Expanded Estate Recovery vs. Medicaid Qualifying Trusts

on Tuesday, 11 March 2014.

Author: Gary A. Loftsgard, CFP®

The Deficit Reduction Act (DRA) (2005) effected certain changes in Medicaid planning including increasing the look-back period for gifts/transfers from 36 months to 60 months and enacting “expanded-estate-recovery” allowances to help facilitate the states’ collection methods for recovering what they have paid out to Medicaid beneficiaries (over the age of 55). Every state has opted into the Federal Medical Assistance Percentage (FMAP) program used for matching up states’ funds with Medicaid. So, the states must comply with federal rules governing those areas for which they are receiving funding such as with Medicaid.

In terms of estate recovery applications, the federal government has allowed each state a certain amount of latitude in determining how those rules can be applied. Because of the aggressive interpretations of the DRA by some states with respect to Medicaid-pay recovering tactics, special awareness is in order when promulgating the benefits of Medicaid Qualifying Trusts (MQTs). Notwithstanding, other than outright gifts that entirely subjugate the giftor of all asset-ownership benefits, there is really no other effective way to avoid a confiscatory spend-down of the long term care resident’s estate. However, MQTs still can and do provide a legitimate means of “having one’s cake and eating it too” when administered properly.

The law is clear that all estate recovery efforts relating to long term care support reimbursements are limited to only the “probate estate” of the (now deceased) Medicaid recipient. That means if the Medicaid beneficiary had made himself legally indigent for Medicaid qualifying purposes then his probate estate would be deemed as zero. For qualifying purposes, any outright gifts made within 60 months from the time of applying for Medicaid benefits are not recognized (i.e., the Medicaid applicant was not fully indigent) and thus a formula is applied – based on the (i) value of the gift, (ii) the time it was made, and (iii) the average cost of long term care in the applicant’s location – to determine the applicant’s reduced level of Medicaid eligibility.

In terms of making transfers to trusts for entitlement purposes, USC section 1396p(b) restricts recovery actions concerning paid-out Medicaid benefits from a recipient's trust/estate to three specific determinates: (1) the classification of the trust; (2) the Medicaid recipient’s interest in the trust; and (3) whether that interest existed at the time of the recipient’s death. Estate recovery from Medicaid payments is limited to “any other real and personal property and other assets in which the Medicaid beneficiary had any legal title or interest at the time of death (to the extent of that interest), including such assets conveyed to a survivor, heir, or assign of the deceased individual through joint tenancy, tenancy in common, survivorship, life estate, living trust or other arrangement, as well as any proceeds from the sale of any such property which remain in the estate of the survivor, heir or assign of the beneficiary, to the extent of the beneficiary’s interest.” 42 U.S.C. §1396p(b)(4)(B).

We can see from the definitions above that estate recovery methods can be applied toward a variety of a Medicaid beneficiary’s interests. So, it’s important to know that a properly designed MQT will generally limit the recipient’s interest to income only, and therefore only the income stream of a MQT would be subject to attachment for estate recovery purposes at the time of the beneficiary’s decease. (It should be noted that in some states a separate lease agreement is used in conjunction with the MQT’s life estate clause relative to a transferred homestead interest; this can help to authenticate the MQT’s application and to secure its effectiveness.)

That said, as mentioned earlier, the DRA allows states room to apply their own interpretation of a probate estate for expanded estate recovery purposes. As a result, some states may take the liberty to simply broaden the definition of what constitutes a probate (collectable) estate in an attempt to include assets held in a MQT even though it may be properly funded beyond the 60-month look-back period.

Recently, in New Jersey (an “expanded estate recovery” state), a lower court was asked to rule on the legality of such an action implemented by the state who had set aside the grantor’s intent of the MQT and declared its assets as an available resource to spend down. The court disagreed with the state, however, and ruled in favor of the Medicaid recipient’s estate by recognizing the MQT. In this case, the MQT trustee transferred the MQT assets to the remainderman beneficiaries shortly before the grantor applied for Medicaid. The New Jersey court ruled that the transfer to the beneficiaries occurred at the time the trust was funded (i.e., beyond 60-months) rather than the time the trustee transferred the MQT assets to the remainderman beneficiaries. In that case, simply by the trustee transferring the entire MQT asset base to the remainderman beneficiaries prior to the Medicaid application being submitted, the MQT trustee was able to deny an aggressive/expanded estate recovery attempt by the state of New Jersey and thus save the day for the grantor’s estate.

