Advanced Elder Law Review January 27 & 28 Newport Beach, CA

Advanced Issues in Pre-Mortem

Legal Planning

Michael J. Amoruso, Esq.

January 27, 2015

Advanced Elder Law Review January 27 & 28 Newport Beach, CA

Advanced Issues in Pre-Mortem

Legal Planning

Document 1

Advanced Elder Law Review

Newport Beach, CA
January 27, 2015

Advanced Estate Planning, Tax, Pre-Mortem

and Post Mortem Planning

Hyman G. Darling, CELA, CAP

Bacon Wilson, P.C.
33 State Street
Springfield, MA 01103
413-781-0560
hdarling@baconwilson.com

1184875

Michael Amoruso
Amoruso & Amoruso, LLP
800 Westchester Avenue
Suite S320
Rye Brook, NY 10573
914-253-9255
michael@amorusolaw.com

Although there are many planning opportunities with regard to estate

planning, asset protection planning, or assisting with high-end wealthy clients, one
must always consider the tax implications and options available to the client.
Keeping that in mind, the practitioner must advise the client as to the tax (and nontax) issues that may be either beneficial or detrimental to the client as well as the
clients family, heirs, and beneficiaries. While the client may not care about the
adverse tax consequences to the beneficiaries, you can be sure that the
beneficiaries will be second guessing all planning strategies if they have to pay any
taxes, especially if there were options to reduce or negate the taxes. Therefore, it
is very important to be clear with the client(s) as to the ultimate consequences that
will occur. That being said, one must also keep in mind the ever-changing tax laws
that are enacted periodically without regard to consideration of past laws, future
consequences and other issues within a clients life as well as the economy. Very
often, a tax law is not retroactive, but it also may not be grandfathered-in (or
grandmothered in) relative to a previously tested strategy that worked for the
client in prior years. A letter to the client in which the details of the options are
spelled out should be set out as clearly as possible. The letter should also be
acknowledged by the client where they state that they understand the options
presented and the direction they wish to take regarding the planning strategies.
These letters can prove to be very valuable later when either the client becomes
disabled or passes away.
The definition of estate planning may not be the same to all persons. A
client may view estate planning as including financial planning, while another client
may see it as merely preparing a will. Therefore, it is important to understand
exactly what the client expects from the attorney relative to planning. Most elder
law attorneys are aware of the basic tools, including a will, health proxy/living will,
durable power of attorney, trust and other state specific documents such as a
homestead declaration or advance directive. Elder law attorneys set themselves
apart from other general practitioners by taking the time to focus on specific issues
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such as end of life decisions, special language to include in the durable power of
attorney and tax allocation clauses in a will and trust.
The sophistication (or lack thereof) of the client is often a difficult position
to deal with relative to the client. Some clients may comprehend some of the
issues part of the time, and some clients need several meetings to be educated on
relatively simple issues several times in order to make a decision as to the options
in the planning process. Then there are the college professors and engineers who
review and scrutinize the documents to be sure there are no dangling participles
and split infinitives, but dont understand the big issues relative to the plan. These
clients need much more than an initial meeting to review the law and make
decisions as to the implementation of a plan.
Certainly, the basics of providing advice presume that one has the
knowledge to provide the information and application of the code and regulations
to the situation at hand. If one is not familiar with the law, then outside assistance
must be obtained. Compliance with the provisions of Circular 230 used to be
required, but that language is no longer necessary as of June 12, 2014. See 31CFR
Part 10.
The basic documents are the most important, but also require special
attention. A review of these are listed as follows without the basic provisions as the
provisions suggested are additional ones that may not be standard to include
where applicable. It is presumed that the basic and standard provisions are
understood and provide all the basic requirements in each jurisdiction. Naturally,
each client or jurisdiction is different and may require special or different
provisions. A few of the optional (or mandatory) provisions are listed below.
DURABLE POWER OF ATTORNEY
Who is in charge?
Is that person mature, responsible and does he/she have the time to attend
to this task?
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Should there be a committee of more than one person? If so, can they work
together?
Must these individuals work together or can they work independently?
Who is the most suitable backup decision maker?
Does a springing power of attorney work in this situation?
Are gifting powers included?
Are the powers to gift unlimited? Should they be unlimited?
Does the agent have the right to make gifts to themselves and their family?
Are charities to be included in the gift process, and if so, to what extent?
Can the agent amend estate planning documents and change beneficiaries
on policies and retirement plans?
Does the agent have the right to access a safe deposit box and remove the
contents?
Can the agent access electronic banking websites and withdraw/transfer
funds?
Does the agent have access to a post office box, if applicable?
Are the tax provisions inclusive?
Should the client have multiple documents if they spend time in multiple
states?
Are there multiple trusts that may or should be funded in specific situations,
such as a special needs trust(s), both payback or non-payback?
Can the agent attend to any domestic relations issues in the event they are
desired?
Has this issue been discussed with the client?
Is there property in other states that may require the document to conform
to those states or foreign countries?
Is the document recordable wherever needed?
Does the document provide for the appointment of a conservator or
guardian if the document is deemed unenforceable?
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Are multiple originals being executed in the event that some financial entity
wises to retain the original?
Are there provisions for the care of a pet or the funding of a pet trust if
applicable?
HEALTH CARE PROXY/ LIVING WILL/ADVANCE DIRECTIVES
Is there a HIPAA waiver within the document or is a separate form required?
Is a separate form required if the client wishes to have a DNR order?
Are multiple copies being signed to provide originals to medical personnel?
Do you require the agent to acknowledge their acceptance so that the client
has an opportunity to discuss the options with the client?
Are there any special religious or other directions the client desires?
Has the client preplanned or prepaid for the funeral that should be
referenced?
Does the client have any special directions about the funeral?
Is this a second (or later) marriage, and if so, with whom does the client
wish to be buried?
If the client wishes to be cremated, have they pre-signed a cremation order
if they are permitted to do so?
Does the client wish to be an organ donor, and if so, to what extent?
Has a donor form been signed, and has the client noted this decision on
their drivers license?
What provisions are being made in the event of incapacity of the client?
Does the client wish to be kept alive by heroic means or not?
Is the client competent to understand the nature of the terms within the
document?
Does the document meet the test of multiple states if the client spends
times in multiple jurisdictions?
Does the client need separate forms for different states with specific terms?
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Does the form have to be recorded or registered?

Does the client wish to consider having the document registered with a
registration service?
Is it permissible to allow the administration of anti-psychotic medication?
Can the agent agree to institutionalization of the client?
Is there a provision to allow the agent to confine the client, and is this
allowable under law?
If the document or any portion of it is not enforceable, is there a provision
to give priority to the named agent under this document?
What is the standard to determine incapacity and when is this
determination made?
Does the client wish medication to keep them comfortable without pain?
If so, what provisions are made for this?
If the client does wish to be kept alive, have they understood the
ramifications?
Will the agent be in a position to carry out the terms of the document
regardless of the intentions of the client?
Is there a prior document to be revoked, and if so, who has been given
copies who have to be notified:
Prior counsel
Family members
The agent appointed on the prior document
Hospitals, doctors, dentists, etc.
Was it recorded? Where and how to revoke?
Has thought been given to the interrelationship with the proxy agent and
the agent under the Power of Attorney?

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ESTATE PLANNING
Wills and Trusts
With regard to wills and trusts, there is no limit as to the issues that the
client may wish to include. Naturally, there are many standard clauses to include,
and many should be included within the will and trust, as the estate could be nonprobate, but the language should be reiterated in the will in order to comply with
the requirements of the state, probate court, and also conform to the intentions of
the client. Some of the more frequent clauses that must be considered are:
Default of the survival of a beneficiary.not all beneficiary successors may
be treated similarly.
Tax allocation clause for estate and income taxes. Who will pay and with
what?
If there is a tax due, may the executor pursue the beneficiaries for
contribution on a pro rated basis?
If a beneficiary disclaims, who will the takers be in default?
Are there provisions in the document that may be non-enforceable, such as
against public policy? (Provisions on restrictions on who the child may marry)
Is there a memorandum as to the disposition of tangible personal property,
and how is the property being distributed? Lottery? Bidding? Drawing of straws?
Age of beneficiaries?
Is there an option being given to a child to buy a parcel of real estate?
How is the option to be exercised?
Is there a set price or formula?
How is notice to be given and received?
What if there is a disagreement, is there forced mediation?
Has property been deeded to a child or children to the exclusion of others?
If so, is this intentional or should the other children be required to share?

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Are there non-probate assets, such as bank accounts, and are they joint for
convenience or joint with rights of survivorship with the intention to allow the
surviving tenant to retain the account balances?
What if the property owned by the client is sold during lifetime?
If a specific devise of real estate is made, does it pass free of mortgages?
Does the payment of debts and expenses clause intend that the debt is paid
by the estate or is the devisee responsible for the debt? (Mortgage, home equity
loan, reverse mortgage)
Are any children indebted to the client, and if so, are there written notes?
Even if written, are they enforceable or did the statute of limitations expire?
If offsetting advances, be sure the language is as intended as an offset may
not be an equalization of all assets.
What if the debts exceed the distributable assets?
Are in terrerom clauses appropriate?
What if the client owns property in multiple jurisdictions?
Has the client filed income taxes or are there significant taxes due (and
penalties and interest)?
Has the client given sufficient thought as to the fiduciary? (not choosing the
oldest child)
ALWAYS SAY What if whenever a provision is included to cover a
contingency!
Dont hesitate to have someone read the draft to be sure you have covered
the bases.
Do not get rushed into getting documents prepared because the client has
procrastinated or the family has called you at the last hour to prepare a simple
will! If there is something that is acceptable to be public and it needs to be said,
then say it, such as this is intended to qualify for the marital deduction.

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PLANNING AND TAXES

Update on the Estate Taxes
On December 17, 2010, President Obama signed the Tax Relief
Unemployment Insurance Reauthorization, and Job Creation Act of 2010. It is also
known as Public Law 111-312 111th Cong.,2nd Session. This new law provides a
temporary reprieve from the anticipated return to the sunset provisions of the prior
EGTRRA law of 2001 wherein the exemption for estate taxes was to return to $1
million with a tax on the excess in the 55% range. It is important to understand the
prior law so that the practitioner will comprehend the consequences of what would
have occurred had the new law not passed, as well as what will happen in the
future if the provisions of the new law are not extended. This new law really
applies to estates of decedents who die within the 2 year period from January 1,
2011 through December 31, 2012, but also may be utilized for estates of individuals
who died in 2010.
In 2012, an extension of the law was signed that made the exemption
permanent until changed!
The prior law was enacted in 2001 when the exemption for estate taxes
increased over the period from $600,000 in 2001 to $3.5 million in 2009, with an
unlimited exemption in 2010. Had the new law not been enacted, the exemption
for estates was to return to $1 million, with taxes on the excess taxed at 55%.
(Many of your clients believe they still have only a $1 Million exemption). Consider
the difference between this result and the unlimited estate exemption, that is NO
TAX regardless of the amount of the estate assets. This situation sounds relatively
straight forward since the amount the U.S. Treasury receives from estates is less
than 1% of the total of national income. Naturally, the government has an ulterior
motive in giving away this exemption, and the detriment (or possibly benefit) to
estates was the theory called carry over basis. Since there are many issues that are
interrelated, a breakdown of the issues into separate categories may allow the

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application of the new law to become clearer. In short, the following is a brief
synopsis which will be detailed:
Each decedent has an exemption of $5 Million for estate tax purposes
(indexed for inflation so $5.43 Million in 2015).
Each decedent has an exemption of $5 Million for gift tax purposes (indexed
for inflation so $5.43 Million in 2015).
It may be possible for a person (married couple) to obtain a $10 Million
exemption ($10.86 Million in 2015 indexed for inflation).
Each decedent has an exemption of $5.43 Million for generation skipping
taxes ($10.86 Million in 2015 indexed for inflation for a married couple).

