So, you’re one of the few people who understand that 70% of individuals over 65 will need long-term care. You also understand that figure to mean that you have a 70% chance of paying tens of thousands of dollars a month in long-term care. Lastly, you’re someone who’s worked hard their whole lives and you don’t want to see everything you worked hard for go to some facility. Thus, you know that you should plan to use Medicaid to pay for long-term care. The only issue is, how do you qualify?
Before we talk about qualification, let’s clear the air. First, Medicaid is a system that you’ve contributed to your whole life. It’s not assistance, it’s reimbursement. Second, those who have Medicaid pay for their long-term care are not forced to some “Medicaid facility.” That’s a myth.
Now that we’ve cleared the air, lets talk assets. Take stock of your assets and break them down into the following categories: 1. Financial Assets e.g. cash, accounts, investments; 2. Real property; 3. Titled personal property; and 4. Other miscellaneous assets e.g. businesses and business equipment. The following rules apply to those categories:
Finances or financial assets (not counting income unreceived) is considered to be a countable asset for Medicaid purposes. This means that it is an available resource that Medicaid would “count against” the applicant.
Real Property: Real property is generally considered to be a countable asset except for the following: a. the personal residence (where the applicant intends to remain or intends to return) ; b. life estate interests; and c. tenants in common interests, also known as a less than 100% interest in property.
Business interests: Businesses are countable assets; however, the working capital, inventory, and equipment do not count. Thus, the business’s value is what is countable.
Personal Items: personal items are generally not countable unless they are a titled asset, or they are some sort of currency or currency equivalent like gold or silver. With respect to titled assets, an applicant and spouse is allowed to own ONE vehicle.
Note that the applicant can only have up to $2,000.00 worth of countable assets in their name. The applicant’s spouse can only have up to roughly $126,800.00 worth of countable assets in their name.
So, what can you do if you’re over the threshold? The answer is: it depends. It’s different depending on whether you’re in a crisis i.e. need care immediately or if you’re pre-planning. If you’re pre-planning you have many options. Some of those options may be trusts or certain deed work that can exempt your property from being considered a countable asset.
If you’re in a crisis situation, then the plan is a little different. There are many options that you can use spend-down the countable assets while preserving the value. If you have questions about Medicaid Qualification, call the experienced attorneys at McIntyre Elder Law (704) 259-7040.
Under Federal law and the Nursing Home Reform Act of 1987, virtually all nursing facilities nationwide must meet specific requirements and adhere to certain standards. Most importantly, federal law prohibits these facilities from requiring financial guarantees from third party individuals. In other words, a facility cannot require a resident’s family member to sign or co-sign an agreement to take on financial liability incurred by the resident. Nonetheless, there is a long history of facilities using admission agreements that do just that.
As a condition of admission, family members and friends of prospective residents are often given admission agreements, and then instructed to sign those admission agreements. Sadly, a resident’s family members and friends often have no realistic opportunity to understand or to even read the admission agreements before signing them. Facilities have been known to then use those guarantees to pressure a family member or friend into paying bills for which the family member or friend should not be responsible.
Many facilities use forms that are confusing and deceptive, even to some attorneys. For example, many facilities will use express language disclaiming any notion that the agreement operates as a third-party guaranty, only to turn around and enforce the agreement as such. One of the most common strategies employed by nursing facilities today include the use of admission agreements that obligate a “responsible party” or “financial legal representative” to use the resident’s money to pay medical expenses. Then, if the resident incurs a large bill prior to death or if the resident’s bills remain unpaid, the facility will bring suit against the third-party representative in an attempt to hold them personally liable. Lawsuits such as these are not only questionable from a professional and ethical perspective, but also conflict with the general rule that duly appointed agents are not liable for the debts of a principal.
In sum, be aware of ambiguous language and terms within a nursing home contract. Does the contract serve to admit the resident into the facility and detail the care and services provided? Or, does it attempt to impose a legal duty on a family member unlawfully? Does it appear to do both? If it’s not obvious what the contract does, you should be hesitant to sign. A credible facility will be considerate of the family’s need to understand the operative language. Pertinent federal law includes but is not limited to: 42 C.F.R § 483.15(a)(3), 42 U.S.C. §§ 1395i-3 (c)(5)(A)(ii) and 1396 r(c)(5)(A)(2).
Here at McIntyre Elder Law, we regularly assist individuals and their family members with navigating placement of their loved ones in a long-term care situation. If you or your family have been the target of a lawsuit under similar circumstances, please do not hesitate to contact our professional team. Our mission is to help seniors maintain their assets and preserve their legacies.
Probate: why I study the process just to try to avoid it
Before I began to practice in Elder Law, I always assumed that if you went through the probate process then that meant you were doing something right. Probate is the legal process that a court uses to authenticate a will, or in situations where someone passes without a will it is how a court administers someone’s assets according to the law.
In those situations where someone was probating a will, I would think that was a person who was really on the ball. Hey, you planned ahead and had a will to probate so you took care of business and did what was best for everyone involved. But here I am, screaming from the mountain top (specifically from our new office in Hendersonville, come and see me) that you want to avoid probate whenever possible!
Here is why: North Carolina is a limited recovery state. This is a big deal and an important legal right that you have in our state. What that means is that creditors, whether that be credit card companies or those trying to collect medical bills, are limited to going after the possessions in your estate as it passes through the probate process. If any of your assets in your estate can be passed to someone else without going through the probate process, then creditors don’t get the chance to take them. So, if creditors never get a chance to collect on debts because your possessions are passed on without going through probate, then that means more of your estate will get into the hands of your loved ones.
Preserving your estate may seem easier said than done, but that is where the planning comes into play. This is why our firm has made it our mission to provide excellent estate planning services. You bring the estate, that you have worked very hard for your entire life to achieve, and we work with you on a plan to preserve those assets and ensure that you are able to leave behind the legacy that you want. Every plan is different because every estate is different. However, the goal of preserving your legacy remains the same. Our goal is to help you. Sometimes probate is unavoidable and we have to be prepared for what that means. But, one of our strongest tools we have is to help you locate the potential to avoid the probate process.
