Taking on DHS: Successfully Challenging the Medicaid Penalty

We want to welcome Richard Winblad, Guest Blogger and Lawyers With Purpose member.  Today Richard shares about his win with the Medicaid Penalty. Great work making a difference for your clients!

Taking On DHS Benefits the Client and Referral Source

An accounts receivable director of a nursing home advised me about a disturbing Medicaid denial they received. The case had already gone to one Fair Hearing. The caseworker identified $60,000 of checks that she contended were made without receiving “commensurate return.”[1] During the hearing, she wanted to amend the finding so that $113,000 was improper and to deny benefits for 792 days. In Medicaid language, this means that it would not reimburse the nursing home until after the two years had passed. Not a great result for a 95-year-old widow suffering from Alzheimer’s disease. This was bad news for the facility and for the family. The family had no resources to self-pay.

The nursing home was interested in having the result reversed. They were already out approximately $40,000 in unreimbursed fees and were not relishing funding an additional $70,000. Clearly, the caseworker’s decision had to be examined and perhaps challenged. Eviction was not an option the nursing home was willing to consider. It also wanted to avoid funding her care. The administrator saw the value of paying an elder law attorney to represent the resident. Of course, the resident’s guardian agreed to the arrangement.

10552662_10152286215015017_6265785845376458735_nTraining Builds Confidence

Lawyers with Purpose provides training that is useful in dealing with Medicaid eligibility gatekeepers. Sometimes caseworkers get things very wrong, resulting in improperly denied benefits. This case involved a “lookback period” which is 60 months prior to the Medicaid application. The agency looks for transfers for less than “fair market value.” Generally, the agency examines transactions with family members and often treats these as gifts. The amount of the gifts is then divided by that state’s reimbursement rate to compute the penalty period. For example, Oklahoma’s reimbursement rate is $143.70 per day.

$113,810 ÷ $143.70 = 792 days

Aside from the initial training, Lawyers with Purpose provides online content and webinars that reinforce and expand the initial training. It also connects attorneys through a Listserv email group where members can ask and answer questions. One-on-one legal technical service is also available.

Not Accepting Medicaid’s Answer

The caseworker acts as the initial gatekeeper. If an application is denied or penalty period is imposed, the applicant must be notified of the decision and provided with an opportunity for a “Fair Hearing.” If unsuccessful at the Fair Hearing, further appeals are available typically to the agency director, then to the state courts.

Federal Option

However, the state’s administrative process is not the only avenue for relief. Denials of benefits often trigger claims under 42 U.S.C. § 1983 which can be brought in federal court. A successful §1983 claim can entitle the victor to attorney’s fees. In many jurisdictions, this may be the best answer. It is good to review both federal and state decisions in order to determine the most advantageous route. In this case, the most expeditious way to challenge the caseworker was through the Fair Hearing.

Pretrial Preparation

This case involved review of the denial and of the Fair Hearing Packets. Family witnesses were interviewed and records examined. An opening brief demonstrated flaws in the caseworker’s logic and legal basis. It also involved developing the family story that showed the funds paid were for care, that there were time logs, and why the care was necessary. The state agency filed a reply, which used a different but nonetheless incorrect legal standard. Naturally, we filed a reply to the response.

The Hearing

Telephonic hearings are difficult, especially when using financial exhibits. About a week before the hearing, we delivered an exhibit that showed how challenged checks matched time records kept by the caregiver. Just like any trial, we wanted our evidence in and theirs out. Although not requested, we filed a brief containing the proposed findings of fact and conclusions of law. We received the decision about two weeks after the hearing. The themes in the briefs, testimony and exhibits were reflected in the findings and reasoning of the hearing officer. Of the $113,800 originally challenged, the administrative law judge found only $1,983 to be inappropriate. This reduced the penalty period from 792 to 13 days.

Don’t Be Afraid to Fight

I come from a litigation background, so a Fair Hearing is simple. Evidence standards are relaxed. It has the feel of a small-claims proceeding. There are few formal pretrial procedures, but it is good to play by the normal court rules of the jurisdiction. Informal requests for information normally resulted in production.