RETURN OF ESTATE TAXES

As of December 31, 2009, the estate tax and generation skipping tax (GST)
were repealed. Prior to that time, there was a tax assessed on assets owned by a
decedent. All assets were included in the estate at the date of death value, unless
alternate valuation was elected. This situation provided that the top level of estate
taxes was at 55%. In 2010, there were no taxes due, regardless of the size of the
estate, the assets owned by the decedent, or to whom the assets were left. It was
anticipated that the law would be changed in some manner, but most professionals
in the estate tax area believed that the law would change and replace the prior law
before the end of 2009 so as to adjust the proposed unlimited estate exemption.
However, with the change in the administration, debate and enactment over health
care reform and other related issues, the estate tax law fell to the lower priority. It
wasnt until less than 20 days before the end of the year that the law was passed
and signed. Perhaps the issue of extending unemployment benefits was the
catalyst to gain approval of the law.
Under the new law, the exemption of $5 million was allowable for 2 years.
(Actually $5.43 Million in 2015 with COLA). This figure is the net amount of the
estate before taxes are due in most cases. Keep in mind that taxable gifts must be
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added in to the estate in determining the taxable estate as the new law implements
a unified credit, where the exemption for all taxes takes into consideration the
amounts of taxable gifts made during lifetime together with the value of assets left
in their estate upon death. In addition, expenses such as mortgages, funeral bills,
legal fees, debts, last illness, and outstanding credit card debts are allowable
expenses to reduce the estate. Note that the tax exemption increased in 2015 as
inflation increased in increments of $10,000.
The requirement to file the return for deaths in 2015 is that the limit is
$5.43 million, as adjusted. If a decedent has less than this sum as adjusted for gifts,
there may not be a requirement to file a return. In fact, if a return is not required,
the return should not be filed under the Paperwork Reduction Act, unless there is a
surviving spouse for whom portability may be an issue.
The Estate Tax Return (Form 706) is due 9 months from date of death unless
an extension is approved (Form 4768). In all cases, if a tax is due and an extension
is needed, the extension should be timely filed to eliminate the penalty for late
payment, penalty for late filing, as well as interest on the late payment.
Under the new law, a Form 706 is required to claim portability with specific
areas of how much is being claimed versus how much is carried over for the
exemption. Also, line 36 of page one of the return allows for the state death tax
paid to become a deduction for Federal Estate Tax purposes, but only if a State
Estate Tax is paid. An often missed deduction is the credit for gifts on prior
transfers. Whenever a person dies and leaves money to another person and the
donee dies within ten years of the death of the prior decedent and there was an
Estate Tax due, a credit may be taken for a portion of the taxes paid based on a
proportionate share of the assets left to the second to die. This basically allows a
credit to be taken for a portion of the tax that was paid so as to not cause double
taxation. However, this a direct credit against the taxes as opposed to a deduction
against expenses of the estate. It is to be listed on page one on line 14 of the 706
after Schedule Q has been completed. Therefore, it is necessary to ask every client
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if they have received any money from someone else who has died within the past
ten years and an Estate Tax was due. This would also follow through to ask every
family member of a decedent if that decedent inherited money under similar
circumstances.
The other changes will be noted in the following sections of the subject
matters below.
GIFT OR GENERATION SKIPPING TAXES
The exemption for both gift and estate taxes is also $5 million as adjusted.
($5.43 Million for 2015) A gift tax return (Form 709) is due by April 15 of the year
following the gift, together with payment. If an extension to file the personal
income tax return is extended, there may be an extension of the time to file the gift
tax return. However, the payment of the tax is due by April 15 or interest and
penalties could be due. If upon a death, the practitioner does not have knowledge
of prior gifts, they should file Form 4506 for a copy of Form 709 as soon as possible
to determine if any prior taxable gifts were made, as the decedent may have had
prior counsel or accountants file the forms. The IRS does cross match upon receipt
of 706.
PORTABILITY ELECTION
A significant change in the prior law was the unexpected allowance to share
the $5 million exemption. Under the prior law, a person had to use the exemption
or lose it. That is not necessarily the case, but it is unknown as to whether this
exemption will be allowed forever. Under the law, if a person dies, his or her
executor/personal representative has the right to make an election on the Form
706. This election is in addition to the unlimited marital deduction which remains
in place similar to the prior law.
As an example, a married person who dies with $7 million may leave $5.43
million to a by-pass or credit shelter trust, and the rest of the assets are left to the
surviving spouse. In this case, there will not be any estate tax on the death of the
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first to die since the full $5.243 million exemption is utilized, and the balance
qualifies for the marital deduction. The $1.57 million (or whatever this amount has
increased or decreased to) will be included in the surviving spouses estate at
whatever rate will be in effect at that time. An option may be to have the executor
make the election to NOT include any or part of the assets of the estate for estate
inclusion, and these assets will then qualify for the marital deduction. Upon the
surviving spouses death, those assets will be included in his/her estate at the value
as of date of death.
A benefit of the deferral would be to eliminate the need for the trust, thus
possibly saving trustee fees and expenses. However, detriments would be the
increase in value of the assets, and therefore, these assets could cause more taxes
to be due if there is a significant increase in value. Also, the unknown estate tax
rates and credits could increase the tax. Furthermore, the surviving spouse could
be sued, have creditor or tax issues, or redirect the assets to beneficiaries other
than those the first spouse to die establishes under their documents.
A further problem is the possible remarriage of the surviving spouse. Under
the law, the remarriage of the spouse could eliminate the possibility of utilizing the
balance of the credit from the first spouse to die. This is due to the fact that the
new spouse of the surviving spouse may have deferred the credit of his/her spouse,
and therefore, there would be extra credits available to the new second spouse.
This is a good reason NOT to utilize the portability option.
Attention must also be paid to the fact that the surviving spouse may move
to a different jurisdiction than where the first spouse died, and therefore, the
assets that were deferred federally but possibly not by the state may be included in
a surviving spouses estate where they may be taxed other than in a state that had
no estate taxes.
This deferral is a tremendous opportunity to shift assets to be included in
the surviving spouses estate, but only under certain circumstances. Many factors
have to be considered including increase or decrease in assets, health of the
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surviving spouse, relocation, and the assets that the surviving spouse may currently
have or inherit.
Part 6 of the current 706 is a one page form which allows a person to take
the credit for the DECEASED SPOUSAL UNSED EXLCUSION DSUE. A person may
either opt in or out of utilizing the exclusion for portability purposes for the future.
This nothing more than a decision to defer the tax on the assets, but all gifts made
during lifetime must added back in for purposes of what is available to the surviving
spouse as a future portability sum.
On the estate tax return, there is an option for the fiduciary to check the
box in order to elect to defer the inclusion of assets as well as provide information
for the IRS to track the assets for inclusion in the surviving spouses estate,
presumably by social security number. It is undetermined if there will still be a
requirement to file a Form 706 if the surviving spouses estate, together with assets
from the first spouses estate, do not exceed the estate threshold as of his/her date
of death. There will be new filing instructions and regulations issued, so it is
important to continue to be involved with the tax section of NAELA and also review
the updates on the IRS website at www.irs.gov to check on updated forms and
instructions for Form 706.
BASIS ISSUES AND OPT OUT OPTION
For deaths in 2010, it was clear that a decedents estate had no Federal
estate taxes. However, the basis of the assets had to be reviewed. Under IRC sec.
1014, as in effect prior to 2010, a decedents date of death value of all assets
became the basis for the values for purposes of gains and losses by the estate, trust
or beneficiaries. Until the law changed (except for a brief time in the late 1970s
when the law was repealed), section 1014 of the Internal Revenue Code provides
that the date of death value of all assets owned or controlled by a decedent was
the tax basis since these assets were included in the estate. However, in 2010,
when there was no Federal estate tax, the government was not willing to give a
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free ride relative to all taxes, so there was a special code section 1022 imposed
which provided for a limited step-up in basis for estates, with the majority of assets
in a large estate retaining the carry over basis, or basically, the tax cost of the assets
of the decedent.
The decision was one that had to be given significant consideration in light
of both state and federal estate taxes as well as state and federal income taxes. So
even though the law was passed almost 12 months subsequent to the death of a
client on January 1, 2010, the law provided an option to elect to pay no federal
estate tax and obtain a limited step up in basis, or elect to have the estate receive
the step up in basis and obtain only a $5 million exemption. (2010 was the year
that George Steinbrenner died thus a timely death). Therefore, if you are doing
planning for a client who received assets from a decedent who died in 2010, it is
vital to obtain a copy of the 706 for the decedent/donor.
The estate tax rate for 2011 deaths was 35% on all assets over the estate
value of $5 million ($5.12 million in 2012). The step up in basis on assets, if the opt
out election was not made, was to apply to the first $1.2 million plus an additional
$3 million if the assets passed to a surviving spouse. The estate tax had to be
compared with the potential income tax rate of 15% on the capital gain if the estate
assets were sold. Basically, estates greater than $5 million are the ones affected,
but an estates assets may include assets that depreciated from date of purchase,
and therefore, carry over basis may have been preferable.
Furthermore, the IRS now requires tracking of all basis of assets in an
attempt to determine the long term vs. short term capital gain on assets, as well as
verifying the basis. Therefore, the IRS promulgated Form 8939 that the fiduciary for
the estate had to file with the decedents final income tax return which is normally
due April 15.
There are also a few added benefits under the new law such as:
----permitting special use valuation of real estate up to $1,100,000 (2015
adjusted value) if used for business or farming.
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----allowing for installment payments for the estate tax if there is a closelyheld business in the estate that makes up more than 35% of the estates value, and
the IRS will charge only 2% on the balance due.
----the estate really has a flat 40% tax, and this is assessed on estates and
gifts.
For additional reference materials on the new estate tax, see the following
sites:
http://www.irs.gov/newsroom/article/0,,id=243617,00.html This Revenue
Procedure 2011-41,(31 pages) provides quite clear administrative guidance as to
the application of carryover basis treatment vs. step up basis for those decedents
who died in 2010. In addition, there are examples of how to adjust basis and also
attend to the losses/gains under the rules. Furthermore, there is discussion on noncitizen, community property, charitable trusts, filing requirements, generation
skipping taxes, and much more presented fairly clearly. You may need to review
the documents.
Another directive was issued in Notice 2011-66 (19 pages) wherein the
method of making an election to apply carry over basis was clarified. Mainly, this
notice addressed how an election was made NOT to apply the automatic election,
which had a due date of NOVEMBER 15, 2011. The time and manner in which an
executor of the estate of a decedent dying in 2010 elected pursuant to the Tax
Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
(P.L. 111-312) (the 2010 Act) to have the carryover basis rules under Code Sec. 1022
apply to property transferred as a result of the decedents death are explained. The
election was made on Form 8939, Allocation of Increase in Basis for Property
Acquired From a Decedent, on or before November 15, 2011. The election is
irrevocable.
The method to allocate basis increase to assets passing from the decedent is
defined in section 4.02 of Rev. Proc. 2011-41, I.R.B. 2011-35. Allocations of basis
increase had to be made on a timely filed Form 8939. No extensions of time to file
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Form 8939 were granted, and the IRS did not accept a Form 8939 or amended Form
8939 filed after the due date except in the event of conflicted filings or under
certain types of relief as detailed in the notice. Therefore, an executor could not file
an estate tax return and a conditional Form 8939 that would become effective only
if an estate tax audit resulted in an increase in the gross estate above the $5 million
applicable exclusion amount.
UPDATE ON GIFT TAXES
There is no question that 2015 is a great year to make gifts, just ask the
donees! Never before have we had the opportunity to gift up to $5 million (as
adjusted) to non-charitable beneficiaries without paying taxes, in addition to the
annual exclusion amount, currently $14,000 per donee. With a married couple,
even a same-sex situation, this couple may gift $10 million ($10.86 million in 2015)
(unless or until the law changes) with no gift tax liability.
Of course, it must be determined if the couple or donor has made any prior
taxable gifts. Also, the amount of the gift to the donee includes birthday,
anniversary and holiday gifts, as well as annual (Crummey) gifts, so these must be
taken into consideration when calculating the amount of the total gift to the donee,
especially for the annual exclusion amount. So much of the public are under the
misunderstanding that they can only give away $10,000 per year that the clients
hardly believe us when we explain the gift tax rules to them. The annual exclusion
is the amount that may be gifted annually without the need to file a gift tax return
(Form 709) which is due by April 15 of the year following the year of the gift, unless
the donor has filed an extension to their income tax return. (See more detail
below) Nevertheless, similar to the income tax rules, although the filing of the
return may be extended, the payment of the tax is not, and it must be paid by April
15 even if an extension to file the return is approved.
A significant opportunity exists in situations where there are potential gift
taxes due, when the donor feels the tax laws may change, or when there is an
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opportunity to parlay the gift into a large ultimate gift in the future. This would be
in situations where the donor may purchase a life insurance policy and gift larger
gifts than the annual exclusion. It must be noted that the trust may not limit the
amount that may be contributed to the trust on an annual basis, such as a
limitation on the Crummey power. Therefore, if a client is purchasing a new policy,
be careful not to merely add this policy to the trust, but rather, a new trust should
be established and funded properly, or possibly have children/grandchildren own
the policy
When a client has a closely-held business or owns property that has
significant value, the client may wish to gift minority interests or small portions of
what is owned. By doing so, the client may obtain a discount on the value of the
asset, thus substantially getting a larger portion of the asset out of the estate. A
discount for lack of marketability may be obtained, and also, a discount for a
minority interest may be taken. There are cases in which the taxpayer has received
a discount of upwards of 35%-40% for a gift. It is imperative that a gift tax return
be filed together with a formal appraisal prepared by a qualified appraiser, not
necessarily the clients accountant. See the cases of Darden V. Commissioner TC
Memo 2012-140 (May 2012) and Mohammed vs. Commissioner TC Memo 2012-152
(May 2012) where appraisals or letters from the charities were not prepared or
received timely and the charitable deductions were not allowed, based on the
untimeliness of the documents.
One can look to Reg. Section 25.2503-3(b) for the definition of a present
interest. A present interest is defined as "[a]n unrestricted right to the immediate
use, possession, or enjoyment of property or the income from property (such as a
life estate or term certain)." In contrast, if the donee's right to use, possess, or
enjoy the property or the income from such property does not begin until a future
date or condition, then the gift is considered a future interest. Items such as
reversions, remainders, other interests and estates, and property held in trust for a
term of years are considered future interests.
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Reg. Section 25.2503(c) provides the following examples that demonstrate

