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Income vs Asset Transfer Lookback: When the VA Questions Income Prior to the Effective Date

July 6, 2016

by Lawyers With Purpose with No Comment Asset Protection Legal Technical Systems & Processes VA

You may be aware that the Department of Veterans Affairs (VA) will be implementing a proposed three-year lookback period for asset transfers sometime in 2016. Until this rule becomes final, veterans and their surviving spouses can continue to transfer assets out of their name and become almost immediately eligible for VA pension under the asset standard. However, you may have already experienced the “income lookback,” which is when the VA questions income prior to the effective date of a claim. Today, I will explain why this occurs, whether it matters, and finally, how you respond. But first, let’s cover what determines the effective date of a claim.

What is the effective date?

The effective date is technically the date the VA receives the intent to file claim or the formal claim. If you file an intent to file claim or a formal claim on June 6, 2016, the effective date is June 6, 2016. However, actual payment for awarded claims begins the first of the month following the month in which the intent to file or the formal claim is filed. Thus, when we think of effective date, we are usually thinking of when payment begins. Therefore, if you file an intent to file claim or formal claim on June 6, 2016, the effective date for payment would be July 1, 2016.

Regardless of the effective date, there are situations in which the VA will consider retroactive months. A veteran can seek benefits for up to 12 months prior to the effective date if he/she was disabled and financially eligible at that time. Note that when you seek this, you should specifically include the citation in Title 38 CFR Sections 3.114 and 3.400 and provide income, asset, and medical expense information for the prior 12 months as well as for the current time period. A surviving spouse has up to a year after the death of the veteran to file a claim for death pension, and the VA will grant retroactively to the month of the veteran’s death. If he/she files after this one-year window, the effective date will be the first of the month following the month in which the intent to file or the formal claim is filed.

Why does the VA question income prior to the effective date?

The VA is supposed to explore potential retroactive benefits, or at least inform claimants of them. Although you might not expect the VA to go out of its way to find out if a claimant was owed benefits for any period of time before filing a claim, it can happen. I have seen death pension claims awarded back to the month of the veteran’s death, even though the surviving spouse was not eligible at that time, and despite the fact that we specifically requested a later effective date when he/she was eligible.

Questions regarding prior income generally arise because the VA cross-checks income submitted on the application for benefits (the VA forms 21P-527EZ and the 21-534EZ) with what is on record with the Internal Revenue Service (IRS). The VA started doing this in the year 2013 once it phased out the Eligibility Verification Report, which was the annual review of income and medical expenses to confirm VA eligibility. Because the VA is seeing historical information, the income reported to the IRS in prior years may be substantially more than what a claimant currently expects to make.

Does it matter if the VA questions income prior to the effective date?

If you are seeking retroactive benefits, then you should expect the VA to question income prior to the effective date, as well as assets and medical expenses, which, in this case, does not matter. Another possibility – and this does occur – is that by checking with the IRS, the VA discovers an income stream that was not reported to you and thus is not included in the claim. This is not necessarily intentional on anyone’s part but may be due to a family’s unfamiliarity with an incompetent claimant’s financial details. This can occur with irregular sources of income in particular. In this case it does matter, as you must now concede to the VA that there is additional income of which the family was not aware. If there is more income being currently received by your claimant than you knew about, then you might not have enough recurring medical expenses to offset this newly found income, and this could result in a partial award or denial. You may need to plan to file actual medical expenses annually with the VA in order to maximize your claimant’s pension benefit.

When it does really matter is when that income is no longer being generated as of the effective date (e.g. because interest-bearing assets were liquidated, spent down or transferred, because a retirement fund was withdrawn, because bonds were cashed, etc.) because the VA Adjudication Manual M21-1, V.iii.1.E.6.o on “Income Received Before the Effective Date of the Award” specifically states:

Do not count income received before the effective date of an original or new award. (For Survivors Pension cases, do not count income received between the effective date and the date of the Veteran’s death.) The effective date is the date a claimant is entitled to benefits without regard to 38 CFR 3.31.

And elsewhere the VA Adjudication Manual M21-1, V.i.3.A.3.c defines the “Reporting Period for Current-Law Pension” as:

Current-law pension income is based on 12-month annualization periods. After the initial year, income-counting periods for irregular income and medical expenses coincide with the calendar year. Income is reported on a calendar-year basis.

If the case involves … an original or reopened claim

Then … the initial annualization period extends from the date of pension entitlement through the end of the month that is 12 months from the month during which entitlement arose.

Finally, even the main application forms for veterans’ improved pension (the new VA form 21P-527EZ) and the surviving spouse’s death pension (VA form 21-534EZ) specifically request income as of the effective date for expected income such as dividends and interest.

How do you respond?

You should respond to all inquiries from the VA, but depending on your claimant’s particular scenario you must decide whether the appropriate response is to rebut or regroup. Regardless of the scenario, make sure to reply in a timely manner or request an extension. You are usually given at least 30 days to respond or the VA will go ahead and decide a claim, and that may mean a denial or an approval for a lesser amount, if they are considering prior, higher income. This does not mean that you have no recourse after the VA has issued such a decision. If you get a denial, you still have up to one year from the date of the denial letter to appeal. If you have an approval for a lesser amount, you have a little more flexibility, as the VA must consider any income/medical expense information as long as it is submitted within the calendar year following the year in which that income/medical expense occurred. For example, if I had a claim approved today for a lesser amount based on income that the claimant received in tax year 2015, then I would have until 12/31/2017 to submit a rebuttal of this information, and the VA must consider it.

