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IRA Transfers to Grantor Trusts for Medicaid Planning Purposes

IRA Transfers to Grantor Trusts for Medicaid Planning Purposes. Presented by:. David Zumpano, CPA, Esq. Medicaid Practice Systems, LLC 555 French Road, Suite 201 New Hartford, NY 13413. Robert S. Keebler, CPA, MST Virchow, Krause & Company, LLP 1400 Lombardi Avenue, Suite 200

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IRA Transfers to Grantor Trusts for Medicaid Planning Purposes

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  1. IRA Transfers to Grantor Trusts for Medicaid Planning Purposes Presented by: David Zumpano, CPA, Esq. Medicaid Practice Systems, LLC 555 French Road, Suite 201 New Hartford, NY 13413 Robert S. Keebler, CPA, MST Virchow, Krause & Company, LLP 1400 Lombardi Avenue, Suite 200 Green Bay, WI 54307-1997

  2. Medicaid Planning 2

  3. Medicaid Planning The State of Medicaid • Estate planning & Medicaid environment • A challenging “puzzle of needs” • The possibilities for you and your clients • The formula for success 3

  4. Medicaid Planning The Estate Planning and Medicaid Environment • Economic conditions • Estate planning industry • Medicaid legislation 4

  5. Medicaid Planning Challenges and Possibilities • For You • Peace of mind • Quality of life • More revenue The Federal Rules: State And Local Interpretations Medicaid Department Referral Sources (Advisors) Clients • For your clients • Peace of mind • Quality of life You and your practice 5

  6. Medicaid Planning Medicaid Laws and Rules • Title XIX of the Social Security Act • 42 USC 1396 - 1396s (1396p - Qualification) • 42 CFR §430, et seq and 20 CFR §416, et seq • As amended by Deficit Reduction Act 2005 • Effective 2/8/06? • The transition of law over several years • Teach old/new • Timelines of new law 6

  7. Medicaid Planning MMMNA Limits Federal Maximum: $2,489 (Jan, 2006) Your State: MMMNA Federal Minimum: $1,650 (July, 2006) 7

  8. Medicaid Planning CSRA Limits Federal Maximum: $99,540 (2006) Your State: CSRA Federal Minimum: $19,908 (2006) (Many States: Min=Max) 8

  9. Medicaid Planning Look Back Date • The first day of the month in which a MA resides in a health care facility and applies for Medicaid benefits. • Can apply for benefits retroactively 3 months 9

  10. Medicaid Planning Look Back Period • The period of time Medicaid will look at all financial records of a Medicaid Applicant (MA) • The Look Back Period begins on the Look Back Date OLD LAWDRA ’05* • Transfers to Individuals or Others:ALL Transfers: 36 Month Look Back Period60 Month Look Back Period *(Only as to transfers after 2/7/06) • Transfers to OR from a Trust: 60 Month Look Back Period (Only as to those transfers) 10

  11. Medicaid Planning Transfer 4 2/7/06 Transfer 3 Transfer 2 Transfer 1 36 mths 36 mths 36 mths 36 mths Lookback expires here Lookback expires here Lookback expires here Lookback expires here Transfer 5 2/8/06 60 mths Lookback expires here Lookback Transition: Lookforward(Based on Transfer Date) 2/7/03 2/7/04 2/7/05 2/7/06 2/7/07 2/7/08 2/7/09 2/7/10 2/7/11 11

  12. Medicaid Planning Look-back Period (36 mos.) If Apply 2/7/07 Look-back Period (36 mos.) If Apply 2/8/08 Look-back Period (36 mos.) If Apply 2/8/09 Look-back Period (48 mos.) If Apply 2/8/10 Look-back Period (60 mos.) If Apply 2/8/11 Lookback Transition(Based on Application Date) 2/7/03 2/7/04 2/7/05 2/7/06 2/7/07 2/7/08 2/7/09 2/7/10 2/7/11 Lookback Exp. Transfer 1 Transfer 2 Lookback Exp. Transfer 3 Lookback Exp. Lookback Exp. Transfer 4 2/7/06 Transfer 5 2/8/06 Lookback Exp. 12

  13. Medicaid Planning Penalty Period (a/k/a/ Ineligibility Period) • The number of months an MA is ineligible for Medicaid Benefits because of an uncompensated transfer • Calculation: Uncompensated Transfer / Monthly Regional Divisor • NO LIMIT on the number of months a MA can be ineligible • “Cure”: No penalty will be imposed if recipient of MA’s uncompensated transfer “gives it back” 13

  14. Medicaid Planning Penalty Period: Start Date • OLD LAW • DRA ‘05 Penalty begins the first day of a month during or after which assets have been transferred (most states = month of transfer; some states = month after) Penalty begins “the first day of a month during or after which assets have been transferred”… or “the date on which the individual is eligible for Medicaid assistance under the state plan and would otherwise be receiving institutional level care... but for the application of the penalty period, whichever is later.” Translation: Penalty begins when institutionalized and financially qualifies 14