the present interest and future interest classification of gifts.
EXAMPLE (1). Under the terms of a trust created by A the trustee is directed
to pay the net income to B, so long as B shall live. The trustee is authorized in
his/her discretion to withhold payments of income during any period he/she deems
advisable and add such income to the trust corpus. Since B's right to receive the
income payments is subject to the trustee's discretion, it is not a present interest
and no exclusion is allowable with respect to the transfer in trust. EXAMPLE (2). C
transfers certain insurance policies on his own life to a trust created for the benefit
of D. Upon C's death the proceeds of the policies are to be invested and the net
income therefrom paid to D during his lifetime. Since the income payments to D
will not begin until after C's death the transfer in trust represents a gift of a future
interest in property against which no exclusion is allowable. EXAMPLE (3). Under
the terms of a trust created by E the net income is to be distributed to E's three
children in such shares as the trustee, in his uncontrolled discretion deems
advisable. While the terms of the trust provide that all of the net income is to be
distributed, the amount of income any one of the three beneficiaries will receive
rests entirely within the trustee's discretion and cannot be presently ascertained.
Accordingly, no exclusions are allowable with respect to the transfers to the trust.
EXAMPLE (4). Under the terms of a trust the net income is to be paid to F for life,
with the remainder payable to G on F's death. The trustee has the uncontrolled
power to pay over the corpus to F at any time. Although F's present right to receive
the income may be terminated, no other person has the right to such income
interest. Accordingly, the power in the trustee is disregarded in determining the
value of F's present interest. The power would not be disregarded to the extent
that the trustee during F's life could distribute corpus to persons other than F.
EXAMPLE (5). The corpus of a trust created by J consists of certain real property,
subject to a mortgage. The terms of the trust provide that the net income from the
property is to be used to pay the mortgage. After the mortgage is paid in full the
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net income is to be paid to K during his lifetime. Since K's right to receive the
income payments will not begin until after the mortgage is paid in full the transfer
in trust represents a gift of a future interest in property against which no exclusion
is allowable. EXAMPLE (6). L pays premiums on a policy of insurance on his life, all
the incidents of ownership in the policy (including the right to surrender the policy)
are vested in M. The payment of premiums by L constitutes a gift of a present
interest in property.
In general terms, gifts in trust create two separate interests; an income
interest and a remainder interest. Most often the transfer of the income interest
qualifies for the annual exclusion and the remainder interest being a future interest
does not. A mandatory right to income generally qualifies for the annual exclusion;
however, if there is a discretionary provision to distribute corpus to an individual
other than the beneficiary of the trust, the income interest will not qualify, as the
income interest will be considered unascertainable in amount. One can look to
I.R.C. Section 2503 and it regulations for guidance on this. The transfer of property
in trust must be valued and allocated into the two separate interests according to
I.R.C. Section 7520, using I.R.S. provided actuarial tables. Typically trusts that are
funded with non-income producing assets also fail to qualify for the annual
exclusion because of an unascertainable income interest. See Rev. Rul. 76-360 and
Rev. Rul. 69-344.
Reg. Section 25.2503-2(b) determines that a transfer of property to a trust is
a gift to the beneficiaries. As discussed below, gifts to certain types of trusts can be
deemed to be gifts of present interests.
A Crummey trust and a Crummey power to withdraw are named after the
court case Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968). The Court of
Appeals determined that the beneficiary's unrestricted right to withdraw some or
all of the contributions to the trust within a limited period of time satisfied the
present interest requirement of the gift tax annual exclusion. Use of a Crummey
trust allows the withdrawal amount to be sheltered by an amount equal to the
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annual gift tax exclusion. A properly drafted Crummey power will provide written
notification to the beneficiary and a sufficient length of time. See Rev. Rul. 81-7 and
TAM 9141008.
Transferring gifts for the benefit of a minor are considered a present
interest if the all of the following terms are met:
1.

The transferred property and its respective income may be

expended by, or for the benefit of the minor donee before the donee attains 21
years of age;
2.

The remaining property and its respective income pass to the donee

when he or she turns 21 years of age; and

3.

If the donee dies before attaining the age of 21 years, the property

and its respective income are payable to the donee's estate or to the appointees of
the donee under a general power of appointment.
From a gift and estate planning point of view, a benefit of a Section 2503(c)
trust is found in the third requirement listed above. Most likely, the minor will not
have a will, and therefore the property will pass to the takers in default, those
individuals named by the donor in the trust document. This allows the donor
(parent) to deem the power of appointment to be exercised to the other siblings,
and the donor is not required to re-gift the property. The fact that the minor does
receive the property upon turning 21 may be considered a downside to this type of
trust. Attaining the age of 21 years does not magically make an individual mature
and responsible enough to handle large sums of money. However, the trust may be
designed to continue past the beneficiary turning 21. In general, if the trust has a
provision that allows the beneficiary to either compel the distribution or to extend
the term of the trust, the contributions will not be considered future interests and
will qualify for the annual exclusion. See Rev. Rul. 74-43.
In general, a gift may be considered as a transfer of property for less than
adequate and full consideration. The federal gift tax applies to a transfer by gift
made directly or indirectly, made in trust or otherwise, of real or personal property,
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either tangible or intangible in nature. See I.R.C. Section 2511 for exceptions for a
non-resident and non-citizen of the United States.
The gift tax may be applied to: gratuitous transfers of property; sale or
exchanges of property outside of the normal course of business for less than
adequate and full consideration; a release, lapse, or exercise of a general power of
appointment; a forgiveness of debt; below-market interest rate loans or interestfree loans; and assignment of benefits in an insurance policy. While this list is not
exhaustive, it covers the more common transfers of property upon which the
federal gift tax may be imposed. Reg. Section 25.2511-1(h) provides examples of
transfers that result in taxable gifts.
Two types of qualified transfers are described in Reg. Section 25.2503-6 and
are excluded in the total amount of gifts made by an individual for 1982 and
calendar years thereafter. The first type is amounts paid to a qualifying educational
organization on behalf of an individual for tuition or educational training of that
individual, the second is amounts paid to a person or institution on behalf of an
individual for qualifying medical expenses provided for that individual. There is no
relationship requirement between the donor and donee in order for these two
types of payments to qualify for the gift tax exclusion.
To qualify for the gift tax exclusion, the educational payments must be paid
directly to an I.R.C. Section 170(b)(1)(A)(ii) educational organization. The payments
are required to be for tuition only; payments for room, board, books, or other
expenses do not qualify for the exclusion. In some cases, payments for a computer
may be acceptable. In order to qualify for the exclusion, the medical care payments
must meet the requirements of I.R.C. Section 213(d) and be made directly to the
health care provider or facility that provided the care. The exclusion does not apply
to those medical care expenses that are reimbursed by the donee's health
insurance company. Keep in mind that the Donor does not obtain any income tax
deductions for making these gifts.

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If a donee refuses to accept a gift and makes a qualified disclaimer, then

that transfer of property is treated as if it had not taken place. The transfer is
considered as passing directly from the donor of the property to the person entitled
to receive the property as a result of the disclaimer. In turn, the disclaimant is not
treated as making a gift. I.R.C. Section 2518 lists the requirements for a qualified
disclaimer. (See details below). It must be noted that the governing document or
law of intestacy should be reviewed carefully before disclaiming to ensure that the
intended beneficiaries receive the assets upon the use of the disclaimer.
As determined by I.R.C. Section 2502 and Reg. Section 25.2502-2, generally,
the donor of the gift is responsible for the payment of the federal gift tax. If the
donor should die before the gift tax has been paid, the gift tax due becomes a debt
of the decedent's estate. However, if the tax is paid or not paid, it will still be
added back into the estate for estate tax purposes if the tax is not paid within 3
years of the decedents death.
The Form 709 is an annual return. The federal gift tax return is due on or
before April 15 of the year following the close of the calendar year in which the gifts
were made. For a donor who died during the year the gift was made, the
decedent's executor must file the 709 return by the earlier of either a) the due date
of the donor's Form 706 (including extensions) or b) April 15, of the year following
the calendar year in which the gift was made. If no estate tax is due, then the 709
return is due on or before April 15, of the year following the calendar year in which
the gift was made. As a rule of thumb, if the donor dies after July 14, the filing due
date for the 709 (no extension) is April 15 of the following year. If the donor dies
prior to July 15, the filing due date for the 709 may possibly be earlier than April 15
of the following year.
The IRS provides for two methods to extend the time to file a 709 return;
however, keep in mind that neither method extends the time to pay the gift tax or
the generation-skipping tax that is due. The time to file the extension can be
obtained by either extending the time to file the donor's federal income tax return
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on Forms 4868, 2688, or 2350, or by submitting a written request to the IRS service
center. The written request must include an explanation of the reason(s) for the
request and must be filed before the due date of the return. Reg. Section 25.6081-1
states "[t]he application should, when possible, be made sufficiently early to permit
the Internal Revenue Office to consider the matter and reply before what otherwise
would be the due date of the return." It is worth noting that a Form 709-A, the
short gift tax return, may not be used to file a return after the due date or extended
due date.
Each individual has a lifetime exemption from gift and estate taxes, once
again referred to as a unified credit. The amount that each individual may transfer
without incurring any gift tax is $5 million (as adjusted - $5.43 million in 2015)
which is the same amount that each individual can transfer at death. Keep in mind
that the credit for estate tax purposes used to be $600,000 in 1992 and increased
to an unlimited amount in 2010, while the gift tax exemption grew to only $1
million, with a tax due on any amounts above this sum. Gifts are valuable in that
the gifted amount is removed from the donors estate which would otherwise be
potentially subject to estate tax. Further, the appreciation on the gifted asset and
any income or dividends from the date of the gift will be also excluded from the
donors gross estate. There may also be income tax benefits if the Donee is in a
lower bracket.
For example, assume a father (single) owns an asset worth $100,000. If
father gifts the asset to his son in 2015, there is a $14,000 annual exclusion, and the
remaining $86,000 uses part of his lifetime exemption from transfer taxes. Assume
the father dies in 2016 when the asset is worth $150,000. The $150,000 asset is
excluded from the fathers gross estate, while only $86,000 of the fathers lifetime
exemption is used by the gift in 2015.
If the father had not made the lifetime gift, the $150,000 asset would be
included in his gross estate for estate tax purposes. If the fathers taxable estate
exceeds the applicable credit amount, the marginal estate tax rate on the $150,000
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would be 35%. Thus, the transfer tax savings as a result of the gift would be at least
$17,500.
There is at least one tax disadvantage to lifetime gifts. For income tax
purposes, assets included in a decedents taxable estate receive a stepped-up basis
equal to the fair market value of the asset at the decedents death. The step-up in
basis does not apply to assets transferred by gift during lifetime that are not
included in the donors taxable estate for estate tax purposes. Instead, the donee
keeps the donors basis.
One must review the income tax consequences prior to making the gift of
both the donor and the donee, as well as the intention of the donee as to whether
the appreciated asset will be kept or sold. Also, all state income tax, estate tax, and
gift tax consequences must be reviewed.
Very wealthy donors should consider making taxable gifts even if the gift
produces a gift tax because the gift tax itself is not subject to estate or gift tax
(provided the donor does not die within 3 years of the date of the gift). Assume a
donor who has already used her annual exclusion and lifetime exemption has $3
million in cash and the transfer tax rate is 35%. The donor gifts $2 million to her
son and pays the gift tax which is then removed from the donors estate if she lives
for 3 more years. If the donor had died before making the gift, her estate would
have been increased by the value of both the gift and the tax. So long as she
survives for 3 more years, the amount of the tax is excluded from her estate. Of
course, if the law changes (again) and there is no longer an estate or gift tax, one
does not know if there would be a refund on the tax paid.
The example shows that it is advisable to transfer assets with a high basis
(or cash) when making a gift to minimize the cost of the loss of the step-up in basis.
Also, it is advisable to transfer assets with high potential appreciation, and a high
rate of current income, particularly if the donees marginal income tax rate is lower
than the donors. It is also advisable to transfer assets eligible for valuation
discounts, such as interests in closely held businesses or real estate partnerships.
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These assets may be valued at a discount from their fair market value for gift tax
purposes due to transferability or control limitations.
A donor should not gift assets where the basis is greater than the value of
the asset. Instead, the donor should sell the asset to recognize the loss for income
tax purposes and transfer the net sales proceeds to the donee.
GRANTOR RETAINED ANNUITY TRUSTS AND UNITRUSTS (GRAT OR GRUT)
In order to prevent what was deemed estate and gift tax avoidance, in
November, 1990, IRC Section 2702 was enacted. This section provides that when
there is a transfer in trust to a family member with a retained interest, the value of
the interest retained by the transferor will be zero unless the transfer is a qualified
interest. GRATs and GRUTs are the two forms of qualified interests under this
section. If the interest is not qualified, the transferor is deemed to have made a gift
of the entire property transferred.
GRATs and GRUTs are gifts of remainder interests in a trust. Since the
Donor (Grantor) retains a current income interest under the trust for a certain time
period and the vesting of the remainder in the Donee is deferred, the value of the
remainder interest has a significantly lower gift tax value.
A GRAT provides for a fixed annuity payment that must be paid at least
annually, while a GRUT provides for a unitrust payment which constitutes a fixed
percentage of the value of the trust property, requiring the trust to be valued on an
annual basis.
The values of the payments under a GRAT or GRUT are determined by using
IRS actuarial tables as well and the monthly Applicable Federal Rate (AFR) issued by
IRS. The AFR is a key determinant as to whether a GRAT or GRUT is an appropriate
planning device as it is considered the rate to beat. The theory behind Section
2702 is that based upon the required actuarial factors, the Grantor will recover the
actuarial equivalent of the gift by the end of the trust term. Therefore, if the AFR is
5% and the trust actually returns 5%, at the end of the term, there will be nothing
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left in the trust. However, if the AFR is 5% and the trust returns 8%, there will be
funds in the trust that pass to the Donee estate and gift tax free. The ideal property
to place in a GRAT or GRUT is property that can reasonably be assured of exceeding
the AFR. This makes income producing property (real estate, closely held stock)
that can be discounted a prime candidate for this type of planning.
Example: Assume a parcel of real property valued at $100,000.00 that
produces $10,000 of income (10%). The AFR is 8%. If 40% of the property is
transferred to a GRAT, there will be an allowable discount of 30%. The value of the
property transferred to the GRAT is $26,000.00 ($40,000.00 x .65). However, the
cash flow to the trust will still be 40% of the income or $4,000.00. This means the
rate of return to the trust for GRAT payment purposes will be 15.38%
($4,000.00/$26,000.00). If the GRAT is for 10 years and requires an 8% payment,
the gift upon creation would be $12,637.00 and there would be $65,689.00 left in
the trust for the Donee. If a growth rate of 3% were included, the amount left to
the Donee would be $97,871.00.
A question that often arises is whether a GRAT or a GRUT is more
advantageous. This is determined in part by the relationship between the AFR and
the selected payment rate. If the payment rate is higher than the AFR, the GRAT
will produce a smaller taxable gift. The converse is true where the payment rate is
lower than the AFR.
A GRAT is much easier to administer than a GRUT, especially where hard to
value assets (real property, closely held stock) are involved. In a GRAT, the
payment is fixed upon creation and remains constant. Since the GRUT involves a
variable payment, annual revaluation of the trust property is required. This can be
a very expensive proposition.
Additionally, it is easier to zero out a GRAT. This means finding a term of
years where the remainder interest is essentially 0. As a result, the Grantor would
receive payments and upon expiration of the term, the remaining trust property
reverts to the Donee gift tax free. Although the IRS continues to take the position
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that a GRAT can never result in a zero gift, the Tax Court unanimously rejected the
IRS position. However, the IRS has ruled that a GRAT with a 1% gift was qualified.
The main disadvantage of GRATs and GRUTs are that they are bet to live
strategies. This means that in order to have effect, the Grantor must survive the
term of the trust. In the event the Grantor dies before the end of the trust term,
the assets are considered part of the taxable estate. As a result, the chosen term
should be one that the Grantor can reasonably be expected to survive. Another
disadvantage of these trusts is that the GST exemption cannot be allocated to the
gift until the term expires. If a skip person becomes a beneficiary of the trust, there
could be an inadvertent GST if the Grantor dies before the expiration of the trust
term. There were proposals to the Tax Relief Unemployment Insurance
Reauthorization and Job Creation Act of 2010 that zero GRATs would be abolished,
but this provision was not included. The Government has recently proposed the
elimination of certain Irrevocable Trusts such as these, but as of the date of this
program, no provisions have been enacted.
Another consideration is the grantor trust status of GRATs and GRUTs. The
IRS has held that where a grantor retains an annuity interest in a trust and the trust
provides that the portion of the trust which is includible in the Grantor's estate, if
the Grantor dies during the retained term, is to revert to the Grantor's estate, the
trust is a grantor trust. This would be a distinct advantage if the trust was forced to
return principal to the Grantor as part of the required payment. The grantor trust
status would prevent the recognition of any gain to either the trust or the Grantor if
the principal had appreciated since the initial transfer. Furthermore, the payment
of the income taxes by the Grantor on income earned by the trust would constitute
an additional tax free gift to the trust. Finally, grantor trust status will allow S
corporation stock to be the subject of a GRAT or GRUT.
With the AFR being significantly lower than in prior years, it can easily be
seen that the net benefit in taxable estates will be significant with a lower rate
assigned by the government. If the estate is no longer taxable due to the increase
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in the exemption, then the GRAT or GRUT may not be a suitable option as the stepup in basis will be lost and there may not be an estate tax liability. At the current
time of the writing of these materials, the AFR is .39% for short term and 2.91% is
for long term Trusts.
QUALIFIED PERSONAL RESIDENCE TRUSTS
An exception to the Section 2702 rules is a trust that involves a personal
residence (as defined in former Section 1034). These trusts are Personal Residence
Trusts (PRT) and Qualified Personal Residence Trusts (QPRT). For purposes of this
presentation, only QPRTs will be discussed due to the severe restrictions imposed
on PRTs which render their use limited.
Like a GRAT, the QPRT is a gift of a remainder interest, in this case a
personal residence. Unlike a GRAT, there is no required payment to the Grantor.
The value of the gift is strictly a function of the APR, the term selected and the
value of the residence. There are a myriad of rules imposed by the Code and
Regulations on the operation of the QPRT. The major points are as follows:
1.

