TAX LAW

July 12th, 2007

DISCLAIMER: INFORMATION ON THIS WEBSITE IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP. NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN. PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION.

Joel F. Dorroh, P.C. represents individuals persons and businesses in a wide variety of tax issues. This includes estate planning and business planning matters that are discussed in detail in other places on this web site. As stated in those areas, there is often a lot of overlap between probate law or corporate law and issues involving taxation. Since they are so intricately interconnected, they are not considered to be necessarily separate tax practices.

In addition to those services, we also provide strategic tax advice that is specifically designed to meet each of our client’s needs. This includes individual tax planning and tax litigation. We represent individuals and businesses with all types of taxing authorities, including the Internal Revenue Service, the Alabama Department of Revenue, the Alabama Department of Industrial Relations, and individual county or municipal taxing authorities. We provide both tax planning and assistance regarding income taxes on both the federal and state level, Alabama Business Privilege tax issues, sales and use tax, rental and lodging tax, and other tax matters.

In addition to helping individuals plan for an reduce these taxes, we also provide assistance in negotiating, appealing, and, if necessary, litigating all of these tax issues. We have a close connection with both the Internal Revenue Service agents and Alabama Department of Revenue agents in our area and have been successful in reducing and eliminating tax litigation issues that have arisen between our clients and these organizations. When the circumstance arises that our clients need assistance in the tax area, we are able to provide assistance in virtually all areas.

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MEDICAID AND NURSING HOME PLANNING

July 12th, 2007

DISCLAIMER: THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP. NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN. PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION.

There isn’t a day that goes by when we are not confronted with the question “What do I do to protect my Home if I have to go into a Nursing Home?” That seems like a very simple question and it is. However, the answers that are given to this simple question by attorneys and lay persons who are not well-versed in Elder Law are sometimes wrong and the results of those wrong answers can be very, very expensive to you and your family. In this article, we will discuss the recommendations that are often made by attorneys to their clients and point out the benefits and detriments of each of those recommendations.
First let us make sure of exactly what we are talking about. When persons talk about protecting my home from the nursing home, what they are actually saying is that they do not want to pay for their own nursing home care. Any person can go to a nursing home and pay a monthly fee for services rendered. In doing so, the nursing home is perfectly willing to accept such payment just as a landlord rents an apartment. However, everyone of us knows someone who “gave it all away” so as to protect it from the nursing home. Why? Because they are attempting to qualify for Medicaid assistance.
Medicaid is a federal-state program of medical assistance for low-income individuals who are aged, blind, or disabled. If eligible, Medicaid will cover most costs associated with long term nursing home care. Do not confuse this with Medicare. The only qualification for Medicare is that the individual reach the age of 65. However, Medicare only pays for skilled nursing care (e.g., treatment you would receive from a nurse in a hospital setting), as opposed to long-term custodial care. Medicaid, on the other hand will pay for nursing home care, but has a very important additional requirement based on the individual’s needs. In other words, to qualify for Medicaid you must essentially have no way of paying for your own nursing home care.
While the amount varies from state to state, generally to qualify for Medicaid an individual must have less than approximately $2,000 in assets. This is why people trying to qualify for Medicaid refer to it as giving it “all” away… a person must literally have almost nothing before they can qualify.
Before going any further, it is important to point out that any type of plan or program designed to qualify for Medicaid can have tremendous negative consequences. The choices you make concerning your resources and your lifestyle must first take your own feelings, wishes, and comfort level into account before you can even begin to think about whether a particular course of action will “save your family money.” As with any estate planning, Medicaid planning should not put money saved before your quality of life. “Giving it all away” can impact your life seriously. Each and every one of these consequences must be considered prior to taking any action. If an individual gives assets away in order to qualify, consider that among other problems:

The gift must be permanent and without strings. This means that if you transfer your house or money to a child with the expectation that the child will take care of you and then later the child declines to do so or decides to literally “kick you out of the house,” they can and there is little or nothing that you can do about it.
If transferring your house, you lose your homestead exemption and your federal and state income tax deduction for real estate taxes.
You have given away your children’s ability to claim a “step-up”in basis in the property after your death, which could result in your children paying much more in Capital Gains income tax on the sale of your house.
If transferring your house, you lose your ability to claim your $500,000/$250,000 Capital Gains Exclusion.
You have exposed your assets to the claims of creditors of your kids.
You have exposed your assets to the possibility that half of the value of your assets will fall into the hands of your daughter-in-law or son in-law if they divorce your child.

