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Why is it necessary to correct your estate plan on the eldercare journey?
Because most people’s estate plans plan for death. Most attorneys will draft these plans well and accomplish the goals of asset transferring upon death. However when you’re on the eldercare journey, and death is not imminent but you face long-term care and the costs of $5,000 to $15,000 a month (in a facility located in Chicago and the surrounding Chicago suburbs and Chicago metropolitan area in general), estate planning documents that serve you well at death may not serve you so well when the healthy spouse may unexpectedly may die before an ill spouse who is residing in an Illinois nursing facility.
 
So the question remains how do we correct your estate planning documents when you begin the eldercare journey?
First we make sure that upon death assets do not go directly from the predeceasing spouse to the surviving spouse. Rather, upon death, assets are transferred from the predeceasing spouse to supplemental needs trust (SNT) for the benefit of the surviving spouse. Please note that the supplemental needs trusts for spouses must be found in the will of the predeceasing spouse. So instead of doing pour- over wills where assets controlled by the will pour -over to the trust, we do the reverse: assets controlled in the trust pour – back to the will, where the supplemental needs trust are found for the benefit of the surviving spouse.
 
Why is it advisable to do this as couples age?
Because if at the time of the death of the predeceasing spouse, the surviving spouse finds themselves either in a long-term care facility or soon to enter a long-term care facility, we are not enriching the surviving spouse directly and causing more potential costly spenddown. Rather, we are leaving assets in a supplemental needs trust for the surviving spouse so the surviving spouse can apply for governmental benefits to cover the devastating cost of long-term care ( $5000 to $15,000 per month in Chicago and the Chicagoland metropolitan area and in other parts of Illinois as well), while at the same time having the benefit of the assets and the inheritance left by the predeceasing spouse to be found in supplemental needs trusts left for their benefit.
 
Don’t fall into two traps of erroneous thinking!
First, don’t fall into the trap of thinking that if one spouse becomes ill, the couple can leave assets directly to the children. This is a formula for disaster because it may create immediate ineligibility for any governmental benefits related to long-term care under the Medicaid rules. Medicaid will not permit you to do this.
 
Second, don’t fall into the trap of thinking that if one spouse becomes ill, we must completely disinherit that spouse or watch a complete spend-down without any assets being left for the surviving spouse. That is not true either. The reason is spouses are allowed to leave assets for each other in supplemental needs trusts (SNTs) as described above. Thus, there is no need to completely disinherit your loved one, you can leave them assets (in an SNT) that will improve the quality of their life if they need institutional care but at the same time allow them to remain eligible and qualify financially for governmental benefits because the assets that you left for them are not left directly in their ownership, but rather in a special needs trusts that I described above, which is perfectly permissible under the Medicaid rules.
 
Sounds complicated?
It is not complicated. It’s just different than what you have most likely done with your “traditional” estate planning in the past. As we start approaching our senior years at around age 60-65, in addition to looking into Social Security and Medicare and other related topics for seniors, couples that are concerned about the devastating cost of long-term care you should consider correcting their estate documents so that assets are not left directly from one spouse to the other, but rather, transferred to supplemental needs trusts as described above. This type of planning can save assets by properly relying on rules left for the benefit of aging spouses by Congress in its legislation of the current Medicaid laws that have provisions intended specifically to help avoid this type of spousal impoverishment.
 
 
Conclusion
Take advantage of these generous Medicaid provisions and correct your estate plan documents as you begin the eldercare journey around age 60 to 65. Note: If there is a diagnosis of illness prior to age 60 sometimes it is prudent to do this type of planning even earlier.
 
And once again, this is not the kind of drafting that one will try on their own, rather you need to seek elder law counsel to draft these documents because these documents will be closely scrutinized by governmental agencies.
 
Best to you and your loved ones,
 
Anthony B. Ferraro
 
 
PS: in the month of May 2019 we have presented at least six times to various audiences on the issues pertaining to Elder law and Elder care. Please contact our offices if you would like to become aware of future speaking engagements that you may wish to attend.
 
Also please be aware that it is our practice that before clients retain us that we offer them a free 15 minute telephone consultation before they even have to come into our office. If this will help you or one of your loved ones please feel free to take advantage of it by calling our offices.
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In most people’s experience the creation of an asset inventory is nothing more than creating a list of assets, account numbers and account balances as of a beginning date.
 