Assets other than a personal residence cannot be held by a QPRT.

2.

The trust instrument may allow cash to be placed in the trust to

allow for payment of expenses.

3.

There are no prohibitions on the residence being voluntarily sold and

a replacement residence being acquired.

4.

If the QPRT holds temporary investment assets it might realize

investment income from those assets. The QPRT must require that any income of
the trust be paid to the term holder at least annually.
5.

The QPRT must not allow distributions of corpus to any beneficiary

other than the Grantor prior to the expiration of the primary term.
6.

The QPRT may permit cash to fund for improvements to the

residence to be added to the trust. The improved residence must satisfy the
personal residence requirements.

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7.

The QPRT may allow the sale of the residence and may permit the

trust to hold the proceeds from the sale of the residence. In this instance, the
proceeds must be held in a separate account.
8.

The QPRT may permit the trust to hold one or more insurance

policies on the residence. Furthermore, the QPRT may allow the trust to maintain,
in a separate account, insurance proceeds payable to the trust due to damage or
destruction to the residence as well as the proceeds of an involuntary conversion of
the residence.
9.

The QPRT must specify that the trust ceases to be a QPRT if the

residence ceases to be used or held for use as a personal residence of the Grantor
(i.e., the residence is not occupied by any other person (other than the spouse or a
dependent of the term holder) and is available at all times for the use by the term
holder). The QPRT must provide that the trustee is permitted to hold the proceeds
upon the sale of the residence, in which case the trust will cease to be a QPRT with
respect to the proceeds of sale not later than the earlier of:
(a)

Two years after the date of the sale of the residence;

(b)

The termination of the primary term of the trust; or

(c)

The acquisition of a new residence by the QPRT.

(d)

The QPRT must further provide that the trust property either

be distributed outright to the Grantor or held as a qualified annuity interest for the
balance of the primary term within thirty days after the date on which the trust no
longer functions as a QPRT regarding certain assets. The grantor can grant the
trustee the discretion to choose either of these options, or the QPRT itself may
direct the result. In most instances, the trustee will elect to convert the QPRT to a
qualified annuity interest, rather than pay the trust assets outright to the Grantor,
since the potential is thereby maintained to exclude the assets from the Grantors
gross estate for estate tax purposes.
Mortgaged property may the subject of a QPRT, although the IRS has
provided no guidance as to how this would be taxed. Normally, the amount of the
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mortgage would reduce the value of the property. This would result in an
additional gift to the QPRT each time a mortgage payment is made (as part of the
payment is principal). Consider, however, having the Grantor contractually obligate
himself/herself upon creation of the QPRT. This should be enough to make the
value of the mortgage itself part of the initial gift to the QPRT. Since the QPRT is a
grantor trust, the Grantor would still be entitled to the income tax deductions from
the mortgage payments. With rates relatively low, consider having Donor refinance
the property and take out an interest only loan prior to transfer.
Like GRATs and GRUTs, QPRTs are "bet to live" strategies. If the Grantor
dies before the expiration of the term, the value of the residence will be included in
the Grantors estate. Additionally, the Grantors GST exemption may not be
allocated to the trust property until the end of the trust term.
Upon expiration of the QPRT term, it is not necessary for the Grantor or
spouse to vacate the residence. The IRS has ruled that a trust which provides that
the Grantor can opt to rent the residence for a fair market rent upon expiration of
the initial term qualifies as a QPRT. Furthermore, by maintaining the grantor trust
status following the expiration of the term, the Grantor is effectively paying the
rent to himself/herself which results in no taxable income and additional gift tax
free transfers to the trust.
CHARITABLE REMAINDER TRUSTS
Charitable remainder trusts (CRT) are similar in structure to GRATs and
GRUTs. The payments must be in the form of an annuity (CRAT) or a unitrust
(CRUT), however upon expiration of the trust term, the remaining trust property is
paid to or held for the benefit of a charity. CRTs must be irrevocable and in writing.
The IRS has issued model forms for CRATs and CRUTs. These are voluminous but
provide a reasonably safe harbor for CRT qualification.
A CRAT must meet the following requirements:

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1.

The trust pays a specified annuity to at least one non-charitable

beneficiary who is living when the trust is created. Annuities can be paid annually,
semiannually, quarterly, monthly, or weekly.
2.

The amount paid, as an annuity, must be 5% or more of the initial

net fair market value of the property placed in the trust. The charitys interest at
inception must be worth at least 10 percent of the value transferred to the trust
and the annuity you have retained cant exceed 50%.
3.

The annuity is payable each year for the life of the Beneficiary or a

period not greater than twenty years.

4.

No annuity is paid to anyone other than the trust beneficiary and a

qualified charitable organization.

5.

When the specified term ends, the remainder interest is transferred

to a qualified charity or is retained by the trust for the use of the qualified charity.
The requirements for a CRUT are as follows:
1.

A fixed percentage (not less than 5%) of the net fair market value of

the assets is paid to one or more non-charitable beneficiaries who are living when
the unitrust is established. The charitys actuarial interest must be at least 10% of
any assets you transfer to the trust and you must not retain an interest that
exceeds 50% of the trusts value.
2.

The fixed percentage amount is paid at least once a year for the life

of the Beneficiary or a term not greater than twenty years (unitrust assets are
revalued each year).
3.

No sum is paid to anyone other than a qualified charity at the end

the retained interest.

4.

Assets in the trust are transferred to the qualified charity you have

selected or retained in the unitrust for use by the charity.

As stated above, the remainderman of a CRT must be a qualified charity.
However, the trust may permit the Grantor to retain the right to remove a

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designated remainderman and name another qualified organization to receive the

remainder interest.
Although a charitable remainder trust may be exempt from income taxation,
distributions to beneficiaries of the charitable remainder trust may be includible in
their gross income. Distributions to a recipient are deemed to consist of the
following:
First, the trust's ordinary income for the year and prior years (except to the
extent previously distributed); second, the trust's capital gain income for the year
and prior years (except to the extent previously distributed); third, the trust's other
income for the year and prior years (except to the extent previously distributed);
and, last, the corpus of the trust.
A person creating a charitable remainder trust may receive, in effect, two
benefits under the tax law. First, the person creating or contributing to the trust, as
a general rule, will be entitled to an income and gift tax deduction (if the trust is
created and the contributions made during lifetime) or an estate tax deduction (if
the trust is created at death) equal to the tax value of the remainder committed to
charity. Several factors will determine the size of the deduction. Some of the
important factors are the amount contributed to the trust, the length of time the
trust is expected to make payments to persons other than charity and the size of
the payments in relation to any contribution to the trust. Generally, the longer the
trust is expected to last and the higher the payout, the smaller the deduction. As a
general matter, the value of the remainder must be at least 10% of the value of the
initial fair market value of all property placed in the trust. However, the full value
of the remainder may not be deductible for income tax purposes.
It is assumed that anyone who is considering a CRT has charitable
motivation. However, in addition to an up front charitable deduction, the second
tax benefit of a CRT presents some clear planning opportunities. A person holding
highly appreciated property has the opportunity to liquidate the property and
convert it to an income stream without reducing the principal by capital gains tax.
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Even if assets are not highly appreciated, a CRT can still be used to produce a
constant income.
When coupled with a wealth replacement strategy, a CRT can be a very
effective tool in reducing estate taxes while maximizing the amount passed to an
heir and benefiting a charity. If a CRT is funded with $5,000,000.00, and a
$1,000,000.00 insurance policy is purchased in an irrevocable life insurance trust
(using the cash flow from the CRT to pay the premium), the only party receiving less
on the death of the Grantor is the IRS.
UPDATE ON INCOME TAXES
Grantor Trust Rules
There is much confusion over the Grantor trust rules, so in the event that
you do not remember the basic sections, a very brief list is provided below. Most of
these will cause a trust to be considered a Grantor trust for income tax purposes,
even if the trust is determined to be irrevocable:
Section 673

Reversionary interest in income or corpus of trust

Section 674

Power to control beneficiary enjoyment

Section 675

Power by Grantor to deal with assets for less than

adequate consideration.
Also, if the Grantor may borrow assets from the trust without adequate
consideration or security or the opportunity to vote stock
Section 676

Power to revoke

Section 677

Power to distribute income to the Grantor or the

Grantors spouse. Also included is the power to pay premiums on life insurance
policies on either the Grantor or the Grantors spouse.
Section 678

When the person other than the Grantor is treated as

the owner of the trust corpus, such as when the person has a general power of
appointment.

