ira transfers to grantor trusts for medicaid planning purposes

IRA Transfers to IRA Transfers to Grantor Trusts for Grantor Trusts for Medicaid Planning Medicaid Planning

PurposesPurposes

Robert S. Keebler, CPA, MSTVirchow, Krause & Company, LLP1400 Lombardi Avenue, Suite 200Green Bay, WI 54307-1997

David Zumpano, CPA, Esq.Medicaid Practice Systems, LLC555 French Road, Suite 201New Hartford, NY 13413

Presented by:

Medicaid PlanningMedicaid Planning

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The State of MedicaidThe State of Medicaid

• Estate planning & Medicaid environmentEstate planning & Medicaid environment

• A challenging “puzzle of needs”A challenging “puzzle of needs”

• The possibilities for you and your clientsThe possibilities for you and your clients

• The formula for successThe formula for success


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The Estate Planning and Medicaid The Estate Planning and Medicaid EnvironmentEnvironment

• Economic conditionsEconomic conditions

• Estate planning industryEstate planning industry

• Medicaid legislationMedicaid legislation


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Challenges and PossibilitiesChallenges and Possibilities

• For YouFor You– Peace of mindPeace of mind– Quality of lifeQuality of life– More revenueMore revenue

The Federal Rules: StateAnd Local Interpretations

Referral Sources

(Advisors)Clients

You and your practice

• For your clientsFor your clients– Peace of mindPeace of mind– Quality of lifeQuality of life


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MedicaidDepartment

Medicaid Laws and RulesMedicaid Laws and Rules

• Title XIX of the Social Security ActTitle XIX of the Social Security Act– 42 USC 1396 - 1396s (1396p - Qualification)42 USC 1396 - 1396s (1396p - Qualification)– 42 CFR §430, 42 CFR §430, et seqet seq and 20 CFR §416, and 20 CFR §416, et seqet seq

• As amended by Deficit Reduction Act 2005As amended by Deficit Reduction Act 2005– Effective 2/8/06?Effective 2/8/06?– The transition of law over several yearsThe transition of law over several years– Teach old/newTeach old/new– Timelines of new lawTimelines of new law


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MMMNA LimitsMMMNA Limits

Federal Maximum: $2,489 (Jan, 2006)

Federal Minimum: $1,650 (July, 2006)

Your State: MMMNA


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CSRA LimitsCSRA Limits

Federal Maximum: $99,540 (2006)

Federal Minimum: $19,908 (2006)

Your State: CSRA

(Many States: Min=Max)

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Look Back DateLook Back Date

• The first day of the month in which a MA The first day of the month in which a MA resides in a health care facility resides in a health care facility andand applies applies for Medicaid benefits.for Medicaid benefits.– Can apply for benefits retroactively 3 monthsCan apply for benefits retroactively 3 months

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• The period of time Medicaid will look at all The period of time Medicaid will look at all

financial records of a Medicaid Applicant (MA)financial records of a Medicaid Applicant (MA)– The Look Back Period begins on the Look Back DateThe Look Back Period begins on the Look Back Date

OLD LAWOLD LAW DRA ’05*DRA ’05*Transfers to Individuals or OthersTransfers to Individuals or Others:: ALL Transfers:ALL Transfers:

36 Month Look Back Period36 Month Look Back Period 60 Month Look Back Period60 Month Look Back Period

*(Only as to *(Only as to transfers transfers afterafter 2/7/06) 2/7/06)

Transfers to Transfers to OROR from a Trust: from a Trust: 60 Month Look Back Period60 Month Look Back Period (Only as to those transfers)(Only as to those transfers)

Look Back PeriodLook Back Period

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Lookback Transition: LookforwardLookback Transition: Lookforward (Based on Transfer Date)(Based on Transfer Date)

2/7/03 2/7/04 2/7/05 2/7/06 2/7/07 2/7/08 2/7/09 2/7/10 2/7/11

36 mthsTransfer 1 Lookback expireshere



36 mthsTransfer 42/7/06

Lookback expireshere

60 mthsTransfer 52/8/06

Lookback expireshere

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Lookback TransitionLookback Transition (Based on Application (Based on Application Date)Date)

2/7/03 2/7/04 2/7/05 2/7/06 2/7/07 2/7/08 2/7/09 2/7/10 2/7/11

Transfer 1

Transfer 2

Transfer 3

Transfer 42/7/06

Transfer 52/8/06

Lookback Exp.

Lookback Exp.

Lookback Exp.

Lookback Exp.

Lookback Exp.

If Apply 2/7/07Look-back Period (36 mos.)