It is a good practice to maintain an asset inventory for yourself and update it periodically.
 
Some Issues that can Complicate Your Asset Inventory
 
When someone is ill, and we are looking to establish eligibility for Medicaid for long-term care in either a supportive living facility or a skilled nursing facility, asset inventory issues become complicated in some cases.
 
In ALL cases:
 
1.  In cases involving individuals who are applying for Medicaid, their asset level must be down to $2,000 of assets as described above. Quite often the easiest way to get to those lower asset limits is to liquidate assets and convert to cash. However, in doing so, various issues arise that we will describe below.
 
2.  First, please recall that any liquidation of any tax qualified retirement account such as a tax qualified annuity, 401(k), IRA etc. will trigger tax, except for a few exceptions.
 
3.  In the payment of debts prior to the filing of the Medicaid application care, must be given regarding the order in which debts are paid. Sometimes certain creditors have priorities over other creditors.
 
4.  In the liquidation of assets, sometimes there are penalties associated with liquidation , depending on the time that you liquidate. For example, annuities can have early withdrawal penalties and surrender charges.
 
5.  Payment of outstanding debt such as credit card debt, mortgages and HELOC (home-equity) loans, may become an important part of your overall strategic spend-down plan when you’re seeking governmental benefits.
 
6.  Long Term Care Insurance: This can and should be considered an asset and income source for certain governmental benefits, but make sure when and where the policy terms will make payment available.
 
7.  Prior transfers or gifts and other uncompensated transfers of cash or property that were made before the date of filing a Medicaid application, to individuals or charities, in the past 5 years can be a liability when you look for Medicaid eligibility for long-term care.
 
8.  Homes unless occupied by certain allowable individuals such as adult disabled children, spouses, or minor children, may need to be listed for sale when an individual seeks Medicaid eligibility. Business assets may also need to be listed for sale.
 
In SPOUSAL cases : 
 
1.  As stated above, any liquidation of any tax qualified retirement accounts such as a tax qualified annuity, 401(k), IRA etc. will trigger tax except for a few exceptions. In a spousal case,  if we are going to apply for Medicaid for an ill spouse, then the ill spouse may have to liquidate or change the form of ownership of certain tax qualified assets such as IRAs and 401k.
 
Note: In order to accomplish this, it is sometimes necessary to open a limited guardianship proceeding in court. However, with IRA’s and other tax qualified retirement accounts we do not want to trigger the payment of taxes sooner than is necessary since the ill spouse may still be residing either at home or in a facility that does not take Medicaid or where no Medicaid eligibility is possible. Thus, why pay tax to the IRS earlier than you need to? Eventually however you may begin the process of transferring the IRA from the ill spouse to the healthy spouse with the assistance of the guardianship court and suffer the triggering of the tax (for example say, 20%) in order to save the bulk of the IRA account for the healthy spouse who is likely still living in the community.
 
Remember also that because many IRAs are structured as an “IRA annuity” by your financial adviser, there may be penalties and surrender charges on the transferring of such IRA annuity or the cashing out of such an IRA annuity
 
2.  Illinois Medicaid regulations provide that if the community spouse can remain living in the family home, then the community spouse is entitled to retain $109,560 of the couple’s nonexempt assets in addition to the family home, an automobile, personal and household effects, and Medicaid compliant prepaid burial arrangements. Because of these asset limitations, which can be exceeded with careful planning that is authorized under the Medicaid regulations, it is crucial that you be thoughtful in transferring assets from one spouse to the other and be careful about the timing of such transfers.
 
Conclusion: 
 
As we indicated at the outset, the task of preparing an asset inventory should not in and of itself be that complicated. The difficulties come in when one seeks to re-position or transfer certain assets that are found in your inventory. Many assets have contractual constraints, deferred tax implications built into them, or problems with access before the assets can be freely used for the benefit of you and your loved one.
 
Be complete and seek guidance if you must to deal with any complicated assets in your asset inventory while you are on the eldercare or long- term care journey.
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In the previous installment we mentioned how important it is to begin senior estate planning or traditional estate planning with the execution of powers of attorney for both property and healthcare matters. Quite often we take for granted the notion that these documents will be something that are easy to have signed.
 
However with diminished mental capacity, sometimes it is difficult and sometimes impossible to have such documents executed by a patient, resident, loved one or client due to the fact that they no longer possess the required cognitive capability to legally and ethically sign documents.
 
