A Couple of 2021 Heckerling Institute Estate Planning Take-Aways

Last week I attended the first virtual, remote University of Miami 2021 Heckerling Institute on estate planning. As usual, there was a great deal of good, thought-provoking information. I am, however, greatly looking forward to the actual post-Covid on-site 2022 Heckerling Institute next year.

Here, very briefly, are two take-aways. I plan periodically to present more of these short take-aways in future blog posts:

One is that the inter-vivos QTIP marital trust (my long-running favorite estate planning tool) appears to be one of the best options for a married couple to take advantage of the current $11.7 million estate / gift exemption before possible federal legislation to reduce that large exemption arises ($23.4 million combined for a married couple). This QTIP option is akin to using a SLAT (spousal lifetime access trust), but better, in my view, as the QTIP election feature provides the unique ability to wait-and-see so as to make, or not make, the QTIP marital deduction election for the inter-vivos QTIP trust, until after the smoke clears on what, if any, changes Congress might make in reducing the gift / estate exemption.

But, keep in mind the QTIP trust funding itself is locked-in in all events; only at play (a very important play) is whether the spouse who funds the QTIP trust ends up being able to use the current large exemption amount. As an important aside, some states (including Georgia) have a protective statute that prevents a creditor from reaching a secondary QTIP interest, by that creditor otherwise asserting the secondary interest is a self-settled interest back to the settlor spouse. This favorable statutory protection enables the inter-vivos QTIP trust, up front, to include a secondary QTIP interest for the settlor (funding) spouse in the event the other QTIP beneficiary spouse predeceases the settlor.

If use of the large gift exemption is thereafter thwarted — in part or in whole — for whatever reason (e.g., a Congressional retroactive reduction in the exemption amount), the amount of exemption applied to the QTIP gift can be effectively adjusted downward by the offsetting use of the QTIP marital deduction election. The QTIP election (including a partial election) does not have to be made until the due date of the gift tax return Form 709 for the 2021 QTIP trust gift. This gift tax deadline, if extended, is October 15, 2022. Thus, the binding exemption-effect of now using the excess gift exemption to fund the QTIP trust can be deferred with no fixed, rigid commitment until October 15, 2022.

Two is the importance of the separate trust share rules under Internal Revenue Code Section 663(c). This is very important when one’s estate planning set-up includes separate trust shares for each child, grandchild, etc. The separate trust share treatment under Section 663(c) insures that each child / grandchild, etc., is tagged only with the DNI arising from his or her trust share. [DNI is “distributable net income”.]

Otherwise, there can arise anomalies — without the separate trust share treatment — where one trust beneficiary receives a trust distribution that (undesirably) carries out excess taxable DNI to that recipient beneficiary, as a result of an inclusion in the DNI calculation of undistributed DNI as to the other trust beneficiaries. Adding separate share language to the trust instrument helps avoid this imbalance and makes clear the Code Section 663(c) separate trust share rule applies in these multiple-beneficiary trust situations. Below merely is a sample provision:

“8.9      Separate Trust Shares.  As to each trust share under section 8.4 above, I intend that each such trust share be treated as a separate economic interest (separate trust share) as to each beneficiary for whom the trust is created under this Article VIII with the result that each separate trust share is not affected by the economic interests accruing as to the interests of another beneficiary or class of beneficiaries.”

Medicaid Nursing Home Planning. Who Needs it?

I ponder this nursing home question from time to time as I look around at my friends and family. My conclusion is a lot of families stand to lose financially (and unnecessarily) absent Medicaid planning.

The essential question starts with what demographic group needs to consider Medicaid nursing home planning? Is it only the poor who get (or should get) Medicaid benefits? Does anyone not in this poor group need even to think about Medicaid eligibility? As you read this blog post keep in mind the average monthly nursing home expense is in the $6,000 and up range in most states. Significantly more in certain areas, such as New York.

Here are five broad points to consider:

One is that preventive Medicaid planning significantly protects the continuing standard of living (e.g., economic) lifestyle of the non-nursing home spouse if the other spouse goes into a nursing home. This planning goes simply to getting the nursing home spouse in a position as soon as possible to receive government-paid Medicaid nursing home care, without depleting the family’s funds for the non-nursing home spouse (and any children who still are living at home, etc.)   The key point here is to have Medicaid planning already in place in the event of a head injury, stroke, accident, or other tragic event that might put one spouse into a nursing home much earlier than expected.