All of these situations can be costly and some can be down right devastating. Therefore, it is hard to ever recommend that giving all of your assets away to qualify for Medicaid is a good idea. Nevertheless, we are asked everyday to do exactly that. So with that in mind, the remainder of this article is dedicated to explaining how to transfer assets prior to needing to qualify for Medicaid assistance.
Nursing home care costs approximately $3,500 per month, so private payment can deplete a family’s finances very rapidly. Therefore persons trying to qualify often want to transfer assets out of their name to qualify. However, the “powers that be” were smart enough to realize that if some protections were not put in place, everyone would wait until the day before they needed Medicaid and then give everything away so as to immediately qualify. This led to the enactment of two very important rules relating to Medicaid planning: the “Three-year lookback rule” and the “Medicaid penalty period.”
It seems almost everybody knows that there is some kind of three-year period related to gifts and Medicaid eligibility. It also seems like almost everybody is confused about the exact relationship. Federal and state law require you to disclose on your Medicaid application every gift you’ve made during specified time periods preceding the date you want Medicaid benefits to start. These time periods are called lookback periods. The lookback period for outright gifts is 36 months (3 years), however this period is 60 months (5 years) for gifts made in trust.
The general rule can be summed up as “Lookback and Count Forward.” For example, if you gave away something in May, 1999, then this gift would not have to be disclosed if you applied for Medicaid today. Additionally, if you gave something away today, it would be three years from today before you would not have to disclose this gift when applying for Medicaid.
This leads into the second rule which is commonly referred to as the Medicaid penalty. Realizing that some people would give things away but need to qualify for Medicaid prior to the three-year period expiring, the Medicaid laws provide a formula for knowing when a person would be eligible.
A Medicaid transfer penalty is a period of restricted eligibility. During that period of time, the person who made the transfer is not eligible for Medicaid benefits covering nursing home care. A Medicaid penalty period is produced by an uncompensated asset transfer. “Uncompensated transfer” means, basically, that you made a gift. The term “asset” includes your house, cash, bank accounts, stock, personal assets and basically any other thing of value you own. You can make a gift of some or all of the value of an asset. For example, you could give someone your house for free or you could sell it to them for less than fair market value. Some things that you may not think of as transfers by you, will be treated as transfers and, if made within a look-back period, will affect your eligibility for Medicaid. These include:

Any transfer made by your spouse before you are awarded Medicaid is treated the same as if it were made by you.
Transfers made on behalf of either of you by a conservator, under power of attorney, etc., are treated as if made by you.
Withdrawals by a joint account-holder from a joint bank accounts.
Putting the title to your house into joint names with someone else.
Disclaimer of an inheritance is a transfer.

However, a gift in a will is not considered a transfer. Regardless of the actual intentions, the presumed purpose of any transfer by the Medicaid administration is that it was for Medicaid qualification.
The “penalty period” is equal to the amount of care (usually expressed as a period of time) that Medicaid could have purchased with the assets transferred. In other words, if all of the assets transferred had been sold for cash and used to pay for nursing home care, how long would the money last. There are several steps to the calculation. First, you determine the length of the penalty period. Second, you determine when the penalty period starts.
The length of the penalty period is determined by dividing the total uncompensated value of the asset transferred by the applicable Medicaid regional rate (approximately $3,500 for Tuscaloosa County, Alabama). For example, a $50,000 gift divided by $3,500 produces a 14.3 month penalty period during which no Medicaid benefits are available.
The penalty period starts in the month after you made the gift. For example, if you gave away $50,000 on June 30, 2002, the 14.3 month penalty period would start on July 1, 2002 and end during September, 2003. During that period, Medicaid and the nursing home would expect the person to private pay for the nursing home care during that period.
Depending on when you made the gift, how big it was and when you want Medicaid to start, the penalty period may or may not affect your Medicaid eligibility. For example, if you want Medicaid to start on August 1, 2002, and you gave away $50,000 on July 31, 1999, there would be no penalty period because the gift was outside the 3 year lookback; therefore the person would immediately qualify. However, if the gift was on June 30, 2001, it would be within the lookback period and you would not be eligible for Medicaid benefits until sometime after September 1, 2002, because of the 14.3 month penalty period that started on July 1, 2001.
It is also important to remember that the penalty period is unlimited. In other words, even though the look-back period is only 36 months for transfers to individuals, a transfer penalty can be unlimited. For example, if a person transfers $500,000 to his son on January 1, 2001 and then on February 1, 2002, that person enters a nursing home and applies for Medicaid, then Medicaid will look-back 36 months. During that 36 month time period, the person made the $500,000 transfer. That transfer results in a penalty. Assuming a $3,500 applicable Medicaid regional rate, the penalty would be 142.9 months ($500,000/$3,500=142.85 months). This means that it would be roughly 12 years before the person would be eligible! You must be careful.
Two final thoughts that often come up in the discussions of Medicaid planning:

A lot of times instead of “giving” assets away, the better plan is to use assets to take care of other matters that does not impact the person’s ability to qualify for Medicaid such as paying off unsecured debts (e.g. credit cards) and/or pre-paying for non-countable assets such as funeral expenses or life insurance that does not accumulate cash value.
Do not confuse gifts for Medicaid purposes with the Federal Gift Tax laws. Nothing prevents a person from giving away more than $10,000 (now the amount is actually $11,000) per person per year as some people believe. For Medicaid spend-downs gifts of any amount can be given away subject to the lookback and penalty provisions discussed above. However, if a person gives away more than $11,000 per person per year, then that person MUST file a Form 709 with the Internal Revenue Service stating the amount given away and possibly subjecting the gift to a Gift Tax.