This is an impediment, even if we know that the documents would be good for them to have. But because cognitive capacity may not exist, the documents cannot be signed, legally or ethically, even if the individual is capable of going through the physical motion of signing their name. This is because even though they may be able to sign their name, they may not understand what it is that they are signing.
 
Sometimes circumstances are very clear-cut as to whether mental capacity exists, but sometimes the facts surrounding the behavior of a loved one are not so clear or not so well understood.
 
What can be done then?
 
In situations where it is not clear as to whether or not your loved one has mental capacity, the attorney involved may need to seek consultation from a medical professional or mental health expert.
 
If a formal assessment is desired, the attorney usually attempts to obtain the consent and cooperation of the client, if that is possible. Sometimes this can be upsetting or embarrassing to a client. Nevertheless, the determination of mental capacity is something that must be established before other matters that are encountered on the Elder Care Journey are confronted.
 
Assuming that either the consent of the client is obtained, or perhaps the client cannot consent, then who does the lawyer look to as a referral for consultation on matters of diminished mental capacity?
 
If the patient, resident, loved one or client is fortunate enough to have a physician regularly attending to them, then reaching out to that physician may be the first order of business. Sometimes however, primary care physicians may decline as they may feel that they are not trained sufficiently to administer psychiatric and psychological assessment tests.
 
If the attending physician will not undertake the assessment, you may look to other geriatric assessment professionals that can often take a multidisciplinary approach to determining mental capacity.
 
Keep in mind that the determination of mental capacity is sometimes complicated by the fact that mental capacity can vary from day to day and can often be task specific. This means that an individual can have the capacity for one type of task, for example, the execution of a power of attorney for healthcare, but may not have sufficient capacity for the execution of a power of attorney for property that has gifting and asset repositioning authorizations written into the document.
 
Why the difference?
 
The reason is: The former task (executing a power of attorney for healthcare) has a lower cognitive capacity standard or threshold that must be met in order to establish capacity. The latter task (executing a power of attorney for property) has a higher cognitive capacity standard that must be met, which standard is, for example, closer to the standard that must be met to knowingly execute a contract.
 
These varying degrees of capacity are why it’s important to select professionals that are trained to parse the levels of capacity needed based on the specific tasks that are being contemplated. As you can see this can become complicated.
 
The Takeaway: Obtain and sign powers of attorney for healthcare and powers of attorney for property, as well as any other estate planning documents that you need for either senior estate planning or traditional estate planning, as soon as possible. Waiting till one reaches the later stages in life creates the risk that in those later stages, you may not have the requisite mental capacity to execute the documents that you need.
 
The problem that arises: If you do not have the requisite mental capacity to legally and ethically execute documents, it may be necessary to engage in a protective action such as a expensive guardianship proceeding in the State of Illinois. Let’s assume the senior resides in the City of Chicago, at this time, in the Circuit Court of the County, the waiting period for a hearing on a guardianship petition can take as long as 4 to 6 weeks due to tremendous case backlog in Cook County. This creates unnecessary expense and time delay that can be avoided with the timely execution of estate planning documents such as powers of attorney for property and powers of attorney for healthcare.
 
In our office we recommend people execute powers of attorney when they are 18 years of age! Obviously the type of power of attorney that an 18-year-old may need will be quite different than that of a 88-year-old, but the point is you need to get these documents in place sooner rather than later.
 
Don’t fall into the trap of helplessness that diminished mental capacity can create, and possibly be permanently locked out of your constitutional right to self determination, regarding your own health needs, property matters, estate plan, and other related matters.
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Do you have powers of attorney in place?
 
I know it sounds simplistic, and we have all heard this before, but perhaps the most important document that you can have upon beginning the long term care journey is the power of attorney. This is the first matter we suggest to our clients in the Chicago and Park Ridge metropolitan areas who are on the long term care journey.
 
Why is the power of attorney so important?
 
Because a power of attorney is a legal document where one person called the “principal” legally authorizes another person called the “agent” to act on their behalf with regard to either financial or health related decisions.
 
