beneficiary designations distinguish which beneficiaries of the trust will receive the IRA. More importantly, these designations will also distinguish the stretch period based on the life expectancy of the oldest beneficiary inside the designated trust (the general trust, the family trust, or the separate share residuary trusts).

Inside designations refer to the specific beneficiaries named inside the trust document. When the proper inside designations are made after the correct outside designation, meaningful and comprehensive protection is afforded the client. Typically, a family trust will name the spouse and children of the client as beneficiaries. In such a situation, the oldest beneficiary would likely be the surviving spouse and therefore trigger a much shorter stretch-out period. In addition, a second stretch period at the death of the surviving spouse would be lost because it was not rolled into the surviving spouse’s IRA. Alternatively, when a residuary trust is named as outside beneficiary, the IRS would then examine all beneficiaries inside the residuary trust and choose the oldest beneficiary for the measuring life of the stretch. Finally, when the outside beneficiary is designated as separate share trusts, each separate share trust under the particular article would be analyzed to identify the oldest beneficiary therein. Typically in each separate share trusts there is only one beneficiary, so each beneficiary would use his or her age as the measuring life for stretch calculations.

Disclaimers are an important tool to consider in conjunction with outside and inside designations in IRA planning. Disclaimers may be effectively used on both outside and inside beneficiary designations. The use of disclaimers can create a variety of options to meet the overall goals of the client after death.

Proper inside and outside beneficiary designations together with the effective use of disclaimers are powerful planning tools. As an example, let’s analyze a situation in which a client desires to leave his IRA to his spouse of the same age, while still getting the most return on his investment for his wife and children. In this scenario, the client’s outside IRA beneficiary designation form names a family trust as the primary beneficiary and the surviving spouse as the contingent beneficiary of the IRA.

When the client names the family trust on the outside beneficiary designation form, the trustee of the family trust accepts the IRA designation. The surviving spouse, as sole inside beneficiary of the family trust, may choose not to benefit from the IRA. In accordance with the terms of the family trust, she can disclaim her interest in the family trust within the trust document. The IRA must then be paid in accordance with the trust terms to the residuary trust and the oldest of the residuary trust beneficiaries (in this scenario, the client’s oldest child) becomes the measuring life for the stretch.

Alternatively, as primary outside beneficiary, the trustee could disclaim the trust’s interest in the IRA in accordance with the outside beneficiary designation form before it is ever transferred into the family trust, resulting in the IRA going directly to the contingent outside beneficiary designation, the surviving spouse. The surviving spouse could then roll the inherited IRA into her own IRA and get all the benefits associated therewith. As evidenced, this plan permits an examination of the surviving spouse's health and income with regard to long-term care costs at our client’s death. In doing so, we have given our client and his spouse the greatest opportunity to ensure that the overall protection goals of the IRA owner (client) are met.

By understanding and implementing the three key elements in determining IRA beneficiary designations (the overall intention of the IRA owner; the intended beneficiary; and proper language to use on the IRA beneficiary designation form), we as LWP attorneys are able to provide our clients with the best IRA distribution plan to fit their desires and needs.

For a deeper understanding of Lawyers With Purpose and what we have to offer your estate planning and/or elder law practice, join us in Phoenix, AZ, in October. If you are even considering coming to this event register today – The first 2.5 days of the program are officially SOLD OUT and the room is at capacity. We still have a few spots left for the BIG Tri-Annual Practice Enhancement Retreat that kicks off Wednesday afternoon. For registration information contact Amanda Ross at aross@lawyerswithpurpose.com or call 877-299-0326.

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

When Is It Too Late to Protect Assets?

August 21, 2015

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

Many people are accustomed to the concept of "protecting their assets," but few are clear on the details of how to do it. The primary concern for clients is the loss of their assets to long-term care costs. Most people believe they need to wait five years to protect their assets, and once they enter a nursing home, they believe it's too late. The truth is, it's never too late to protect assets. As the LWP™ Medicaid Calculation software shows, individuals can qualify immediately for Medicaid, even if they have assets in excess of half a million dollars. The trick is to know the Medicaid laws and rules and how they apply to each client fact pattern.

I'll use Mary as an example. Mary called my office frantic because her mother was admitted to a hospital, and she was advised that mom would be going to a nursing home. She immediately contacted her dad's lawyer to see what to do. Dad's lawyer was swift to give them advice on protecting their assets from the threat of mom's impending long-term care costs. Mary was thrilled that the lawyer showed them how to protect $175,000 of their $450,000. Although they were losing $275,000, they were thrilled to protect the balance.

Mary eventually called me because her sister knew me and insisted she get a second opinion. When we put Mary's mom's fact pattern through our Medicaid qualification software, we were quickly able to determine that, in fact, Mary's mom qualified for Medicaid immediately and all $450,000 of her assets were safe and protected for dad, who still resided at home. In fact, I run into dad frequently at breakfast, and six and a half years later, mom is still in the nursing home and he's still at home with 100 percent of his assets protected. So, the question is not whether it is too late. The question is, how much can we protect and how soon?