Medicaid planning is still very much an option that should be given close consideration for elderly asset owners. Nevertheless, I think it would be wise (and safest) to consider and promulgate that the ultimate goal sought by such planning methods (estate preservation) may sometimes prove to be a moving target rather than declaring or implying that the outcomes of the MQT applications are iron-clad guarantees. Our experience with MQTs has been very positive over the years as we have placed hundreds of this type of trusts through our network since 1991. The only adverse ruling that I am aware of came about in the mid 90s from an administrative law judge (in North Dakota) who declared the MQT as “(an instrument) against public policy.” In other words, even though the law recognized the authenticity of the MQT, the judge did not. And what he ruled had to stand, of course, unless it had been successfully challenged in court.

Five Lessons Learned from the Last Will of Philip Seymour Hoffman

on Friday, 28 February 2014.

Source: Stone Law Offices, Ltd.

The Last Will and Testament of Oscar-winning, renowned actor Philip Seymour Hoffman was filed in the New York Surrogate Court this last week. The Will was drafted in October 2004 and left the entirety of his estate first to his long-time companion and mother of his three children, Marianne O'Donnell, and if she didn't survive, then alternatively to his son, Cooper. Unfortunately, many things had occurred in Mr. Hoffman's life between the time he signed his Last Will and his death - including the subsequent birth of his two daughters Tallulah and Willa.

Reviewing a copy of Mr. Hoffman's Last Will reveals several universal lessons that apply to every person's estate plan, regardless of wealth:

The importance of updating your estate plan. Mr. Hoffman signed his Last Will in 2004, when he only had one child. However, it is clear that Mr. Hoffman did not review and update his Will or estate plan in the subsequent nine years before his death as the Last Will did not mention his two daughters that were born after the Last Will was signed. It is not likely that Mr. Hoffman intended to omit his two minor daughters, but that his estate plan was simply not revised to include these subsequently born children. Many people view their estate plans as one-time static events - you sign it and put it away. However, I encourage clients to perform a comprehensive review of their estate plans no less than every 3 - 5 years to see if there have been any changes in family members (births, deaths, divorces), family dynamics (disputes, reconciliations, special medical needs, spendthrift or substance issues), assets (purchases, sales, distributions), and laws. In this manner, a client's estate plan will always reflect his or her current wishes and family circumstances.

The importance of Living Trust based estate planning. One of the reasons that you are reading this article is that Mr. Hoffman's Last Will is now public record - anyone can obtain a copy of his Last Will. As a result, the entire world can (and likely will) follow the entire saga of the Hoffman estate as it unfolds through the New York probate court system, including the nature, value, and ultimate distribution of his assets. One of the many benefits of a Revocable Living Trust is that the Trust and its assets are not subject to probate or public disclosure in the courts after your death. As such, your family can maintain its privacy over the type and extent of your assets, and the identity of your beneficiaries.

The importance of distribution planning. Mr. Hoffman's Last Will provides that if his son, Cooper, had inherited the estate (assuming that Ms. O'Donnell had predeceased), then Cooper's inheritance would have been held in trust for his benefit, with one-half of the trust assets distributed at age 25, and the balance at age 30. These "stated age" provisions are the most common form of distribution that I see in estate plans and trigger distributions to a child simply because he or she has reached a certain birthday. However, these provisions do not take into consideration a child's circumstances when he or she reaches that stated age. If the child is in the midst of a divorce, financial crisis, litigation, or other adverse life event at the time of that specific birthdate, then the child could be receiving a significant distribution of his or her inheritance at the worst possible time. I encourage clients to consider these "what ifs" and how we can structure the distributions so that the family wealth is received in a protected environment and not diminished by creditors, predators, and other incidents of life.

