Uncategorized – Page 10 – Kling Law Offices

IRAs and Trusts: A Good Combination?

January 15, 2015/in Uncategorized/by Michael Kling

A recent unanimous Supreme Court decision has rekindled the debate about whether it is better to inherit an IRA in a trust or receive the IRA assets outright. The decision in this case, Clark v. Rameker, in a nutshell, held that an inherited IRA is not an exempt asset. This means inherited IRA assets can be attached to pay a third party creditor’s claim. An “exempt asset” is one that cannot be used to pay a creditor claim. In Nevada, a well-known exempt asset is a Homesteaded primary residence. Under this new Supreme Court case, if you directly inherit IRA assets, the assets are not exempt and can be used to satisfy creditor’s claims.

On the other hand, if you inherit an IRA through a properly structured trust, the trust can protect the IRA assets from creditors. The asset protection feature of a properly drafted trust is not the only reason to consider using an Inherited IRA Trust. Other important scenarios include: when the beneficiary is a minor; if there is a second marriage and the IRA owner wants the spouse to benefit, but also wants to make sure children inherit; ensuring proper management of the assets; controlling the cash flow to children; and, estate tax considerations.

Generally, IRA inheritors must withdraw a minimum amount each year starting on December 31 of the year after they inherit the IRA. If desired, the individual can stretch out these minimum required distributions over their own life expectancy—a tactic often called the “stretch-out IRA.” Stretching out IRA payments gives the account extra years, and potentially decades, of income tax-deferred growth (or tax-free growth in a Roth IRA). Transferring IRA assets through a trust, however, may have income tax consequences by affecting when the beneficiary must take IRA distributions.

A trust, as opposed to a direct inheritance, must meet certain federal regulation requirements to achieve a stretched-out distribution schedule. With a properly drafted trust, the IRS will “look through” the trust and treat the beneficiary as if he or she were directly named the IRA’s beneficiary. This enables the trust to take advantage of the favorable “stretch” distribution rules that apply to individuals. If the trust is not properly drafted and is the named IRA beneficiary, the assets will still be transferred to the trust, but IRA distributions will be required to be taken within as little as five years.

You might think that because you already have a living trust you can simply name that trust as the IRA beneficiary. Beware, however, as the standard living trust may contain boilerplate language that is fine in other contexts, but detrimental when it comes to transferring IRA assets.

If you want to make sure the beneficiary of your IRA achieves the maximum tax benefits while still protecting the IRA assets from creditors or predators, an Inherited IRA Trust would be the answer. Please call Kling Law Offices for a consultation on this important and complex issue. We would be happy to discuss the issues with you so you can make the best decision for transferring your IRA assets.

Medicaid and the Miller Trust (aka Qualified Income Trust)

December 11, 2014/in Uncategorized/by Michael Kling

Lately, we have received several inquires about Medicaid planning and the use of a “Miller Trust” to qualify for nursing home benefits. Since this seems weighing on people’s minds, we wanted to address the concept and provide you with some important information about Medicaid planning. Because we can’t tell you everything about Medicaid in one article, we will focus on some basics of an individual qualifying for Medicaid’s long-term care coverage—which means gaining entry into a nursing home to most applicants.

You should understand that to qualify for nursing home services, the applicant must meet both medical need and financial requirements. Typically, any person who requires skilled nursing care is mentally impaired due to Alzheimer’s or dementia, or is unable to care for him/herself will medically qualify. The moment someone applies for Medicaid, the State takes a “snapshot” of the applicant’s income and assets to determine whether the applicant financially qualifies for services. Nevada is an “income cap” state, which means that applicants will be disqualified from receiving Medicaid if their income exceeds the state-determined “cap.” For 2014, Nevada’s income cap is $2,163.00 monthly. Nevada’s 2014 asset limit, or “Individual Resource Allowance,” totals $2,000.00. (Just remember, we are focused on income limits for purposes of discussing a Miller Trust).

When an applicant’s income exceeds the monthly cap, but is insufficient to pay for nursing home care, that person falls into a difficult gap. This is when we hear the term “Miller Trust” popping up—it is an informal name for a trust that is used to receive and hold excess income, thereby lowering the Medicaid applicant’s countable income to meet the eligibility threshold. This type of trust is also referred to as an “Income Cap Trust.”