If you decide that the VA’s inquiries into income prior to the effective date should be rebutted as immaterial to your client’s claim, then you can respond with the citations from the VA adjudication manual above and essentially state in your rebuttal that income prior to the effective date is irrelevant.

However, despite the VA’s own regulations, you may struggle to get them to accept this rebuttal, and they often still insist on evidence of termination/liquidation of any accounts that historically have generated more income than what is declared on the VA claim. In the interest of getting your client awarded his/her rightful pension sooner rather than later, you may choose the path of least resistance and obtain the requested documentation.

Nevertheless, the very real possibility that the VA may question income prior to the effective date may shape how your firm recommends that clients transfer assets. Consider closing accounts rather than transferring or renaming accounts to create a clean break. Go ahead and collect documentation about closed accounts so you will be prepared in anticipation of such an inquiry from the VA. You may even want to consider inserting a statement with VA formal claims that explains that expected income will decrease significantly as compared to prior years due to liquidating interest-bearing accounts to pay for increasing medical costs. Also you may want to anticipate issues by requesting the prior year’s tax return of any VA claimant so you can see what information the VA is likely going to get from cross-checking with the IRS.

After the proposed changes affecting pension benefits and transfers of assets become final, we expect that the VA will specifically request financial information prior to the effective date – specifically three years prior to the effective date. And because net worth under the proposed rule may include annual gross income, you’d better believe that the VA will continue questioning income received prior to the effective date. Only time will tell what the proposed lookback period will look like when finally implemented, and that will determine how we recommend that you respond to such inquiries in the future. Rest assured, however, that when that time comes, Lawyers with Purpose will be there to develop strategies and draft recommendations that you can use in your firm.

If you are interested in our monthly complementary VA Tech School webinar you can register here. We host it on the first Wednesday of every month and it's open to both members and non-members. Our next webinar is on Wednesday, August 3rd at 12 EST titled Big Brother is Watching: Fiduciary Accounting.

By Sabrina A. Scott, Paralegal, The Elder & Disability Law Firm of Victoria L. Collier, PC and Director of VA Services 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.By Sabrina A. Scott, Paralegal, The Elder & Disability Law Firm of Victoria L. Collier, PC and Director of VA Services for Lawyers with Purpose.

In Unexpected Trust Fight, A Meaningful Victory

June 16, 2016

by David Zumpano with 2 Comments Asset Protection Legal Technical

An individual entered the nursing home with no pre-plan. The daughter, the power of attorney, contacted Mike Goss’s office for a plan. As he has successfully done many times in the past, Mike created an asset protection plan for the new nursing home resident using an MIT trust. The penalty period was correctly calculated and a Medicaid Compliant Annuity was purchased to pay through the penalty.

This is where the “typical” part of Mike’s typically successful Medicaid application ends. Because, unlike countless other applications he had submitted using the same format and planning tools, this patient’s application was denied. It was denied under the premise that, because the patient could become the trustee, she therefore had access to the principal of the trust.

At the desk review, documentation was submitted stating that the trust, under no uncertain terms, allows the trustee to be a principal beneficiary. It was further submitted, though not necessary, that although the woman could not ever be a beneficiary, she also could not be a trustee, as she was admitted to the nursing home in an incompetent state.

After losing at the desk review, Mike moved forward to the Administrative Law Judge. Surely when the case was placed in front of an attorney, it would be determined that the desk worker simply did not understand a trust that had full force of the law and had been submitted and approved by the Medicaid Agency many times.

In the interim, the Lawyers with Purpose team, headed by Dave Zumpano and LWP members from the state of Indiana, met to go over the legal arguments supporting the long use of the IPUG trust in Indiana. However, it was determined that in all likelihood this case would be overturned by the ALJ. The ALJ did not feel the same way. He ruled that the trust was an available resource because the grantor could be the trustee.

Mike was forced to file for judicial review of the denial, and the case was moved over to the FSSA attorney. Using the law review article written by Dave Zumpano, POMS and state rulings, Mike invested time writing a brief for the hearing. Months went by as the FSSA attorney “attempted” to get the records from the administrative hearing. Mike tried to negotiate with the FSSA attorney to no avail. Right before the hearing date, Mike was asked for an extension by the FSSA attorney, with the reasoning that they may be able to negotiate a settlement. A few weeks later, Mike was contacted and asked to write an Order. He had won the appeal with no judicial hearing – a year after his client applied for Medicaid.

Mike’s due diligence paid off and his client received the Medicaid benefits she was legally entitled to. His advocacy for his client not only got her on Medicaid but protected the MIT trust as a planning tool for all attorneys in his state moving forward. Had he not kept fighting for what the law allows, bad interpretation by a Medicaid desk worker could have closed an entire avenue of planning for countless applicants in the future. Thank you Mike Goss for being a tireless advocate for not only your clients, but for all elderly in your community and state.

If you want to learn more about becoming a Lawyers With Purpose member give us a little information about yourself. You will then be able to download the Membership Brochure and learn more about our membership benefit options.

