When some people think about estate planning, their first thought is to hold property jointly with their children or whoever their beneficiaries are in order to simplify the transfer of assets upon death. It may sound like a good idea at first, but upon closer examination there are some important issues that should be considered before using joint property as your estate plan.

• With some assets, designating a joint owner amounts to a present gift of a portion of the asset rather than only creating a survivorship interest. On the portion of the property that’s a gift, there’s no stepped-up basis. Your cost carries over to your beneficiary. When they sell, they pay capital gains taxes. But if they inherit the property directly from you or from your living trust at death, the capital gains are wiped out altogether.
• While the property is in joint names, your beneficiary might be sued, go bankrupt, get divorced, or have an accident that leaves them incapacitated. If so, the assets might become consumed by your beneficiary’s expenses and be unavailable to you, leaving you destitute.
• If your beneficiary has siblings to whom you expect the joint owner to divvy up the assets when you pass away, the transfers are gifts, subject to gift tax.
• You can have a falling out with your beneficiary and they can clean out an account they are listed as joint owner on.
• If your beneficiary dies before you, the IRS wants proof that the asset was bought by you. Otherwise, they’re taxable in your beneficiary’s estate.

You may notice the common issue with every case described above stems from giving someone else access to your assets during your lifetime. I am a firm advocate of protecting your own assets from all the risks out there. I am hard pressed to find a reason to justify taking on somebody else’s risks by naming a joint owner of an asset. It’s risky.

One way to avoid all of these problems is to not use lifetime ownership designations to accomplish property transfers you desire after you pass away. Use a Will or Trust to define your estate plan and coordinate your assets to be distributed according to your Will or Trust. You are not vulnerable to these joint ownership issues when you use a Will or a well designed Trust.

Ready to get started? Call (860) 593-0404 and schedule your consultation today.

This is the second in a series discussing the key terms and principles you’ll encounter when applying for Connecticut Medicaid nursing home benefits. In the first article I covered, the CSPA, or Community Spouse Protected Amount. This article will discuss the MMNA, or Minimum Monthly Needs Allowance.

The Minimum Monthly Needs Allowance (MMNA) refers to the monthly income that the community spouse is allowed to retain while a spouse living in a nursing home can qualify for Medicaid benefits. The “community spouse” refers to the spouse remaining in the home that is not receiving Medicaid benefits. The starting point to determine the MMNA is a minimum MMNA adjusted annually. For fiscal year 2006-2007 the minimum MMNA is $1,650.00 per month.

This starting point is then adjusted by a separate calculation to determine the “excess shelter allowance.” The excess shelter allowance totals the following expenses:

Rent, mortgage, or condo fees for a primary residence;
Property taxes;
Homeowner’s insurance; and
Standard utility allowance of $517.00.

From the total of those expenses, the Department of Social Services subtracts a predetermined standard shelter allowance. This is currently $495.00. The remaining balance is then added to the minimum MMNA ($1,650.00) to determine the community spouse’s actual Minimum Monthly Needs Allowance. Your attorney can then discuss strategies to protect assets based on this calculation. Note, the Case Worker does not have authority to approve an actual MMNA that exceeds $2,541.00 (adjusted annually). You should consider a Fair Hearing to pursue the maximum MMNA if you are in this category.

Why is this important? The MMNA plays a significant role in determining what spousal assets (in the form of the CSPA) the community spouse will be allowed to retain in order to create sufficient income to achieve his or her Minimum Monthly Needs Allowance. The MMNA is one of the items you will focus on if your spouse needs to qualify for Connecticut Medicaid and alternative asset protection strategies are not available. Make sure your team is prepared to protect your rights if you find yourself in a Medicaid situation.

Whether you own a small business yourself or you work in an industry that serves small business owners, it is critical to stay on top of the latest tax news. As one of my professors in law school was fond of saying, taxes have some impact on almost everything we do (even if we’re not aware of it). The IRS has a mailing list anyone can sign up for to help stay informed of developments. You can find additional information here.

The Revenue Ruling consider two situations. In Situation 1, Trust 1 and Trust 2 are both grantor trusts, which are treated as wholly owned by the Grantor for Federal income tax purposes. Trust 2 owns a life insurance contract upon the life of Grantor which it transfers to Trust 1 in exchange for cash. In Situation 2, the facts are the same as in Situation 1, except that Trust 2 is not a grantor trust. At issue is whether the purchase of the policy by Trust will constitute a “transfer for a valuable consideration” within the meaning of section 101(a)(2) of the Internal Revenue Code.

