Save Your Home for Your Heirs if You Seek Medicaid Help for LTC
The main asset of many seniors is their home. And they want to see it passed on to their children when they die. However, if they cannot afford to pay long-term care insurance (LTC) premiums or are not prepared to privately pay for their long-term care when needed, their house will be in jeopardy.

Medicaid is your only alternative. Medicaid's LTC benefits are quite comprehensive, but only for some states. You will have to check the benefits offered by your own state.

But you will not qualify for Medicaid unless you are close to being indigent. If you are not, then Medicaid will seek payment for its services out of your assets. And that includes your home.

So can you give away you assets before applying for Medicaid LTC? Yes and no...

In carrying out their Medicaid program, states¹ can "look back" to find transfers of your assets for 36 months prior to the date the individual is institutionalized - or, if later, the date he or she applies for Medicaid. For certain trusts, this look-back period extends to 60 months.

If a transfer of assets for less than fair market value is found, the state must withhold payment for nursing facility care (and certain other long-term care services) for a period of time referred to as the penalty period. The length of the penalty period is determined by dividing the value of the 'gift portion' of the transferred asset by the average monthly private-pay rate for nursing facility care in the state.

As an example, a transferred asset worth $90,000, divided by a $3,000 average monthly private-pay rate, results in a 30-month penalty period. And, there is no limit to the length of the penalty period.

Thus if it is your intention to transfer your house or anything else as a gift or for less than fair market value to your children, you must do so at least five years - to be safe - before incurring any LTC that you will want Medicaid to pay for. The transfer cannot be conditional or revocable.

Giving your home directly to your children can still leave you vulnerable. You may trust your child to maintain you in 'what was your home'. But if he (or she) is sued, his assets - including what used to be your house - could be lost.

To protect against this possibility, you can transfer it irrevocably to a trust. This can guarantee your use of the house while you occupy it with your child as the beneficiary.

Gives us a call so we can help you protect assets from being forfeited - you may ultimately require Medicaid assistance with your LTC.

¹ (Section 1917(c) of the Social Security Act; U.S. Code Reference 42 U.S.C. 1396p(c))

Need a Tax Deduction Now? Set Up a Charitable Remainder Trust
If you are in one of the higher tax brackets and seek a substantial tax deduction now, you may want to consider establishing a charitable remainder trust. This is an arrangement that can allow you to gift a highly appreciated asset to a charity of your choice. Then the charity can sell the asset and pay no taxes on the sale. This means both an immediate tax deduction for you based on the value of the item donated, and an additional tax savings from not having realized the capital gain on the sale of the asset.

But there are additional benefits to this arrangement. As the donor, you will be entitled to receive a stream of income generated by the proceeds from the item donated. While you must receive income equal to at least 5% of the value of proceeds per year, more can be taken if necessary when stipulated at the inception of the trust. But charitable remainder trusts provide a golden opportunity for you to convert highly appreciated assets into an income stream with beneficial tax consequences.

Of course, the charity also benefits from this, as it will receive the remaining principal from the sale of the asset once you are gone. If you have been considering making a substantial donation to a specific charity, a charitable trust will allow you to do so in the most tax-advantaged way possible. There are several different variations of charitable trusts available, such as remainder trusts, lead trusts, and unitrusts. The traditional remainder trust pays out income now to the donor, while a lead trust lets the donor keep the principal for now and pays out income to the charity. In the case of the lead trust, the asset can revert to the donor's heirs. There are also differences in how the income is paid out; for example, some trusts will pay out a set percentage of the settlement proceeds each year regardless of whether that dips into the principal, while other will only pay out the interest generated by the trust proceeds.

If you would like to know more about how a charitable remainder trust could benefit you as a potential tax reduction and income generation tool, please contact us. We can help you determine which assets would be most beneficial for donation and help establish the trust arrangement with your beneficiary.

Will the IRS See through Your Beneficiary?
Investors often have trusts as a convenient way for their heirs to receive assets after they die, and generally this works as intended. Everything goes into one pot, and each beneficiary takes out his or her share as specified in the trust. IRAs left to your trust, however, can cause complications, and could leave your loved ones with less than you had planned.

The IRS views a trust differently than the individuals named in the trust. For instance, suppose you are not taking Required Minimum Distributions (RMD) yet, and named your trust as the beneficiary of your three IRAs. In addition, your trust documents specify that your two daughters, ages 45 and 28, are to receive equal portions of the trust assets after you die. Upon your death, your IRAs will transfer into the trust, and your daughters would receive their shares. However, they will have to start taking RMDs and paying income taxes based on your older daughter's shorter life expectancy, thus penalizing your younger one.