Finally, this article does not represent an endorsement of any particular course of action. Decisions about whether to do Medicaid planning are VERY IMPORTANT and should only be entered into with a full understanding of the potential negative consequences. Before any actions are taken, you should consult an attorney.

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ADVANCE DIRECTIVE FOR HEALTH CARE

July 12th, 2007

DISCLAIMER: THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP. NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN. PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION.

An advance directive for health care is a relatively new item in Alabama law, although it had predecessors that we have had for many years. Most people have referred to these type documents as “living wills” for quite some time. In fact, today’s advance directives contain a section that is a living will by itself.

Under current Alabama law, advance directives for health care are legally enforceable to make health care decisions for you even if you are incapacitated or unable to direct your medical care. Most health care directives have two parts. First, they appoint a health care proxy, which is similar to a power of attorney exclusively for health care. Additionally, if the health care proxy is unable to make the decision or is not available, there is also usually a section devoted to outlining the medical decisions that the person wishes to be made.
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Under Alabama law, advance directives for health care can be used in two occasions. First, were the person has a terminal illness or injury in which the threat of death is imminent. This requires the person not only to have an incurable disease or injury, but that the person will also not have very long to live. In such situations, the person may designate that he does not wish to have life sustaining treatment which would only “artificially” keep him or her alive or would only prolong his or her death. Additionally, a person may also designate an advance directive to handle a situation in which they might sustain a permanent coma. This requires that not only that the person be in a comatose state, but that there be no hope that the person will come out of the coma. In such situations, the person may again designate that he or she not receive any life sustaining treatment which would not cure him or her but which would only prolong the comatose period. In either situation, the person may also direct that he or she be administered pain relieving medications, even if such medications are addictive or may actually hasten the moment of death.
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Advance directives for health care are extremely personal decisions for each person to make. However, it is essential that each person consider the ramifications of having or not having a health care directive in place should they ever need one. Health care directives can not only ease a person’s suffering, but may also be very important for the rest of person’s family not to have to watch that person suffer a lengthy death or coma.

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PROBATE

July 12th, 2007

DISCLAIMER: INFORMATION ON THIS WEBSITE IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP. NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN. PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION.
Probate in Alabama is governed by the local Judge of Probate for each county. The “probate process” simply is the transfer of assets after a person’s death. This can happen in different ways.
If a person passes away with a will, the will must be “probated” in order for the person’s property to be transferred to his or her beneficiaries. This process begins by petitioning the probate court to issue Letters Testamentary to the person designated as the executor or personal representative in the will. Usually, the other heirs must be contacted and either sign waivers of notice or there must be a hearing scheduled to allow for any will contest. Once the will has been entered into probate court and Letters Testamentary issued to the executor, the executor then has the power to collect all assets belonging to the deceased person. He must then pay any liabilities or expenses owed by the deceased person. The remainder of the property left over after paying any expenses of the estate are then divided according to the terms of the person’s will.
During the probate process, the estate must be open for a period of six months, during which publication of the estate must be run in the newspaper once a week for three consecutive weeks. This allows any person having a claim against the deceased person’s estate to enter such claim with the court. Most estates are capable of being closed out shortly after the six-month claims period. However, some estates are more complicated and may take longer to close.
If a person passes away without a will, he or she is said to have died “intestate.” An intestate estate must be administered according to the laws of the State of Alabama. The deceased person does not have any control over how the property is to be distributed. Rather, it is distributed strictly as defined in the Alabama Probate Code. In the case of an intestacy, anyone may apply for Letters of Administration on the estate of deceased person; however, certain persons are given preferential treatment in being appointed as administrator, such as the spouse and children. Typically, if a person has a will they exempt their executor from having to file a bond with the probate court. In the case of an intestacy, a bond must be filed in the amount of double the value of the estate. Finally, wills typically give the executor the authority to do certain acts such as sell or consolidate property inside the estate. This is not the case with an administration. In the case of an intestacy administration, the administrator must apply to the probate court and get an official order to sell or exchange any of the property on behalf of the estate.
Due to the time delays, probate expense, and other problems associated with probate, some people choose to try to avoid probate through the use living trusts. There is an entire article on Living Trusts to avoid probate in this section.