I found that this opportunity to work with clients to achieve these goals brings with it a very personal reward. I like to see you win! So it would be a personal favor to me to meet with you and see what plan fits your estate. Since you have made it this far, I look forward to meeting you and working with you on a plan to achieve your goals.
The last will and testament has been bestowed with a level of sanctity in the law approaching the divine. A person’s will is law. Whenever one writes their will, they are codifying rules they themselves are handing down. This unilateral legislation is recognized as a right everyone possesses, regardless whether you’re a politician or a prisoner. Given the solemnity employed in considering the will, the court is rather quick to entertain allegations of impropriety regarding the will’s creation. Thus, a challenge to a will is something that is not only something that can be done, it’s also a very important fail safe that been thoughtfully ingrained into our legal system.
Trusts are just like wills, except that trusts are considered living documents. Because a trust is a living entity, it avoids probate. Thus, a challenge to a trust is performed in a much different way than a challenge to a will.
In North Carolina, a challenge to a will is called a “caveat”. A caveat may be brought for any number of reasons. Maybe the testator (the person who made the will) was incompetent at the time of the signing. Maybe the will is a product of undue influence by some interloping family member. Maybe the signature on the will is a product of forgery. One may challenge a trust on same basis for challenging a will. The difference, however, is in the details.
When you challenge a will, the probate process is frozen. This means that the personal representative of the estate (read: Executor) can no longer administer the estate e.g. they cannot distribute assets. Conversely, challenging a trust does not freeze the administration of the trust. Notwithstanding a legal action, the trustee may still distribute assets. If the challenger wants to prevent this, they can seek an injunction.
An injunction is when the court is asked to compel or prevent an individual from doing something. To enjoin a trustee, one would need to prove to the court, as a matter of equity, the trustee should be prevented from distributing assets out to the beneficiaries. If you’re the one challenging a trust, you’d want to seek an injunction. It is much harder to reclaim the assets in the trust after they’ve been distributed.
Just like a will, a trust may be challenged. However, there may be extra steps to the process. If you suspect wrongdoing within the estate plan of a loved one don’t hesitate to contact McIntyre Elder Law at 704-259-7040.
Long-term care is incredibly expensive. The average cost of long-term care ranges from $7,000 to $10,000 a month. Considering the average stay in a long-term care facility can be years, you’re looking at paying out hundreds of thousands of dollars if you need long-term care, which you most likely will. On average, 70% of individuals over age 65 will need some type of long-term care. And this number is slowly creeping up. As medical technology gets better, people live longer. However, the quality of life doesn’t necessarily increase. This means that more and more people live longer and require assistance in the form of long-term care.
Okay, you get that it’s expensive and that you’ll mostly likely need it, so how do you pay for it? Well, you have a few options: you could pay out of pocket. However, given the crazy cost, you couldn’t maintain that for long. Besides, that’s how you end up losing your hard-earned money and property. You could utilize a long-term care insurance policy. However, these policies are difficult to get, they can be expensive, and they are meant to supplement, not cover, long-term care (not that you shouldn’t look into getting long-term care insurance). Lastly, you can utilize the pot of money that you have been chipping into ever since you started working, Medicaid.
Medicaid is a lot like Social Security (SS). You pay into the system with every paycheck just like you do with SS. Except, with Medicaid, you have to apply and qualify. Most people tend to think that you cannot own anything if you want to qualify for Medicaid. That’s not true. In fact, you can own quite a bit of assets and still have your cost of long-term care covered. The key is to set a plan in place to 1) get Medicaid qualified while keeping your assets; and 2) protecting the assets you keep.
To get Medicaid qualified, you must think about preserving the value of what you own. There are assets that Medicaid considers exempt and other assets are considered non-exempt. Thus, an effective plan for preservation and qualification involves turning non-exempt assets into exempt assets—thereby preserving the value but removing those assets from the list of assets that Medicaid holds against you.
To protect your assets, you must set them up in such a way that they avoid probate. Probate is the process of transferring assets from an individual who’s passed away to their heirs at law. Probate is a default process that can be avoided by very useful estate planning tools. The reason why. You’d want to avoid probate is because 1) it is a long, expensive, and complicated process; and 2) probate is the opportunity for creditors—including Medicaid—to come after your assets after you pass away. If you avoid probate in the correct way, you avoid the creditors/Medicaid from coming in and taking everything you saved before it can pass to your loved ones.
Medicaid is a great option to pay for long-term care. With the correct plan, you can get your long-term. Care paid for and preserve your assets. If. You have a question about Medicaid or asset protection, give the experienced attorneys at McIntyre Elder Law a call at (704) 259-7040 or visit our website at www.mcelderlaw.com.
I want to talk to you today about a problem many of my clients are facing. They want to protect their assets, including retirement funds, in a trust like an irrevocable or convertible trust. Many Americans have much of their savings tied up in traditional Individual Retirement Accounts (IRAs) or 401ks painting an asset picture that is “Qualified Fund Heavy”. That means their funds are locked in tax qualified funds like traditional IRAs or 401ks. These retirement savings products seem like a great idea at first. They allow you to set aside money each paycheck, pre-income tax, and allows that money to grow. You are not taxed on the gains or in other words, there are no capital gains taxes on the growth of the investments inside of the IRA package. However, you are penalized 10% for any withdrawals you make prior to age 59 and you must start taking distributions from the IRA at the age of 72. The distributions from your qualified retirement assets can provide much needed income well into your retirement. However, these types of assets (401ks and IRAs) cannot be legally protected with estate planning tools like trusts. Simply put, your traditional IRA or 401k cannot be moved into a trust to be protected; not in their current form, at least. To be placed into a trust they would need to be liquidated first… Why use a trust to protect assets like retirement funds?
Okay, we’re here for the elder law report, and we’re talking about IRA to trust conversion. This is part of our Attorney Advisor Series. I wrote a blog piece on this that you can find on our site, MCElderLaw.com/Blog. IRA to trust conversion. Or you can just watch this video. The reason I wanted to talk about IRA trust conversion is people come in all the time and talk about IRAs, and talk about retirement assets, and other assets. And they want to put those IRAs, 401ks, qualified assets into trust. Andy you can’t. Qualified assets don’t go into trust. So to start, what are qualified assets Brent?