The importance of estate tax planning. Mr. Hoffman's estate has been estimated at $35 milllion at the time of his death. While it is possible that Mr. Hoffman engaged in some form of estate tax planning, it is not reflected in the Last Will. Given the current $5.34 million federal estate tax exemption and the 40% tax on the excess over the exemption, it is estimated that Mr. Hoffman's estate could owe $15.1 million in federal and state estate taxes. Estate taxes are one of the truly "optional" taxes within a taxpayer's control and, with proper planning, can be minimized or wholly avoided. There are many specialized trusts and planning techniques that can be used to reduce the tax value of your estate during your life and at death, and redirect to your family or charity what would otherwise be paid in unnecessary estate taxes. You get to decide how much in estate taxes will be paid; but if you fail to properly plan, then the law will make that decision for you.

The importance of values-based planning. One of the most remarkable portions of Mr. Hoffman's Last Will was the directions that Mr. Hoffman left to the guardian of his son (and presumably for his daughters too). Specifically, Mr. Hoffman expressed his preference that his children be raised in Manhattan, Chicago, or San Francisco, and if not, then his children be allowed to visit these cities at least twice a year to expose them to the "culture, arts and architecture that such cities offer." In this regard, Mr. Hoffman's Last Will was more than a mere technical disposition of his assets, but left a piece of himself and an expression of a passion that he hoped his children would hopefully enjoy as well. Every estate plan should be a reflection of your hopes, dreams, beliefs, purposes and passions and leave a "legacy" of the values that you want to pass down to your beneficiaries. With some thought and creativity, your estate plan can be more than a dry, sterile set of asset instructions, but can be driven by your most heart-felt wishes for your family.

We often assume that the estate plans of celebrities will be examples of well-thought out, accurate, and efficient dispositions of their wealth. However, as we can see from the Last Will of Philip Seymour Hoffman, even the rich and famous fall prey to some of the most common flaws in estate planning. Hopefully, we can all recognize and implement the five lessons above so that our own estate plans leave a better story.

As always, please do not hesitate to contact us if we can help with the review and update of your estate plan.

Stone Law Offices, Ltd.
9060 W. Cheyenne Avenue Suite A
Las Vegas, NV 89129

The Technology of Marketing Estate Planning with Living Trusts

on Monday, 18 November 2013.

Introducing the Summit Estate Planning Center

By 1982 I had been ten years in the banking business.  My bank was the largest in Philadelphia at the time.  I had just introduced the first Private Client Service in Philadelphia banking, and I was looking for a unique factor that would set us apart from other banks. 

A consultant told me about Living Trusts, and how they were being marketed heavily in Florida.  The principal advantage of the Living Trust in Florida was the reduction in the cost of settling an estate by avoiding the charges for probating the estates. Similar, but somewhat less onerous conditions existed in Pennsylvania.  So we tried it out on some customers, and they responded overwhelmingly.

The consultant helped me prepare a presentation to describe the advantages of Living Trusts.  We conducted workshops for our banking clients, and always had a local attorney to present part of the advantages.  We did this regularly over the next four years, and the response to the idea was very strong.

In 1986 I left banking.  With my son Kevin, and my wife Leona,  I formed a broker/dealer and a registered investment advisory firm.  I also created a life insurance general agency.  I had recruited 37 registered representatives and we continued to conduct estate-planning seminars, featuring the Living Trust as the core instrument in the plan. 

Our strategy was conventional: conduct workshops, make appointments, collect data, provide the attorney will all he needed to draft the documents, hold a “signing” meeting, and another meeting to transfer assets to the trust.  In the process, we analyzed portfolios and suggested alternatives.  We gathered a lot of assets under management.

The only technology we used at the time was in the presentation.  We used a 35-millimeter carousel slide protector and screen, which we toted around to various hotels in the Philadelphia area.  The cost in those days of generating slides was not all that much, but there certainly was not much flexibility to make changes. 

Living Trusts continue to be a mainstay in estate planning.  The presentation technology has changed.  In fact, up until this year, the only significant change that has taken place on the marketing side has been the transition from 35-millimeter slides to PowerPoint presentations. 

Today many of the attorneys with an estate planning practice have the advantage of better document preparation systems for producing Living Trusts and other documents. There are still many attorneys, on the other hand, that do not have such access, or don’t have the staff and the means to acquire such systems.  While they may have the opportunity to perform more advanced estate planning, above and beyond living trusts, they need support to do so.