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TAX RATES--ESTATES AND TRUSTS--2015

Taxable income:

Tax:

Over

But not over

Tax

+%

$2,500

0.00

15

$ 0

2,501

5,900

$ 375.00

25

2,500

5,901

9,050

1,225.00

28

5,900

9,051

12,300

2,107.00

33

9,050

12,301

.....

3,179.50

39.06

12,300

On amount over

There is a recent case regarding the payment to caregivers as to the

deductibility of long term care expenses which provides guidance. Estate of Baral v.
Commr, 137T.C. No. 1
(2011) http://www.ustaxcourt.gov/InOpHistoric/BARAL2.TC.WPD.pfd. In this
matter, there was a situation where a person with dementia paid caregivers
subsequent to the determination from a doctor that the taxpayer needed long term
care. The Court ruled that the taxpayer was permitted to pay these non-licensed
health care providers due to the determination that she was chronically ill as set
forth by a licensed health care provided under a plan of care and she needed
substantial supervision to protect her from threats to her health and safety due to
her severe cognitive impairment. Keep in mind that the amounts that may
deductible are only the excess of 7.5% of the taxpayers adjusted gross income AND
that the amounts had not been reimbursed by insurance or other sources. As a
practice tip, consider the taking of additional distributions from an IRA, savings
bonds or taxable portions of an annuity in order to offset the income with the
medical deductions, although the deductions may not be a wash as to the income.
Check the income tax rates of the client vs. the beneficiaries to determine who is in
a lower bracket. Also, pay attention to the addition of social security income, as an
increased portion of it may be taxable, which could cause the taxpayer to be
- 35 -

pushed to an increased bracket. In addition, if income of the client exceeds certain

limits, then the 3.8% Medicare surtax could also be due.
One must also be cognizant of the state taxes that may be applicable to the
client, both now and in the future. Therefore, do not overlook the taxes and credits
that apply to the client when completing a plan, as the Federal tax issues are only a
portion of the planning considerations.
DOMICILE
As a person may have more than one residence, they have only ONE
domicile. Most states have their own formulas and criteria for determining
domicile, and these are apt to change also. When determining if a client should
change domicile, there are many factors to consider. Some may be advantageous
while others may not be, such as having to select new medical professionals and
having to change medical insurance. A list of considerations to follow is listed:
1.

Be sure that residency covers at least six months of the year. To the

extent one is able, maintain a diary of dates in all jurisdictions and vacations. Also,
be sure to keep all receipts for vacations and departure and arrival cities.
2.

File income tax returns in the new jurisdiction with the new address

on returns. If necessary, file the final year in prior jurisdiction or part year nonresident return.
3.

File Declaration of Domicile in Circuit Court or county of residence. If

married, file joint declaration and be sure to obtain stamped copy and maintain
copies with attorney and accountant.
4.

Register to vote and notify prior jurisdiction town clerks office that

you are no longer registered to vote in the departing state.

5.

Register automobile and other vehicles, boats, trailers etc., with new

jurisdiction. If you do not have certificate of registration or titles, be sure to apply

for them before attempting to register them.

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6.

Notify automobile and other vehicle insurance companies and

surrender old plates.

7.

Obtain drivers license in new jurisdiction. If you think it may be

necessary, obtain eye examination prior to license to be sure the new license will
be issued.
8.

Surrender prior state drivers license.

9.

Change will, health proxy, power of attorney, and trust to indicate

that these are now valid documents in new jurisdiction and that these documents
qualify under law of new jurisdiction. If documents were held with prior attorney,
be sure to obtain all originals if switching law firms.
10.

File homestead declaration if possible in new jurisdiction, such as

Florida, to obtain reduced real estate tax bill. Notify the local tax assessor that you
are now a Florida resident so that the reduction in tax will be adjusted.
11.

If there is a need to maintain a safe deposit box, consider opening a

safe deposit box in another jurisdiction. If appropriate, close safe deposit box in
former state,
12.

Be sure to open bank accounts in new jurisdiction unless the bank

you are currently utilizing may have branches and offices in both states. There
should be at least one local bank account opened, and it is preferable to have direct
deposits for retirement, social security, VA benefits, etc., go to a new local bank.
13.

If will names someone who may not be permitted to serve as the

personal representative\executor, be sure to revise documents to indicate the

allowable fiduciary may serve.
14.

File a change of address form with the post office to be sure that all

mail is forwarded to new jurisdiction.

15.

Change the address on all accounts, charge cards, fund accounts,

stationary, etc.

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16.

Consider joining church, temple, and other social membership

societies in new jurisdiction. If member of organization such as Rotary, Lions, etc.,

consider joining in new jurisdiction.
17.

If there is any issue regarding any lawsuits, tax audits, etc., be sure to

have all addresses used as your new address and notify courts, tax examiners, etc.,
of your new change of domicile.
18.

Consider obtaining professionals such as doctors, optometrists,

podiatrists, in new jurisdiction and consider having all medical\dental records

transferred to new medical personnel.
19.

If a party deceases, even in prior jurisdiction, be sure to use new

jurisdiction as the domicile on the death certificate and to include in the obituaries
when published in newspapers.
20.

If using a cell phone, consider whether it is appropriate to change

your number to a more local number although this is not critical.

21.

If one becomes incapacitated, consider where that person will be

living if a rehabilitation for long term care facility is necessary for short term or long
term stays.
22.

Be sure to change umbrella policy address to cover potential liability

in new jurisdiction.
23.

Evaluate and determine the health insurance and long term care

insurance policies to consider whether necessary documentation should be filed to

switch domicile. If there is any supplemental insurance, be sure the carrier knows
of the new jurisdiction.

- 38 -

The author wishes to acknowledge and thank those of his colleagues (and
friends) who assisted with prior materials for this program, Stephen Silberberg,
Timothy Crawford, and Robert Anderson.

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Advanced Elder Law Review January 27 & 28 Newport Beach, CA

Advanced Issues in Pre-Mortem

Legal Planning

Document 2

Incorporating a Revocable Living Trust, Will

and Ancillary Documents into a Medicaid Asset Protection Plan
Materials by Michael Amoruso and Valerie Peterson
A Medicaid Asset Protection Trust can provide a great deal of protection for a client who
is facing significant long term care costs and cannot afford to pay privately for that care.
Likewise, a gift combined with a promissory are also excellent planning strategies, particularly
when a client is about to enter or has already entered a Medicaid-approved facility. However,
planning of this type is never done in a vacuum. The client, especially in a pre-crisis case, will
also require a revocable trust and/or a will, along with powers of attorney for both financial and
health care matters.
While a revocable trust or will is beneficial for a single client, for married couples it is a
must. Using Tom and Mary as an example, lets assume they took our advice and created a joint
Medicaid Asset Protection Trust and placed all but $109,000 into the trust. That $109,000 was
transferred into an account solely in Marys name, because both Tom and Mary believe that Tom
will be the first to require facility care and they agree that it will be simpler to transfer the money
now, than have to deal with it if and when Tom needs Medicaid.
But what happens if Mary dies before Tom? She now holds $109,000 in her own name,
which by law will pass at least in part to Tom. Or worse yet, Mary has an I love you will she
signed 20 years ago giving everything to Tom. So Marys estate will be probated (something
they came to you specifically to avoid) and if Tom is own Medicaid, he will lose his Medicaid
benefits by inheriting all of part of the $109,000.
What if Mary should become disabled? Without a durable power of attorney, no one
would have authority to access the $109,000. There is also no one with written authority to
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make health care decisions for Mary. The result could be an expensive guardianship where a
stranger is appointed to manage Marys assets and make health care decisions on her behalf.
Both of these situations can be avoided by comprehensive planning involving either a
revocable living trust, a will with a spousal special needs trust, a durable power of attorney with
enhanced powers, and a health care power of attorney with enhanced powers.
A. Use of a revocable trust.
A revocable trust in a Medicaid plan can be utilized to hold exempt assets. For example,
the $109,000 that Mary is keeping out of the irrevocable trust could instead be held in a
revocable trust in her name. The revocable trust still gives her complete access to the funds, but
upon her death, her estate will not be subject to probate, and she can leave the assets in trust for
her children or grandchildren should she desire to. The revocable trust can also name a
successor trustee in the event Mary should become incapacitated and unable to serve as trustee.
B. Will with a spousal special needs trust.
The rules in 42 U.S.C. 1396p(d)(2)(A)which require a payback provision do not apply
to those trusts established by will. One type of testamentary trust commonly used is a spousal
special needs trust. While only allowed by will, this type of trust may allow the discretionary
invasion of principal for the spouses supplemental needs.

This trust may be funded with all of the deceased spouses remaining assets, or it may be
funded only with the elective share amount. In a state where one spouse cannot disinherit the
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other spouse, the elective share constitutes the amount a surviving spouse has a right to if he/she
elects against the deceased spouses will.

C. Combining a Revocable Living Trust with a Testamentary SNT

A popular estate planning technique is the use of a revocable living trust, wherein the
grantor retains full control over the trust, the power to amend or revoke, and the power to remove
assets from the trust combined with a will that contains spousal special needs trust provisions.
The revocable trust has lifetime benefits such as asset management and the benefit at death of
avoiding probate. But to achieve the added protection for a surviving spouse who may need
long term care or may already be receiving benefits, the revocable trust can be written to require
the trustee to pay any remaining principal to the grantors estate or to the trustee of the
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testamentary special needs trust directly. The grantors estate will pass according to his/her will
which includes the testamentary spousal special needs trust.
D. Using a Special Power of Appointment in the Medicaid Asset Protection Trust
A special power of appointment reserved in the Medicaid Asset Protection Trust could
also be used by the grantor to appoint remaining trust assets to the spousal special needs trust
contained in the grantors will.
E. Ancillary documents
A durable power of attorney and health care power of attorney are two extremely
important documents to be incorporated into an overall asset protection plan. Without a properly
drafted power of attorney, those trying to act on behalf of a person now incapacitated will be
severely limited in what they can do. The result can be the expenditure of thousands of dollars
unnecessarily either in privately paying for health care, or in having to establish a guardianship
on behalf of the incapacitated loved one.
While many states provide statutory forms as a model, most state forms do not contain all
of the necessary powers to achieve effective Medicaid planning. As clients age, it is important
that the powers granted in a durable power of attorney arent lessened, but rather are expanded to
include as many powers as necessary to plan for any situation. Below are some examples of
additional powers which may be considered:

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F. Health care power of attorney or health care proxy.

The health care power of attorney (or health care proxy) can include more than just
giving a third party the authority to make decisions on behalf of the principal. Many clients may
not realize they have the ability to include extra provisions about where they want to live, how
specific they can be in the authority they give their agent with regard to end-of-life treatment,
and that they can allow their health care agent to choose what facility they will reside in when
the time comes. Giving the client these types of choices will not only give the client a greater
sense of control, it will give them greater peace of mind.

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Alternatively, in cases where the client want to give the health care agent unfettered
discretion to make a live saving or life ending decision given the quality of life facts as they exist
for the client at the future time then a statement that my health care agent knows my wishes
about artificial nutrition and hydration, cardiopulmonary resuscitation and any other forms and
means of life sustaining treatment and has full authority to make decisions on my behalf
regarding such life sustaining treatments, including refusing the same may assist. It is
important, however, that the agent knows the clients wishes since this is broad authority
intersects with ethical, moral and religious paths. It is imperative that the attorney assist in the
dialogue between the client and agent to explore the balance of the affecting condition, quality of
life and the clients ethical, moral and religious beliefs if such broad discretion is to be given to
the health care agent.

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Advanced Elder Law Review January 27 & 28 Newport Beach, CA

Advanced Issues in Pre-Mortem

Legal Planning

Document 3

Drafting the Irrevocable Medicaid Asset Protection Trust

I.

Statement of Intent
It is important to state very clearly in the beginning of the document that the grantor (may

also be referred to as trustmaker or settlor) may not revoke, amend or alter the document in any
way. For example:
Single trust language:

Joint trust language:

A paragraph indicating the grantors intent is also proper:

Single
trust:

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Joint trust:

II.

Income and Principal Provisions

Pursuant to 42 U.S.C. 1396p(d)(3)(B) a grantor may receive income from an irrevocable

trust, or the grantors spouse may receive income, but neither can have access to principal. An
example of restricting the grantors right to principal might read as follows:
Single trust:

Joint trust:

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B. Tax issues relating to income.