It is also important to know that Medicaid uses a broad definition of “income” and will count Social Security income, defined benefit pension payments, alimony, income from immediate or annuitized annuities, as well as looking at all typical sources of income. Basically, if the applicant’s name is on the income check, all or part of that income will be attributed to the applicant. To reduce an applicant’s countable income, payments are assigned to the Miller/Income Cap Trust, taking them out of the applicant’s control.

When establishing a Miller/Income Cap Trust, the applicant’s income goes into the trust. There are limitations on how the trustee may distribute the income within the trust, which include: paying for the institutionalized person’s personal needs allowance; paying the nursing home for the patient’s payment amount; and paying the community spouse (if applicable) to increase the maximum monthly maintenance needs allowance. Upon the Medicaid beneficiary’s death, any assets remaining within the trust are paid directly to the State to repay Medicaid costs.

The fact that Medicaid benefits are not truly free is often not thought of, but should be remembered. Even when an applicant qualifies for benefits, Medicaid programs require beneficiaries to contribute most of their income as a co-payment for services. Fortunately, there are a number of tools that can reduce income and protect assets for those needing Medicaid assistance. Proper planning is essential, however, to avoid leaving income and assets exposed and to prevent penalties caused by transfers within the 5-year look-back period. Please call our office for a consultation to discuss Medicaid planning options if you are facing these difficult issues in your life.

Questions to Ask Before Buying Long-Term Care Insurance Details That Affect You: Part 2 of 2

October 15, 2014/in Uncategorized/by Michael Kling

In our previous blog article, we began the discussion on long-term care insurance with some initial questions about how much insurance you need, for how long a period, and how insurance benefits may be defined. In this segment, we want to introduce you to some of the more technical aspects of these policies.

Is the policy tax qualified?
Under the provisions of the Health Insurance Portability and Accountability Act of 1996 (which went into effect on January 1, 1997), long-term care premiums may be deducted from your Federal income tax within certain limits and to the extent you have medical expenses (including these premiums) that exceed 7.5 percent of your adjusted gross income. Any benefits received under a tax-qualified policy are not taxable if the policy meets certain guidelines. Employers may treat long-term care insurance premiums paid on behalf of their employees just like health insurance and fully deduct the cost. Moreover, the employees do not have to include the premium as income and the benefits, when received, will be tax-free.

Are the benefit triggers clearly spelled out?
A benefit “trigger” is the inability of the policyholder to perform specified Activities of Daily Living (ADL’s), such as transferring, toileting, bathing, continence, dressing, and eating. Ask your insurance agent for a copy of the actual policy in order to see for yourself how the benefit “triggers” and ADL performance are described. The policy you want must include coverage for ADL Standby Assistance. Otherwise, you will own a policy that is harder to qualify for benefits at claim time. Don’t make the mistake of focusing your comparison of companies on less important details like a 21-day vs. 31-day bed reservation benefit. Moreover, check policy language to be sure pre-existing conditions are covered.

Does the policy cover homemaker services?
Homemaker services include cooking, shopping, changing beds, cleaning the house, and doing laundry. Not all policies provide coverage for homemaker services and some require that services be specifically included in a plan of care. Look for policies that clearly define these services and give you a choice of options.

How does my health history affect the cost of the insurance?
Your personal health history can make a difference in both coverage and premium costs. Since insurance companies differ in the way they view certain health problems, it’s essential that your insurance agent has access to a broad selection of insurance carriers.

Is your agent or broker Certified in Long-Term Care (CLTC)? And do they offer a choice of companies?
Many insurance agents are now selling long-term care insurance since it has received so much media attention. Because the purchase of this type of protection is so important, we recommend that you do business with an agent or broker who is knowledgeable, experienced, and has established a good reputation in this area of insurance. Also, you want an agent who represents a number of insurance carriers so you can choose from a variety of policies.

The questions raised in this 2-part blog article are presented as a guide for helping you evaluate long-term care policies and make the decision that is best for you. As always, we would welcome the opportunity to help you evaluate your long-term care insurance needs.

Questions to Ask Before Buying Long-Term Care Insurance Part 1 of 2

September 16, 2014/in Uncategorized/by Michael Kling

When long-term care insurance first became available about eight years ago, there were few customers. The product was full of holes, untested, and overpriced. Not surprisingly people took a wait-and-see attitude, mainly because it took a while for most people to even become familiar with the need for this type of protection.

Fortunately, insurers have responded with significant product enhancements. But with so many policies to choose from, it has become more difficult to be sure that you’re selecting a policy that’s best for you. Because all policies are not the same, here are some issues to help you understand long-term care insurance options so you can obtain the coverage that best fits your needs.