Without these powers of attorney in place, no one has the legal authority to act on another’s behalf and therefore we may have to resort to a court guardianship proceeding where a person appointed by the court, usually a family member, called the “guardian” has the power to make personal decisions for another usually called the “ward”. Guardianship’s are expensive, require the testimony of physicians, the appointment of a Guardian “ad litem” to investigate and protect the ward’s interest, and many other formalities have to be observed, all in the interests of protecting the ward.
 
These court efforts are all well and good, but if you can avoid all of this by simply having created valid powers of attorney for property and finance and healthcare matters (this may not be possible in all cases), you can streamline matters during your long-term care journey, later on.
 
How many different types of powers of attorney are there?
 
In Illinois we have two types of powers of attorney one for health and one for property (and financial matters). Sometimes these documents are called statutory powers of attorney and at other times these documents are called durable powers of attorney. The difference lies in the type of form selected to draft the power of attorney. Most of the time we recommend you stick to the statutory form power of attorney because this is the one the doctors, other health providers, nursing homes, assisted living facilities banks and financial institutions most readily recognize.
 
Can I create my own powers of attorney?
 
Yes you can, however they will not contain the necessary language that Elder Law Attorneys put into such documents such as: the power to make gifts to family members and others in order to qualify for Medicaid eligibility, the power to remove and add assets to a trust, and the power to apply for public benefits and then appeal any decision on public benefits. Unfortunately your standard power of attorney forms do not have these provisions built into them. Worse yet, if these additional powers are not built into the power of attorney, then you cannot engage in these powers under the power of attorney. They must be expressly listed in the power of attorney.
 
What’s the take away?
 
Get powers of attorney in place immediately. You could wait until later when you I need them, however if you lose the cognitive capacity to legally and ethically execute documents like these, then you may never be able to have these types of documents and hence we are left pursuing an expensive and complicated guardianship process.
 
Get your powers of attorney in place now.
 
How old should you be when you start executing powers of attorney?
 
18 years of age. Most people don’t realize that at 18 they cannot make either financial or medical decisions for their children. But that is in fact the law, because at 18 children have reached the age of majority and without legal authorization nobody can make decisions for them as they are now adults.
 
Ask your adult children to have their powers of attorney done now, as well.
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Installment 3 of 10

In Our Series: “Long Term Care Costs for the Middle Class: 10 Steps to Asset Protection Through Medicaid in Illinois, for Middle Class Seniors and Boomers”