The imposition of a penalty period was based upon bogus views of the law and the facts. Despite being confronted with the applicant’s case, the agency was unwilling to make any substantial concessions. Unless the applicant won, she might have died without ever receiving any benefits. Ultimately, the administrative law judge agreed with the applicant’s position and accepted her facts. LWP’s training made the victory possible.

Richard Winblad,

Richard is an attorney and LWP member who practices estate and Medicaid planning in Oklahoma. He is a Veterans Affairs Accredited Attorney and provides educational programs to consumers and elder care professionals. Richard is president of the Oklahoma City Commercial Lawyers Association. His blog can be found at www.WinbladLaw.com 

[1] The caseworker was using the incorrect term; what she really meant was that the resident did not receive anything in return.

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

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.


The Medicaid Millionaire: Myth or Reality?

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.

Bigstock-calculator-on-the-background-o-117504416But 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.

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


Trust Funding Essentials

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.

Bigstock-Funding-for-welfare-collection-125848160Therefore, 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



The ILIT / TAP Distinction

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.

Bigstock-Red-Pencil-Standing-Out-From-C-104390930One 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 


The Death of Ascertainable Standards

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.

Bigstock-Question-mark-heap-on-table-co-86579810When 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….

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Who Should Be Trustee?

There's a constant battle between lawyers as to who should be trustee of an irrevocable asset protection trust. The primary school of thought is that it should never be the grantor, and some schools of thought believe it should never be the beneficiary. At Lawyers with Purpose, we disagree with both of those positions, but we recognize the concerns and rely on sound principles of asset protection law in making the final determinations.

Bigstock-Who--4420521Let's first discuss the question of whether the grantor should be trustee. Many practitioners believe that allowing the grantor to be trustee makes the assets of an irrevocable trust available to the grantor's creditors. Such a proposition is ludicrous. The challenge with most lawyers is that they do not allow the grantor to be trustee of his or her irrevocable trust. When pushed to explain why, they typically assume that's the way it was always done. Few dig further to see why it was done that way. So let's examine why grantors were not traditionally named trustee. The most adverse impact is that, if the grantor is trustee, they're deemed to retain enough control to have the assets of the trust included in their taxable estate when they die. For many generations, this was the death knell? of an asset protection trust. But in the last 15 years it's become irrelevant because of the rise of the estate tax exemption. Today only two in a thousand Americans have a taxable estate, so preventing the grantor from being trustee because of a potential inclusion of the trust asset in the estate of the grantor is not relevant to 99.8 percent of Americans. So why hold them to that standard?

The next major argument is a theory that if the grantor has control of the trust, then he could direct it back to himself. Well, that depends. What does the trust say? If the trust says that the grantor is not a beneficiary, or similarly the grantor is not a principal beneficiary but is entitled to the income, does that mean that the grantor as trustee all of a sudden gains a super power to violate the terms of the trust and give himself the principal when it's not allowed for? Hardly. In fact, there is consistent case law throughout all of the states, including cases that lead all the way up to the Supreme Court, that supports the notion that a grantor as trustee has all of the same fiduciary obligations as any other trustee and by no means has authority to act outside the powers granted to trustee. I specifically refer you to my Law Review article, "The Irrevocable Pure Grantor Trust: The Estate Planning Landscape Has Changed" in the Syracuse Law Review. In this article, I go through in‑depth review of all of the case law nationwide, and I'm excited to say that it is sound law that a grantor can be a trustee without risking the assets to the creditors of the grantor. One caveat, however, is if the grantor does retain the right to the income, then absolutely the income will be available to the creditors of the grantor.

So are there circumstances when the grantor as trustee's trust is invaded? Absolutely, but in every single case the invasion was not due to the grantor being the trustee, but rather was due to the pattern of behavior by a grantor trustee who violated regularly the terms of the trust in favor of themselves, and the trust was thereafter deemed a sham. In such cases, I concur with any court that makes that decision based on people who try to defraud the system. Irrevocable trusts must be managed in an arm's length manner, and as lawyers we do not plan for someone to become fraudulent. They are fraudulent to their own peril. But a properly drawn trust when the trustee is the grantor in no way, shape or form creates any risk of loss of asset protection if the terms of the trust are followed, as they are required to be in every case whether the grantor is trustee or not.