Kimberly Brannon, Technical Legal & Software Trainer – Lawyers With Purpose

Maximizing Your Legal Technical Training

June 11, 2016

by David Zumpano with 3 Comments Asset Protection Coaching & Implementation David J. Zumpano Estate Planning Drafting Software Legal Technical Medicaid Systems & Processes

Lawyers with Purpose is getting ready for some exciting changes in our legal technical training. Over the past several months, as my calendar has been freed up to provide one-on-one legal training and file reviews with members, case-specific questions for the Live Case Study review have slowly faded. As such, we are restructuring the Monday afternoon hour to continue to provide members with the most efficient use of your time and the time of your staff. Moving forward, while we will continue to address all questions that are submitted by 5 p.m. Friday on the following Monday, we will be using a large portion of the legal technical hour as an in-depth study of the Lawyers with Purpose system and the many uses of the LWP Client Centered Software.

Marriage/Schmarriage: What’s Love Got to Do with VA Non-Service-Connected Disability Pension?

June 7, 2016

by Lawyers With Purpose with No Comment Asset Protection Legal Technical VA

Love and marriage can be of supreme importance when the Veterans Administration (VA) is considering an application for death pension from a surviving spouse. It is true that marriage is one way to document a veteran’s dependent, and this would mean an additional $332 per month to a vet’s pension in 2016. But failure to document a veteran’s marriage would certainly not be an outright bar to pension. By contrast, in the case of a surviving spouse’s claim, if you cannot document that the marriage between the surviving spouse and the veteran was valid, you have no claim at all, regardless of how eligible the surviving spouse may be otherwise.

Proper Remarriage Protection Planning

May 10, 2016

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

Many lawyers proclaim to have remarriage protection in their estate planning documents, but few are worthy of this claim. For most lawyers, having remarriage protection means removing a spouse’s right to benefit from a trust in the event the spouse remarries. Although this is a good start, it is wholly insufficient in determining the expansive abilities that one can have regarding remarriage protections.

So let’s look at the key points. Typically, clients use trusts to benefit their spouse. Outright conveyances to spouses are common, but they do not provide any asset protection or remarriage protection. To ensure that assets are protected in a remarriage, one must plan appropriately in four core areas.

Beneficial interest of the spouse
The definition of “remarriage”
Powers of appointment to the spouse
Removal powers to the spouse

When designating trusts for clients of long-term marriages, most want to ensure that the intentions of the couple are carried out after the death of the first spouse, and are not adversely influenced. Although this is a common goal, it could be derailed when a new relationship enters the picture after the death of the first spouse. The goals and intentions of the surviving spouse are often altered significantly due to the fear of having lost their spouse and/or the introduction of a new relationship that can influence them. To ensure that the deceased spouse’s intentions are carried out, the Lawyers with Purpose Client-Centered Software (LWP-CCS) ensures remarriage protection at all three levels. Let’s examine each and how they apply to remarriage protection.

First is the spouse’s right to a beneficial interest. The surviving spouse often has a right to principle and/or income from the deceased spouse’s trust. That interest can come in the form of a family-type trust that benefits the spouse’s kids/non-family, or a common trust with other beneficiaries. So often, we see lawyers name just the spouse as the beneficiary of the family trust. Although this protects the spouse, it also unduly restricts them. A spouse who wants to benefit a child and use assets from the deceased spouse’s trust often has to take the distribution and then give it to the child. Instead, it is more practical to include the children and other descendants as benefits of the principal and income to a surviving spouse. This allows the surviving spouse, as trustee, to distribute or “sprinkle” the income or principal as they determine to accomplish the goals of the family. In contrast, if the surviving spouse gets unduly influenced by a new relationship, then one must be able to restrict that spouse’s right to income and principal under the deceased spouse’s trust. Remember, the surviving spouse has assets that are still available as provided by the original planning.

Another critical issue in remarriage planning is the definition of remarriage. Most trusts define remarriage as however remarriage is legal in the jurisdiction. This is another mistake. In today’s day and age, no one gets married anymore, but not getting married does not mean that a new “significant other” does not have significant influence over the surviving spouse. That’s why Lawyers with Purpose’s Client-Centered Software includes default remarriage language that identifies remarriage as any marriage legal in the jurisdiction or any relationship that results in cohabitation for one night. The software also allows attorneys to custom-tailor the definition of remarriage any way they choose. What’s critically important is what remarriage protections are triggered when the remarriage definition is met, first, upon remarriage under the definition, the ability to access principal or income can be restricted in the LWP-CCS software.

In addition, a deceased spouse’s trust can allow a spouse certain powers of appointment to ensure that the couple’s goals are continued after the death of the first spouse. When there is an outside influence or a remarriage (as defined by you), then you may also begin to restrict the surviving spouse’s power of appointment to ensure that the children are not penalized for failing to agree with the surviving spouse, and the power to make distributions that would go against the deceased spouse’s intentions.

Perhaps the most significant power that can be removed in the LWP-CCS remarriage protection software is the ability to remove a surviving spouse’s removal powers. Removal powers include the surviving spouse’s ability to remove a trustee and/or trust protector of the deceased spouse’s trust. Allowing removal powers after the influence of a new third party can adversely affect children or other beneficiaries who are acting as co-trustees, or trust protectors who were independent and in place to ensure the preservation of the deceased grantor’s intentions. Interestingly, the Lawyers with Purpose software allows not only the appointment of all these powers to a spouse, it also allows you as the attorney to cherry pick which powers, or any combination of them, are altered upon the remarriage of a spouse as you wish to create them with the client.