It appeared to us that there is a need among the general public for estate planning that would be best satisfied by trusts more advanced than the conventional Wills, even those Wills with complex testamentary trusts.  Living Trusts can begin to satisfy those needs, but many clients could also benefit from Irrevocable Life insurance Trusts, Special Needs Trusts, Spendthrift Trusts, Asset Protection Trusts, Charitable Trusts and Dynasty Trusts, just to name a few.

The issue appeared to be that this vast market of under-served families is larger than can be served by the current number of lawyers that are practicing estate planning.  At least they can’t be served well with the current technology that was being used.  The fact of the matter is that these attorneys find it difficult to reach out to these families to identify their potential needs.  Indeed, many such attorneys depend heavily upon referrals from financial advisors and insurance agents.

The other issue is that the task of gathering data from clients and discerning their needs and concerns is time consuming and tedious.  Attorneys, even with a good staff assistant, often cannot afford the time to perform these functions, especially for clients who are very fee-sensitive.

A combination of factors now exist that will change the entire approach to estate planning for the average “somewhat-affluent” client-family.  One of these is that the “Boomer” generation is now quite computer literate, and is using the internet virtually every day, at work and at home.  The same can be said about the financial advisors and insurance agents who are working with these clients.

So all that is needed is a technology that would permit a cooperative, collaborative effort between the clients and their trusted advisors and agents. Working together in an on-line environment to collect data and make certain choices in a highly structured systematic approach, the time and costs of data collection and plan structure can be significantly controlled.

So, to make a long story short, we are the only trust company that is providing a technology that meets the needs of this larger market for advanced estate planning services.  The system has been under development and in use, in one form or another, since 1985, and has had input from some of the best legal and technical talent available. 

We are calling this service the “Summit Estate Planning Center”.  It is a total and comprehensive center for collecting data, collaborating with clients and the attorney, and implementing the funding of the trusts.

What we now have is a technology that permits both the client and the advisor to each have their own “console” to input and review the data, and collaborate on the choices, to produce the entire documentation package.  The system will automatically draft the documents for the final review and adjustment by the attorney.  The time required, and we all know that time is money, can be significantly reduced by the use of this well designed, fully integrated trust development system.

The basic advantage of any technology is the acceleration of completing a project.  Doing things faster and better is permitted by having clients actively participate in the process, where they can see the significance of the participation and the elements required each step of the way. 

We are now seeking qualified advisors who understand the discipline of estate planning and have clients who are in need of such services.  We will provide this system to them for their use, and we will train them.  We also have a network of attorneys who understand the system and are prepared to provide appropriate services as each case is developed.

Our system provides for orientation and training both on-line and in personal sessions to assure that properly qualified individuals deliver the highest level of service to their clients.

We are prepared to provide these services to the family and to the business owner.  In our past experience, we have had over 25,000 people go through our workshops on estate planning, and a significant percentage of these families owned their own businesses.  It became our pattern that we would serve the family needs first, and then the needs of the business. 

Our slogan is: “Family First, Business Next”!  So we are training our advisors to work with the family in regard to their estate planning, and then to apply the new technologies that we have for the business owners.  The first of these is the Summit Business Valuator”, which is an outstanding technology that helps the business owner know the value of his business for one-fourteenth the cost of the traditional business valuations prepared by consulting firms. 

The fact is, even the least costly valuation runs around $8,000.00.  Our new system can be done quicker, more accurately and less expensively - - for only $365.  This opens the door for virtually any business to determine their value. 

Once they know their value, they now have a benchmark for additional more advance business planning.  The technology we have for that purpose is so inexpensive that you might consider it pocket change - - about the cost of going out for dinner for a husband and a wife.

Finally, we have software that will determine if the family has saved enough money for a comfortable environment, and then additional software to determine if they can give money away to their children or to charity.

The use of a fully integrated service based on high technology will change the way that advisors deliver the highest quality of services to their clients.  We are dedicated to bring that technology to them so they can continue to be a valued and trusted advisor, and maintain long-term relationships based upon meaningful service.

For more information on the Summit Estate Planning Center, contact:

George P. Brown PhD, TEP
This email address is being protected from spambots. You need JavaScript enabled to view it.

Visit: http://www.summitprivateclientgroup.com/resources/spcgits-platform

Theresa Le, JD Promoted to Vice President

on Tuesday, 17 September 2013.