Yeah, a qualified asset is just another term for an account that has money in it, and that money has not been taxed yet. So a very common form of a qualified asset is a traditional IRA. Where if you pull the money out, you have to pay tax on it.
What kind of tax?
What kind of taxes, income tax on the money. Because you didn’t pay income tax on the money in the first place when you put that money in there. You have required minimum distributions from these types of accounts at some point, because at some point they want you to pay the tax on this money, because you got the benefit of growing it, tax-free, which is really a mistake. I hear that a lot. “This is an IRA, you get to grow it tax-free.” I’m like, “No, that’s a lie.” Because you put the money in there, you don’t have to pay the tax at that time, but you will, or your loved one will have to pay that tax at some point.
What happens with income tax, your gains are tax-free, so you don’t have to pay capital gains tax on all the gains. And I guess the trade off is, you get to put a larger pre-taxed chunk in, so you get better growth.
Yeah. And that’s one of the main driving factors for a lot of people when they have a traditional or qualified account. Either they want to make sure that they can grow that money, because it has compounding interest. So you want to grow a bigger principal amount. So it’s good to put pre-tax dollars in there, because that’s more money. So when you have the interest rate that is applied to that money, it’s going to grow at a higher rate. But the other thing is, if it’s sponsored by an employer, and they kick in a certain amount, obviously that’s a thing to have as well. So those are some of the driving factors behind why some will do it. And obviously, it’s good to have tax-free growth, meaning that the gains aren’t taxed, but there’s other ways other than a traditional IRA, that you can have tax-free growth. For example, you could have a Roth IRA that’s after tax non-qualified funds, or certain insurance policies, for example, can do that.
That being said, it can be a good tool. There’s no lie that it can be a good tool to have a qualified account to grow that money. However, you can really run into some problems in the future that a lot of people don’t know about.
Agreed. And we see many, many Americans today, many clients today that are IRA pre-tax qualified fund heavy.
Oh, real heavy. Yeah.
And they want to know, maybe they don’t have long-term care insurance, and estate planning, and especially elder law, which is just a subset of estate planning. We really keep our eye on the fact that 70% of people over the age of 65 are going to need some type of long-term care, either in-home assisted living, or nursing home care. And that costs a lot. It could cost, everything you’ve saved in that IRA. It could cost everything that you have, just in you, and then maybe you and your spouse to long-term care or to provide for long-term care, whether that be in-home, assisted living or nursing home care. If you don’t have long-term care insurance, and the reason a lot of people don’t have long-term care insurance is I think several reasons. One, they put it off, because it’s not an emergency today, and why pay for something today that’s not an emergency? I’ve got other emergencies that I need to pay for today, or other things that are calling for my dollars today.
Another is a lack of planning, or foresight of what might come, and a lack of a sense of urgency. We as human beings are primarily motivated by fear and pain, and what’s urgent right now. That’s just the truth. And because of that failure to have that in place, we get hurt on the back end sometimes. So a lot of times we see people who want to use trusts. So Brenton, irrevocable trusts are a place where assets can be protected, correct?
We’ve defined the IRA. We’re going to talk about a protective tool, a couple of types of protective tools that can protect assets as you age against a long-term care spend down. And we’re going to talk about how you might be able to achieve the best of both worlds, which is protecting that money that you have in the IRA. So that’s where we’re going. We’re going three steps to get there. So what are the tools Brenton that we can use to protect our hard-earned money and property, our house, our money? As an attorney, what can you offer me to help?
Right. So a lot of people don’t know this, but your IRA is not protected or exempt from being counted as an asset for Medicaid purposes. Most states give you protection as far as if you get sued, you can have exemptions on your IRA, but not for when you need long-term care. And when we talk about protection, we mean both needing to pay for long-term care, you don’t want to have to use that IRA to pay for long-term care. You want to be able to preserve that for yourself, your family, and your loved ones. And the other thing is, you want to be able to, if you do get long-term care paid for by a benefit like Medicaid, you don’t want them to be able to come back and go after those assets.
So the best way to do that, the best tool to use to do that to just straight up protect everything is an irrevocable trust. It’s very important that you understand that it’s an irrevocable trust, and not a revocable trust. Because while revocable trusts can be amazing tools and have a lot of benefits, what we’re talking about is exempting those assets from counting against you for Medicaid purposes so you can qualify for Medicaid.
Why does the government, why does Medicaid count a revocable trust, things that I put into revocable trust, I mean, I see people all the time, “Hey, I’ve got a trust. I’m good. I’ve got a revocable living trust.” Why are they not good?
That falls to the importance of the difference between the two. So let’s define the two. So a revocable trust is a trust where you, the person who creates it, the grantor, you have power of that trust in a number of ways. Typically, it’s because you’re also the trustee over that trust. But the big point is that as the grantor, the person who created the trust, you may not be the trustee of the trust, the person who can control the trust, but you still have the power to revoke the trust, which is a huge power, if you think about it, you have the power to kill that trust. And essentially all those assets that are in there, that are in the trust, and ostensibly not in your name, you could change that in a heartbeat by revoking that trust.
So it’s not like you ever put those assets into different hands. An irrevocable trust is like its own entity in of itself. It’s like a whole different person, that you hand those assets over to, to take them out of your name so they no longer count against you as an asset. But it’s very important as well that you understand that you’re not giving away the assets at the same time, because there’s protections built in there. And that really is emblematic of the name of this tool, a trust.
So if I set up an irrevocable trust, I have a third-party trustee, I’m not the trustee. So somebody else is really in control of those assets in the trust, right?
However, I can still live off the interest and dividends off of the income generated in that trust from investments, things like that, right?
Right. And I kind of want to back up a little bit, because when we say that the trustee, the third-party trustee, the person who administered the trust is in control of those assets, they are, but then again, they also have a duty to the trust-
Within the legal construct of the trust.
That’s right. The way I like to explain it is, an irrevocable trust is scary for a lot of people because it sounds so definitive. It’s set in stone. But you get to set the rules of the game. And once the game starts, you don’t get to change it. But you get to set the rules of the game. And that’s a big deal. And so once you set those rules, your trustee has to follow those. And they have to act in the best interest of the beneficiaries of the trust, which you, as the person who created it will be a beneficiary of that trust. So they have that fiduciary duty.