Again, this is what we call trust drafting. Too many times we have lawyers get comfortable and lazy with the simple provisions most would call “remarriage protection.” That’s why at Lawyers with Purpose our software supports your ability to be purposeful to your client’s plan.

If you want to learn more about what it means to be a Lawyers With Purpose member, consider joining us for THE estate and elder law event not to be missed this June in San Diego. You can see the full agenda here: http://retreat.lawyerswithpurpose.com/agenda/. If you aren't a member contact Molly Hall at mhall@lawyerswithpurpose.com to find out more information about how you can reserve your spot today. Early bird pricing ends Friday, May 13th so register today!

Registration link: www.retreat.lawyerswithpurpose.com

Dave Zumpano, Co-founder – Lawyers With Purpose

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The Medicaid Millionaire: Myth or Reality?

May 4, 2016

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

As the Lawyers with Purpose attorney trainer, I am often asked by transitioning attorneys or new members how I can justify helping people shelter money so that they could possibly one day receive Medicaid benefits, while still having funds available in trust. I often think as I respond, how could you not?

The Medicaid program was established in 1965. The original purpose of the program was to provide needed care for the indigent. In a 2011 House hearing on “Abuses of Medicaid Eligibility Rules,” Rep. Trey Gowdy argued that the extremely wealthy should not be on Medicaid. Medicaid is a program to alleviate impoverishment, so certainly this argument makes sense. One thing both Donald Trump and Hillary Clinton have in common is that neither should be in our offices asking how to get Medicaid benefits for long-term care.

But Rep. Gowdy went a step further, stating that “Income and asset tests are easy to circumvent and abuse. In fact, a cottage industry has arisen seeking to educate the wealthy on how to transfer or hide assets so taxpayers can pay for their long-term care.” When I read Mr. Gowdy’s quote, certainly I was not shocked. We, as a “cottage industry” of elder care attorneys, have already been pinned “pension poachers” by the Department of Veteran’s Affairs. So, it is not a stretch to hear that we are also being labeled in this way, even though we never break or abuse a law and certainly never ask our clients to do so.

I would like to ask Mr. Gowdy, and all of those who paint us with the broad brush stroke of system abusers, if they actually have any idea who our typical clients are. I suspect that they do not. Because the reality is that very few multi-millionaires come into our offices seeking Medicaid benefits. No, they come in for tax planning, they come in for asset protection and they come in for family trust planning. The people who come through our doors because a spouse has just entered the nursing home and they have been asked to deplete their $250,000 in savings to pay $8,000 a month for care are not these “millionaires.” They are the hard-working, tax-paying middle class. And they are frightened, they are nervous and they know that they are quickly becoming the indigent.

Currently, long-term care beneficiaries represent about 7 percent of the Medicaid recipient population. However, they absorb about 19 percent of the Medicaid funds. Why? Because long-term care is astronomically expensive and there is no other public program available to help with the expense. It is also believed that the average pre-plan for couples who plan over five years prior to institutionalization is saving the married client between $240,000 and $750,000. These numbers decrease by over half when we look at crisis cases. When asking why they pre-planned for Medicaid eligibility, below are the answers I received from former clients.

From a former school teacher married to a Vietnam veteran: “My husband has dementia. He could be sick for a long time and I am only 68 years old.”

From a widow with an adult disabled child in her home: “My daughter has special needs and is wheelchair-bound and I need to have the money left over to care for her for the rest of her life.”

From a retired doctor and his wife, a teacher: “I paid taxes all my life and I continue to pay all that is required of me. I also donate time and money to those in need. My children work hard and I do not want to be a burden on them.”

From an auto mechanic with Parkinson’s and his wife, a retired bus driver: “My neighbor lost everything they worked for. I don’t want to die having lost everything I worked for my wife to have when she is alone.”

It is also worth noting that the “Abuses of Medicaid Eligibility Rules” hearing never grew into any proposed law changes. This is most likely because the officials from the state Medicaid agencies and the nursing care industry who were brought in to speak before the committee painted a completely different portrait of the “system abusers.” They told the stories that they see every day. They spoke of the middle class – scared, desperate, and struggling to pay for care – and the attorneys who help them manage the legalities of a complex system. They spoke of the reality, not the myth.

If you haven't registered for the June Tri-Annual Practice Enhancement Retreat we're filling up fast and Early Bird pricing expires soon! Don't miss THE estate and elder law event not to be missed! Click here to register now and reserve your spot!

Kimberly M. Brannon, Esq., Legal Technical & Software Trainer – Lawyers With Purpose

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Trust Funding Essentials

April 18, 2016

by David Zumpano with No Comment Asset Protection David J. Zumpano

We as attorneys, and sometimes even our clients, hear so much about trust funding, but rarely is it truly understood. I would like to outline a few essentials when doing trust funding to ensure that the underlying estate plan works as intended.

The first key step in any trust funding strategy is to identify what type of estate plan the client is pursuing. A traditional revocable living trust is an estate plan wherein the client identifies who gets to benefit from the client's assets when the client is well, disabled, and after death. A critically important point to funding a revocable living trust is if all assets funded in the trust are still 100 percent available to creditors, predators, and long-term care costs of the grantor while alive. The assets can continue to be made available to the creditors and predators of the beneficiary after the death of the grantor without proper planning (more on that later). In the alternative, if a client has opted to do an irrevocable trust for asset protection and/or current or future benefits eligibility (we call these IPUG® trusts) then funding is much more important, because assets are not protected from third-party predators until funded, and they're not protected from long-term care costs until funded and any related penalty period for the conveyance of the trust has expired.