Two is that Medicaid has an extremely harsh 5-year rule essentially meaning Medicaid planning ideally needs to be in place at least 5 years prior to a need for nursing home care. The inter-vivos QTIP trust for a married couple, in my view, helps address this 5-year factor.  Below is how this 5-year rule applies.

Three.   Assume grandfather Bob makes a gift of $200,000 to his grandchildren to pay for their college. Two years later Bob falls and needs to enter a nursing home.

Assume Bob has few remaining assets, primarily as a result of this $200,000 college funding. Because Bob’s $200,000 transfer occurred within 5 years prior to Bob’s need to enter a nursing home, Bob is ineligible for nursing home Medicaid assistance for 26.6 months. This is the $200,000 divided by the average monthly Medicaid nursing home expense (assume $7,500 per month in this example; $200,000 divided by $7,500 = 26.6 months of ineligibility).

Also assume 4 years ago Bob funded an irrevocable gifting trust for his children and grandchildren with $1.5 million, in addition to the above $200,000 college funding.   His ineligibility in this second example is 226.6 months ($1,700,000 divided by $7,500 = 226.6 months of ineligibility).

By contrast, if Bob’s transfers had occurred simply one day outside the 5-year period, the transfers would not have been subject to the above Medicaid limitation.

Four, and this is important, all is not lost even if one fails to plan outside the above 5-year period. The available options, however, are limited, but still exist to help maintain the financial well-being of the other non-institutionalized spouse (and children). This means Medicaid should virtually be on everyone’s checklist, unless financial resources are substantial enough to remove all concern about a nursing home stay.

Five is that at a minimum families should consider Medicaid planning to keep the family home. Absent planning, the family home is protected from Medicaid / nursing home problems while at least one spouse remains living in the home. But, if a widow or widower vacates the family home in order to go into a nursing home, the home generally is subject to spend-down before Medicaid nursing home eligibility.  A transfer of the home within the above 5-year period will trigger the same ineligibility as in Bob’s case with his college funding and trust gift.

Medicaid Nursing Home Planning. What is the Market?

I ponder this question from time to time as I look around at my friends and family. That is, what is the market and what demographic group needs to consider Medicaid nursing home planning? Planning in terms of helping insulate a family’s assets from being spent down to pay for nursing home care before qualifying for need-based Medicaid paid nursing home assistance. Medicare does not pay for nursing home care except for a short, limited post-hospital recovery period.

The average nursing home expense varies by location. Assume Georgia is $6,000 month and that you will stay in a nursing home for 5 years. This will require $360,000. If both spouses end up with 5 year stays, this is $720,000.

For many high-end clients this cost is not material and self-funding is the most reasonable and likely course of action.

But here is an example more broadly regardless of whether you feel you will self-insure or not. What if I fall on the sidewalk, hit my head, and end up in a nursing home for 20 years? My wife and kids will spend down easily $1.5 million or more of our family assets to cover my nursing home care. But, there are ways this family exposure can be limited. One is an inter-vivos QTIP trust.

And, on the other hand, if nursing home care is the result only of old-age, what — for many families who might have a net worth under $5.0 million — should they do for Medicaid nursing home planning, if anything?

The significant hurdle for this under-$5.0 million crowd is the severe Medicaid 5-year look-back penalty rule (that I will cover in my next blog post). What this means is that ad hoc attempts to transfer away assets to kids, etc., if the transfer occurs within 5 years prior to applying for Medicaid nursing home assistance, will result in an ineligible Medicaid penalty period.

So, last minute giving away of assets is no solution. This “giving away” look-back covers virtually any manner of reducing your assets, including gifts, paying grandchildren’s tuition, etc.

Fortunately, there are Medicaid planning options that are effective in helping these families retain assets. And, for most people in this under-$5.0 million range, a minimum Medicaid planning goal, in my view, should be to try and save the family home from being sold and spent down for nursing home care.