Right. So they have a legal fiduciary duty to act in your best interest with those funds…
Okay. And so now we get to the bridge. So we’re going to marry these two things together. How do I take an IRA, which doesn’t fit into trust, which is pre-taxed funds. I haven’t paid income tax on it. In order to put any of those funds in the trust, I’ve got to cash out the IRA, and I’ve got a big tax hit that year that I cash out the IRA.
Yeah. So this is another sticking point that we run into with irrevocable trusts and this type of planning. The first one is the trust being irrevocable, people feeling like they’re giving up some sort of power. The next thing we usually have to get over is the concept of being taxed on this money. Now, a lot of the reason why this is a sticking point is because we think of IRAs the wrong way. If I have $100,000 in a traditional IRA, I don’t really have $100,000. I know that because I know how IRAs work, but if you have an IRA, and you check it every day and you see $100,000 in there-
You have $100,000 minus the income tax you’re going to pay.
That’s right. Built into that $100,000 is latent tax that has not been paid out yet. So you’re only going to be able to pull out $85,000 out of that account, the rest is going to go to taxes. It may be even more. And it’s important to know that when you look at your IRA, not to see the number on the balance, and think that that is your actual, the money that you could pull out.
Before we jump to that, I wanted to hit one more thing on the way, on the bridge to getting the IRA into the trust. And this is something as a client, I’m still stuck with the irrevocable trust, and I can’t control it. Is there something that’s the best of both worlds? I’ve heard about a trigger trust or a convertible trust.
That’s right, yeah.
[inaudible 00:13:17] Will that work in this case?
You can have the best of both worlds, especially if you really preplan. This is really good for people who have a sense of urgency, but not necessarily because they have an imminent need for some type of long-term care.
Sure. I know I’m going to know that down the road maybe, but right now, I still want to control it. Income taxes right now are historically low. The amount of tax I might have to pay. They’re historically low right now.
That’s right. And, you probably don’t want to pull all of that IRA money out in one year.
No, no, yeah. So let’s make a plan. So tell me about the convertible trust. With a convertible trust, is it the same as an irrevocable trust, is that the same as a revocable trust? What’s it do?
It’s the best of both worlds. It’s a really awesome tool, and I’m very happy that we have this tool, and we’re able to provide this type of service for our clients, because it is really the best of both worlds, because we married the two. The revivable trust that gives you the comfort of having total power over those assets. And it’s already in this protective shell. And I like the analogy that you came up with, Greg. It’s like putting everything in a safe, but leaving that door cracked. Because when everything is in that revocable trust, all you got to do to protect it is shut the door. And it becomes irrevocable, and therefore protected.
How would I convert that? Let’s say I hire McIntyre Elder Law to create a convertible trust for me and my family. And then you and I create say a five year plan where I’m going to remove money out of my IRA over five years to minimize my tax burden each year on what I have to pay taxes off of that come out. And I’m going to start putting that in an account inside, because I can set up an unlimited amount of accounts. I can set up investment accounts inside of a trust. Just can’t be an IRA, a traditional IRA or 401k. My investment guy, gal, they could still invest those funds?
Yeah. They can still handle them.
So over five years, we’re going to convert a fifth each year. I’m going to move that into the account. I’m going to minimize my tax burden because I’m going to take control, because I’m going to say today, taxes are historically low, and I’m going to take advantage of that. Are taxes is going to go up.
Oh, yes. The only constant in life has changed, but the other one is that taxes will rise. You know what I mean? That’s a thing that anyone who’s done even a little bit of tax law knows is you want to assume that taxes will go up, especially when they’re at historically low rates, as they are.
Why do you we think taxes will go up based on current events?
Well, one of the things is with the TCJA, the Tax Cuts and Jobs Act, that was enacted in 2017, 2018. That bill expires, the whole thing just goes away. It lowered tax rates, significantly. It simplified, quote, unquote, the tax code in a lot of ways by just slashing rates for corporations. It raised the estate tax threshold. So you won’t have to pay estate taxes for seven years. And there’s other things that it did, but the point is, it goes away. All of that expires. So we know that taxes are going to rise after that goes away. But the thing is, is that-
[crosstalk 00:17:32] The places borrowing a lot of money, and giving away a lot of money here lately, too, I mean, we’ve been in the middle of a pandemic, trillions of dollars in bailout money given to airlines and other industries.
And when going gets tough too, I mean, they can lower that required minimum distribution age as well. That’s been thrown around, different ways of tax IRAs and 401k’s have been thrown around when it gets tough as well.
The government has control of what your IRA is actually worth. You don’t right now, unless you take advantage of tax rates that are low. The government can raise the income tax, thereby lowering the value of your IRA.
They can also lower the age of required minimum distributions to force you to take it earlier.
They have already in the Secure Act that was passed, forced your non-spouse beneficiaries, so your children, to take it within 10 years. Whereas prior to last year, they could have taken it over their lifetime. Now this year, they have to take it within a 10 year period. So it forces higher tax payments to get to get that money out and those taxes paid.
Yeah. They’re working too, the difference is for a lot of people at the tax rate they’re going to experience when they have to have and pull out required minimum distributions, they’re going to be retired and living off social security for the most part, they’re not going to be working and having a higher income like their children will when they have to take that money out. And also over a shortened period, that 10 year period.
What you’re saying is, by not taking my IRA during my life, I’m really passing that tax burden down to my children.
Right. A tax burden too. I mean, that’s an important term for it, because while it is a tax burden for you, it’s going to be more of a burden for them.
And it’s more of a burden for my children as well, because they have to take that distribution within a 10 year period. I don’t.
That’s right. And at a higher tax rate.
Okay. So I get it, so I can set up a plan over five to 10 years to move my IRAs into an account in an irrevocable trust, or maybe this convertible trust. So the convertible trust, do I have control of it when I set things into a convertible trust?
Yeah. So initially you have total control over the trust, but we built in triggers, okay? In this trust. So the trigger could be, you get diagnosed with some type of debilitating disease. Maybe you’re diagnosed with dementia. You have imminent placement in a long-term care facility. You become incapacitated for an indefinite amount of time. Something like that would automatically cause the trust, you wouldn’t have to do anything, it would automatically cause the trust to convert into irrevocable. And at that time, you need care, and you need to have the assets protected at the same time. So it’s very important to understand that when you’re quote unquote losing control, which you’re not, because we talked about that, but let’s just use that for now. You’re losing a measure of control, but it’s when you need that person to come in and start helping you, that’s when you need it the most.