It is important to become familiar with Internal Revenue Code Sections 671-678, known
as the Grantor Trust Rules. When these Code sections are used to create a grantor trust for
income tax purposes, the trust will be ignored and all income will be taxed to the grantor. This is
a much better result than allowing trust income to accumulate as the trust then becomes
responsible for taxation of income that is generated but not disbursed to a beneficiary. Trusts are
taxed at rates far in excess of individual rates and absent Grantor Trust Powers all accumulated
income will be fall into the compressed tax brackets, the highest of which is just under $3,000
plus 35% of all trust income over $10,450.
A trust will be ignored (for tax purposes) and all income taxed to the grantor if the
grantor has kept, or is deemed to have kept, one or more powers set forth in Sections 673-677 of
the Internal Revenue Code. These retained powers include the power to add beneficiaries, the
power to borrow trust funds without adequate security interest, and the power to reacquire the
trust corpus by substitution other property of equivalent value. In addition, a grantor will be
treated as the owner of any portion of trust property (and thus taxed on trust income) to the
extent beneficial enjoyment of income or principal is subject to a power of disposition
exercisable by the grantor or a non-adverse party without the consent of an adverse party. An
adverse party is defined in 672 of the Code as any person having a substantial beneficial
interest in the trust which would be adversely affected by the exercise or non-exercise of the
power which he possesses respecting the trust.

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Some of the grantor powers will also confer grantor status over the principal which is
important to maintain the Section 121 exclusion when a primary residence is sold and to ensure
that individual capital gains tax rates apply upon the sale of appreciated property held in the
trust. The chart below shows the various grantor trust powers and their effect upon income tax
and estate tax.
Grantor Trust Power

Income Tax to
Grantor

Grantor
Trust status
with respect
to principal
No.

Powers which cause estate tax

inclusion

Income to Grantor.
Sec. 677(a)
Power to decide who
benefits from trust
assets. Section 674

Yes.
Yes, if grantor is the
trustee or if a nonadverse person is
trustee.

Yes.

Power to revoke.
Sec. 676.

Yes.

Yes.

Investment powers
(power to decide
between a life
beneficiary and a
remainderman).
Sec. 674

Yes.

Yes.

Grantor retains
reversionary interest
greater than 5%.
Sec. 673
Trustee can pay
premiums on life of
grantor or grantors
spouse. Sec.
677(a)(3)

Yes.

Yes.

Grantor retains the right for his

life to the possession or
enjoyment of or the right to
income from the property Sec.
2036(a)(1)
Grantor retains the power to
designate the persons who shall
possessor enjoy the property or
income. Sec. 2036(a)(2) This is
the special testamentary power
of appointment provision.
Grantor retains a reversionary
interest (worth greater than 5%
of the value of the property) and
grants another person the right
to the possession or enjoyment
of the property if they survive
the grantor.
Grantor retains the right to alter,
amend or revoke. Sec. 2038

Yes.

No.

Grantor retains power to

appoint assets to himself, his
estate, his creditors or creditors
of his estate. Sec. 2041

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Power to borrow
without adequate
interest or without
adequate security or
deal with trust assets
for inadequate
consideration.
Sec. 675
Someone other than
the grantor has the
power to add
beneficiaries.
Power to substitute
property of equal
value. Sec. 675(4).
Power by someone
other grantor to
substitute property of
equal value. 674(4)

Yes.

Yes.

Yes.

Yes.

Yes.

Yes.

Yes.

Yes.

Grantor transfers or releases any

of the above powers within 3
years of his death.

Out of an abundance of caution, we have chosen two grantor trust provisions which are,
in our collective opinions, the most conservative and least likely to create a problem with
Medicaid. The language incorporating these provisions may read similar to the paragraph below:

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III.

Beneficiaries
A. Lifetime Beneficiaries of Principal
Naming lifetime beneficiaries of principal should be carefully considered by the grantor.

The lifetime beneficiaries will be eligible to receive distributions from the trust according to the
standards allowed within the trust. Distributions can be restricted so that the trustee may only
distribute principal to a lifetime beneficiary for purposes related to the beneficiarys health,
education, maintenance or support (known as the HEMS standards) or the trustee could be
given complete discretion to distribute principal for any purpose. Limiting distributions to a
HEMS standard keeps the amount paid to the beneficiary out of the grantors estate for estate tax
purposes.
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The lifetime beneficiaries may be called upon to take a distribution in the event their
parent has an unexpected expense arise. For example, if Ron, from our earlier example, was on
Medicaid and later needed a van that would accommodate a wheelchair, Ron will not have the
funds available to purchase such a vehicle. However, one of Rons children, a lifetime
beneficiary, could take a distribution from the trust and purchase the vehicle for Ron. It is
therefore crucial that a lifetime beneficiary is trustworthy, free of creditors (to the extent you can
determine this) and willing to take a distribution not for himself, but to benefit the grantor.
C. The Grantors Retained Rights
a. Rights in the grantors home.
If the grantor owns a home that will be placed into the trust, it is important to draft the
trust so that the grantor has the exclusive right to possess, occupy and use the home. This
retained right makes the transfer of the home an incomplete gift for estate tax purposes which is
significant as the beneficiaries will receive a step-up in basis at the grantors death. If the
transfer of the home to the trust was a completed gift, then the beneficiaries would be subject to
carry-over basis and could endure significant capital gains upon the sale of the home.
You must determine whether there is any additional language in your state that needs to
be incorporated in order to protect any exemptions the grantor/homeowner is currently given
either because of age, a widows exemption, or homestead rights, to name a few.
Below is sample language to retain the right of the grantor to reside in the home:

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b. Special Power of Appointment

A second retained right the grantor may wish to keep is a power to change beneficiaries.
This power may only be exercised at the grantors death, therefore it is as a testamentary power
of appointment. This special power of appointment serves to make assets transferred to the
Medicaid Asset Protection Trust an incomplete gift for gift tax purposes under Treasury
Regulations Section 25.2511-2(c) and is included in the grantors estate pursuant to IRC
2036(a)(2).
Because transfers to an irrevocable MAPT that includes a special power of appointment
constitutes an incomplete gift, any real property or appreciated assets placed into the trust will
receive a step-up in basis at the death of the grantor. Furthermore, the grantor would still be
given his/her rights to the exclusion from capital gains tax for the sale of a principal residence
under Section 121 of the Internal Revenue Code (up to $250,000 per individual). This power

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also gives the grantor additional flexibility in the event the grantor wishes to change beneficiaries
after the trust is signed and funded.
Below is an example of the wording for this special power of appointment:

By contrast, a general power of appointment is one that is exercised in favor of the donee,
his estate, the donees creditors or the creditors of the estate. The most beneficial aspect of a
general power of appointment is the control retained by the donee. If the power can be exercised
by the done in the donees own favor, the donee has not given up any control. However, the
holder of a general power of appointment is treated for estate tax purposes as if he or she is the
owner of the property subject to the power, whether or not the power is exercised. Thus, the
property which is subject to the power is includable in the power holder's estate for estate tax
purposes.

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In order for a power of appointment to be effective for Medicaid and SSI purposes, it
must be a special power of appointment, as the ability to acquire assets by the donor or donee of
a power will render all trust corpus available to them, and prohibit access to the required
government entitlements.
IV.

Use of a Contingent Special Needs Trust

A contingent special needs trust is to protect a beneficiary who may be disabled and

receiving need-based government benefits at the time they inherit. If a disabled beneficiary who
is receiving government benefits, in particular Medicaid or SSI, inherits money that is not in a
properly structured special needs trust, that beneficiary will most likely lose his/her benefits due
to excess resources.
An example of wording which may be used in the Medicaid Asset Protection Trust to
establish a contingent special needs trust:
Notwithstanding the preceding paragraph, during any period that a beneficiary is disabled
or is eligible to receive or is receiving government benefits or Assistance under a means-based
program (for example, Medicaid or Supplemental Security Income, or any other means-based
government program), as such terms are defined in (state law citation), or other provisions of
(state) law, my Trustee shall administer the beneficiarys share as provided in Error! Reference
source not found.___.
The special needs trust within the Medicaid Asset Protection Trust is worded as a third
party supplemental or special needs trust. Therefore, there are discretionary distributions from
the Trustee for the beneficiarys supplemental needs only. Supplemental needs refers to the
requisites for maintaining the good health, safety, and welfare of Beneficiary when, in the sole

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and absolute discretion of the Trustee, such requisites are not being provided by any public
agency, office, or department of any state or of the United States.
It is advisable to provide examples within the document of what is meant by
supplemental needs, for example, medical and dental expenses, annual independent checkups,
clothing and equipment, programs of training, education, treatment and rehabilitation, private
residential care, transportation (including vehicle purchases), maintenance, insurance, and
essential dietary needs.

However, it should be clear that the Trustee is in no way obligated to

pay for any of these items, but instead it is within the Trustees sole discretion to do so.
Finally, be extremely careful not to use any type of support language in the contingent
special needs trust. In Corcoran v. Dept. of Social Services, (Conn., November 9, 2004), the
court considered the following language in a testamentary trust to be a general support trust and
thus available as an asset for Medicaid purposes. The will which established the third party trust
provided, [i]f my daughter [the plaintiff] is then living, the trust established for her shall be
retained by my trustees to hold, manage, invest and reinvest said share as a Trust Fund, paying to
or expending for the benefit of my daughter so much of the net income and principal of said
Trust as the Trustees, in their sole discretion, shall deem proper for her health, support in
reasonable comfort, best interests and welfare . . . . Id.

Because the trust did not contain specific language reflecting the testators intent that the
trust be used for the plaintiffs supplemental needs, the court concluded that in the absence of
such intent, the trust was a general support trust and an available asset to the plaintiff.
of Corcoran is provided with the course materials.
A. Optional Provisions
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A copy

a. Care Manager Provisions

You may wish to appoint a Care Manager as part of the contingent special needs trust:

A Care Manager may provide advice to the Trustee concerning discretionary distributions
to be made from the trust that are helpful and appropriate for Beneficiarys needs including
payment for medical care, counseling services, and daily support. You may consider giving the
Trustee the authority to set up a bank account for the Care Manager to use for any disbursement
authorized by the trust. You may also require the Care Manager to submit an annual Care Plan
for the beneficiary. The trust should also address how the Care Manager will be paid, how or
when a Care Manager can resign, and how the Care Manager will be replaced.
b.

Termination Provisions

You may consider giving the Trustee the authority to terminate the contingent special
needs trust if the beneficiary is no longer receiving government benefits and is no longer
dependent on others and can provide independent support. It is important to define what is
meant by independent support in order for the Trustee, in his/her sole discretion, can determine
whether it is appropriate to terminate the trust:
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V.

Use of a Trust Protector

The definition and possible functions of a trust protector is best described in the attached

article by Alexander Bove, The Trust Protector: Trust(y) Watchdog or Exotic Pet, 30 Est. Pln.
390. The use of a trust protector in Medicaid Asset Protection Trust can provide numerous
advantages. A trust protector can perform any or all of the following functions:
1.

Name a trustee when no other trustee is able to serve;

2. Remove a trustee;
3. Amend the trust (subject to certain limitations);
4. Hold the right to change beneficiaries.
5. Direct the Trustee to exchange trust assets for assets of equivalent value.

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Below is sample language outlining the function of the trust protector and certain powers
that person may hold:

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Often times the challenge is not the powers of the trust protector, but rather finding
someone appropriate to serve in this capacity. While some attorneys do appointment themselves
in this position as they are arguably in the best position to perform the functions of trust protect,
you must determine what you are comfortable with and discuss it fully with the client.

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VI.

Funding an Irrevocable Medicaid Asset Protection Trust and Using a Trust

Summary/Funding Letter
A. Understanding the relationship between the lookback period, penalty period and trust
funding.
Funding an irrevocable Medicaid asset protection trust properly is one of the most

important pieces of the overall asset protection plan. It is imperative to fund the trust with as
many assets as possible at one time, or during the same month, in order to start the look back
period or penalty period as soon as possible.
The bottom line is simple: assets should be transferred as soon as possible following the
signing of the trust. Once all of the assets are retitled in the name of the trust, the lookback
period will begin.
A. The first step obtaining a tax ID number for the trust.
The grantors social security number may be used as the tax ID number for an irrevocable
grantor trust. You may, however, elect to obtain a separate tax ID number for the trust. A
separate tax id number will allow a smoother administration upon the grantors death. The
income will still be taxable to the grantor a separate tax ID number will not change that fact.
A tax ID number can be obtained online at www.irs.gov. You will need your clients
permission to apply for a number on behalf of the client, or his/her trust.
B. Funding the trust.
All trust assets must be titled in the name of the trust in order for the trust to be funded.
A suggested title for assets is, _____, Trustee of the _____ Irrevocable Trust dated ____, 2009.
The attorney may handle funding for the client, or instead provide detailed instructions for the
client to fund his/her trust.
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1. Attorney funds the trust.