What is the best way to calculate how much coverage you should buy?
It’s difficult to give a definite answer because each individual has a different comfort level with risk tolerance and how much of their income and assets they’re willing to spend to avoid risk. The amount of coverage depends in part on what you need and in part on what you can afford. Generally speaking, you should not spend more than 5 to 10 percent of your income on long-term care insurance premiums. In terms of the size of the daily benefit you purchase, it should make up in the shortfall between your income and the average cost of nursing home care in your area.

For how long a period should I insure myself?
Again, there is no one right answer for everyone. Most people buy what gives them peace of mind and is affordable. If you’re between the ages of 50 to 65, consider lifetime benefits with compound inflation options. If you’re 65 to 75, think about a six-year or lifetime benefit period with simple inflation options. Those older than 75 years old should consider buying more daily benefit for as long a period as they can afford.

Will the agent provide you with a sample policy?
Although sales literature can be helpful to give you a general overview of policies, it’s in your best interest to request a sample policy so that a family member, friend or adviser can review it with you before you buy. Be sure the sample policy matches the policy quoted by the agent; look for a policy series number.

Is the policy a group certificate type or an individual policy?

The difference between a group policy and an individual is significant even though the distinction may not be obvious. In some states, individual policies are regulated while group ones are not. Individual policies, however, are guaranteed renewable for life and premium increases for a class of insureds must be approved by the state.

This is a starting point for making an informed personal choice regarding long-term care insurance. We would be happy to consult with you to help assess and guide you regarding whether this insurance should be part of your overall estate planning. Please contact us at Kling Law Offices to discuss things further.

Using DIY Legal Forms? It’s a “Penny-Wise and Pound-Foolish” Idea the Court Says

June 13, 2014/in Uncategorized/by Michael Kling

Recently, the Florida Supreme Court used a phrase we do not often hear in court opinions to describe a decedent’s actions in planning her estate: “Penny-wise and pound-foolish.” Just what prompted the Court to use this cautionary axiom? It was a woman’s use of an E-Z Legal Form for her will.

You have probably noticed advertisements about the wonders of DIY legal forms. They suggest a pre-printed form can substitute for an attorney’s advice and save you bundles of money in the process. In estate planning, you may feel that you can save money up-front using EZ form documents. What you may never know, however, is how high the costs will run for your beneficiaries in sorting out the mess left behind when “EZ” turns into “complicated and problematic.”

The penny-wise case started when, in an attempt to plan her estate, Ann Aldrich completed an “E-Z Legal Form” as her will. On the form, she listed in great detail her possessions and bank accounts that she intended to go to her sister unless her sister predeceased her, in which case the possessions were to go to her brother, James Aldrich. Her sister died before her, leaving her additional money and property, but Ms. Aldrich never revised her will. Later, Ms. Aldrich attempted to write a codicil to the will that gave “all my worldly possessions” to her brother, but the self-written codicil was determined to be invalid.

After Ms. Aldrich died, her brother asked the trial court to determine who would inherit the property Ms. Aldrich acquired after she wrote her will. By this time, two of Ms. Aldrich’s nieces from a pre-deceased brother were claiming entitlement to a share of the estate as Ms. Aldrich’s intestate heirs.

The case made its way to the Florida Supreme Court, which held that the after-acquired property would pass under intestacy laws because the E-Z Legal Form will had no residuary clause or general bequests that could cause those assets to pass to James Aldrich. The fact that the E-Z Legal From failed include a residuary clause meant any property Ms. Aldrich did not specifically list on the form would be shared by the nieces.

As the concurring Justice noted in her opinion, the result was unfortunate but it resulted from Ms. Aldrich’s own actions: “[T]he fact that Ms. Aldrich wrote her will using a commercially available form, an ‘E-Z Legal Form,’ which did not adequately address her specific needs—apparently without obtaining any legal assistance.” Ms. Aldrich’s intent was clear, yet her use of a preprinted form prevented her wishes from being carried out.

What can you learn from the Aldrich family feud? First, please recognize that it is unwise to draft your own estate planning documents. Second, remember that your assets may change over time, so drafting your will or trust with overly detailed particularity can be a bad idea. Lastly, consider the possibility of future probate litigation and contemplate how you can avoid being “penny-wise and pound-foolish” when making decisions about your estate and your future.

Have estate planning or probate questions?