Absolutely. Absolutely. So I could set up a plan with McIntyre Elder Law that helps me move my assets into the trust, lets me keep control of the assets, but is irrevocable and protects that money in that retirement when I need it.
Absolutely. That is absolutely correct. And what we’re trying to do here, is we’re trying to preplan, we’re trying to get you in while the gettin’s good, so that we can make this a long-term plan for you. So you’re not penalized in your old age, or in your retirement for working hard, and contributing to an account that everybody told you your whole life is a good thing to contribute to, and saving.
But what if your financial planner says, “Oh man, but moving this money over, you’re going to have to pay tax on it now.” And what if they’re scared that they’re going to lose management of this IRA?
What I’d say to that is, we’ve talked about the taxes. The tax thing is, someone, at some point, is going to have to pay the tax on that anyway. That’s my response to that. And the other thing is, I mean, that financial planner shouldn’t sweat because that account you move it into, that the trust holds, they can manage that account.
And that’s motivation for the financial planner to really grow that other account tax-free.
Yeah. That financial planner needs to get on board with your plan, so that you can protect your assets, the legal side. Because if I’m a financial planner, I’m just trying to grow, grow, grow your assets, which is a good thing. You need to grow your assets as much as possible. But at a certain point, you need to look at protecting those assets, because it doesn’t matter how much you grew them, that risk that’s out there, that you or your spouse, or both could need some type of long-term care is so big that you have to switch your mindset to protection and growth, instead of just reckless growth with no protection. It’s so important that we’ve literally created a new type of trust to help our clients start planning very early to do this sort of thing.
Absolutely. So I think that that was an excellent breakdown of one, what tax qualified assets are, two, the vehicles that you could move those into over a period of time to minimize your tax exposure, such as an irrevocable trust, maybe a Medicaid asset protection trust, or a convertible trust, which gives you the control now. And then later it goes irrevocable, either when you choose to make it irrevocable, or because you become incompetent or incapacitated to protect those assets, and then maybe… yeah. I think that’s a great breakdown..
Yeah. And I’d say that the convertible trust, the type of client that fits into really well is someone who’s about to retire, or has just retired, right around that age. Or maybe even contemplating retirement in the next, I mean, can’t start really too early with the convertible trust, to be honest with you. A convertible trust is a very useful tool at all stages of life. But once you start to get to beyond retirement age, 70s, mid-70s, things like that, we’re going to be looking at a convertible trust as a possibility, but we’re going to look at a lot of things as far as preexisting conditions, possible health issues, things like that. Because we want to consider that. And it might be that a pure irrevocable trust would be what we advise at that time. It depends on who you are, but both of those tools will be there for you.
So every plan is individualized. And if I come to McIntyre Elder Law, will you help me pick the plan that’s right for me?
Absolutely. We’re going to consider everything. So we’re going to look at your assets. We’re going to look at your goals. Your goals, we don’t want to forget what you want to do with your money, your property. We want to protect it, but we also want to make sure that whatever it is, whatever legacy that you’re building, we can fulfill that. And we’re going to look at your family, who your beneficiaries are, who your trustees are, all of that, to give you a individualized, personalized, customized plan to protect your assets, and hard-earned money and property.
Well, thank you very much, Mr. Begley, for helping me with this elder law report today. I know you work hard for your clients. I know I do as well. I’m signing off. This is Greg McIntyre with McEntyre Elder Law, Brenton Begley with McIntyre Elder Law. We’re both estate planning and elder law attorneys. And we’d love to help you. If you would like to sit down with us and talk about your estate plan, and asset protection plan, give us a call. (704) 749-9244. Or go online and book a free consult with us at MCElder Law.com/BookFreeConsult. MCElderLaw.com/BookFreeConsult, and stay tuned every week for our Elder Law Reports series, or visit our special Attorney Advisor series, which I think are next level topics that are going to just give you even more information and education on how to protect your hard-earned money and property. See you next week.
That title is a bit of a misstatement. The death tax (aka estate tax) hasn’t gone anywhere; it just doesn’t affect you. Unfortunately, that’s probably going to change soon. Let’s explore what we could be facing in the future.
What is the Death Tax?
The “death tax” is a pejorative nickname for the estate, gift and generation skipping transfer tax. Basically, it’s the tax that is collected from someone’s estate when they die. The tax is calculated based on the value of the decedent’s estate and can include just about any asset they own upon death. If you think about all the assets someone can accumulate in a lifetime, it’s not hard to envision a hefty tax bill at the end of life.
While this type of tax may be a great method of redistribution of wealth. It can also be a huge burden on the family of a decedent. Thus, many preplanners actively work to set up their estate plan to avoid the death tax.
Why Does it Matter?
For the last decade or so, the death tax has not been much of a factor for most individuals. This is because it has not applied to most Americans for a number of years. Since 2011, the death tax has only applied to estates that gave over five million dollars’ worth of assets—those below are exempt. However, in 2018, that amount changed to over eleven million dollars, an amount that many Americans don’t even come close to. Built into that 2018 change in the law is a time limit. In the Tax Cuts and Jobs Act (TCJA), Congress compromised to allow the death tax exemption to be as high as it is today with the caveat that it automatically revert back down to five million in 2025.
But here’s the thing, just because it’s going back down to five million, doesn’t mean it won’t go lower. In fact, hitting the sunset date in 2025 means that the death tax exemption is on the chopping block. Given the recent economic turmoil and previous debates surrounding the TCJA, the death tax exemption could be lowered significantly. There is a possibility that the death tax could apply to estates valued in the hundreds of thousands (like it did in the early 2000s). Considering that the death tax takes into account the value of all of your asserts at death, many Americans may be affected by this tax that can range from 40% to 50% of a person’s estate.
Luckily, there are ways that you can plan ahead now to avoid the future depletion of your family’s inheritance. If you want to learn how to plan ahead to avoid taxes or protect assets, give the experienced attorneys at McIntyre Elder Law a call at (704) -259-7040 or visit our website at www.mcelerlaw.com.