Therefore, funding in asset protection or benefits eligibility is significantly different. Finally, if the client has done a trust predominantly for estate tax planning to ensure that assets are not included in the grantor's taxable estate, or to minimize the taxes on them, funding takes on yet another unique importance. Finally, regardless of what type of planning, we also need to look at the types of assets we are funding. For example, funding a home has several options as well as funding an IRA or other tax-qualified assets. So examine the differences and determine how to fund properly.

The first questions we must ask are, what type of planning has the client done and what type of assets is the client funding? If a client has done a revocable living trust, then funding is important to ensure that the trustee actually has the authority over the client's assets to administer them in the manner that has been identified by the client in the trust. If funding is not completed or properly done, a "pow will" usually cleans up any missed items at death by ensuring that any assets not funded that go through probate name the trust as beneficiary. Unfortunately, if the client doesn’t die but instead becomes incapacitated, failure to fund a revocable trust has more dire consequences. In addition, failure to fund assets to the trust does not eliminate probate, one of the primary benefits of having a revocable living trust to ensure the plan is carried out without the excess costs, delays and frustrations of probate to the client’s family.

In stark contrast to revocable trust planning, when planning for asset protection or benefits eligibility, funding becomes the most critical element to which all protection occurs. For example, if an asset is funded into an irrevocable asset protection trust today, it is protected from any and all claims that arise after the funding. More definitive, if planning for benefits eligibility, the funding of the last asset becomes most critical, as all assets funded to a trust will be subject to Medicaid's review of that transfer for up to 60 months. At Lawyers with Purpose, we call this the "look forward™" period. When funding an irrevocable trust for benefits planning, the look forward on the final conveyed assets will trigger protection of the assets. For example, if a client has $500,000 to fund and only funds $450,000 of it, and two years later remembers to finally fund the last $50,000, the $450,000 conveyed initially will have a 60‑month look forward, but the $50,000 conveyed two years later will have its own separate 60-month look forward that will extend years beyond the expiration of the previous trust transfer. That is why it's essential when benefits eligibility planning that funding be done in a timely and effective manner to ensure that the look forward is minimized.

For estate tax planning, obviously the funding of assets becomes critical by use of the Crummey power if life insurance or any gift-discounting techniques are being used, since the funding must be used to pay the insurance premium and must specifically relate to any special valuations that are obtained at the time of funding.

Although funding is a critical element in each type of planning, what can complicate it further is the type of assets being funded. For example, let's consider funding a home. For a typical revocable living trust, the funding of the home ensures that there will be no probate on the home but still makes the home available to creditors (if not protected by some other state statute while tenancy by the entirety), or it can become a recoverable asset after death if Medicaid benefits are received. While the home is exempt for married and single applicants, it can be subject to estate recovery after death for all funds paid on behalf of the applicant during their lifetime. See my related article on Estate Recovery - What Can (And Can't) They Get. Finally, a recent case in Massachusetts suggests that having a trust that allows the grantor to reside in the house makes the entire value of the house an available resource in determining the client's eligibility for benefits. See my post on Nadeau v. Thorne – No Reason To Fear. This adds additional complications in funding, since attorneys may now choose to reserve a life estate in the deed rather than fund the entire property to the trust and risk its loss as an available resource. Finally, transferring a house or second home to a qualified personal residence trust is a gift-discounting technique often utilized by those subject to estate tax. Again, the funding of these properties into the trust, and the subsequent survival of the grantor during the term in which the interest is held, is essential to maximize the estate tax reduction.

The other major asset to be considered in funding is the IRA. The Supreme Court in Clark v. Rameker decided in June 2014 that IRAs are not protected for those who inherit them. There is an obvious exception for an IRA that names a spouse beneficiary, who then combines it with an existing IRA. While this ensures IRA protection from general creditors, an IRA is not exempt in determining one's eligibility for Medicaid, and therefore, leaving an IRA to a spouse can expose the entire IRA balance to the surviving spouse's nursing home costs. Federal Medicaid laws are absolute: an IRA is an available resource, unless it is annuitized. Although some states have liberalized the interpretation of annuitization (i.e. many states deem they were payouts of RMD to satisfy the annuity executor) it is not the federal law, but merely state policy, which could be changed at any time without notice. Over the last few years, several states have changed their policy, thus making assets that were presumed to have been protected immediately available for long-term care costs.

The naming of a beneficiary of an IRA and other qualified or beneficiary designated accounts to the trust is now essential to maintain the asset protection intended. For example, even for a young couple with no assets, a $250,000 life insurance policy that pays to the spouse at death could be a catastrophe, as young people often get remarried or make unwise decisions. One should be cautious and ensure that all or part of a life insurance policy for a young couple names a separate share trust under a will for the benefit of the minor children, so as to ensure that the surviving spouse does not squander the proceeds, and that they are used as intended by the client. Finally, as we look at trust funding, it is essential to have a key system in place to ensure that your funding is done in a timely and appropriate manner. How assets are funded, the timing of assets funding, and the beneficiary designation utilized in funding for after death, are essential to ensure that the underlying goals of the client are achieved.