Many people ask, “What is guardianship in the state of Illinois?” Simply put, guardianship is the process of applying to a court to be able to legally assist an individual over the age of 18, if the person has a disability. A disabled person, for purposes of guardianship laws, is someone who cannot make basic life decisions or manage their own property or money. Due to the participation of the court system and the attorneys’ fees involved, this process is an expensive proposition and should be avoided at all costs, if possible. Guardianship is avoided by using other methods of surrogate decision making for disabled individuals such as powers of attorney, trusts, the Health Care Surrogate Act, and other related surrogate roles. Unfortunately, many people wait too long and do not have the authority to execute powers of attorney, trusts, etc. because they are incapacitated. In such cases, we are grateful that the guardianship court exists. Guardianship is achieved to the following general steps:
  • Filing of a petition for appointment of a guardian to be determined at a court hearing
  • Issuance of service of summons;
  • Appointment of a guardian and guardian ad litem, an unrelated individual who will be the eyes and ears of the judge in understanding the circumstances;
  • Obtaining the necessary physician’s report establishing that the individual does not have decision-making authority, and;
  • Giving notice to all spouses, children, siblings and agents under power of attorney so that they can concur or object with the guardianship itself.
The benefits of guardianship are that the day-to-day management of financial affairs can be handled by the guardian of the estate, and the day-to-day management of health matters can be accomplished by the guardian of the person. Sometimes the same individual is the guardian of both the estate and the person and sometimes different persons are appointed to these roles because of their different skill sets. Guardianship can consist of both:
  • Uncontested guardianships: when everybody agrees with the process of the person selected, or
  • Contested guardianships: when the Ward (the person that is the subject matter of the guardianship process) or someone known to the Ward may object to the guardianship, in which case the guardianship process becomes what is called a contested guardianship (which results in expensive litigation)
The guardianship process is a last resort when people have not taken time to do the appropriate estate planning. I recommend that people get powers of attorney for property and powers of attorney for healthcare in place at age 18, in order to avoid guardianship in the event they become incapacitated. Remember, at age 18, you are an emancipated adult and you can make decisions for yourself and nobody else can make decisions for you, unless you authorize them to do so. It is for this reason we recommend powers of attorney whenever we can. Don’t allow your personal and health matters to fall into guardianship. We are grateful that guardianship exists for tragic situations where proper planning has not taken place. But, now that you know that you can avoid guardianship through proper estate planning, prudence would indicate that you take the steps to do such planning.
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Problem: We recommend that our clients seek to purchase long term care insurance. But, what happens if it cannot be purchased either due to unaffordable costs or underwriting prohibitions? Solution: Medicaid is the only federal governmental program that will pay for long-term care. This will require using some of your own funds in order to properly pay your way at a long term care facility, but if planned for properly, will not result in the use of all of your funds. Therefore, in order to access the Medicaid program in Illinois, one must take some of the following steps in order to become eligible. Be aware, this is a very complex area of planning, but these initial steps should be an overview of what you need to do to begin the process. You would be wise to consult with an Illinois elder law attorney who focuses in this type of asset protection work.
  1. Revise Powers of Attorney
First, revise any powers of attorney for property and health care that you currently have. Most of the powers of attorney that we see in our office, while valid, are inadequate to allow the necessary repositioning and reclassification of assets to gain eligibility to Medicaid, VA, and other governmental benefits.
  1. Contact a Physician
If the senior has mental competency issues, then perhaps contacting a physician to determine whether or not the senior has the requisite mental capacity to execute new estate planning documents is essential. It is unethical to have a senior sign anything that they don’t have the capability of understanding.
  1. Seek Guardianship
This step is a last resort, but may be necessary in some cases, if no powers of attorney can be executed due to diminished mental capacity.
  1. Revise Old Wills and Trusts
Revising old wills and trusts is also essential. Most wills and trusts are nothing but death plans. But, when you’re looking to gain eligibility for Medicaid for long-term care, the documents must reflect the authorization of handling long-term care planning matters rather than just distribution of assets and a death.
  1. Create a Blueprint
The next step, which is useful to seniors, and the family members that are supporting them, (and boomers that are beginning to ponder the long-term care journey), is to create a blueprint.  This blueprint will consist of breaking down considerations into life’s 3 main phases: preplanning, wait-and-see planning, and crisis planning. Preplanning is done when there is plenty of time to plan, waitand-see planning is done when there is a diagnosis, but you are not forced to leave home for long-term care, and crisis planning is when you must seek a higher level of care in an institutional facility of some type. Quite often, after the blueprint is done and steps one through four are completed, there is nothing further to do until the situation becomes more escalated and a higher level of care may be needed by the senior or boomer, who may migrate to a crisis planning stage.