Probably the largest concern that arises when someone wants to sell property is the possible tax implications of such sale. Luckily, the tax code is set up in such way that incentivizes property ownership and transfer. This means that there are procedures by which tax can be avoided that have been built into the tax code. We will explore some of those procedures, but first we will lay some foundation.
Types of Tax
There are many types of tax (e.g. excise tax, estate tax, etc.). The type of tax you’re likely most familiar with is income tax. The tax that this article is most concerned about is capital gains tax. Similar to income tax, the amount of capital gains tax you may incur is based on the amount of gross income you earn each year. Such rates can be found at IRS.gov, specifically look at Tax Topic No. 409 Capital Gains and Losses.
Capital Gains Tax
So, what is capital gains tax? Capital gains tax (or cap gains for short) is the tax you incur as a result of selling a capital asset. A capital asset is most anything you own: your house, your car, your toothbrush. The best way to think about capital assets is that everything you own is a capital asset—unless it isn’t. An example of things that aren’t capital assets are patents or copyrights, accounts receivable, and inventory held in a trade or business. Refer to 26 U.S. Code § 1221 for the exact definition.
Calculating Capital Gains Tax
To calculate the amount of capital gains tax you owe on the sale of a capital asset, you must first determine your basis and your gain.
The best way to think of basis is that it’s the baseline value you’ve invested in the asset. There are many ways to establish basis; however, we will discuss the most intuitive method: cost basis. Cost basis is equal to what you pay for an asset. So, if you buy a car for $25,000, your basis in that car is $25,000. Cost basis can increase with further investment. Let’s say you decided to put some after-market parts on the car worth $5,000, your basis in the car is now $30,000.
Your gain, if any, occurs when the asset is sold. The gain is equal to the difference in the basis and the sales price. For example, if I pay $25,000 for a car, my basis is $25,000. If I then sell that car for $30,000, I have a gain of $5,000 ($30,000 – $25,000 = $5,000). In much the same way, if you sell the car for less than your basis, you have a loss equal to the difference in your basis and the sales price.
After you’ve found your gain, you will then apply the applicable capital gains rate to your gain. For example, let’s say your gain is $5,000 and, based on your annual gross income, your rate is 15%, your capital gains tax will be $750 ($5,000 x 15%).
Avoiding Capital Gains Tax
Procedure 1: Sale of Personal Residence IRC §121
The largest capital asset for most of is our home. Real estate tends to appreciate in value, which is a good thing if you own a home. However, when you go to sell that home, you don’t want the appreciation in your home’s value to lead to a giant tax bill. Thankfully, there is a provision in the tax code that allows you to exclude a certain amount of gain from the sale of a personal residence (see IRS Publication 523).
Per section 121 of the Internal Revenue Code, you can exclude up to $250,000 worth of gain from the sale of a personal residence if you’re a single individual and $500,000 if you’re a couple. To qualify for this exclusion, you must have owned and resided at the property for 2 out of the last 5 years leading up to the sale.
Procedure 2: Like-Kind Exchange IRC §1031
In the past, section 1031 applied to many types of assets. Since 2017, and the adoption of the Tax Cuts and Jobs Act, a like-kind exchange can only be done with real property. A like-kind exchange (or 1031 exchange) is essentially a way to defer taxation on the sale of a piece of real property.
Let’s say that you own a rental home that you purchased for $100,000 in the year 2000. Over the last 20 years, the property has appreciated to $250,000. The rent from the property is not what you want, so you decide to sell the property and trade up. However, it’s an investment property, so you can’t use the personal residence exclusion mentioned above. If you sold the property, you’re looking at a $150,000 gain. If your capital gains rate is 20%, your tax would be $30,000. You definitely don’t want that.
You can avoid this tax altogether by rolling the gain into another piece of real property. When you roll the gain into the new property, you won’t have to pay the tax on your gain until the sale of the new property—unless of course you use another like-kind exchange.
A like-kind exchange can be done in an unlimited amount and frequency. Although, just like any good tax planning tool, it has its rules. The rules boil down to this: you must identify the new piece of real estate into which you’re planning on rolling the gain within 45 days of the sale of your property. This designation must be done in writing. Then, you must close on that new property within 180 days of the sale of your old property. Note, you can also back into a like-kind exchange if you’ve already sold property and purchased new property.
Don’t let the fear of taxes keep you from investing in real estate or selling your real property. Real property is too good of an asset to be deterred by taxes. After all, it’s the one thing they’re not making more of.
If you have question about tax planning or planning in general, give the experienced attorneys at McIntyre Elder Law a call at (704) 259-7040.
There’s nothing more certain than death and taxes, or so it’s been said. And, while there’s nothing I can do about the former, I’d like to talk to you about how to best avoid the burden of taxes in retirement.
Let’s first discuss what I mean by “tax-free retirement”. A tax-free retirement means planning with the goal of tax avoidance but most importantly planning with the goal of getting taxes behind you. A retirement free of the dark looming cloud of potential tax, is a free retirement.
A tax-free retirement is not a retirement that is totally devoid of tax. Rather, a tax-free retirement means that your retired years will not be spent restricted in an attempt to avoid tax that has been deferred over the years, but still needs to be paid. Tax avoidance should mean avoiding taxation period, not deferring taxation and trying to avoid it in the future. Pure tax avoidance is rare. And, while pure tax avoidance should also be a goal, we are going to look at avoiding the restriction of future or delayed taxation.
For example, if you put money in a traditional IRA, you won’t have to pay tax now, but you will have to pay tax later. “Later” is when you retire and start pulling that money out. And, while it feels nice to pay zero tax in the present, all you’re doing is burdening your future self and restricting your ability to plan or protect assets in retirement.
There are a few amazing tools that you can utilize to ensure that you can save for retirement and avoid the restriction of future taxation. Below are three of those tools:
a. Roth Retirement Accounts
Unlike a traditional retirement account, Roth retirement accounts are accounts where you invest money that has already been taxed rather than pre-taxed money. The result is that you invest a lower amount (because the tax has been taken out) but the money that sits in the account is tax free. Because of the after-tax nature of the account, there are many fewer restriction on a Roth as opposed to a traditional account that I will list below.
