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The Tale of Two Partners: Do you want a 10% net return or 35%, using the same dollars?

Last year we set up a private retirement plan to exempt retained earnings for two business partners in the development industry where their business is growing at 20% net profit margin.  We gave options to each partner on how to leverage their Plan to maintain cash flow business growth.  The 1st Partner was stubborn and didn’t want to spend extra time or energy. Partner 2 was open and sought guidance and advice.  Here are the results over one year January to January:

Partner 1: 20% Trust growth less 10% paid in taxes = 10% net after-tax return. But he didn’t have to spend any extra time on planning.

Partner 2: 20% Trust growth less 7% paid in taxes (3% saved), plus 24.84% tax free interest credits less 3.95% in total interest and carrying costs = 33.89% net after-tax return on dollar.  The additional values of the 23.89% improved return are both secured against future downside market risk, interest rate volatility risk, as well as exempt from creditor risk (lawsuits). He worked harder, smarter and made much more money.

The Question: So what do you think the future value is after 5 years of compounding this increased cash flow?

The Answer: MASSIVE. This will convert into a major increase in annual benefits and enhanced lifestyle at retirement.

Changing the Tune: Partner #1 was pretty upset he missed the boat so we’re now adjusting his Plan. Partner #2 laughed out loud.

TRUST-CFO knows business, and we are Trust. Want to find out how you can do this? Plug in your info into our calculator and get a report immediately to see if you qualify.

Source: https://www.trust-cfo.com/the-tale-of-two-partners/

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Medical Tax Deductions – 2018

The deduction for qualified medical expenses has survived yet another round of tax reform.  The IRS will allow a tax payer to deduct expenses that exceed 7.5% of their adjusted gross income for 2017 and 2018.  Beginning in 2019, all taxpayers may deduct only the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of their adjusted gross income.

For example, if you have a modified adjusted gross income of $50,000 and $5,470 of medical expenses, you would multiply $50,000 by 0.075 (7.5 percent) to find that only the expenses exceeding $3,750 can be deducted. This leaves you with a medical expense deduction of $1,720 (5,470 – 3,750).

Many elders who have been ordered into a professional care environment such as assisted living, may have qualified care expenses of $30,000, $40,000 or more annually.  Often times, the elder relies on other parties such as their children to supplement their care expenses.  Regardless of the amount, “anyone” who is contributing to the direct care expenses of themselves or a loved one, should seek qualified tax services from an Enrolled Agent or CPA to determine if those expenses are deductible.  Considering the a mount of money and complexity of claiming these expenses, I do not recommend using on-line Internet Tax or Shopping Mall type tax preparation services.  Many of these face to face data collection persons are customer service agents with minimal, if any, actual tax training or credentials.  You have the right to claim these deductions – if it is done properly.

Also, for those who used an Irrevocable Trust to re-position assets, you should meet with your Attorney, Enrolled Agent or CPA to discuss if you will be required to file a 1041 tax return.

One big tip for those receiving VA Aid and Attendance.  Some professionals recommend you file a 1040 and claim your care expenses – even if you are exempt from filing.  Remember, the VA is tasked with verifying your care expenses exceed your income annually.  By filing the 1040, it makes their job easy.  By not filing a 1040, make certain you keep a close eye for any correspondence from the VA.  If you fail to respond timely, they may terminate your monthly benefit.

Source: https://www.advancedwellnessgcm.com/

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VA Disbursements have Increased

Helen Justice, Geriatric Care Manager, at Advanced Wellness, published an informative article on updates to VA disbursements:

Are you a War-Time Veteran or Widow of War Time Veteran?

There are Financial Benefits available for War Time Veteran and Widow of War Time Veteran to help defray the cost for senior placement Assisted Living Facilities, Board and Care Homes, and In-Home Care. There is a non-service connection pension cal Aid and Attendance Pension Plan. This was established in 1954 under Section 38 USC to assist qualified veterans and their surviving spouses.

And the amounts have just increased:

Current Maximum VA Monthly Benefit Amounts

  • Two Veterans/ Spouses: $2,903 per month / $34,837 annually
  • Married Veteran: $2,169 per month / $26,036 annually
  • Single Veterans: $1,830 per month / $21,962 annually
  • Widow: $1,176 per month / $14,113 annually

What are the qualifications?
The Veteran Must:

  • Be aged 65+ or Unemployable
  • Be Honorably Discharged having 90 days or more of active duty service with at least one of those days during a period of War. This does not mean they needed to be in War Country.
  • Have Cost of Care that is 5% greater than their fixed income.
  • Eligible Veterans must show active duty service for a minimal 90 days during a time in which the US was involved during a declared conflict (from 1980 forward the veteran needs to serve 2 years active duty).
  • You must need assistance with activity of daily living (ADLs) (bathing, eating, dressing, hygiene, transferring, and medication management). Your doctor will provide a report that you need assistance with at least of two ADLs.

You can contact Helen directly at her website, or call our office and we’ll get you going in the right direction. Our toll-free number is: 866-988-3956.