To have learn more about the support and systems to fund clients' plans properly, contact Lawyers with Purpose now. If you want to learn more about who we are consider joining our FREE webinar this Thursday, April 21st. Discover how to build a thriving Estate, Elder and Asset Protection practice that attracts higher quality clients, generates an endless supply of referrals and continuous exposure in the community … without working 80 hours a week or breaking the bank! Reserve your spot today, just click here now.

David J. Zumpano, Co-founder – Lawyers With Purpose

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The ILIT / TAP Distinction

April 3, 2016

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

Many people commonly use Irrevocable Life Insurance Trusts (ILIT) to ensure that life insurance owned by an individual is not included in their taxable estate at death. While an ILIT is a useful trust, you could accomplish far more with a TAP™ trust. So let's review an ILIT and distinguish how a TAP enhances the benefits often sought by ILITs. An ILIT is an irrevocable trust wherein the grantor retains no rights to modify the trust, benefit from the trust or control the trust. Retention of any of these rights will trigger estate tax inclusion under Internal Revenue Code Sections 2036 through 2042. An Irrevocable Life Insurance Trust may be a non-grantor trust or grantor trust, depending upon the attorney's drafting choice.

Triggering a provision of Internal Revenue Code Sections 671 through 679 will cause the inclusion of all income from the ILIT to be included in the personal income tax return of the grantor. While the grantor retains no rights to modify, control, or benefit from the trust, the grantor may be taxed on its income if a grantor trust provision is triggered. The most common of these grantor trust provisions is to allow the grantor to substitute assets of equal value, or make loans to the grantor without adequate security. By choosing grantor trust status, it essentially serves as an additional gift without having to utilize the annual gift tax exclusion, because the income taxes are paid from the grantor, rather than the trust. As a result, those additional sums are retained in the trust, thus providing additional assets to the intended beneficiaries that otherwise would have been used to pay the taxes.

One of the core elements of an ILIT is ensuring the use of Crummey powers. Crummey powers are based on the landmark case Crummey v. the Commissioner wherein the U.S. Tax Court held that granting someone the right to withdraw money funded to a trust immediately but limited to a short period of time (i.e. 30 days) was sufficient timing to deem the contribution a "present interest" and thereby trigger the annual gift tax exclusion for the contribution. A Crummey power is essential to ensure that the annual gift tax exclusions are utilized so as not to reduce the grantor's overall lifetime estate and gift tax exemption. One critical restriction under the current power, however, is that Section of the Internal Revenue Code limits the annual exclusion made to trusts to the greater of 5 percent of trust assets or $5,000. Therefore, it is essential to have a "hanging power" to ensure any contributions in excess of $5,000 or 5 percent are not deemed to be taxable gifts.

These hanging powers allow the Crummey beneficiary to continue to have the right to withdraw this excess amount, even beyond the 30-day period. For example, if a grantor contributes $42,000 to a trust for three Crummey beneficiaries and the $42,000 is the only asset of the trust and it was utilized to pay the insurance premium, then 5 percent of the trust assets only equals $2,000. Obviously, $5,000 would be greater, so $5,000 of each $14,000 contribution would be deemed to be a present interest gift and $9,000 of the contribution would "hang" until no contributions are made in a given year. At that time, an additional allocation of the annual gift would occur based on the $5,000 or 5 percent trust value limitation. Obviously, this could be problematic if these powers hang and one of your Crummey beneficiaries becomes subject to lawsuits, divorce or long-term care costs.

Another consideration with the Crummey power is to have straw Crummey beneficiaries. This is typically done by adding beneficiaries to the lifetime trust, which operates during the grantor's lifetime and provides the names of people who are not residuary beneficiaries. For example, one straw Crummey beneficiary might include spouses or other remote relatives who are willing to be a Crummey beneficiary, understanding that they are not likely to be an ultimate beneficiary. This allows additional payments each year to be contributed within the annual exclusion limit. Both ILITs and TAP trusts have Crummey provisions with hanging powers.

Neither ILITs nor TAPs are user friendly to individuals with estates less than $5,450,000, or $10,900,000 if married. These excessive restrictions need not be applied in circumstances where the total estate of the grantor plus the life insurance benefits does not exceed the estate tax limit. Obviously, the only other consideration would be if your state had an estate tax at a lower limit. If estate tax is a concern, a primary benefit of the TAP trust over the ILIT is that a TAP trust stands for Tax All Purpose trust, which means its intended benefit is far beyond the holding of life insurance. The TAP trust will typically hold life insurance policies, stocks, bonds, and other assets and/or business interests that the grantor would like to get passed on to the trust beneficiaries after death. This is especially helpful, as it will ensure that there are other assets in the trust other than the life insurance policy to accumulate assets of more than $280,000 to ensure that the entire Crummey contribution can be utilized each year with no hanging powers. In addition, the TAP trust has extensive provisions for lifetime and residuary trusts to the individuals or classes of people.