You will not be penalized for early withdrawal of funds from a Roth account.
There are no required minimum distributions with a Roth account.
You are not subject to the whims of Congress’s treatment of traditional retirement accounts i.e. Congress can accelerate the tax on traditional accounts. This is something that is discussed every time the US heads for a recession.
Lastly, you can more plan, spend, and protect your money without the restriction of future tax.
Even if you have already started a traditional account, you can slowly roll-over the funds into a Roth account, spreading out and minimizing the tax burden. This will consequently also lead to the elimination of the restriction of future taxation.
Much like a Roth account, you can use insurance as a tax-free investment. The money in the investment grows tax-free and you similarly will not be faced with a huge tax bill if and when you want to pull the money out. Insurance policies geared for retirement are especially useful for those high-earners who may be disqualified from using a Roth account because of their income.
Another “future tax” you may want to consider is inheritance tax. Currently, the federal inheritance tax is not a factor for most Americans. That’s because an individual’s estate must give over eleven million one hundred eighty thousand dollars ($11.18M) before it will be subject to inheritance tax. However, this amount is subject to change. The current threshold will automatically revert to the previous amount, a little over five million ($5.56M), in 2025. And it can go lower from there. The federal estate tax or “death tax” has been applicable to estates with a total worth of as little as six hundred thousand dollars ($600,000).
Trusts can be a great tool to help individuals to avoid burdening their heirs with a hefty tax bill. Certain trusts may be use at not only avoiding the estate tax but also protection of assets and qualification of benefits to pay for long-term care.
Tax avoidance means not burdening yourself with future taxes. The time that you will need the most flexibility and when your assets face the most risk is after you retire. Don’t restrict yourself with the straight jacket that is delayed taxation. Get taxes behind you.
Getting Taxes Behind You
Damocles was an admirer of his King Dionysius. He pandered to his King, complimenting him on his great status and wealth. In his gratification, it was clear to Dionysius that Damocles was jealous of the King, so Dionysius decided to offer an opportunity to Damocles. Damocles would take the King’s place, his status, his power, and his riches. The only stipulation was that the position would also come with the danger of being King. To demonstrate the precarious position of monarch, Dionysius suspended a sword over the head of Damocles, being held by the hilt by only a single strand of horse hair. This way, Damocles could feel the true nature of the power and wealth of the ruler, knowing that at any time the sword would inevitably fall upon him.
The “Sword of Damocles” is not only a “heavy is the crown” type analogy. It is also emblematic of the manner in which government sponsored retirement accounts work.
IRAs are almost too good to be true—almost being the key term there. They have a lot of benefits that are touted by probably every financial planner ever. The reason why is that they seem like a no-brainer. The funds you put into a traditional IRA are pre-taxed and grow tax free. That’s right, you don’t have to pay the tax on the money when it goes in and when it grows. But just like the wealth and power of kingship, the traditional IRA has its own looming danger.
When you’re young and working hard toward a retirement there’s nothing better than seeing than number in the account grow, regardless of its taxable nature. However, when you’re at retirement age, the number you see no longer simply represents years of hard work and saving. It also represents a giant tax bill that someone at some point will have to pay.
The reason why this is so important is best explained within the context of asset protection. Funds in a qualified or pre-taxed account are not protected from the risk of long-term care costs. And if seventy (70%) percent of people over the age sixty-five (65) will need some type of long-term care (costing hundreds of thousands a year), then protection from long-term care is important.
The catch here is that to protect the funds in these accounts, you must take the money out—generating a taxable withdrawal. This seems bad on its face. After all, no one wants to pay tax. However, someone at some point will be required to pay the tax on that account regardless.
Let me give you an example. Let’s say Donald has five hundred thousand dollars ($500,000) in a traditional IRA. He wants to protect this money because he’s getting up there in age and knows of the likelihood for needing expensive long-term care. He also knows that he would rather protect his money and leave behind for his family, than to give it to a facility. He could use something like a Medicaid Asset Protection Trust to protect the money, but he would have to take the money out of the IRA, generating a taxable withdrawal. Donald gets nervous, not wanting to face the inevitable, he avoids protecting the money and ends up needing long-term care. In the end, he pays the balance of the retirement account to a long-term care facility in addition to all the latent taxes.
If Donald would have acted rationally, he would have cashed the IRA out and protected the remaining balance, regardless of the tax consequences. Better yet, if Donald would have planned ahead, he could have started to slowly withdraw the money from the IRA in small increments, spreading out the tax burden over a number of years. Regardless, the best course of action for Donald is to protect his IRA and the only way to do that is to take the money out.
Getting taxes behind you means freedom. You will no longer have the proverbial Sword of Damocles hanging above your head. You can spend, invest, and protect your assets without the fear of the inevitable tax burden.
If you have question about protection of assets or enjoying a tax-free retirement, then it’s important that you speak with a professional. The attorneys at McIntyre Elder Law are happy to sit down and have a straight-forward discussion about the best strategy for you and your family, in a clear and understandable manner. Give us a call at (704) 259-7040 to schedule your consultation today.
I want to talk to you today about a problem many of my clients are facing. They want to protect their assets, including retirement funds, in a trust like an irrevocable or convertible trust. Many Americans have much of their savings tied up in traditional Individual Retirement Accounts (IRAs) or 401ks painting an asset picture that is “Qualified Fund Heavy”. That means their funds are locked in tax qualified funds like traditional IRAs or 401ks. These retirement savings products seem like a great idea at first. They allow you to set aside money each paycheck, pre-income tax, and allows that money to grow. You are not taxed on the gains or in other words, there are no capital gains taxes on the growth of the investments inside of the IRA package. However, you are penalized 10% for any withdrawals you make prior to age 59 and you must start taking distributions from the IRA at the age of 72. The distributions from your qualified retirement assets can provide much needed income well into your retirement. However, these types of assets (401ks and IRAs) cannot be legally protected with estate planning tools like trusts. Simply put, your traditional IRA or 401k cannot be moved into a trust to be protected; not in their current form, at least. To be placed into a trust they would need to be liquidated first.
Why use a trusts to protect assets like retirement funds?