So at Lawyers with Purpose we encourage our members to do good legal work based on sound law, not fear, conjecture or because that's the way it's always been done. In the end, the client wins. It is silly to deny thousands of clients that we serve the ability to manage and control their own assets for the benefit of their families, just because some rogue case in some rogue state from some vile fact pattern allowed the court to invade against the intentions of the grantor. Protect your clients. Teach your clients. Share with your clients how these work. They are very safe and a great planning tool.

If you want to learn more about Lawyers With Purpose you can find all the information about becoming a member by clicking here to download our Membership Brochure.

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


Is Asset Protection Dead? Pfannenstiehl v. Pfannenstiehl

A recent Massachusetts case throws into question whether long-term asset protection is safe. This particular case was disturbing because the defendant in a divorce proceeding's share in an irrevocable trust from his parents was deemed to be a marital asset and had to be distributed to his ex‑wife. This was a third-party trust, created by the parents for the benefit of their son, that had specific spendthrift provisions to prohibit such an attack. The Massachusetts court deemed otherwise.

So is asset protection planning on its way out? Absolutely not, in light of the fact that the case had several significant factors – and as always, the devil is in the details. First, Massachusetts has a very strong statute regarding marital property interests. Second, the trust had a specific termination date wherein the son was going to get the rest, residue and remainder of his share at a specific date. Third, payments from the trust were made regularly and consistently and stopped on the “eve” of the divorce. And fourth, the trustee had ascertainable distribution standards of health, education, maintenance and support. Finally, it had the ideal plaintiff: the wife who shared two special-needs children with the defendant. Put all of that together and judges will find a way to pierce the trust. So what is one to do?

Bigstock-Breaking-The-Bank-4881450While this case was shocking to many, decisions like this are not a surprise in the Lawyers with Purpose community, which is why we have been recommending certain strategies to safeguard against even the pickiest judges and fact patterns. For example, when traditionally drafting a trust and leaving it to beneficiaries in asset protection trusts, we believe the strongest protection comes from having separate share trusts for each beneficiary, with provisions specific to the needs of the individual beneficiary. Second – and this is the most important part – we believe there should not be ascertainable standards, but rather pure discretionary rights to the trustee. Finally, whenever possible the beneficiary should not be an individual, but rather a class of people. For example, in this case, instead of naming just the son as beneficiary, we would recommend naming the son and his issue as beneficiaries, thereby opening up the class of beneficiaries and enhancing the asset protection. One may be fearful of naming the issue. Well, therein lies the trick. Who is named beneficiary is not ultimately the determining factor of who benefits, but rather who the trustee determines who benefits. Create a class of people the trustee can sprinkle income and/or principal among as they deem appropriate in their absolute discretion (not ascertainable standards).

In the Massachusetts case, this could have solved the problem. How? During the marriage, it is likely most of the regular payments provided to the son were actually used in the marriage for the children or items that the husband and wife benefited from jointly. By opening up the class of people, the trustee could have made distributions directly to the children to provide support for the children that the husband was using the money for anyway. By doing this, it surely indicates the assets were not assets of the husband's, but were truly a third-party trust that, at the discretion of the trustee, was distributed to various members in the class, thereby not making it a marital asset. The defendant could have continued to use proceeds from the trust for the benefit of his special-needs children even after the divorce; in fact, most fathers would not penalize their children for divorcing from their spouse. But the key distinction would be that the husband would have remained in control of the assets rather than having to surrender them to a former spouse, wherein there would be no control.

The challenge today is that too many lawyers are on autopilot when they're drafting trusts – or worse, their trust drafting software system doesn’t allow the customizations and protections that the Lawyers with Purpose client-centered software does. Our client-centered software advises the attorneys and allows them to custom tailor each and every option. In addition, LWP™ attorneys are trained to think like the worst court you can imagine and identify how to create provisions that are not specifically targeted at a particular goal but rather strategically drafted to accommodate multiple objectives.

