Posts tagged: 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

Many practitioners inquire whether the Social Security actuarial tables or the IRS minimum distribution tables should be used when determining the required minimum distribution (RMD) of an IRA to ensure their client qualifies for Medicaid.  So what is the proper tables to use? 

In typical lawyer fashion, the answer is, it depends.  42 USC Section 1396(b)(c)(1)(G)(ii) provides for annuity to be actuarial sound, and not considered an uncompensated transfer, the annuity must pay out over the life expectancy of the annuitant "in accordance with the actuarial publications of the Office of the Chief Actuary of the Social Security Administration."  The same is true when determining the proper payout on a promissory note or mortgage as outlined in 42 USD 1396p (c)(1)(I).  How does this differ from the required minimum distribution tables published by the Internal revenue service and what is the relevance?

Sections 401, 403, and 408 of the Internal Revenue code outlines requirements regarding retirement accounts.  Upon attaining age 70½ required minimum distributions are required under the tax laws is based on the RMD tables published.  In comparison, the Social Security tables are very different, and in some circumstances the IRS tables require nearly half the RMD that the Social Security life expectancy tables require.  So how do you be certain which one you use? 

To keep it simple, to remain compliant with the tax laws, the IRS tables must be utilized in determining the required minimum distribution to avoid any adverse tax penalties for failing to withdraw the minimum amount required.  Medicaid and benefits planning, however has a different standard is that the Medicaid law specifically refers to the Social Security Administration table in determining the actuarially sound calculation of any annuity owned by a Medicaid applicant. 

So the proper table to use will depend not on the law, but on which table your Medicaid department uses.  While the law is clear that it requires the Social Security tables, many states allow the IRS RMD tables and some states even exempt an annuity if the IRA is simply in a "payout status.  Once you are clear on how your state identifies an “actuarially sound” annuity or promissory note, you will have your answer. So, one final responsibility is to ensure when the Social Security tables are used, the amount required to be withdrawn is equal to or more than the minimum amount required by the IRS RMD tables.  That ensures a client’s benefits’ planning is also tax compliant.  Conversely, if a client is not doing benefits planning, then relying on the IRS RMD tables may result in a lower minimum distribution requirement.

If you are not a Lawyers With Purpose member, and would like to know more about who we are and the benefits we can bring to your estate and elder law practice, join our FREE Having The Time To Have It All webinar Monday at 8:00 PM EST.

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