  1. Inventory Assets
Assuming that we need a higher level of care, we need to continue the work that we did in steps one through five and take the next step, which is set up work necessary to inventory assets and get an understanding of asset ownership, beneficiary designations, and ability to convert to cash in order to pay for long-term care expenses, at least for some period of time.
  1. Seek Placement in a Facility
The next step, assuming that a higher level of care is to be delivered, is to seek placement in a facility. There are many kinds of facilities, such as, independent living facilities, assisted living facilities, supportive living facilities, and nursing homes, and continuing care retirement communities (CCRC’s). I am pleased to say that, for the most part, we see these business entities delivering good care to most of our seniors. Like any other business entity some of their business contracts are fair and others are unscrupulous. It is necessary for you to have a lawyer familiar with these types of contracts to be sure that, from a legal standpoint, whatever you are signing is acceptable. Remember, some of these contracts can require you to pay $10,000 a month and may unnecessarily impose financial liability on children and other signers of these contracts.
  1. Select a Strategy
The next task is to select a strategy which will allow the senior or boomer to legally and ethically reposition his or her asset(s).  This opens up eligibility for the Medicaid benefit in Illinois without spending down to the paltry statutory level of $2,000 of assets. Remember without further planning, Illinois expects you to rely on $2,000 for the rest of your life. This is impossible because some of our seniors enter long-term care at the age of 67 and may remain in long-term care for the next 20 years. It would be nice to have more than a mere $2,000 to buy the TVs, radios, bathrobes and slippers, hearing aids, and eyeglasses that make life more tolerable.
  1. Prepare and File the Medicaid Application
The next step is to prepare and select a time, after the implementation of all asset protection strategies, to file the actual Medicaid application, which fully documents all transactions over the last 60 months. In some cases this can be very demanding task as some seniors lose documentation and forget about transactions and assets.
  1. Prepare for the Post Application Audit
The next step is to prepare for the post application audit by the State of Illinois staff members and be ready to file an appeal in the event the state objects to anything you have presented in the application. Also be ready on an annual basis to respond to the state’s request in what is called their annual redetermination process (REDE). Summary: I hope this gives you a simplistic view about how to qualify for Illinois Medicaid while using Medicaid asset protection strategies. Most clients are trying to preserve some assets and they are entitled to do so as a matter of exercising their civil rights as long as they do this legally and ethically. This planning is not done by wealthy individuals, as they can pay their way through any costs associated with long-term care. Rather, this planning is best done by middle class individuals who have worked to accumulate some savings only to find that the cost of long-term care make their life’s work disappear in no time. Our goal, as asset protection attorneys for the middle class, is to allow seniors to gain access to the Medicaid program. Although this requires clients to use some of their own assets for their cost of long-term care, it also enables them to preserve some of their assets.  Therefore, in their senior years, after a lifetime of work, they are entitled to some dignity and some resources to make a life in a nursing home more livable. Anthony B. Ferraro BS-MSTax-CPA-JD
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1. The Problematic Situation You represent the personal representative of an estate where the decedent made one person their joint tenant on real property, accounts, stocks, or other assets. It becomes clear upon reading the decedent’s will, which was prepared after the creation of the joint tenancy accounts, that the decedent did not actually intend for the co-tenant to take a 100% beneficial interest in the property at the decedent’s death. Rather through the prior conversations with the co-tenant and others, the decedent was merely trying to avoid the probate process and wanted to assign the responsibility for the re-distribution of the jointly owned assets to one person: the surviving joint-tenant. Unfortunately, the decedent may not have realized or may have forgotten that when the first co-owner of joint tenancy property passes away, the surviving joint tenant takes title to 100% of the legal and beneficial interests in the jointly owned property. This may create an unintended consequence where the surviving joint tenant wishes to “normalize” the inherited assets and redistribute them among the beneficiaries stated, for example, in the decedent’s will. The unintended consequence is that the surviving joint tenant will incur gift taxes (and possible estate taxes if the interest passed is large enough), upon distributing the inherited assets to the intended beneficiaries. One possibility for mitigating the burden on the surviving joint tenant is to argue that the assets were in fact held in a “resulting trust.” 2. Illinois Law Under Illinois law a resulting trust can be created by operation of law when property is transferred to a person who did not pay for the property, and it is implied that that person hold the property for the benefit of another person. Resulting trusts should not to be confused with “constructive trusts,” even though they are both judicially imposed “trusts.” A constructive trust arises when a wrongdoer party has taken title to property rightfully owned by another. That party is then ordered to transfer the property back to the rightful owner. In a resulting trust, however, the party vested with the mistakenly inherited assets (for example a surviving joint tenant) is acting like a mere trustee,  and did not commit any wrongdoing to obtain title to the property. Under Illinois law, a resulting trust is a trust created by operation of law based on the intent of parties.