One way to give your beneficiaries better tax treatment is to create separate accounts for each one of them. For example, you could name your spouse as the beneficiary for one IRA and each of your children the beneficiary on other IRAs. This might create work for you now, but the end result could be less taxes and greater flexibility for your heirs.

You should review your trust documents and estate plans with your attorney each year or whenever there has been a significant change in your life. But if you would like to discuss and update the beneficiaries on your IRAs, please call us for an appointment.

Lump Sum - Should You Manage It or Annuitize It?
Many retirees face the 'Lump Sum' dilemma: 'Should I take a lump sum which I will manage for all or part of my retirement income - or just annuitize it for a lifetime income and be done with management worries?' Let's consider some of the pros and cons of each option.

A Lump sum can come as a pension option from work, the result of your company 401(k) savings, or your own IRA savings, and possibly as an inheritance. Your decision on how to handle it has a lot to do with your psychological makeup and risk tolerance.

Manage a Lump Sum or Annuitize it?
	Manage Your Lump Sum	Buy a Fixed Annuity
Pros	More potential for growth Can offset inflation Withdraw at your own rate	Income assured Lifetime payments Fixed income payments always
Cons:	Risk: Possible loss in investments Unpredictable markets	Inflation erodes payment value No access to principal

Directly managing income from the lump sum through your own investments choices and buying a fix annuity represent two polar options. Examining the pros and cons of each will help you position yourself for any intermediate strategy.

Managing money requires time and effort. You have to research and choose investments that will both grow your money to offset inflation, minimize loss against market downturns, and incorporate income producing investments that will allow monthly and emergency withdrawals that do not force untimely investment losses.

You achieve these goals by appropriately allocating your holdings between equity and income investments, along with holding some cash equivalents such as CDs or money market funds. Continually rebalancing your portfolio will help you capitalize on any gains too and keep you in line with your goals.

You must keep your withdrawals low - perhaps 3% to 4% in the early years - to make sure you will not eat up your principal too fast. You do not want to run out of money if you face a severe market down turn and/or you live a long life.

The worry about running out of money - or nearly so - scares a lot of people. That is where your psychological makeup comes in and what makes an annuity always a realistic alternative.

Taking a fixed annuity or buying an annuity relieves you of investment management concerns by converting your retirement sum into a fixed monthly payment. That payment can be for your life or your spouse's too. Inflation, unfortunately, will erode the value of your payments. Even at only a 2% inflation rate, a $2,000-a-month payment would lose a third of its purchasing power in 20 years. Also, taking an annuity excludes access to your principal. That is a problem if emergencies or for unexpected expenses crop up.

The table summarizes the pros and cons of each. You can always find an intermediate strategy that satisfies some concerns of both extremes.

You can split your lump sum in two and buy a fixed annuity with half and manage the rest. Your fixed annuity allows you to be more 'growth' oriented in your portfolio to counter the inflation effects on your annuity. You can always choose to convert the portfolio to an annuity too if you are tired of managing it.

Give us a call so we can help you find investment options suitable to your goals.

Note: Annuities once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59½ are subject to a 10% penalty. Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims-paying ability of the insurance company. Annuities should be considered long-term investments. Annuities are insurance products and subject to insurance related fees and expenses.

Do Not Mess Up Rolling Over Your Company Qualified Account into Your IRA
When you retire from your company, you may decide to rollover you company's qualified accounts into your IRA. Make sure you do a Direct IRA rollover to avoid cost and maintain protection.

Even if you have the option of leaving your money with the company's plan, transferring it to your own IRA may give you more varied investment opportunities. That is because company plans often restrict investment to company designated accounts.

When you decide to rollover your funds, you may do either² an

• Indirect IRA rollover, or a
• Direct IRA rollover

If you make the Indirect IRA rollover, you receive a check from your employer made out to you. Unfortunately your employer is required by the IRS to withhold 20% of the amount you request to rollover for tax payment purposes, in case you do not continue the rollover into an IRA account, but keep the money for other purposes.

In order to sustain no loss to taxes, you must rollover the complete amount your employer withdrew from your account into your own IRA. That means you must make up the additional 20% withheld by your employer, along with depositing everything you received by check from them - all within 60 days. You will get a credit or a refund for the 20% withheld when you do your taxes for the year.

The Direct IRA rollover is much more efficient. You simply have your employer directly transfer your funds to your own IRA, which you set up to receive the transfer. In this, case no 20% is required to be withheld so you need not worry about coming up with that additional 'make-up' tax money or the 60 day limit.

Another advantage of the Direct IRA rollover option into a new IRA account is that it preserves full protection³ of all you rollover against creditor claims on it. That is because it eliminates the money's 'availability to you' time during the rollover as well as higher limits on creditor protection limits afforded money from 'company plans' than individual IRAs you directly contribute to.

Give us a call so we can help you set up IRA or other accounts suitable for handling your retirement funds.