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Penalty Period (a/k/a/ Ineligibility Penalty Period (a/k/a/ Ineligibility Period)Period)

• The number of months an MA is ineligible for The number of months an MA is ineligible for

Medicaid Benefits because of an uncompensated Medicaid Benefits because of an uncompensated

transfertransfer

– Calculation: Uncompensated Transfer / Monthly Calculation: Uncompensated Transfer / Monthly

Regional DivisorRegional Divisor

– NO LIMITNO LIMIT on the number of months a MA can be on the number of months a MA can be

ineligibleineligible

• ““Cure”: No penalty will be imposed if recipient of Cure”: No penalty will be imposed if recipient of

MA’s uncompensated transfer “gives it back”MA’s uncompensated transfer “gives it back” 13


Penalty Period: Start DatePenalty Period: Start Date• OLD LAWOLD LAW

• DRA ‘05DRA ‘05Penalty begins “the first day of a month during or after which assets have been transferred”… or “the date on which the individual is eligible for Medicaid assistance under the state plan and would otherwise be receiving institutional level care... but for the application of the penalty period, whichever is later.”

Penalty begins the first day of a month during or after which assets have been transferred (most states = month of transfer; some states = month after)

Translation: Penalty begins when Translation: Penalty begins when institutionalized and financially qualifiesinstitutionalized and financially qualifies

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Basic Trust TypesBasic Trust Types

• RLTRLT

– Whatever MA can get, Medicaid can getWhatever MA can get, Medicaid can get– Transfers from, creates 60 month look backTransfers from, creates 60 month look back

•Be careful with house and/or giftsBe careful with house and/or gifts

All Control

All Income

All Principal

(All subject to loss)

Revocable Living Trust

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• Typical Typical Irrevocable TrustIrrevocable Trust

– Rarely accomplishes client’s objectivesRarely accomplishes client’s objectives– Typically used for tax planning purposesTypically used for tax planning purposes

No Control

No Income

No Principal

(None subject to loss)

Irrevocable Trust

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Basic Trust TypesBasic Trust Types


• MIT™MIT™– MA and/or CSMA and/or CS

GrantorsGrantors Some (All?) Control

All Income

No Principal (?)

(Income subject to loss?)

My Income Trust

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Medicaid Asset Protection Trust TypesMedicaid Asset Protection Trust Types


• FIT™FIT™– MA and/or CSMA and/or CS

GrantorsGrantors

– Income and Principal Paid to a “class” for MA & Income and Principal Paid to a “class” for MA & CS LifetimesCS Lifetimes

Some (All?) Control

No Income (?)

No Principal (?)

(Nothing subject to loss)

Family Irrevocable Trust

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Medicaid PlanningMedicaid Planning Medicaid Asset Protection Trust TypesMedicaid Asset Protection Trust Types

• KIT™KIT™– Trust created Trust created

by children of by children of

MA with funds MA with funds

gifted by MAgifted by MA

All Control

All Income

All Principal

(Nothing subject to loss)

Kids Irrevocable Trust

Is this a “trigger trust”?Is this a “trigger trust”?19

Medicaid PlanningMedicaid Planning Medicaid Asset Protection Trust TypesMedicaid Asset Protection Trust Types


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QUESTION: QUESTION: How do you implement this in your How do you implement this in your

practice?practice?

ANSWER: ANSWER: The Medicaid BootcampThe Medicaid Bootcamp


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I.I. The business rationale of implementing The business rationale of implementing Medicaid into your estate planning Medicaid into your estate planning practicepractice

II.II. Medicaid laws & rulesMedicaid laws & rulesIII.III. Planning strategiesPlanning strategiesIV.IV. Counseling & design issuesCounseling & design issuesV.V. Funding strategiesFunding strategiesVI.VI. Implementation strategiesImplementation strategiesVII.VII. Communicating with your clientCommunicating with your client

Medicaid Bootcamp OverviewMedicaid Bootcamp Overview

IRA-Grantor IRA-Grantor Trust PlanningTrust Planning

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IRA-Grantor Trust PlanningIRA-Grantor Trust Planning

• Grantor trusts were created to eliminate Grantor trusts were created to eliminate income tax abuses involving (then-lower) income tax abuses involving (then-lower) trusts bracketstrusts brackets

• Grantor trust as to:Grantor trust as to:– IncomeIncome– PrincipalPrincipal– BothBoth

OverviewOverview

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• Removal of highly-appreciating assets Removal of highly-appreciating assets from taxable estatefrom taxable estate

• Payment of taxes on behalf of trust are not Payment of taxes on behalf of trust are not considered gifts for gift tax purposesconsidered gifts for gift tax purposes