[i] Resulting trusts arise when property is bought with the money of one person, but the title is taken in the name of another.[ii] The creator of the resulting trust must not intend to give the recipient a present interest.[iii] Illinois law further provides that although there is a presumption that transfers between family members are gifts, the presumption can be overcome by showing the intentions of the family members.[iv] If the property was (1) purchased solely with the creator’s own funds, (2) the recipient did not contribute to the taxes, management, or maintenance for the property, or (3) the property was put in joint tenancy for the purpose of probate avoidance, these factors contribute to overcoming the presumption of a gift.[v] The recipient’s understanding of the arrangement is also a factor that Illinois courts consider.[vi] If the recipient believed that she had no present interest in the property that, along with the other factors, contributes to the court’s finding a resulting trust.[vii] When a resulting trust is established, the recipient has title to the property in name only and is acting instead as a trustee.  (Emphasis added).[viii] 3. Practical Applications So, what are the practical applications of the use of the resulting trust? The first application relates to the elimination of potential gift taxes when the unintended sole beneficiary, the surviving joint tenant, wishes to reallocate or redistribute the assets to the true intended beneficiaries of the decedent’s estate as expressed.  In these cases, I think it may be possible to make a resulting trust argument to the IRS.  I think the resulting trust argument would apply specifically in cases where the personal representative of the estate was listed as a joint owner on assets belonging to the decedent, despite the fact that the personal representative did not contribute any of their own money towards the purchase of the assets, nor did the personal representative assist in their maintenance or pay any of the taxes on the property. This application and argument is further bolstered by evidence that the decedent (a relative) who passed away had expressed during his lifetime that he did not want his estate to go through probate, but merely wanted the personal representative to handle distributions to other family members, for example, in a well-executed will subsequent to the creation of the joint tenancy. We all know that gratuitous transfers will be viewed as gifts from the transferor, thereby either causing gift taxes to be paid or, at a minimum, creating a charge against their lifetime exclusion amount, assuming that the gift exceeds the annual exclusion amount.  Thus, we believe that by arguing for a resulting trust, we will be able to spare the surviving joint tenant from incurring the unwanted gift taxes, or perhaps estate tax at death, by gratuitously re-conveying the assets received through joint tenancy to the intended beneficiaries described in the decedent’s will that a decedent may subsequently have prepared after creating the “temporary” or “convenience-type” joint tenancy asset with the surviving joint tenant. A second application may arise in the handling of matters pertaining to the elderly. One may use the resulting trust argument to posit to the state Medicaid agencies that an asset held by a Medicaid applicant is not a “countable asset” because it is being held merely in a resulting trust. Of course, some practitioners of Medicaid eligibility law will argue: “Why not just make a complete return of the asset prior to application?” The implication of this argument is that the asset will be out of the Medicaid applicant’s estate; thus, no problem with ineligibility. Generally, I would agree with this line of argument, but, there are some assets that cannot be returned at least on a timely basis. Sometimes Medicaid eligibility is something that is required immediately with greater urgency because of lack of other funds. Furthermore, practitioners of Medicaid eligibility should be aware of the potential counter-argument by the State Medicaid agency that indicates that any asset held by the Medicaid applicant that is available, but is instead disclaimed or transferred without compensation, will result in a possible penalty for uncompensated transfers. While practitioners are well aware of this prohibition, the essence of the resulting trust argument is that the Medicaid applicant was never intended to be in possession of this asset or countable resource in the first place, thus creating the resulting trust and thus eliminating the need for a disclaimer or a compensated transfer. 4. Conclusion In conclusion, one hopes that both the IRS and Illinois state Medicaid agency can see and agree to practical applications and usage of the resulting trust argument: 1) for avoidance of IRS imposed gift taxes on the re-distribution of assets inadvertently held by the surviving joint tenant taxpayer who erroneously came into title through joint tenancy, and 2) in the avoidance of having a State Medicaid agency consider an asset inadvertently acquired by operation of law to be a countable asset for Medicaid eligibility purposes and thereby delaying or preventing the eligibility that a senior needs. [i] Suwalski v. Suwalski, 40 Ill. 2d 492, 495 (1968). [ii] Id. [iii] In re Estate of Wilson, 81 Ill.2d 349, 355 (1980). [iv] See In re Estate of Koch, 297 Ill. App. 3d 786, 789 (1998) [v] Ludwig v. Ludwig, 413 Ill. 43, 52 (1952). [vi] Id. [vii] Id.  [viii] In re Estate of Koch, 297 Ill. App. 3d at 789.