I know a statistic that should scare you. Seventy percent (70%) of those over sixty-five (65) years old today will need some type of long-term care during their lives. Long-term care costs can be in excess of $100,000 per year. For most of us, those costs far exceed what we can save during our lives. Therefore, our savings, retirement and homes can be threatened by this high cost of care. Trusts can be great legal, estate planning tools in which assets can be placed to be preserved for a family during their lives and then the remaining assets passed on to the children and grandchildren. Certain types of trusts can protect assets from being spent down to pay for long-term care if a benefit like Medicaid is used.
What types of trust are effective at protecting assets?
Revocable Living Trust: When we are looking at activating a Medicaid benefit to pay for long-term care you need to use the right type of trust. A revocable trust is a trust where you are the trustee and have the right to revoke or otherwise cancel the trust. Because of this control over the trust and therefore the assets in the trust, when applying for a Medicaid benefit to pay for long-term care, those assets in this type of trust is still a countable asset to you and thus subject to the so-called “Medicaid Spend-Down”.
Irrevocable Trust/Medicaid Asset Protection Trust: An Irrevocable Trust, however, let’s say one written specifically for long-term care Medicaid qualification, called a Medicaid Asset Protection Trust, would be a trust where you would not be the trustee and would not have the ability to revoke or cancel the trust. You are not in control of the assets, so to speak, but the trust has specific instructions written within for the trustee to maintain the assets within the trust for your use and benefit during your lifetime. You may also draw the income off any invested assets within the trust. The benefit of this type of trust is protection. The drawback is that you are not in control of the assets within the trust. You are not the trustee. Many clients will appoint the duty of Trustee to a trusted child or family member. In some cases this duty is undertaken by an attorney. In either case, there is a legal, fiduciary duty written within the trust for the trustee to maintain the investments and real estate within the trust for the use and benefit of the Grantor(s), you or you and your spouse, during your life or lives. Then the property in the trust would avoid probate and pass directly to beneficiaries of your choice or be held in trust for their use and benefit also under your instruction. This type of trust can be a great asset protection tool to protect retirement benefits, homes and other savings and real estate.
Convertible Trust: Want the control of the revocable living trust with the asset protection of an irrevocable trust? A convertible trust may be for you. Some clients aren’t ready to relinquish control of their home and other assets to a third party trustee but they still yearn for the asset protection qualities, long-term, of an irrevocable trust. A convertible trust allows a couple or individual to be their own trustee and then, like the name implies, converts to an irrevocable trust when either the grantor (you) elects by signing a short amendment or a grantor becomes incompetent or incapacitated. In the case of a grantor becoming incompetent or incapacitated the trust will shift to become irrevocable to protect the assets within for the use and benefit of the grantor but also to protect the assets from a future long-term care Medicaid spend-down. This trust can present a great option for those who are not yet ready to give up control but also want future asset protection for assets within the trust. It can truly present the best of both worlds.
Why won’t Qualified Funds like IRAs and 401ks fit into a trust?
Tax qualified funds like traditional IRAs and 401ks are already wrapped in a “special deal” where there are advantages for keeping the money, an early withdrawal penalty of 10% prior to 59 years old and a mandatory annual withdrawal starting at 72 years old. Withdrawals are taxed at the income tax rate of the individual that particular year. Traditional IRAs or 401ks cannot be placed into a trust mainly because the money has to be moved out of those assets prior to the leftover, post-taxed funds being placed into the trust. Once in the trust the money can be invested into most any investment vehicle like stocks, bonds, etc. These investments can then be managed by yourself or a financial planner. The grantor of the trust, even if the trust is irrevocable, can still take the income distributions from the invested assets in the trust. So the question becomes: Do I leave the retirement funds alone and vulnerable to a long-term care spend down or do I liquidate those funds and move them to an irrevocable or convertible trust?
What is the best plan?
We work with clients daily to develop comprehensive plans to protect homes, other real estate, savings and yes, retirement. Here are some key points to focus on when deciding to move your tax qualified retirement funds to an irrevocable or convertible trust:
Tax rates are historically low right now and may rise in the future. Tax rates have recently been at historically low levels. Due to recent crises do you think an income tax increase is in the cards for the future? The government controls the income tax rates and therefore how much of a bite they can take out of your traditional IRA or 401k distributions. If you wait until income tax rates are higher to withdraw your funds then you could be sacrificing a larger portion to taxes than if you acted to start taking withdrawals and moving funds into a trust now. If you did start now that would certainly put you in control and take you out of the position of falling victim to higher tax rates later.
If you do not have long-term care Insurance your traditional IRA and 401k assets are exposed and unprotected. Certainly, seeking long-term care insurance would be a great answer if available to protect retirement assets and to allow you to private pay for any in-home, nursing home or assisted living care you may need as you age. However, the reality is that many can simply not afford long-term care insurance. Long-term care insurance may turn you down as you reach a certain age limit or with pre-existing conditions. If you do not have long-term care insurance and your retirement assets are not protected in a legal, estate planning tool like an irrevocable trust, then know that it is exposed. The retirement assets are subject to being used to self-insure against a long-term care crisis or be subject to a Medicaid spend down if that benefit is to be used.
Developing a plan to move the money into an irrevocable trust now or over a few years may save the money in the long run and the taxes paid on withdrawals now may be lower than taxes paid after a tax increase. The benefit being protecting the retirement asset versus losing it to a long-term care crisis. Planning and taking control is essential to peace of mind and to financial health over the long term. A move of assets from a tax-qualified asset into a trust may be immediate or it can be planned and spread over a period of years. Consider the chart below:
* this chart does not factor or show income tax payments based on withdrawals. For an estimate of income tax payments due after withdrawals from a traditional IRA or 401k please consult your income tax professional.
Is it time to start a move from an unprotected retirement asset to a protected trust investment fund?
We at McIntyre Elder Law would be glad to meet and discuss just that question in an effort to help you reach the right answer for you. We are offering FREE consultations to discuss these matters. Please call out office at 704-749-9244 or go online to: mcelderlaw.com/bookfreeconsult to schedule a FREE consult with an attorney.
This website is attorney advertising and does not establish an attorney-client relationship, which is only formed when you have signed an engagement agreement. We cannot guarantee results; past results do not guarantee future results.
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