It’s easy with the LWP Medicaid Calculation software. It shows you how. If you would like a FREE demo of our Estate Planning Drafting Software click here to schedule a call now!

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

VA Aid and Attendance Benefits Qualification Worksheet

August 14, 2015

by Lawyers With Purpose with No Comment Asset Protection Estate Planning Drafting Software VA

What is it?

The VA Qualification Worksheet is an invaluable tool for estate planning when your client is a wartime veteran or the surviving spouse of a wartime veteran. It allows you to input a client’s income, medical expenses and assets to determine not only whether he or she will qualify for VA benefits, but also how much exactly the client would receive each month from the VA after approval. This tool is essentially mathematical in function, as it does not take into account whether there is eligibility based on wartime service or character of military discharge. The calculations that form the basis of the worksheet are the same used by the VA.

When the VA evaluates a claimant’s income and assets for eligibility, it is considering certain factors. First, gross income cannot exceed the given maximum annual pension rate (MAPR) for any year. The VA usually updates MAPRs each year and publishes them on its website at http://www.benefits.va.gov/pension/rates.asp. Not only can they change every year, but MAPRs also vary according to whether the claimant is a veteran or a surviving spouse, and also with the number of dependents, if any. Fortunately, one can use unreimbursed medical expenses to help offset gross income so that it is lower than the MAPR. Gross income minus these medical expenses is called Income for VA purposes, or IVAP. To get the maximum pension, the IVAP must be $0. IVAP between $1 and the MAPR will only result in a partial benefit.

Second, the claimant cannot have excessive net worth, even though there is no specific asset limit. As the VA Adjudication Procedures Manual Rewrite M21-1MR, Part V, Subpart iii, 1.J.70.a states: “No specific dollar amount can be designated as excessive net worth.” Nevertheless, because the manual M21-1MR, Part V, Subpart iii, 1.J.70.b goes on to state, “A formal administrative net worth decision is required if the beneficiary has net worth of $80,000 or more,” $80,000 has become the widely acknowledged asset limit for VA eligibility. This asset limit applies to both single and married claimants.

In rare cases, the VA will apply what is called age analysis when evaluating assets pursuant to the VA Adjudication Procedures Manual Rewrite M21-1MR, Part V, Subpart iii, 1.J.70.a, which states that “a number of variables must be taken into consideration when making a net worth determination.” These variables include income, expenses, and the claimant’s life expectancy. By applying an age analysis, the VA is attempting to determine whether “a claimant’s assets are sufficiently large that the claimant could live off these assets for a reasonable period of time,” at which point the VA can “deny pension for excessive net worth” (M21-1MR, Part V, Subpart iii, 1.J.67.g). While the adjudicators rarely apply this tool, you should be aware of the possibility.

How to use it

The VA Qualification Worksheet is part of the Lawyers with Purpose VA software and is also available as a standalone document, in either Microsoft Excel or Microsoft Word format, that you can complete by hand. Both versions are available for download from the members-only section of the LWP website. The worksheet is composed of six sections: VA Countable Income, Deductible Medical Expenses, Assets Countable in VA Net Worth, Maximum Applicable Pension Rate (MAPR), VA Allowable Net Worth without Age Analysis, and VA Allowable Net Worth with Age Analysis. Once you enter the appropriate information in the first three sections, the calculations will give you the results for the other three sections.

When to use it

The VA Qualification Worksheet’s value at the beginning of the VA planning process is obvious, as it helps identify how much of a benefit a client can expect to receive, if any. However, it is also valuable to run once you have completed a claim but before you file it, in order to verify that the results are what you expected. This can increase the success rate of your claims. If the claimant does not qualify for the maximum monthly benefit, there may still be time to correct it or, at the very least, you can inform your client of the issue to minimize any surprise or disappointment with the outcome. The worksheet should also be used at every annual review to confirm the monthly benefit given the claimant’s most recent income, assets, and medical expenses, and to determine whether any further planning needs to be done to ensure continued VA eligibility.

If you're not a Lawyers With Purpose member and want to learn more about the VA Proposed 3 Year Look Back, join our FREE WEBINAR on Wednesday, August 19th at 4 EST by clicking here to register. (Members – you already have access to the webinar on the Members Only section of the website!).

By Sabrina A. Scott, Paralegal, The Elder & Disability Law Firm of Victoria L. Collier, PC and VA Production Coordinator for Lawyers With Purpose.

Victoria L. Collier, Veteran of the United States Air Force, 1989-1995 and United States Army Reserves, 2001-2004. Victoria is a Certified Elder Law Attorney through the National Elder Law Foundation; Author of “47 Secret Veterans Benefits for Seniors”; Author of “Paying for Long Term Care: Financial Help for Wartime Veterans: The VA Aid & Attendance Benefit”; Founder of The Elder & Disability Law Firm of Victoria L. Collier, PC; Co-Founder of Lawyers with Purpose; and Co-Founder of Veterans Advocate Group of America.