• Tax free distributions to trust beneficiariesTax free distributions to trust beneficiaries• Permissible transferee of life insurance Permissible transferee of life insurance

policy outside of transfer for value rulespolicy outside of transfer for value rules• Tax-free transfer of IRAsTax-free transfer of IRAs

Grantor Trust BenefitsGrantor Trust Benefits

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IRA-Grantor Trust PlanningIRA-Grantor Trust Planning

FACTSFACTS• Taxpayer (“T”) owned an IRA naming his four sons as Taxpayer (“T”) owned an IRA naming his four sons as

beneficiariesbeneficiaries• T died before his “required beginning date” (i.e. age T died before his “required beginning date” (i.e. age

70½)70½)

• IRA custodian set aside separate shares for each IRA IRA custodian set aside separate shares for each IRA beneficiary within the time prescribed by lawbeneficiary within the time prescribed by law

• One of T’s sons (“S”) is disabled and is receiving One of T’s sons (“S”) is disabled and is receiving Medicaid benefitsMedicaid benefits– Mother (“M”) was named as S’s guardianMother (“M”) was named as S’s guardian– S would lose Medicaid benefits if IRA were payable directly to S S would lose Medicaid benefits if IRA were payable directly to S

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IRA-Grantor Trust PlanningIRA-Grantor Trust PlanningPLR 200620025PLR 200620025

FACTSFACTS

• A state court allowed M to create a “special needs A state court allowed M to create a “special needs trust” (“SNT”) for the benefit of S so as to trust” (“SNT”) for the benefit of S so as to preserve S’s Medicaid benefitspreserve S’s Medicaid benefits

– M is the trusteeM is the trustee

– S is the only trust beneficiary during S’s S is the only trust beneficiary during S’s lifetimelifetime

– M has discretion over the distribution and M has discretion over the distribution and accumulation of income and principalaccumulation of income and principal

• M proposed to transfer S’s interest in T’s IRA to M proposed to transfer S’s interest in T’s IRA to an inherited IRA to be held by SNT an inherited IRA to be held by SNT

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HOLDINGSHOLDINGS

• SNT is a grantor trust under IRC SNT is a grantor trust under IRC §677(a)§677(a)

• The transfer of S’s share of T’s IRA to SNT will be The transfer of S’s share of T’s IRA to SNT will be disregarded for income tax purposes and will not disregarded for income tax purposes and will not be considered a transfer under IRC be considered a transfer under IRC §691(a)(2)§691(a)(2)

• The annual IRA distributions to SNT may use S’s The annual IRA distributions to SNT may use S’s life expectancylife expectancy

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PLANNING POINTPLANNING POINT

• It appears, based on the conclusions reached in this ruling, It appears, based on the conclusions reached in this ruling, that an IRA may be transferred to a grantor trust during that an IRA may be transferred to a grantor trust during lifetime without triggering any adverse tax consequences. lifetime without triggering any adverse tax consequences. Accordingly, it may be possible to do the following:Accordingly, it may be possible to do the following:

– Post-mortem beneficiary transfer of an IRA to a grantor trustPost-mortem beneficiary transfer of an IRA to a grantor trust

– Lifetime IRA assignment to an Asset Protection Trusts (APT)Lifetime IRA assignment to an Asset Protection Trusts (APT)

– Lifetime IRA assignment to an Alaska Community Property TrustLifetime IRA assignment to an Alaska Community Property Trust

– Lifetime transfer to a Grantor Retained Annuity Trust (GRAT) or Lifetime transfer to a Grantor Retained Annuity Trust (GRAT) or Intentionally Defective Grantor Trust (IDGT)Intentionally Defective Grantor Trust (IDGT)

CAUTION: These planning opportunities are CAUTION: These planning opportunities are new and untested. Therefore, they should not new and untested. Therefore, they should not be implemented without first obtaining a be implemented without first obtaining a private letter ruling.private letter ruling. 28


IRA-Medicaid IRA-Medicaid Asset Asset

Protection Protection (MAP) Trust(MAP) Trust

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Overview of TechniqueOverview of Technique

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IRA-MAP TrustIRA-MAP Trust

Grantor /IRA Owner

IRA-MAP Trust(Grantor Trust)

Primary (lead) beneficiary: GrantorSecondary (remainder) beneficiary: Grantor’s children

Transfer of IRA

Overview of Technique – Medicaid Overview of Technique – Medicaid EstateEstate

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Grantor /IRA Owner IRA-MAP Trust

(Grantor Trust)

Assets Inside Medicaid Estate

Assets Outside Medicaid Estate

Overview of Technique – Income TaxOverview of Technique – Income Tax

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Grantor /IRA Owner

IRA-MAP Trust(Grantor Trust)

Taxable income earned within

trust

IRS

Payment of income tax on trust’s behalf NOTE: Trust does not NOTE: Trust does not

“exist” for income tax “exist” for income tax purposes. Therefore, all purposes. Therefore, all income is taxed to the income is taxed to the

grantor.grantor.