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IRREVOCABLE LIFE INSURANCE TRUSTS

July 12th, 2007

DISCLAIMER: INFORMATION ON THIS WEBSITE IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP. NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN. PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION.

Irrevocable life insurance trusts are a form of living (inter vivos) trusts. For a more detailed discussion of living trusts in general, please see the Living Trusts section. Unlike the probate avoidance trust or the by-pass trust discussed in the Living Trusts section, an irrevocable life insurance trust is a form of trust that is not capable of being amended or terminated after it is created. As a general rule, most estate planning attorneys try to avoid using irrevocable trusts for this reason. However, there is one type of irrevocable trust that is commonly used to specifically deal with life insurance issues.
Generally, the proceeds of a life insurance policy are included for federal estate tax purposes in the estate of a decedent who is the owner/insured of the policy. This is true even if the proceeds are paid to a designated beneficiary other than the decedent’s estate. Therefore, even if a person’s life insurance designates his or her spouse or children as the beneficiary of a life insurance policy, the full value of the life insurance policy is includable in the person’s estate when they pass away as far as the Internal Revenue Service is concerned. Therefore, it is very advantageous to transfer any life insurance policy in a manner so that it is not includable in the person’s estate. Many people do not want to transfer the ownership of their policies to their spouse because it will defeat many of the purposes of estate planning and do not wish to transfer ownership to their children for a number of reasons including lack of control over the policies.
This is where an irrevocable life insurance trust (“ILIT”) comes in. An ILIT may be used to hold the “incidents of ownership” of a life insurance policy and thus remove it from the insured’s taxable estate. Generally, a policy owned by the insured is transferred into an ILIT. If the insurance policy is a new policy taken out through the trust, the proceeds from the policy will be immediately excluded from the person’s estate. If the life insurance policy is an existing policy that is transferred into the ILIT, the Internal Revenue Code requires that the insured survive for three years after the transfer for the proceeds to be excluded from his or her estate.
The settlor/insured may pay the premiums of life insurance policies in the ILIT by making gifts to the trust or beneficiaries using “Crummey” provisions. Such gifts qualify for the $10,000.00 per year per donee annual gift tax exclusion. The settlor/insured may not be the trustee of the ILIT. At the settlor’s death, the life insurance proceeds will be paid into trust and administered according to the trust provisions established by the settlor for the benefit, for example, of the settlor’s spouse or children.
As is generally the case with life insurance policies, there will be no income tax payable on the insurance proceeds distributed at the settlor’s death. Therefore, the use of an ILIT allows for substantial sums of money that would ordinarily create estate tax problems to transfer to a spouse or child estate tax free and income tax free.

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MODEL ESTATE PLAN

July 12th, 2007

DISCLAIMER: INFORMATION ON THIS WEBSITE IS NOT PROVIDED AS LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP. NO ENDORSEMENT IS INTENDED BY ANY REFERENCES HEREIN. PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS BEFORE TAKING ANY ACTION.

Any model estate plan for a small estate should consist of the following:

Will (or possible a probate avoidance trust)
Durable Power of Attorney
Advance Directive for Health Care

If a person’s estate is greater than $500,000.00 serious consideration should be given to whether the person needs estate planning other than a simple will. These matters should definitely be discussed with an attorney to help consider factors such as the estate growth rate and what assets are going to be transferred at death. Once it is determined that a person needs estate planning, a model estate plan would consist of one of the following:

Testamentary Trust Method or Living Trust Method
Will with testamentary bypass trust Durable Power of Attorney Advance Directive for Health Care Division of assets to take full advantage of the testamentary trust when the first person passes away	Living (inter vivos) Bypass Trust Pour-over Will Durable Power of Attorney Advance Directive for Health Care Trust funding assistance

Additionally, estate planning is not a once-in-a-lifetime event. Even after an estate plan has been created that perfectly suits the person’s needs at that time, things quite often change. Often wealth is accumulated faster or slower than expected, new potential beneficiaries are born, previously designated potential beneficiaries pass away or it becomes undesirable to leave them as beneficiaries in their present form, divorces, and other events occur that often require us to re-examine an estate plan. It is highly recommended that a person have their estate plan re-evaluated every three to four years or after any significant event has occurred in the person’s life (such as a divorce, new child, child or spouse passing away). Quite often, no changes are necessary to the estate plan; however, it is always well worth the effort to make sure that the plan still fits a person’s needs.

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TAX LAW

MEDICAID AND NURSING HOME PLANNING

ADVANCE DIRECTIVE FOR HEALTH CARE

PROBATE

IRREVOCABLE LIFE INSURANCE TRUSTS

MODEL ESTATE PLAN

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