  15. Medicaid Planning Basic Trust Types Revocable Living Trust • RLT • Whatever MA can get, Medicaid can get • Transfers from, creates 60 month look back • Be careful with house and/or gifts All Control All Income All Principal (All subject to loss) 15

  16. Medicaid Planning Basic Trust Types Irrevocable Trust • Typical Irrevocable Trust • Rarely accomplishes client’s objectives • Typically used for tax planning purposes No Control No Income No Principal (None subject to loss) 16

  17. Medicaid Planning Medicaid Asset Protection Trust Types • MIT™ • MA and/or CSGrantors My Income Trust Some (All?) Control All Income No Principal (?) (Income subject to loss?) 17

  18. Medicaid Planning Medicaid Asset Protection Trust Types • FIT™ • MA and/or CSGrantors • Income and Principal Paid to a “class” for MA & CS Lifetimes Family Irrevocable Trust Some (All?) Control No Income (?) No Principal (?) (Nothing subject to loss) 18

  19. Medicaid Planning Medicaid Asset Protection Trust Types • KIT™ • Trust created by children of MA with funds gifted by MA Kids Irrevocable Trust All Control All Income All Principal (Nothing subject to loss) Is this a “trigger trust”? 19

  20. Medicaid Planning QUESTION: How do you implement this in your practice? ANSWER: The Medicaid Bootcamp 20

  21. Medicaid Planning Medicaid Bootcamp Overview • The business rationale of implementing Medicaid into your estate planning practice • Medicaid laws & rules • Planning strategies • Counseling & design issues • Funding strategies • Implementation strategies • Communicating with your client 21

  22. IRA-Grantor Trust Planning 22

  23. IRA-Grantor Trust Planning Overview • Grantor trusts were created to eliminate income tax abuses involving (then-lower) trusts brackets • Grantor trust as to: • Income • Principal • Both 23

  24. IRA-Grantor Trust Planning Grantor Trust Benefits • Removal of highly-appreciating assets from taxable estate • Payment of taxes on behalf of trust are not considered gifts for gift tax purposes • Tax free distributions to trust beneficiaries • Permissible transferee of life insurance policy outside of transfer for value rules • Tax-free transfer of IRAs 24

  25. IRA-Grantor Trust Planning PLR 200620025 FACTS • Taxpayer (“T”) owned an IRA naming his four sons as beneficiaries • T died before his “required beginning date” (i.e. age 70½) • IRA custodian set aside separate shares for each IRA beneficiary within the time prescribed by law • One of T’s sons (“S”) is disabled and is receiving Medicaid benefits • Mother (“M”) was named as S’s guardian • S would lose Medicaid benefits if IRA were payable directly to S 25

  26. IRA-Grantor Trust Planning PLR 200620025 FACTS • A state court allowed M to create a “special needs trust” (“SNT”) for the benefit of S so as to preserve S’s Medicaid benefits • M is the trustee • S is the only trust beneficiary during S’s lifetime • M has discretion over the distribution and accumulation of income and principal • M proposed to transfer S’s interest in T’s IRA to an inherited IRA to be held by SNT 26

  27. IRA-Grantor Trust Planning PLR 200620025 HOLDINGS • SNT is a grantor trust under IRC §677(a) • The transfer of S’s share of T’s IRA to SNT will be disregarded for income tax purposes and will not be considered a transfer under IRC §691(a)(2) • The annual IRA distributions to SNT may use S’s life expectancy 27

  28. IRA-Grantor Trust Planning PLR 200620025 PLANNING POINT • It appears, based on the conclusions reached in this ruling, that an IRA may be transferred to a grantor trust during lifetime without triggering any adverse tax consequences. Accordingly, it may be possible to do the following: • Post-mortem beneficiary transfer of an IRA to a grantor trust • Lifetime IRA assignment to an Asset Protection Trusts (APT) • Lifetime IRA assignment to an Alaska Community Property Trust • Lifetime transfer to a Grantor Retained Annuity Trust (GRAT) or Intentionally Defective Grantor Trust (IDGT) CAUTION: These planning opportunities are new and untested. Therefore, they should not be implemented without first obtaining a private letter ruling. 28

  29. IRA-Medicaid Asset Protection (MAP) Trust 29

  30. IRA-MAP Trust Overview of Technique IRA-MAP Trust (Grantor Trust) Transfer of IRA Grantor / IRA Owner Primary (lead) beneficiary: Grantor Secondary (remainder) beneficiary: Grantor’s children 30

  31. IRA-MAP Trust Overview of Technique – Medicaid Estate Assets Inside Medicaid Estate Assets Outside Medicaid Estate IRA-MAP Trust (Grantor Trust) Grantor / IRA Owner 31

  32. IRA-MAP Trust Overview of Technique – Income Tax Taxable income earned within trust IRA-MAP Trust (Grantor Trust) Grantor / IRA Owner Payment of income tax on trust’s behalf NOTE: Trust does not “exist” for income tax purposes. Therefore, all income is taxed to the grantor. IRS 32