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For years, estate planners have done what is considered traditional estate planning. They drafted plans primarily concerned with minimizing future estate tax liability and gave minimal attention to income tax consequences. This was perfectly fine years ago when the estate tax was much more severe than the potential for income tax. This was attributable to relatively high estate tax rates, low estate tax exemption that was not indexed for inflation, and comparatively low capital gains rates. Recently, however, Congress has tinkered with the tax system in a huge way. Accordingly, the income tax impact of estate planning is taking on greater significance. More attention is directed towards the importance of income tax basis considerations in estate planning due to the narrowing between the estate tax rates and the income tax rates. In fact, in most estates worth less than $10.5 million, estate taxes are no longer an issue. Now, income taxes loom large, primarily because of the lack of attention on the income tax basis (i.e. cost or adjusted basis) of capital assets. The bad news for most middle-class taxpayers is that for years they’ve been fed a steady diet of estate tax minimizing wills and trusts. Worse yet, they hang onto these outdated documents for many years, thinking they are done with their estate planning and not wanting to be bothered. Sadly, these old documents will no longer serve their intended purpose: estate tax minimization. While there will be no estate tax savings with these documents, because very few middle-class taxpayers will ever pay estate tax, the documents will unnecessarily increase income taxes for their heirs upon the liquidation of any assets. Bottom line:  the game starts anew. Let’s focus on income tax minimization for most taxpayers and forget about estate tax minimization. Unless your estate is worth $10.5 million or more as a couple (or $5.34 million as a single person), your biggest risk is overpaying income taxes due to inattention to income tax basis planning in your wills and trusts.  Don’t make that mistake. Review your documents today.
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Remember that a Revocable Living Trust is like a door or an open box; things can come both in and out. The next type of trust that I want to explain is the Irrevocable Living Trust (IRLT). The irrevocable living trust differs from the revocable living trust (RLT) because once something is put into the IRLT, it is permanently there. Imagine that instead of a door that can be opened in an RLT, an IRLT is like a door that has been permanently locked. If you decide to put all of your assets in an irrevocable living trust and you need to get to them one day, you will have a big problem. Another way of putting it is is that it is like a box that can be locked. You’re probably asking yourself “well, why would anyone want to use an irrevocable living trust then?” The truth is, an IRLT is commonly used because it has asset protection, while an RLT does not. So, since many of us want some control over our assets, IRLTs and RLTs are generally created to work simultaneously. One example of a commonly used IRLT is a Medicaid Asset Protection Trust (MAPT). This special type of trust is used by people who need or will need to pay nursing home costs, but want to protect some their assets from being spent-down. In order to utilize this type of trust though, you must have enough money to potentially private-pay for long-term care during the entire 5-year penalty period. But sometimes, you can use this strategy and not have to be able to private pay for 5 years! Stay tuned to explore more options. -Anthony B. Ferraro
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We are witnessing a sea change in it in tax planning due to two new developments:  1) The new “portability” of the estate tax exemption for our clients The concept of portability allows the surviving spouse (widows and widowers) to carry over the estate tax exemption of the spouse who died and add it to their own exemption amount. However, to take advantage of this action you must “elect portability”. This means your executor, with the assistance of estate tax counsel, must handle the estate of the spouse who has died and file a federal estate tax return, even if there are no estate taxes due. Further, this estate tax return must be filed within nine months of death. However, the Internal Revenue Service has recently issued a Revenue Procedure creating some relief for people who fail to make this filing. Portability has the additional advantage of allowing assets to get a basis adjustment to fair market value after the date of the surviving spouse’s death. By contrast, this step up in basis is not available for assets that went into a bypass or credit shelter trust at the first spouse’s death. Most of the readers of this article have just those kinds of trusts. Specifically, the types of trusts that will not allow step up and tax basis and probably result in more income tax being due than is necessary. Note: This means that it’s probably a good time to review existing wills and trusts. 2) Increased demand by clients for increase in tax basis to avoid increasing capital gains tax from 15 to 20% On January 2, 2013 the capital gains tax increased from 15% to 20%.  Furthermore, Obamacare introduced a 3.8% Medicare tax that applies to capital gains. The combination of these two taxes can result in capital gain taxes of up to 23.8%. This can be a bad result especially when an estate consists of a trust or trusts created to eliminate estate tax but no estate tax, will be due. In 2014, no estate tax will be due unless a husband and wife have a pooled net worth of approx. $10.5 million! Therefore a review of trusts is suggested. It makes no sense to have trusts that avoid estate tax that you will never pay while those same trusts will force you to pay 23.8% in capital gains tax, when that 23.8% tax does not have to be paid at all. In short, the only way that this can be resolved is by creating a potentially taxable estate on the death of the first spouse to die that will fall below the $10.5 million taxation threshold. Simultaneously because the estate of the deceased spouse is left in a way that is potentially taxable to the surviving spouse, the surviving spouse gets to step up in income tax basis at their death. The net result is no estate tax and no income tax due. I would call that a pretty good days work. I have written on this topic before but because it is so immensely important I have chosen to dedicate another article to this concept of estate tax elimination combined with income tax income tax elimination. Still think it’s not time to review that estate plan? Think again.
Anthony B. Ferraro
Attorney – MS Tax – CPA
847-292-1220
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