Action StepsAction Steps

1.1. Draft grantor trust to hold IRADraft grantor trust to hold IRA

2.2. Determine type of Medicaid Asset Determine type of Medicaid Asset Protection TrustProtection Trusta.a. MITMITTMTM

b.b. KITKITTMTM

c.c. FITFITTMTM

3.3. Obtain Private Letter Ruling (PLR)Obtain Private Letter Ruling (PLR)

4.4. Assign IRA title to grantor trustAssign IRA title to grantor trust

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AppendixAppendixAchieving Grantor Achieving Grantor

StatusStatus

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NOTE: A special thank you to Scott Schrader, Esq. of Miller & Schrader, P.A. for the use of the following slides regarding qualifying trusts for grantor status

• §§672 Definitions672 Definitions– Adverse = beneficial interest that is Adverse = beneficial interest that is

substantial and whose interest is substantial and whose interest is adversely affected by exercise or non-adversely affected by exercise or non-exerciseexercise

– Non-adverse = Not adverseNon-adverse = Not adverse– Related or Subordinate = Non-adverse + Related or Subordinate = Non-adverse +

parent/issue/sibling/employee/corporationparent/issue/sibling/employee/corporation– Spousal AttributionSpousal Attribution

Achieving Grantor StatusAchieving Grantor Status

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• §§674 Power to Affect Beneficial Enjoyment 674 Power to Affect Beneficial Enjoyment – Grantor is treated as owner of Grantor is treated as owner of any portionany portion of of

the trust over which grantor controls beneficial the trust over which grantor controls beneficial enjoyment or corpus or income, exercisable by enjoyment or corpus or income, exercisable by grantor or non-adverse party or both, without grantor or non-adverse party or both, without the consent of any adverse party (674(a))the consent of any adverse party (674(a))

– Powers found in 674(b) will Powers found in 674(b) will nevernever cause cause grantor trust statusgrantor trust status

– 674(c) – power to distribute income or 674(c) – power to distribute income or principal, or to add beneficiariesprincipal, or to add beneficiaries

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• §§674 Power to Affect Beneficial 674 Power to Affect Beneficial EnjoymentEnjoyment– 674(d) – Power to allocate income674(d) – Power to allocate income

•Power granted to someone other than grantor or Power granted to someone other than grantor or “spouse living with grantor” to distribute, “spouse living with grantor” to distribute, apportion or accumulate income to or for apportion or accumulate income to or for beneficiaries if limited by reasonably definite beneficiaries if limited by reasonably definite external standardexternal standard

•Power creates grantor trust as to income onlyPower creates grantor trust as to income only

•Possible to switch grantor trust status on and off Possible to switch grantor trust status on and off merely by spouse moving out and back in?merely by spouse moving out and back in?

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• §§675 Administrative Powers675 Administrative Powers– 675(2) – Power given to nonadverse 675(2) – Power given to nonadverse

party to make loans to grantor without party to make loans to grantor without adequate interest or securityadequate interest or security

– N/A if trustee has authority to make N/A if trustee has authority to make loans to anyone without regard to loans to anyone without regard to interest or securityinterest or security

– Power alone will cause grantor trust Power alone will cause grantor trust status, even if no loan is made status, even if no loan is made (PLR (PLR 199942017, 9645013)199942017, 9645013)

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• §§675 Administrative Powers675 Administrative Powers– 675(3) – Actual borrowing of funds675(3) – Actual borrowing of funds

•Direct or indirect loan to grantor or grantor’s Direct or indirect loan to grantor or grantor’s spouse which is unrepaid at the end of yearspouse which is unrepaid at the end of year

•N/A to loans with adequate interest and N/A to loans with adequate interest and securitysecurity

•Creates grantor trust to extent amounts are Creates grantor trust to extent amounts are unrepaid at year end, but . . .unrepaid at year end, but . . .