If the attorney handles the funding for the client, a suggested procedure for doing so is
outlined below.
Task

Responsible
person

Gather all financial statements for

assets to be transferred
Gather all deeds for real property
to be transferred
Advise client to obtain approval
from lender if mortgage on
property
Prepare letter of instruction for
each institution to be signed by
trustee
Prepare new deed for each
property
Send out letters to each financial
institution and deeds for recording
Follow up with institution to
ensure change of title
Have client bring in new statement
showing change of title

Attorney and
client
Attorney and
client
Attorney and
client

Date completed
(to be completed by
attorneys office)

Notes

Attorney

Attorney
Attorney
Attorney and
client
Client

The letter of instruction to the institution should give clear direction on how the assets are
to be titled and advising the institution not to transfer an asset like an IRA into the trust. The
letter may contain language similar to that below:

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A letter summarizing the trust and explaining the funding process is also suggested.
Sample language for that letter is provided below which is taken from the Trust Summary and
Funding Letter available in ElderDocx.
2. Client funds the trust.
When the client is responsible for funding his/her trust, a detailed letter of instruction is
crucial. This letter should outline how the trust should be titled, give the tax id number of the
trust, and should explain how the client should treat different types of assets. When placing real
property into the trust, the attorney should always prepare and record the deed for the client.
Below is a suggested procedure to follow when the client is funding the trust:

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Task

Responsible person

Gather all financial

statements for assets
to be transferred
Gather all deeds for
real property to be
transferred
Advise client to
obtain approval from
lender if mortgage on
property
Prepare trust summary
and letter of
instruction for client
Prepare new deed for
each property
Record deeds

Attorney and client

Have client bring in

new statement
showing change of
title

Client

Date completed
(to be completed by
attorneys office)

Notes

Attorney and client

Attorney and client

Attorney

Attorney
Attorney

The funding and summary letter to the client should include describing how different
assets should be handled, and which assets are not proper for funding into an irrevocable
Medicaid Asset Protection Trust.

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Language instructing the client to gain lender approval if there is a mortgage on real property:

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Similar language should be included for life insurance policies, stocks and securities,
partnerships, promissory notes and any other assets which may be held by the client. Likewise,
language should be given to the client for assets which should not be transferred into the asset
protection trust, i.e. an IRA:

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In addition, instruction as to the clients automobile should also be provided. If you are
not advising a client to transfer automobiles into the trust, language such as this may be used:

Including a summary of the trust provisions will be extremely valuable for both the client
and the trustee. Below is a sample outline which could be followed to draft this type of letter:
I.

WHAT IS A MEDICAID ASSET PROTECTION TRUST?

This section would describe the purpose of the trust and define the role of the grantor,

beneficiaries, trustees and trust protector (if appointed).

II.

NO AMENDMENT OF TRUST PERMITTED

This section reminds the client that he/she may not amend the trust. It also explains the

power the grantor does have if he/she retained a power of appointment.

II.

TRANSFERRING ASSETS INTO YOUR TRUST (FUNDING YOUR TRUST)

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A.

THE IMPORTANCE OF FUNDING THE TRUST

This section stresses the importance of transferring assets into the trust, and that failure to
transfer assets will result in no protection of those assets for Medicaid eligibility purposes.
B.

WHAT IS THE CORRECT AMOUNT OF ASSETS THAT I SHOULD USE

TO INITALLY FUND MY TRUST AND WHAT IMPACT WILL THIS
HAVE ON MY MEDICAID ELIGIBILITY?

This section explains that all assets should be transferred into the trust at one time to
minimize the penalty period and overall effect on Medicaid eligibility. If additional transfers
are contemplated, the letter stresses that the client should contact the attorneys office first.
C.

IN WHAT NAME WILL OUR TRUSTEE HOLD THESE ASSETS?

This section provides sample language on how to re-title assets.

D.

TAXPAYER IDENTIFICATION NUMBER

This section provides either the grantors social security number or the new tax ID
number for the trust.
E.

IMPORTANT INFORMATION REGARDING YOUR IRREVOCABLE

TRUST
1.

Special Power of Appointment

This section explains that the special power of appointment makes the transfer of assets
to the trust an incomplete gift for estate tax purposes and that the beneficiaries will enjoy a stepup in basis at the grantors death.

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2.

Distributions of Income and Principal to You

This section would state whether the grantor is entitled to income or not, and would
reiterate the fact that the grantor may not receive any distributions of principal under any
circumstances.
The trust summary may also contain provisions pertaining to administration of the trust.
These provisions may include a reminder that the trust is a grantor trust and all income is
reported on the grantors tax return, and general guidance to the trustee on record keeping.
Finally, the trust summary may reference whether the client has a living trust or will, and under
what circumstances a probate may be necessary.
VII. Revisiting Ron How to Fund His Medicaid Asset Protection Trust
Ron is 70 years old and in good health. His takes medication for high cholesterol and for
arthritis. He is a widow with 3 children who are all employed and whom he trusts implicitly.
Ron came to you to revise his revocable trust because he now has 6 grandchildren that he wants
to set up trusts for and his existing trust does not include these types of provisions.
Ron has $2,200 in total income each month. His living expenses are approximately
$2,000 for regular monthly expenses. His liquid assets, including a checking account, money
market account and CDs total $275,000. Ron has no long term care insurance. Ron owns a
home worth $200,000 outright.
Here we know that Rons income is covering his existing living expenses and that he is in
relatively good health. However, there is a good chance Ron will need some type of long term
care in the future and his current assets, $275,000, may not be sufficient to pay privately for care
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for the rest of his life. Therefore, Ron may want to take part of his liquid assets and place them
in a Medicaid Asset Protection Trust so that if he needs long term care in the future, he can
qualify for Medicaid, yet still have some money set aside that can be used by his children to
enhance his care.
A. Helping Ron fund his Medicaid Asset Protection Trust
Assume the following breakdown of his liquid assets:
Checking

$ 50,000

Money Market

$100,000

CD 1

$ 50,000

Matures in 6 months Interest rate = 3%

CD 2

$ 75,000

Matures next month Interest rate = 3.75%

None of the assets are tax-deferred so there is no acceleration of income tax problem. If
cashed in, CD 1 will be subject to a penalty. If Ron does not want to pay the penalty on CD 1, he
could leave a small amount in his checking, place the rest in the money market, then retitle the
money market account and CD 2 into the Medicaid asset protection trust.
Should the home be transferred? In most cases the answer is yes, especially when we
believe Ron will make it through the lookback period without needing facility care. Assuming
the trust was drafted correctly and Ron retained the right to reside in the home as well as a
special power of appointment, Ron will retain the 121 exemption if the home is sold, any
additional capital gains tax will be based on his individual tax rate, and if not sold during Rons
lifetime, the remainder beneficiaries will receive a step-up in basis at Rons death. Please note
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that the step-up basis rules may not be in effect in 2010 due to the lapse of the estate tax. See the
ElderCounsel position paper for more explanation on the effect of the carry-over basis rules in
effect in 2010. Whether or not the step-up in basis rules are in effect during 2010, it is important
to continue drafting trusts as if they are. These rules will return when the estate tax returns, the
latest of which is January 1, 2011.
There may be other planning tools available in Rons state such as the retention of a life
estate in the home. This would lessen the penalty period while achieving the additional benefits
with regard to the 121 exemption and step-up in basis outlined above. However, if Rons state
has expanded estate recovery rules, the state may be able to recover from Rons
remainderpersons at his death. Also, the property or proceeds from the sale of the property could
not remain in trust for Rons beneficiaries following his death if the life estate deed simply
names remainderpersons outright.
VIII. Revisiting Tom and Mary (with a twist)
Tom is 72 and his wife, Mary, is 68. Tom is retired but Mary still works 3 days a week
as a receptionist for a local bank. Tom had a heart attack 2 years ago but has fully recovered and
walks 2 miles at least 4 times a week. He was recently diagnosed with macular degeneration.
Mary is in good health and accompanies Tom on his walks. They have 2 children, one of whom
is going through a divorce, and one who is a business owner in a successful business.
Tom and Mary recently had a friend who passed away and their family had a very
difficult time probating the estate. Tom and Mary want to make sure their family does not have
the same problems when they are both gone. They own their own home worth $225,000 and
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their assets, including IRAs total $330,000. Their combined monthly income is $3,500 and their
monthly expenses total $3,500. Neither Tom nor Mary has a long term care policy.
While Toms health is not great, there is nothing in the facts to indicate he is in danger of
entering a long term care facility in the near future. He walks 2 miles several times a week, and
was only recently diagnosed with macular degeneration. In addition, Mary is in good health and
may be able to provide care for Tom at home if needed.
Tom and Mary, like Ron, could place a portion of their assets into a Medicaid Asset
Protection Trust with the remainder placed into a revocable living trust to save their family from
high probate costs. Likewise, Mary may be able to qualify for a long term care insurance policy
which further protects the assets they end up placing into the Medicaid Asset Protection Trust.
Breakdown of their assets:
Joint checking account

$ 30,000

Tom IRA

$100,000

Mary IRA

$ 50,000

Stock account

$100,000

Savings account

$ 50,000

A. Helping Tom and Mary fund their joint irrevocable trust

Obviously the IRAs cannot go into the irrevocable trust. We can assume that the two live
in a state which does not exempt the community spouse IRA. The two IRAs account for
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$150,000 of the total $330,000. If we assume they live in a state which allows the maximum
CSRA, then if one of them enters a facility and qualifies for Medicaid, the spouse at home can
keep $109,560.
The question becomes, aside from the IRAs, how much of the other assets should stay out
of the irrevocable trust? Mary is still working and is not yet required to required minimum
distributions. Their income currently covers their living expenses. If the entire stock account
and savings account was funded into the trust, this would leave $30,000 in their checking
account and both IRAs for them to access if needed (although Mary would have to wait 2 more
years). In addition, the home may be transferred as well. The same issues discussed above with
regard to Rons home would also be appropriate when determining whether to transfer Tom and
Marys home into the trust. A revocable trust could be set up to hold the checking account and
any other assets held outside of the irrevocable trust to avoid probate at the second death.
If Mary could qualify for a long term care policy, this would give the couple even more
protection of the assets placed into the trust.
IX.

Conclusion
While the actual funding of the trust occurs after the trust is signed, the decision of which

assets will go into the trust must begin at the time the attorney is hired. There are numerous tax
issues to consider when funding an irrevocable Medicaid asset protection trust. Furthermore, the
client must be guided by the attorney and other trusted advisers to determine how much of the
clients assets should go into the irrevocable trust so that the client feels comfortable with the
overall plan.
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Advanced Elder Law Review January 27 & 28 Newport Beach, CA

Advanced Issues in Pre-Mortem

Legal Planning

Document 4

Drafting an Effective Will as Part of a Medicaid Asset Protection Plan

I.

When is a Will appropriate?

A Will with special needs trust language for the surviving spouse is always appropriate in

a spousal planning case. This type of special needs trust must be established by will, as
explained below.
The rules in 42 U.S.C. 1396p(d)(2)(A)which require a payback provision do not apply
to those trusts established by will. One type of testamentary trust commonly used is a spousal
special needs trust. While only allowed by will, this type of trust may allow the discretionary
invasion of principal for the spouses supplemental needs.

II.

Understanding the Mechanics of a Spousal SNT

This trust may be funded with all of the deceased spouses remaining assets, or it may be funded
only with the elective share amount. In a state where one spouse cannot disinherit the other
spouse, the elective share constitutes the amount a surviving spouse has a right to if he/she elects
against the deceased spouses will.

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III.

Combining a MAPT, Revocable Trust and Companion Will

A popular estate planning technique is the use of a revocable living trust, wherein the

grantor retains full control over the trust, the power to amend or revoke, and the power to remove
assets from the trust combined with a will that contains spousal special needs trust provisions.
The revocable trust has lifetime benefits such as asset management and the benefit at death of
avoiding probate. But to achieve the added protection for a surviving spouse who may need
long term care or may already be receiving benefits, the revocable trust can be written to require
the trustee to pay any remaining principal to the grantors estate or to the trustee of the

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testamentary special needs trust directly. The grantors estate will pass according to his/her will
which includes the testamentary spousal special needs trust.
A.

Pour-back provisions

There are various options for pouring assets back into a spousal special needs
testamentary trust. If you are not doing marital deduction planning, you can put all of the
remaining assets into the spousal special needs testamentary trust, you can limit it to a certain
amount, or you may choose to simply fund the spousal special needs testamentary trust with the
elective share amount. The resulting language may look like the sample language below:
The Will in the section below, refers to the revocable trust as that is where the division of
assets will take place:

The revocable trust then provides for the statutory minimum to pour back to the trustee of
the testamentary special needs trust established in the decedents will:

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The language of the testamentary spousal needs trust may read as follows:

Article OneSupplemental Needs Trust

Trust property will be administered pursuant to the terms of this Article when:
(i) another Article of my Will directs that the property is to be administered as
provided in this Article; or
(ii) the beneficiary of the property under another Article of my Will is a
Supplemental Needs Person, unless the other Article directs the beneficiarys
interest to be distributed to an existing trust.
Beneficiary under this Article refers to the beneficiary of the property under the other Article.
The provisions of the other Article shall continue to apply to the extent they do not conflict with
the provisions of this Article; specifically, the provisions of this Article shall control the
distributions of income and principal.