For example, sometimes a grantor will create a family-type trust that takes effect after death for the benefit of the surviving spouse and children, and upon the death of the surviving spouse, it provides separate residuary trusts for each child. Other times, clients may want to create a benefit for a class of their children for their lifetime, and at the death of the last child the balance is allocated to their then-surviving children in separate share trusts. TAP trusts are extremely flexible and powerful in ensuring that whatever assets are passed through them (life insurance, stocks, bonds, business interests, etc.) are passed on to their loved ones fully asset-protected in separate asset protection trusts or common trusts, depending on the client's goal. One of the critical distinctions in asset protection trusts after death is to ensure that the trustee is an independent trustee under Internal Revenue Code Section 672(c). One distinction to resolve the concern of naming the child beneficiary as the trustee without violating Section 672(c) is to ensure that you name a co-trustee who is adverse, a strategy far too few lawyers utilize. For example, after the death of a grantor, the surviving spouse can be the trustee with a co-trustee of one of their children. While this would be considered under the family attribution rules to be a controlled trustee, the adverse party interest ensures that the Internal Revenue Code distinctions are met. For example, if a child was a co-trustee with the spouse and approved a payment to the spouse during a family trust administration, that would be adverse to the child's residuary interest and thus satisfy the restrictions within 672(c).

The other exciting element of a TAP trust is the allowance of the spouse or trust protector to have a power of appointment to modify the beneficiaries within a class of people identified by the grantor. This can ensure that the family is able to adjust for changing circumstances after the death of the grantor to cover his or her overall planning intentions. One of the key distinctions of a TAP trust is also specific language that authorizes the accumulation of income but specifically requires the trustee to account separately for income that is accumulated and converted to principal, so as to ensure no portion of that is utilized to pay insurance premiums on the grantor. While the trust ensures that all the proper legal language is included, to be legally proper it is incumbent upon the attorney to educate the client to understand how to properly administer a trust so as not to violate that provision.

So, as you look at the distinctions between an ILIT and a TAP, it's important to note that everything an ILIT is is included in the TAP trust, but not everything in a TAP trust is included in an ILIT, so a TAP is a far more expansive trust that allows much more flexibility and use by a client. If you want to learn more about becoming a Lawyers with Purpose member to discover how the TAP trust can benefit you in your practice and, more importantly, benefit your clients consider joining our FREE webinar "The Four Essentials For A Profitable Practice" on Thursday, April 21st at 8EST. Click here to register now.

This is a FREE training webinar designed for attorneys who wish to add Estate Planning, Asset Protection, Medicaid, or VA Planning to their practice, or significantly improve on their existing business using our PROVEN and paint-by-number strategies. Reserve your spot now!

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

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The Death of Ascertainable Standards

March 14, 2016

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

The recent Pfannenstiehl v. Pfannenstiehl case in Massachusetts is a pretty good indication that the use of ascertainable standards in asset protection planning is dangerous. While this may be news to you, the Lawyers with Purpose legal community has known this for some time and has changed its recommended planning strategy more than seven years ago on how to ensure asset protection is maintained.

When creating an irrevocable trust, some of the most important legal determinations made are the discretion granted to the trustee to make distributions to the beneficiaries. The two most common are "wholly discretionary" and "ascertainable standards." What is the difference? Traditionally when a trustee is allowed to make distributions pursuant to the health, education, maintenance and support of the beneficiary, that is traditionally identified as ascertainable standards, otherwise known as HEMS.

This standard was predominantly created through tax law cases where the question became whether the trustee garnered too much control or authority so as to include the assets of the trust in the taxable estate. The court cases resolved that as long as there were ascertainable standards, it would provide sufficient discretion so as not to have the adverse tax impact. So HEMS became the standard of discretion for trustees. Once again, it was a case of the tail wagging the dog. While estate tax planning was a concern in generations past, since 2001 with the passage of EGTRRA and the massive expansion of the estate tax exemption, the HEMS standard for estate tax purposes only applies to less than two out of 1,000 Americans. Why is it, then, that most lawyers still draft their trust for everyone according to the restrictions required for the two-tenths of 1 percent of Americans? The typical answer is, because that's the way they always did it.

At Lawyers with Purpose, we are absolutely present and future-oriented and always looking at the current laws, but more importantly, we consider the relevance of the laws to the needs of the clients. For example, I remember particularly a case where I drafted an irrevocable life insurance trust and granted powers to the spouse that could deem it to be includable in her estate. While this was not the best tax planning strategy for the client, I clearly reviewed all the rules with the client, explained the adverse consequences and the client's response was "I don't care about the tax impacts; I want my wife to have it." In such a case, I had the client sign an acknowledgment that he was made aware of the adverse consequence, but to any third party reviewing the trust, they were confident I committed malpractice. That's the challenge today: Lawyers want to impose their ways on clients. Our job is not to tell clients what to do; our job is to tell clients what they can do, the pros and the cons of each approach, and to let them make the decisions that best suit the needs of their family. Such is true with ascertainable standards.

It is LWP’s recommendation – and has been for many years – wholly discretionary powers are typically worded as that a wholly discretionary standard be used rather than ascertainable standards, “the trustee shall make distributions to any beneficiary in their sole and absolute discretion….” This assures that discretion is held wholly within the trustee and there is less risk of the trust being invaded by outside sources to ensure for the health, education, maintenance and support of the beneficiary. Can you imagine a court looking at a trust that a senior residing in a nursing home was the beneficiary of and the trust provided that that senior was the beneficiary and the trustee can make distributions for health, education, maintenance and support? How can the trustee not deem a distribution for the cost of that nursing home to be for their health or maintenance or support? It's an accident waiting to happen. In fact some states like Ohio have gone as far as to say that any trust that has ascertainable standards can be pierced to make medical payments in accordance with the health, education, maintenance and support provisions. Don't wait. Stop using ascertainable standards now and protect your clients from any undue risk of having their asset protection trust invaded.