Theresa LeSummit Trust Company is pleased to announce the promotion of Theresa Le, JD to the position of Vice President, in charge of the Las Vegas Office. Theresa will assume full responsibility for the operations of the Las Vegas Office for Summit Trust Company and will continue to serve on the Trust Committee.

Theresa Le joined Summit Trust Company as Trust Officer in 2011 and rapidly demonstrated expertise in virtually all aspects of trust services, with particular skills in business development, creative communications and establishing relationships with law firms and other professional advisory firms.

Theresa Le is originally from San Francisco, California and moved to Las Vegas in 1998 after earning her law degree from the University of Oregon. She worked as a Trust Administrator for Wells Fargo Bank in the Irrevocable Life Insurance Trust Department for 10 years. Her professional experience includes working with professional advisors in law, insurance and investments and welcomes discussions with regard to any aspect of the trust services offered by Summit Trust Company. She enjoys traveling to ancient ruins, reading, calligraphy, graphic design, and is an insatiable landscape photography enthusiast.

Business Valuation for Succession Planning and Exit Strategies

on Saturday, 10 August 2013.

One of the more common reasons to procure a business valuation in general concerns the desire by private firm business owners to properly plan for their future departure from the business in the most expeditious and beneficial manner.  An effective exit strategy requires careful planning well in advance of the anticipated time of departure and almost always involves a clear understanding of the current and expected value of the subject business – in whole and possibly in the form of non-controlling, minority interests. 

Business Valuation for Succession Planning and Exit Strategies

There are myriad reasons (expected and unexpected) why the ownership interests in a given business will change over time, thereby requiring knowledge as to what the “subject interest” is worth.  Some of the more common events that lead to a transfer of ownership include: 

  • Preemptive or proactive gift and estate tax planning 
  • The death or disability of the primary owner
  • The unexpected departure of a key employee 
  • Lack of suitable family member to take over the business 
  • The owner suffers “entrepreneurial burnout” (commonly after 5 to 7 years) and seeks new opportunities
  • Unsolicited approach by prospective buyer
  • Matrimonial dissolution proceedings 
  • Failing business which is heading towards bankruptcy

Most exit strategies will focus on maximizing the after-tax proceeds at the lowest risk possible (all other things equal) while preparing for one or more of the events listed above.  This goal is equally relevant when applied to either an unplanned or planned exit, either next year or 10

years from now.  In other words, a business owner should be planning for his or her exit today irrespective of the ideal timeline for selling or transferring ownership rights and interests.

Although the terms “succession planning” and “exit strategy” can be used differently, they both involve the development of a “roadmap” for the owners’ successful exit from the business at hand. The larger and more complex the business and the greater the number of owners, the more detailed the “plan” becomes.  Naturally, assistance from an insurance/investment advisor, CPA/tax professional and attorney is desirable. 

In the typical preemptive case, the planning process begins with a financial advisor who can clarify available options and help to build a capable and experienced team of professionals – including a business valuation resource.

As noted in earlier blogs, there is “value” in understanding how to value your company. Likewise, the return associated with the owners’ time invested into proper exit planning can be huge and almost always positive.  Due to the stress of day to day operations and a lack of understanding the cost of not investing time into succession planning, many business owners procrastinate and often fail completely to address this pivotal wealth maximization strategy.

Virtually every major step in the exit planning process revolves around the determination of the value of the subject business or minority interests therein.  Whether opting to sell outright to a third party, slowly gifting shares to family members or selling some or all of the company’s equity to an employee stock ownership plan, the estimation of fair market value is central to these outcomes.

Each of these distinct exit options will involve unique valuation considerations that business owners should understand as a means of protecting their interests.  It is reasonable and necessary to rely on “experts” in the various realms of succession planning, but nobody knows the intricacies of their businesses like the owners do.  By understanding basic business valuation principles and procedures, you are in a better position to provide the type of information that can optimize value on the open market.  Take a look at some of my earlier blogs to begin your “valuation education” and you will be following the advice of the “Sage of Omaha” which includes:

“Business valuation is the heart of investing and risk management, and without it, you are blind.”

So contact your financial planner or CPA and see what type of exit strategy might work best for you.

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