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Section 1.01

Distributions of Income and Principal

The Trustee shall collect income and, after deducting all charges and expenses attributed thereto,
shall apply for Beneficiarys benefit, in-kind, or in cash, so much of the income and principal
(even to the extent of the whole) as the Trustee deems advisable in the Trustees sole and
absolute discretion, subject to the limitations set forth below. The Trustee shall add the balance
of net income not paid or applied to the principal of the Supplemental Needs Trust.
(a)

Maximize Benefits

Consistent with the purpose of the Supplemental Needs Trust, before expending
any amounts from the net income and/or principal of this trust, the Trustee shall
consider the availability of all benefits from government or private assistance
programs for which Beneficiary may be eligible. The Trustee, where appropriate
and to the extent possible, shall endeavor to maximize the collection and facilitate
the distribution of these benefits for Beneficiarys benefit.
(b)

No Reduction in Benefits

None of the income or principal of the Supplemental Needs Trust shall be applied
in such a manner as to supplant, impair or diminish any governmental benefits or
assistance for which Beneficiary may be eligible or which Beneficiary may be
receiving.
(c)

No Assignment

Beneficiary shall not have the power to assign, encumber, direct, distribute or
authorize distributions from the Supplemental Needs Trust.
(d)

Supplemental Needs Trust Savings Clause

Notwithstanding any provision to the contrary, in the event that the Supplemental
Needs Trust is challenged or faces imminent invasion by any governmental
department or agency in such a way as to affect Beneficiarys eligibility for
benefits available under any governmental program, the Trustee is empowered to
amend the trust so as to maintain Beneficiarys eligibility for benefits under such
governmental program.
Section 1.02

Definition of Supplemental Needs

Supplemental needs refers to the requisites for maintaining the good health, safety, and welfare
of Beneficiary when, in the sole and absolute discretion of the Trustee, such requisites are not
being provided by any public agency, office, or department of any state or of the United States.
Supplemental needs shall also include, but not be limited to, medical and dental expenses,
annual independent checkups, clothing and equipment, programs of training, education,
treatment and rehabilitation, private residential care, transportation (including vehicle purchases),
maintenance, insurance, and essential dietary needs. Supplemental needs may include
spending money; additional food; clothing; electronic equipment such as radio, recording and
playback, television and computer equipment; camping; vacations; athletic contests; movies;
trips; and money to purchase appropriate gifts for relatives and friends.

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The Trustee shall have no obligation to expend trust assets for such needs, but if the Trustee, in
its sole and absolute discretion, decides to expend trust assets, under no circumstances should
any amounts be paid to, or reimbursed to, the federal government, any state, or any governmental
agency for any purpose, including for the care, support, and maintenance of Beneficiary.
Section 1.03

Objective to Promote Independence of Beneficiary

While actions are in the Trustees sole and absolute discretion, the Trustee should be mindful
that it is my wish that Beneficiary live as independently, productively, and happily as possible.
Section 1.04

Not Available Resource to Beneficiary

It is my intent to create a Supplemental Needs Trust that conforms to the provisions of Section 71.12 of the New York Estates, Powers and Trusts Law, in order to provide for Beneficiarys
Supplemental Needs. I intend that the trust assets be used to supplement, not supplant, impair or
diminish, any benefits or assistance of any Federal, state, county, city, or other governmental
entity for which Beneficiary may otherwise be eligible or which Beneficiary may be receiving.
Consistent with that intent, it is my desire that, before expending any amounts from net income
and/or principal of the trust, the Trustee consider the availability of all benefits from government
or private assistance programs for which Beneficiary may be eligible and that, where appropriate
and to the extent possible, the Trustee endeavors to maximize the collection of such benefits and
to facilitate the distribution of such benefits for the benefit of Beneficiary. All actions of the
Trustee shall be directed toward carrying out this intent and the discretion granted the Trustee
under this agreement to carry out this intent is absolute.
For purposes of determining Beneficiarys eligibility for any such benefits, no part of the
principal or undistributed income of the Supplemental Needs Trust shall be considered available
to Beneficiary for public benefit purposes. Beneficiary shall not be considered to have access to
principal or income of the trust, and he or she has no ownership, right, authority, or power to
convert any asset into cash for his or her own use.
The Trustee shall hold, administer, and distribute all property allocated to the Supplemental
Needs Trust for the exclusive benefit of Beneficiary during his or her lifetime. All distributions
from the trust are in the sole and absolute discretion of the Trustee, and Beneficiary is legally
restricted from demanding trust assets for his or her support and maintenance.
In the event the Trustee is requested to release principal or income of the Supplemental Needs
Trust to or on behalf of Beneficiary to pay for equipment, medication, or services that any
government agency is authorized to provide, or in the event the Trustee is requested to petition a
court or any other administrative agency for the release of trust principal or income for this
purpose, the Trustee is authorized to deny such request and is authorized in its sole and absolute
discretion to take whatever administrative or judicial steps may be necessary to continue
Beneficiarys eligibility for benefits, including obtaining legal advice about Beneficiarys
specific entitlement to public benefits and obtaining instructions from a court of competent
jurisdiction ruling that neither the trust corpus nor the trust income is available to Beneficiary for
eligibility purposes. Any expenses of the Trustee in this regard, including reasonable attorneys
fees, shall be a proper charge to the Supplemental Needs Trust.

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Section 1.05

Distribution Guidelines

Consistent with the purpose of the Supplemental Needs Trust, before expending any amounts
from the net income and/or principal of the trust, the Trustee shall consider the availability of all
benefits from government or private assistance programs for which Beneficiary may be eligible.
The Trustee, where appropriate and to the extent possible, shall endeavor to maximize the
collection and facilitate the distribution of these benefits for the benefit of Beneficiary. In
making distributions, the Trustee will:
(i) consider any other known income or resources of Beneficiary that are reasonably
available;
(ii) take into consideration all entitlement benefits from any government agency, such as
Social Security Disability payments (SSDI), Medicaid, New York State Department of
Social Services, Supplemental Security Income (SSI), and any other special purpose
benefits for which Beneficiary is eligible;
(iii) take into consideration resource and income limitations of any such assistance program;
(iv) make expenditures so that Beneficiarys standard of living will be comfortable and
enjoyable;
(v) not be obligated or compelled to make specific payments;
(vi) not pay or reimburse any amounts to any governmental agency or department, unless
proper demand is made by such governmental agency and reimbursement is required by
the state; and
(vii) not be liable for any loss of benefits.

If marital deduction planning is being done because you are dealing with a taxable estate,
the options are different and include allocating all of the assets to the marital share with no
disclaimer provisions, all to the marital share with the spouse being given the ability to disclaim
any amount, the statutory minimum to the marital share (also known as the elective share
amount), the Clayton Election, and the Fractional Formula.
If you are engaging in marital deduction planning for the couple, then the spousal special
needs testamentary trust will be set up as a QTIP trust to preserve the marital deduction with the
functionality of a special needs trust for the principal portion.

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Below is sample language when utilizing the Clayton Election and forcing a spousal
special needs trust in the decedents will.
Language from the revocable trust:

Language from the will:

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Article Two
Marital Trust
My Trustee will hold and administer the remainder of my trust estate according to the provisions
of this Article and the provisions of Article Eight, entitled Supplemental Needs Trust. The
trust, including the provisions of Article Eight, will be referred to as the Marital Trust.
Section 2.01

Exercise of Right of Election

If my husband makes a statutory election for a share of my estate pursuant to New York law, the
Marital Trust will, after the distribution of the statutory share to my husband, continue for his
benefit, and the statutory election will not result in the termination of the Marital Trust, other
provisions of New York law to the contrary notwithstanding.
Section 2.02

Nonproductive Property

Upon written request of my husband, my Trustee will convert any nonproductive property held
in the Marital Trust to productive property. In addition, my husband has the right to require that
any nonproductive property held in any qualified retirement plan, private or commercial annuity,
an individual retirement annuity, a pension, profit-sharing plan, stock-bonus plan, stock
ownership plan, or similar arrangement made payable to the Marital Trust be converted to
productive property.
Section 2.03

Limited Power of Appointment

My husband has the testamentary limited power to appoint all or any portion of the principal and
undistributed net income remaining in the Marital Trust to my descendants.
My husband may not exercise this power of appointment trust property to appoint trust property
to himself, his estate, his creditors, or the creditors of his estate.
I intend that this testamentary power of appointment be a limited power of appointment and not a
general power of appointment as defined in Section 2041 of the Internal Revenue Code.
Section 2.04

Separate Share for Disclaimed Property

My Trustee will hold any property that has become property of the Marital Trust as a
consequence of a disclaimer by my husband as a separate share of the Marital Trust with
provisions identical to those contained in the other sections of this Article, except that, with
respect to the property of the separate share, my husband will not have the limited power of
appointment that is held by my husband under Section 6.03.
Section 2.05

Qualified Terminable Interest Property

I intend that the Marital Trust property will constitute qualified terminable interest property for
federal or state death tax purposes if and to the extent my Trustee, other than an Interested
Trustee, makes the necessary election, and my Will shall be interpreted to accomplish such
intent.

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If my Trustee elects to have some but not all of the property in the Marital Trust qualify as
qualified terminable interest property for federal or state death tax purposes, the qualified
property and the non-qualified property will be separated into separate shares, but each share will
be held upon identical terms and conditions as if there had been no division. The separate shares
may be invested in a common fund with each share owning a proportionate fractional share of
the fund.
Section 2.06

Termination of the Marital Trust

The Marital Trust will terminate upon the death of my husband. If my husband has not exercised
his testamentary limited power of appointment over the trust property remaining at his death, my
Trustee will administer the unappointed balance or remainder of the Marital Trust, including any
accrued and undistributed income, as provided in Article Seven, entitled Residuary
Distribution.

The supplemental needs trust language is identical to that shown in the first example
above.
B.

Avoiding estate recovery

The ability of a state to recover against a deceased Medicaid recipients estate and the
mandate for states to do so is found at 42 U.S.C. 1396p(a). States are required to either place a
lien on real property owned by a Medicaid recipient in a nursing home, or to otherwise recover
against a Medicaid recipient over age 55 who was receiving nursing facility or other Medicaid
services which was paid for by the State.
No lien may be imposed upon the property of any individual prior to his/her death except
pursuant to a court order as a result of benefits being incorrectly paid to the individual, or if an
individual is in a nursing home on Medicaid and cannot reasonably be expected to be
discharged from that institution. 42 U.S.C. 1396p(a) (1). Exceptions to this rule apply if the
individual on Medicaid has a spouse, a child under 21, a blind or disabled child, or a sibling who

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lived in the home one year prior to the individuals admission to a nursing home and who has an
equity interest in the home. 42 U.S.C. 1396p(a)(2). If a lien is placed upon an individuals
home that lien must be dissolved once the individual is discharged and returns home. 42 U.S.C.
1396p(a)(3).
Recovery can be made by a state for medical assistance paid out on behalf of a Medicaid
recipient in a nursing home who is not expected to return home (subject to the exceptions noted
above) and against individuals over age 55 but only for medical assistance consisting of nursing
facility services, home and community-based services, and related hospital and prescription drug
services paid for by the state. 42 U.S.C. 1396p(b)(1). Recovery against individuals age 55 and
over may not occur if there is a spouse, minor, blind or disabled child. Likewise, there may be
no lien placed against the home of a Medicaid recipient described in this section if there is a
surviving spouse, minor, blind or disabled child, or if a sibling lives there and had lived there one
year prior and who has an equity interest in the home, or if there is an adult child who resides in
the home and has resided there for two or more years and provided care to the individual. 42
U.S.C. 1396p(b)(2).
Estate is defined as: all real and personal property and other assets included within the
individuals estate, as defined for purposes of State probate law. States have the option of
expanding this definition to include any other real and personal property and other assets in
which the individual had any legal title or interest at the time of death (to the extent of such
interest), including such assets conveyed to a survivor, heir, or assign of the deceased individual
through joint tenancy, tenancy in common, survivorship, life estate, living trust, or other
arrangement. 42 U.S.C. 1396p(b)(4)(B). This is known as expanded estate recovery. It is

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Drafting an Effective Will as Part of a Medicaid Asset Protection Plan

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imperative to understand how your state defines estate recovery and whether the definition has
been expanded to include assets outside of the probate estate.
C.

Satisfying the Elective Share

1.

With and without a SNT

Some states, such as New York and Colorado, will not allow a spouses elective share to
be paid into a testamentary spousal special needs trust. Other states, like Florida, will allow the
elective share to be paid into a testamentary spousal special needs trust. In those states which do
not allow payment of the elective share into a testamentary spousal special needs trust, the
elective share may have to be paid outright, and crisis planning performed at that time to help the
institutionalized spouse regain eligibility as soon as possible.

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Drafting an Effective Will as Part of a Medicaid Asset Protection Plan

ElderCounsel, LLC 2014