  33. IRA-MAP Trust Action Steps • Draft grantor trust to hold IRA • Determine type of Medicaid Asset Protection Trust • MITTM • KITTM • FITTM • Obtain Private Letter Ruling (PLR) • Assign IRA title to grantor trust 33

  34. Appendix Achieving Grantor Status NOTE: A special thank you to Scott Schrader, Esq. of Miller & Schrader, P.A. for the use of the following slides regarding qualifying trusts for grantor status 34

  35. Achieving Grantor Status • §672 Definitions • Adverse = beneficial interest that is substantial and whose interest is adversely affected by exercise or non-exercise • Non-adverse = Not adverse • Related or Subordinate = Non-adverse + parent/issue/sibling/employee/corporation • Spousal Attribution 35

  36. Achieving Grantor Status • §674 Power to Affect Beneficial Enjoyment • Grantor is treated as owner of any portion of the trust over which grantor controls beneficial enjoyment or corpus or income, exercisable by grantor or non-adverse party or both, without the consent of any adverse party (674(a)) • Powers found in 674(b) will never cause grantor trust status • 674(c) – power to distribute income or principal, or to add beneficiaries 36

  37. Achieving Grantor Status • §674 Power to Affect Beneficial Enjoyment • 674(d) – Power to allocate income • Power granted to someone other than grantor or “spouse living with grantor” to distribute, apportion or accumulate income to or for beneficiaries if limited by reasonably definite external standard • Power creates grantor trust as to income only • Possible to switch grantor trust status on and off merely by spouse moving out and back in? 37

  38. Achieving Grantor Status • §675 Administrative Powers • 675(2) – Power given to nonadverse party to make loans to grantor without adequate interest or security • N/A if trustee has authority to make loans to anyone without regard to interest or security • Power alone will cause grantor trust status, even if no loan is made (PLR 199942017, 9645013) 38

  39. Achieving Grantor Status • §675 Administrative Powers • 675(3) – Actual borrowing of funds • Direct or indirect loan to grantor or grantor’s spouse which is unrepaid at the end of year • N/A to loans with adequate interest and security • Creates grantor trust to extent amounts are unrepaid at year end, but . . . • IRS has apparently ignored requirement that loan remain outstanding until year end 39

  40. Achieving Grantor Status • §675 Administrative Powers • 675(4) – General • Right exercisable in a non-fiduciary capacity by any person to reacquire trust corpus by substituting other property 40

  41. Achieving Grantor Status • §675 Administrative Powers • 675(4) – General • Right exercisable in a non-fiduciary capacity by any person to reacquire trust corpus by substituting other property • Service’s position is that power alone isn’t sufficient, and applies a facts and circumstances analysis • Defective as to both income and principal • Grantor can release • Protector can re-grant 41

  42. Achieving Grantor Status • §677 Power to Use Income for Benefit of Grantor • Grantor treated as owner of any portion of trust, whether or not under §674, the income of which, without the approval or consent of adverse party is, or in discretion of grantor or nonadverse party may be, distributed to or for benefit of grantor or spouse • Or used to pay premiums on life insurance on the life of grantor or spouse 42

  43. Achieving Grantor Status • §677 Power to Use Income for Benefit of Grantor • Trust should disallow use of income to satisfy obligation of support • Discretionary power to pay income to grantor may cause inclusion under state law • Some states have changed their laws to not cause inclusion (Alaska, Delaware, and others) 43

  44. Achieving Grantor Status • §678 Persons other than Grantor Treated as Owner • Only Code section attributing ownership to someone other than the actual grantor • Power to vest corpus or income exercisable solely by that person • surviving spouse as sole trustee of bypass trust? • limitation to ascertainable standard (HEMS) prevents estate tax inclusion • switch on/off grantor trust status by appointing/firing co-trustee 44

  45. Achieving Grantor Status • §678 Persons other than Grantor Treated as Owner • N/A with respect to power over “income” during any period actual grantor is treated as owner under §§617-677 • Service has interpreted §678(b) as applying to principal as well as income • PLRs 9309023, 8701007, 8326074, 8308033, 8142061 45

  46. Achieving Grantor Status • §678 Persons other than Grantor Treated as Owner • Power to distribute income or principal which is “partially released or otherwise modified” that would cause grantor trust status under 671-677 • 5/5 power holder, until released, modified, or allowed to lapse, is treated as grantor over portion of trust subject to power • Upon lapse, power holder is treated as grantor of amount in excess of 5/5 • Rev. Rul. 67-241 and PLR 200022035 46

  47. Achieving Grantor Status • §678 Persons other than Grantor Treated as Owner • Power to distribute income or principal which is “partially released or otherwise modified” that would cause grantor trust status under 671-677 47

  48. Achieving Grantor Status • Terminating grantor status • Maintain Flexibility • Power to terminate grantor trust status should not be in hands of grantor 48

  49. Conclusion 49

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