Newsletter: April 2010
April 15, 2010
In this issue: Asset Protection for Retirement Benefits; Federal Estate Tax Planning in 2010; Why Hire and Elder Law Attorney to Assist with the Medicaid Application Process?
ASSET PROTECTION FOR RETIREMENT BENEFITS
Bankruptcy Creditors Can Get At An Inherited IRA Account!
Bankruptcy law currently allows debtors an exemption of $1,171,650 with regard to IRA accounts. However, a federal district court recently ruled that this exemption is only available for account owners (as opposed to beneficiaries).
The court ruling involved a child who had inherited an IRA from her mother and subsequently filed for bankruptcy. The court ruled that only accounts owned by a debtor qualified for the exemption. With regard to inherited accounts, the court stated that because such accounts remain in the name of the deceased owner, they are not actually "owned" by the person inheriting the account.
This type of unfortunate result with regard to an inherited IRA, however, can be avoided with careful planning. IRA benefits paid to a trust that is properly structured for the benefit of an individual can be protected from all creditor claims and, accordingly, not included as an asset in a bankruptcy proceeding. This is one of the many reasons that the attorneys at Smith and Condeni are invested in asset alignment strategies for their clients.
Please feel free to contact us if you want further information on this topic. Asset protection planning is one of our core strategies for client estate plans!
FEDERAL ESTATE TAX PLANNING IN 2010
Congress generously proposes to give estates the option to pay taxes.
A new proposal currently under review with regard to federal estate taxes would give estates the option in 2010 to either pay the federal estate tax using the 2009 rules ($3,500,000 estate tax exclusion and GST exemption; top tax rate of 45%), or to take advantage of the one-year repeal of the tax.
While it may seem implausible that any estate would voluntarily pay federal estate taxes in a year in which that estate tax is (so far) repealed, the carryover basis rules tied to the federal estate tax's repeal may make it less implausible for some estates.
To reiterate from a previous edition of this newsletter, under the 2010 rules, when inherited assets are sold, the estate's heirs are able to exclude a maximum of $1,300,000 of capital gain (unless the heir in question is a surviving spouse, who can exclude an additional $3,000,000). Because of this limitation, the heirs of some estates may fare better by availing themselves of the 2009 rules, which provide for an unlimited step-up in basis, even though an estate tax would then be due.
While this proposal is not in any bill yet, it certainly bears following since some commentators have suggested that it could potentially sidestep the argument that the reinstatement of the federal estate tax in the middle of 2010 would be unconstitutional.
In what is unlikely to surprise many advisors in the "know", a report by the Treasury Department detailing the Administration's 2011 fiscal year revenue proposals includes a presumption that the 2009 estate and GST tax rules will be made permanent. If this presumption proves accurate, it would mean a return of the 2009 $3.5 million federal estate tax exclusion and GST exemption, as well as the $1 million gift tax exemption.
Of substantially more interest, however, the Treasury Department's publication reveals some other proposals made by the Administration:
- Authorize regulations under Section 2704(b) of the Internal Revenue Code to create a new category of "disregarded restrictions" that would be ignored in valuing interests in family limited partnerships, corporations or LLCs to eliminate or reduce many of the current valuation discounts for such interests.
- Require Grantor Retained Annuity Trusts ("GRATs") to be established using a 10-year minimum term.
- Also, preclude the use of "zero-gift" GRATs (also known as Walton GRATs) and GRATs with reducing payments.
- Require the use of the values reported on an estate tax return as the basis of assets reported on income tax returns.
- Increase the reporting requirements for sales of life insurance policies.
- Establish a rebuttable presumption that any trust to which a U.S. person makes a transfer has a U.S. beneficiary, causing the trust to be a grantor trust under Code Sec. 679.
Only time will tell how far any of these proposals will go in the Congress, but the enactment of any of them will have far-reaching consequences in terms of planning for our clients. We will continue to do our best to keep you up-to-date any emerging developments in these areas!
WHY HIRE AN ELDER LAW ATTORNEY TO ASSIST WITH THE MEDICAID APPLICATION PROCESS?
We frequently hear from family members that the social worker at the nursing home facility or a family member themselves will handle the Medicaid application process for the nursing home resident. While these individuals have the best of intentions, a majority of time they are not well-versed or educated in the specific eligibility requirements and planning opportunities under Medicaid. An untimely filing of a Medicaid application or payment of an impermissible expenditure can cause significant delay and often times severe penalties. By hiring an elder law attorney to assist with the Medicaid application process, you will ensure that there are no lost opportunities in last minute planning strategies and obtain the overall best outcome for your client or their family member.
Among several other planning opportunities, an elder law attorney may be able to:
- Preserve a portion of the resident's income for use by a non-institutionalized spouse;
- Provide for the transfer of the resident's assets to certain family members without creating a penalty period under Medicaid law;
- Protect life insurance policies and proceeds;
- Protect retirement benefits and accounts;
- Protect the resident's home; and
- Identify last minute expenditures that may be made for the resident's benefit without creating a penalty period for Medicaid eligibility purposes.
If a client or a client's family member needs assistance with a Medicaid application or Medicaid planning, contact Holly N. Denham, Esq. at Smith and Condeni LLP.