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A New Tool for VA Benefits Planning

August 4, 2015

by Lawyers With Purpose with No Comment Asset Protection Legal Technical

Amid all the rumblings of the Veterans Administration proposing to make it harder to qualify for the wartime pension, there is a secret weapon that shouldn’t be affected by the changes. Life Care Funding is an emerging concept wherein a person owns a life insurance policy and sells it to pay for health care. The traditional model, life settlements, paid a person who had a terminal illness a nominal sum to do whatever they needed or wanted to do with the funds. The new concept, Life Care Funding, is different.

With Life Care Funding, life insurance owners do not need to have a terminal illness. However, they must need immediate assistance with activities of daily living or regular supervision due to cognitive decline. These are the same standards as when a person makes a claim against traditional long-term care insurance. Another difference is that, once the policy owner sells the policy to create the life care fund, the proceeds are set up in an irrevocable custodial account that can only be distributed to third-party caregivers. A certain percentage is also allocated toward burial, cremation and funeral expenses. The custodial beneficiary (prior policy owner) directs to whom and how much of the life care fund is paid each month. The payment structure is flexible and can change with the changing circumstances of the patient in need.

How does this help with VA benefits planning?

Qualification for the wartime pension with aid and attendance is dependent on having low assets and low income. The cash value of any life insurance policy counts against the net worth standard to qualify for the wartime pension. Once the policy has been converted to a life care fund, the insured is no longer the owner of the policy; the policy was sold for fair market value, and the funds are placed into an irrevocable custodial account that cannot be converted to cash and wherein the claimant has no access and virtually no direct control over the assets. Thus, as a life insurance policy, it harms VA eligibility, but as a life care fund, it should be exempt.

A complete 19 page legal analysis of why life care funds should be exempt under the current laws and the new proposed laws will be presented on August 5, 2015 at 4 p.m. Eastern time. Click here to register for the webinar, “A New Tool for VA Benefits Planning? Legal Analysis of Life Care Funding and the VA Pension Benefits Laws.”

The Wisdom of Never Giving Assets to the Kids

July 7, 2015

by Lawyers With Purpose with 2 Comments Asset Protection Estate Planning Drafting Software Legal Technical

Invariably, in every workshop I have presented to clients over the last 10 years, I've been asked the question, “When should I give my house (or other assets) to the kids?” My answer is quick, swift and with a smile: “Never. In fact, you never want to give anything to anyone you love.”

That usually gets their attention and draws a frown – until I explain. Giving assets to your children defeats the very thing the client is often attempting to accomplish. When I ask why they want to give their assets to the kids, the response 99 percent of the time is that they want to protect the assets. I respond, so the way you protect your assets from your creditors and predators is to give it to your kids so those assets are subject to all their creditors and predators? Who has more creditors and predators, you or your kids? And then I get the blank stare.

The key element when doing asset protection planning from general creditors and predators, or for Medicaid eligibility and long-term care, is to be properly informed of the options available. Not only can transfers in assets to the kids subject your assets to risk by the kids' bankruptcy, divorce, lawsuits, and even your child's death, but it could have adverse income tax consequences.

Transfers to children are at a “carry over” tax basis to them; that is, they inherit the asset at what you paid for it. This could be extremely detrimental in the case of highly appreciated assets. In fact, it creates an income tax on sale that would not otherwise have been due, had the client held it to death and then transferred it to the children. The key point is to know how to get the best of both worlds.

That's where the IPUG™ protection trust is so essential. The Irrevocable Pure Grantor Trust™ allows the grantor to be the trustee, to benefit from the trust (to the extent they so desire while understanding the impact) and to be able to change their beneficiaries or any other provisions they desire. This is very empowering to clients who traditionally believe once you create an irrevocable trust, you can't change it, you can't benefit from it, and you can't control it.

In fact, you can do all three; it's just in how you do it. The core distinction in an IPUG™ trust is that you must give up only what you want to protect. For example, if you want to protect your assets, you must give up, forever, the right to own those assets. But you do not have to give up the right to control those assets, manage those assets or even get the beneficial interest and use of those assets! The most common way grantors benefit from their assets that they no longer can reach is by living in the house they have transferred to an IPUG trust, or by continuing to maintain receipt of the income and dividends from any cash investments or brokerage accounts in which they have put inside the IPUG™. Most people realize they don't really need the assets; they just need the income produced from them and want to maintain control.

For those who do need access to their assets, they are not candidates for the use of the IPUG™, or any other protection trust. They would use a typical revocable living trust, which accomplishes their estate planning needs and can provide asset protection after death. That's why you never want to give the money to the kids after you die either. One of the greatest advantages seniors have is, after death, the ability to transfer their assets to their children in a trust that the children can control and benefit from any time they want – but creditors or predators can never invade those assets, for the life of the child! This includes the government, lawsuits, divorces, bankruptcies, and even nursing homes.

The money is flat-out safe.

Why would anyone give anything to anyone they love when they can give it to an IPUG trust that protects it for them while they're alive and for their children for their lifetimes after they're gone.

If you aren't a member of Lawyers With Purpose and want to know more about what we have to offer (which is tons of technical legal support) for your estate or elder law practice, register for our Having The Time To Have It All webinar on Thursday, July 23rd at 2 EST. Reserve your spot today to learn more about creating the practice of your dreams.

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