Click here now to see how our trust drafting software will keep your client's needs always in the front of your planning. 

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


Estate Planning & Tax Basis Basics

When doing estate planning, it is critical that the attorney is aware of the basic tax basis issues and their impact on estate planning.

Tax “basis” is a term related to income taxes. The “tax basis” of an asset owned by an individual can change based upon the type of asset, when it was purchased, and the value at sale or death of the owner. So let's start with the basics. Most principal assets are purchased. This includes stocks, bonds, mutual funds, real estate, and even businesses, among other things. When you purchase a principal asset, the IRS looks at the value of that asset when purchased to determine what, if any, income tax should be paid when and if it is later sold. For example, if you buy a stock at $10 per share and hold it for a period of years and then sell it when it is worth $15 a share, the IRS will identify your tax basis as $10 and your sale value at $15 to net an income taxable amount of $5 per share (aka “capital gains”). Over the years, the government has taxed capital gains differently from ordinary income.

Bigstock-Real-Estate-Concept-9382373There are additional issues to consider with basis. For example, it can change if you own real estate, and if it is used as a business (rented out to others), you can “depreciate” the real property. Depreciation is a non-cash-flow expense against your income. For example if you buy a commercial building for $250,000 and rent it out, in addition to the regular expenses incurred each year from your cash flow, including interest, taxes, insurance, utilities, and general maintenance, the IRS also allows you to take a depreciation expense that represents a percentage of the value of the real estate. Traditionally, depreciation periods are over 27½ or 39½ years. So a $250,000 building divided by 39½ years provides for the annual depreciation amount of $6,329. While the IRS allows you this deduction, you do not have to pay anybody anything to get the deduction. In contrast, however, the $6,239 depreciation deduction reduces your basis in the real estate. So, for income tax purposes, your building no longer has a basis of $250,000, but now $243,761. As you continue to own the building and take the depreciation expense, your tax basis in the real estate continues to decrease, thereby leading to a greater potential income tax when the property is later sold. If the property had been depreciated for 10 years, the basis would have been reduced by $63,390, netting a new tax basis of $186,710. If later sold for $350,000, a capital gain will be assessed on the difference between the sales price and no adjusted basis ($163,290), not the original purchased price and sales price ($100,000).

Finally, it is important to note as an estate planner that tax basis gets automatically “stepped up” if you own the asset at death. Under the previous scenario, if you bought a stock for $10 that grew to $15 or you owned a piece of property that you paid $250,000 for and depreciated $63,000, when you die, both are revalued at your date of death and the values are included in your taxable estate for estate tax purposes. The good news is their estate tax does not trigger any actual payment requirement unless the estate exceeds $5,430,000. Conversely, while it does not incur an estate tax, the beneficiaries get a “step up” in basis after the death of the original owner to the value at date of death, so any subsequent sale after death will yield no income taxes. When planning, sometimes holding assets until after death has a strategic advantage if they are significantly appreciated.

This is also true in charitable planning. If assets that have been appreciated are donated to charity prior to death, the donor will receive an income tax charitable deduction equal to the fair market value, not the tax basis, but there are limitations on the charitable deduction if the contribution was made from appreciated assets. A charitable contribution made with a full basis asset (i.e. cash) can be deducted up to 50 percent of the donor’s adjusted gross income, whereas the deduction for a charitable donation of appreciated property is limited to 30 percent of adjusted gross income. The biggest advantage, however, comes from individuals waiting until after death to convey their highly appreciated assets, so no capital gains tax is incurred to the client (because they didn’t sell it during life) nor the beneficiary (because they received a “step up” in basis). Understanding tax basics is critical to ensure that you always consider the income tax impacts when signing in the short and long term for a client.

If you are interested in learning more about Lawyers With Purpose and in particular how our Client Centered Estate Planning Drafting Software can make a difference in your estate and/or elder law practice, just click here and schedule a day/time that works for you to discover it for yourself – first hand.  Just show up with any questions you have!  We've got the answers!

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