• IRS has apparently ignored requirement that IRS has apparently ignored requirement that loan remain outstanding until year endloan remain outstanding until year end

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• §§675 Administrative Powers675 Administrative Powers– 675(4) – General675(4) – General

•Right exercisable in a non-fiduciary capacity Right exercisable in a non-fiduciary capacity by any person to reacquire trust corpus by by any person to reacquire trust corpus by substituting other propertysubstituting other property

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• §§675 Administrative Powers675 Administrative Powers– 675(4) – General675(4) – General

•Right exercisable in a non-fiduciary capacity by Right exercisable in a non-fiduciary capacity by any person to reacquire trust corpus by any person to reacquire trust corpus by substituting other propertysubstituting other property

•Service’s position is that power alone isn’t Service’s position is that power alone isn’t sufficient, and applies a facts and circumstances sufficient, and applies a facts and circumstances analysisanalysis

•Defective as to both income and principalDefective as to both income and principal

•Grantor can releaseGrantor can release

•Protector can re-grantProtector can re-grant

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• §§677 Power to Use Income for Benefit of 677 Power to Use Income for Benefit of Grantor Grantor – Grantor treated as owner of Grantor treated as owner of any portionany portion of of

trust, whether or not under §674, trust, whether or not under §674, the incomethe income of which, without the approval or consent of of which, without the approval or consent of adverse party is, or in discretion of grantor or adverse party is, or in discretion of grantor or nonadverse party may be, distributed to or for nonadverse party may be, distributed to or for benefit of grantor or spousebenefit of grantor or spouse

– Or used to pay premiums on life insurance on Or used to pay premiums on life insurance on the life of grantor or spousethe life of grantor or spouse

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• §§677 Power to Use Income for Benefit of 677 Power to Use Income for Benefit of GrantorGrantor– Trust should disallow use of income to Trust should disallow use of income to

satisfy obligation of supportsatisfy obligation of support– Discretionary power to pay income to Discretionary power to pay income to

grantor may cause inclusion under state lawgrantor may cause inclusion under state law– Some states have changed their laws to not Some states have changed their laws to not

cause inclusion (Alaska, Delaware, and cause inclusion (Alaska, Delaware, and others)others)

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• §§678 Persons other than Grantor Treated as 678 Persons other than Grantor Treated as Owner Owner – Only Code section attributing ownership to Only Code section attributing ownership to

someone other than the actual grantorsomeone other than the actual grantor– Power to vest corpus or income exercisable Power to vest corpus or income exercisable

solely by that personsolely by that person•surviving spouse as sole trustee of bypass trust?surviving spouse as sole trustee of bypass trust?

• limitation to ascertainable standard (HEMS) prevents limitation to ascertainable standard (HEMS) prevents estate tax inclusionestate tax inclusion

•switch on/off grantor trust status by appointing/firing switch on/off grantor trust status by appointing/firing co-trusteeco-trustee

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• §§678 Persons other than Grantor 678 Persons other than Grantor Treated as OwnerTreated as Owner– N/A with respect to power over “income” N/A with respect to power over “income”

during any period actual grantor is during any period actual grantor is treated as owner under §§617-677treated as owner under §§617-677

– Service has interpreted §678(b) as Service has interpreted §678(b) as applying to principal as well as incomeapplying to principal as well as income•PLRs 9309023, 8701007, 8326074, PLRs 9309023, 8701007, 8326074,

8308033, 81420618308033, 8142061

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• §§678 Persons other than Grantor Treated 678 Persons other than Grantor Treated as Owneras Owner– Power to distribute income or principal which is Power to distribute income or principal which is

“partially released or otherwise modified” that “partially released or otherwise modified” that would cause grantor trust status under 671-would cause grantor trust status under 671-677677•5/5 power holder, until released, modified, or 5/5 power holder, until released, modified, or

allowed to lapse, is treated as grantor over portion allowed to lapse, is treated as grantor over portion of trust subject to powerof trust subject to power

•Upon lapse, power holder is treated as grantor of Upon lapse, power holder is treated as grantor of amount in excess of 5/5amount in excess of 5/5

•Rev. Rul. 67-241 and PLR 200022035Rev. Rul. 67-241 and PLR 200022035

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• §§678 Persons other than Grantor 678 Persons other than Grantor Treated as OwnerTreated as Owner– Power to distribute income or principal Power to distribute income or principal

which is “partially released or otherwise which is “partially released or otherwise modified” that would cause grantor trust modified” that would cause grantor trust status under 671-677status under 671-677

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• Terminating grantor statusTerminating grantor status– Maintain FlexibilityMaintain Flexibility– Power to terminate grantor trust status Power to terminate grantor trust status

should not be in hands of grantorshould not be in hands of grantor

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ConclusionConclusion

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ira transfers to grantor trusts for medicaid planning purposes

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