Distributions from IRA and qualified plans are taxed as ordinary income and distribution prior to age 59½ are generally subject to 10% penalty.

² IRS Pub 575 - rollover provisions
³ The Bankruptcy Abuse Protection and Consumer Protection Act of 2005 (BAPCPA), signed into law on April 20, 2005, and effective on October 17, 2005.

Set Up a Dynasty Trust to Preserve Your Wealth for Your Progeny
The federal government wants a sizeable chunk of the wealth you transfer to both your children and grandchildren. If you have significant wealth - beyond the current estate and gift tax exemption levels - to transfer, you would be wise to make good use of a generation-skipping trust (GST) - also known as a dynasty trust, to take advantage of the generation-skipping exemption level. Refer to the table for exemption and tax rate levels.

With the GST, you transfer wealth directly to your grandchildren. Avoiding both estate and final gift taxes, it is an efficient and powerful wealth transfer process. If, on the other hand, you leave everything to your child, it takes about $3 million dollars left in your estate - based on present estate tax rates at the highest level - to get $1 million to your grandchild (after your child's death) if you and your child have significant wealth.

Year	Highest Estate Tax Rate	Estate Tax Exclusion Level	Gift Tax Exclusion Level	Gen-Skip Exclusion Level
2008	45%	$2 million	$1 million	$2 million
2009	45%	$3.5 million	$1 million	$2 million
2010	No Estate Tax	No Estate Tax	$1 million	?

Funding your GST will result in a gift tax. But you can avoid or minimize this tax by taking advantage of both the $3.5 million transfer exemption level and the annual gift exclusion level provided the trust is properly drafted. It is best to fund this irrevocable trust as early as possible so its assets can appreciate - and bypass the transfer tax. But fund the trust with assets that generally appreciate and do not generate income, because trusts pay fairly high income tax rates.

You can draft your dynasty trust to give the trustee's narrow or broad discretion -depending on circumstances of the grandchildren. It can allow responsible beneficiaries to have complete control and access to their trust assets or limit access accordingly.

See the table for the 'final' estate, gift and generation-skipping taxes and exemption levels.

The government imposes taxes⁴ both on the value of your estate when you die and on any gifts you make. The estate tax rate rises quickly to 45% for estate valuations beyond the tax-exempt level ($3.5 million in 2009).

It also imposes a final gift tax on the value of all gifts you made during your lifetime beyond the annual exclusion amount of $13,000 per donor - and then beyond the 'final' gift tax exclusion level of $1 million in 2009.

Lastly, it imposes a transfer tax on generation skipping transfers. And that is at the highest federal estate tax rate. Again, this tax is applied for transfers beyond a $3.5 million (2009) exemption level.

The estate tax (not the gift tax) is repealed for 2010 after which all 'final' taxes revert to their 2001 schedule with much smaller exemption levels. Politicians must act on this soon.

Give us a call so we can show you if a dynasty trust can serve your interests.

⁴ IRS Publication 950 outlines all estate and gift rules- referred to in this article.

Protect Your Disabled Heirs with Special Needs and Payback Trusts
If you or a loved one has a child or other heir that is mentally or physically disabled, then you may have major concerns about how to provide for that person once you are gone. Statistically, the odds of becoming disabled are much greater than the chance of an untimely death. Furthermore, the financial impact of disability can be far more devastating than death, as someone who is incapacitated will continue to require ongoing care for the duration of the disability.

One key component to planning for this unpleasant contingency could be drafting a special needs trust. This type of trust is similar to most other trusts in many respects, and is almost always used in conjunction with Supplemental Social Security income and Medicaid. Therefore, one of the main functions of the trust is to ensure that the funds it pays out do not coincide with benefits that are paid from the public sector. The assets of this trust also cannot exceed a specified amount, or the trust becomes defective.

Generally, special needs trusts can be funded with the same types of assets as most other trusts, such as cash, stocks and bonds, mutual funds, personal property, real estate and even life insurance. Cash value life insurance is in fact often used to fund these trusts, as many donors are not able to adequately provide financial support by any other means once they are gone. Annuities are also often used as an alternative investment if the grantor/donor is uninsurable.

Another type of irrevocable trust, called a "payback" trust, offers the ability to bypass the standard Medicaid rules excluding benefits for those who had assets transferred to them any time in the 60 months before application. There is an exception written into the laws stating that any disabled person under age 65 can remain eligible for Medicaid as long as they transfer their assets to this type of trust. However, the law also mandates that upon the death of the disabled beneficiary, any remaining assets in the trust revert back to the state. This aspect of the trust differs from the special needs trust, which may have a remainder beneficiary.

If you would like to know more about these trusts, contact us. We can help incorporate potentially beneficial strategies into your estate plan.