If you would like to learn more about our estate planning drafting software and how it can support you in your estate or elder law practice, schedule a live software demo at: https://www.lawyerswithpurpose.com/Estate-Planning-Drafting-Software.php. Learn how you can (1) regain lost hours (2) train your team so you spend less time drafting (3) effective document prep for 99% of your estate planning clients (4) and much, much more….

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

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House Bill 4351: Going After Pension Poachers

March 4, 2016

by Lawyers With Purpose with 3 Comments Asset Protection Legal Technical VA

House Bill 4351 should be stopped!

For the past several years, bills have been introduced for Congressional approval that would impose a three-year look back, and penalties up to 10 years, for veterans and their spouses who give away their assets and then apply for a pension program designed for indigent wartime veterans. The bills were limited to addressing the concerns of deliberate impoverishment by veterans with the help of lawyers, financial advisors, and others. The bills never passed.

In January 2015, the Veterans Administration published proposed changes to the laws in the Federal Register that would change Title 38 of the Code of Federal Regulations. The VA included penalties for transfers of assets, and used very broad definitions of transfers (i.e. the purchase of an annuity), just like the previous bills that had been introduced. However, the VA went much further, proposing to (1) extend beyond its Congressional authority and (2) extend beyond the scope of the perceived needed changes.

Beyond VA Authority.

Under the pension program for wartime veterans, the claimant must meet an income and asset standard. With regard to income, the VA deducts from gross income all permissible medical expenses. Home healthcare is a permissible medical expense. But the VA proposed to limit the deduction to the average cost of home healthcare based on a national average set two years prior to the proposed changes, which would be $21 per hour. The law is clear that if a medical expense is deductible, then the entire amount must be deducted, and a change of this nature is in violation of the Congressional right.

Beyond the Scope

The purpose of the bills introduced into Congress and the purpose of the proposed changes to the VA regulations is to prevent people from divesting themselves of assets, which they otherwise could use for themselves to pay for care, in order to qualify for tax-free income from the VA to pay for their care. The VA exceeded the purpose of these bills when they included in the proposed changes a limitation on the lot coverage for veteran’s home place. The home place and a reasonable lot area have always been exempt by the VA when applying for pension. A reasonable lot area has always been defined as the same or similar in size to those in the same community or neighborhood. Rather than keeping the long-standing laws, the VA wants to count any property value that exceeds two acres. This makes no sense under the purpose of the law changes to keep people from divesting themselves of assets. First, a 900-square-foot condo in New York City may be worth well over $1,000,000, but it would be an exempt resource under the proposed changes. Whereas, a house sitting on five acres in south Georgia would be a countable resource, even if its value is only $150,000. Moreover, the veterans may have been living in the house for 10, 20, 30 years or more and had no intention of ever filing for the VA pension when they bought the house. Thus, the change in the law has nothing to do with the perceived abuses of people trying to save their assets and qualify for benefits.

Congress has apparently given up on trying to pass a bill that specifically details a look back and penalties for wartime veterans who give money away to qualify for the pension. After all, this is an election year and that would not look very good.

Nonetheless, a few members have found a sneaky way to get the VA’s proposed changes passed by Congress without Congress necessarily knowing what they are actually passing. House Resolution 4351, submitted in the House of Representatives on January 8, was sponsored by Rep. Matt Cartwright of Pennsylvania and co-sponsored by Rep. Sanford Bishop of Georgia, Rep. Sheila Jackson Lee of Texas and Rep. Walter Jones of North Carolina. It has been referred to the Committee on Veteran’s Affairs.

Its stated goal is “To protect individuals who are eligible for increased pension under laws administered by the Secretary of Veterans Affairs on the basis of need of regular aid and attendance from dishonest, predatory, or otherwise unlawful practices, and for other purposes.” The act would be titled, “Veterans Care Financial Protection Act of 2016.”

This sounds really good, because Congress is professing to protect veterans from financial predators. Second, the act does nothing more than mandate that the secretary of the VA work with the heads of federal agencies, states, and such experts as the secretary considers appropriate to “develop and implement Federal and State standards to protect individuals from dishonest, predatory, or otherwise unlawful practices.” The VA would then have 180 days to submit the standards to the Committee on Veterans’ Affairs of the Senate and of the House of Representatives. If this resolution passes, the VA can just hand over the proposed changes in the laws as the standards. The resolution does not say what the two committees are to do once they receive the standards from the VA.

The VA plans to finalize proposed changes (with modifications) by early summer. What is unclear is whether a passage of this “blind” resolution would immediately sanctify any changes the VA has made, or if the changes cannot take effect until after the two committees have taken some action of approval. What is clear is that advocates and veterans must once again push to make your political leaders, specifically those in the two Veterans’ Affairs committees, aware of these damaging changes that have no bearing on the purpose of the proposed changes – limiting home healthcare to an outdated national average and limiting the home place lot coverage to two acres instead of a reasonable lot for the area.

If you would like to know more about the VA Proposed 3 Year Lookback and Other Law Changes join our FREE WEBINAR on Wednesday, March 16th at 4EST. Click here to reserve your spot today.

Victoria L. Collier, Co-Founder, Lawyers with Purpose, LLC; 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; Co-Founder of Veterans Advocates Group of America; Entrepreneur; Author; and nationally renowned Presenter.