Section 101(a)(2) is an exception to the general rule of Section 101(a)(1) that gross income does not include amounts received under a life insurance contract if such amounts are paid by reason of the death of the insured. Under Section 101(a)(2), if a life insurance contract, or any interest therein, is transferred for a valuable consideration, the exclusion from gross income provided by section 101(a)(1) is limited to an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee.

Although, under applicable Treasury regulations, a transfer-for-value generally includes “any absolute transfer for value of a right to receive all or part of the proceeds of a life insurance policy,” an exception applies when a life insurance contract is transferred to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer.

Citing Rev. Rul. 85-13, 1985-1 C.B. 184, which provides that a transaction between a grantor of a trust that is treated as owned by the grantor for Federal income tax purposes is disregarded, the Revenue Service ruled that, in Situation 1, the transfer of the policy from Trust 1 to Trust 2 while both are grantor trusts is not a transfer for a valuable consideration within the meaning of Section 101(a)(2) of the Revenue Code. (For rulings on similar transactions, see PLRs 200636086, 200120007 and 200228019.) In effect, for federal income tax purposes, Grantor is treated as the owner of all the assets of both trusts, including both the life insurance contract and the cash received for it, both before and after the exchange. Accordingly, in Situation 1 there has been no transfer of the contract within the meaning of Section 101(a)(2), i.e., the entire transaction is disregarded.

In Situation 2, Trust 1 (the purchaser) is a grantor trust, but Trust 2 (the seller) is not a grantor trust. Therefore, Grantor is treated as the owner of the cash (but not the life insurance contract) before the exchange, and as the owner of the life insurance contract (but not the cash) after the exchange. However, although there has been a transfer for a valuable consideration in Situation 2, the transfer for value limitations of the general rule of Section 101(a)(2) do not apply because the transfer to Trust 1 is treated as a transfer to Grantor, who is the insured.

Note that, under Rev. Proc. 2007-3, 2007-1 I.R.B. 108, §§ 3.01(7) and 3.01(47), the IRS stated that it will not issue an advance ruling on the following questions:

1. Whether there has been a transfer for value for purposes of § 101(a) in situations involving a grantor and a trust when (i) substantially all of the trust corpus consists or will consist of insurance policies on the life of the grantor or the grantor’s spouse, (ii) the trustee or any other person has a power to apply the trust’s income or corpus to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse, (iii) the trustee or any other person has a power to use the trust’s assets to make loans to the grantor’s estate or to purchase assets from the grantor’s estate, and (iv) there is a right or power in any person that would cause the grantor to be treated as the owner of all or a portion of the trust under §§ 673 to 677 (See, e.g., PLR 9413045, in which the IRS implied — but would not rule — that the sale of two second-to-die polices, one of which was held by a trust of which the wife was the grantor, and the other of which was held by a trust of which the husband was the grantor, to a new trust that was intentionally designed to qualify as a “grantor trust” with respect to the husband and wife would not be a transfer-for-value with respect to either of them); and

2. Whether the grantor will be considered the owner of any portion of a trust when (i) substantially all of the trust corpus consists or will consist of insurance policies on the life of the grantor or the grantor’s spouse, (ii) the trustee or any other person has a power to apply the trust’s income or corpus to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse, (iii) the trustee or any other person has a power to use the trust’s assets to make loans to the grantor’s estate or to purchase assets from the grantor’s estate, and (iv) there is a right or power in any person that would cause the grantor to be treated as the owner of all or a portion of the trust under §§ 673 to 677.

Rev. Rul. 2007-13 would appear to offer a favorable response to the first of these questions (although it is not clear if the assets of Trust 1 and Trust 2 consisted solely or substantially of life insurance) — the transfer for value question — because the “grantor” status of the trust has been stipulated by the taxpayer who then has the responsibility on audit of establishing the accuracy of that stipulation and thus confirming the favorable nature of the response. In contrast, the revenue ruling does not favorably answer the second of the revenue procedure questions — the grantor trust question — since Rev. Rul. 2007-13 does not discuss the reason why Trust 1 or Trust 2 were in fact treated as owned or not owned by the Grantor for Federal income tax purposes.