Source:  Advanced Wellness Geriatric Care

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The Tax Cuts and Jobs Act is Finally Here, No More Do Overs

–Our friends at Marcum, LLP recently published a detailed article on the new tax plan.–

Highlights of key provisions include the following:

Individual Provisions

  • The act’s final version retains the seven overall tax brackets, but tax cuts are achieved by cutting the rates themselves. The final version cuts the top rate to 37% as follows:
Filing Status


Single Married Joint Married Separate

Head of Household


Up to $9,525 Up to $19,050 Up to $9,525 Up to $13,600
12% $9,525 to $38,700 $19,050 to $77,400 $9,525 to $38,700 $13,600 to $51,800
22% $38,700 to $82,500 $77,400 to $165,000 $38,700 to $82,500 $51,800 to $82,500
24% $82,500 to $157,500 $165,000 to $315,000 $82,500 to $157,500 $82,500 to $157,500
32% $157,500 to $200,000 $315,000 to $400,000 $157,500 to $200,000 $157,500 to $200,000
35% $200,000 to $500,000 $400,000 to $600,000 $200,000 to $300,000 $200,000 to $500,000
37% Over $500,000 Over $600,000 Over $300,000

Over $500,000

  • The standard deduction is increased to $24,000 for married taxpayers filing jointly; $18,000 for single filers with at least one qualifying child (Head of Household filers); and $12,000 for single filers and includes enhancements for the elderly and the blind.
    • Personal exemptions are repealed and merged in with the higher standard deduction.
    • The Child/Dependent Tax Credit will be $2,000 with $1,400 refundable. Modified income limits will make the credit available to more families and a $500 credit will be available for a non-child dependent.
  • The Kiddie tax is simplified by applying the trust and estate rates (reflected below) to the unearned income of a child.
  • The capital gain and dividend rates are maintained at 20%, plus the 3.8% surtax, where applicable.
  • The act retains a modified Individual Alternative Minimum Tax (AMT) as of 2018 and provides for increased exemptions and higher phase out limitations. The limits are indexed for inflation. The new law will change the impact of AMT and should reduce the number of affected taxpayers.
  • There are significant changes to itemized deductions. The “Pease” limitation, which previously limited up to 80% of most itemized deductions, has been repealed. Instead, most itemized deductions are either eliminated or modified, such as:
    • The deduction for non-business state and local income, sales and property taxes will be limited to $10,000 in aggregate ($5,000 for married taxpayers filing separately). This provision potentially harms taxpayers living in high income and property tax states. (As disclosed in our recent Tax Flash on December 18, a specific provision was added to the law to disallow a deduction for the prepayment of 2018 income taxes before the end of 2017.)
  • The deduction for medical expenses has been retained and will be enhanced. The act lowers the threshold for the deduction to 7.5% from 10% of adjusted gross income for tax years 2017 and 2018.
  • The act repeals all miscellaneous itemized deductions that were previously subject to the 2% floor. Miscellaneous deductions included investment fees, tax preparation expenses and unreimbursed employee business expenses. However, the deduction for investment interest expense remains unchanged.
  • The deduction for personal casualty and theft losses is repealed, except for losses resulting from federally declared disasters.
  • The adjusted gross income limit on cash contributions is increased from 50% to 60%.
  • 529 Savings Plans can be withdrawn tax-free if used for higher education expenses. The act now allows up to $10,000 per year to be used for elementary and high school tuition and funds to be used for private and religious schools.
  • The deduction for mortgage interest is subject to the following rules:
    • Interest on acquisition debt currently in existence can be deducted under current rules.
    • The $1 million debt limit is reduced to $750,000 for debt incurred after December 15, 2017, and will only include mortgage interest deduction on a principal residence and second residence.
    • Home equity interest will be nondeductible.
  • The final act includes a repeal of the Shared Responsibility Payment (Individual Mandate) under the Affordable Care Act after 2018.
  • While the above-the-line educator costs is not repealed, the act eliminates many tax credits and income exclusions, including:
    • Moving expenses other than those in Armed Forces.
    • Deduction or alimony payments effective for any divorce decree or separation agreement executed or modified after 2018.
    • Exclusion for employee achievement awards.
    • Elimination of the Deduction for Domestic Production Activities.
    • Credit for clinical testing expenses for certain drugs for rare diseases or conditions is reduced to 25%.
    • Rehabilitation credit is not completely repealed, but limited to 20% for certified historic structures and repealed for pre-1936 non-historic structures.
    • Disabled Access Credit.
    • Retain and simplified the Earned Income Tax Credit to improve efficiency.

Marcum Observations

All of the individual tax changes under the new law are generally effective beginning in 2018 and are temporary and expire after 2025. If Congress does not act at that time to extend these provisions, starting in 2026, the new provisions will lapse and the current rules will return.

Due to the changes described above, many taxpayers will no longer opt to itemize deductions. The beneficial tax rates on long-term capital gains and qualified dividends continue to apply.

High wage earners in high tax states will likely see higher tax bills. Conversely, a similar taxpayer residing in a low tax state will likely see a tax savings due to the lower top rate and the expanded 35% tax bracket.

Charitable gifts could be worth more in 2017 instead of 2018 due to the change in the rates.

Estate and Trust Provisions

Tax Rate Structure


Estate and Trusts
10% Up to $2,550
24% $2,550 to $9,150
35% $9,150 to $12,500
37% Over $12,500
  • Doubles the basic exclusion amount for gift and estate tax purposes from the current exclusion of $5.49 million in 2017, as indexed for inflation, to $11.2 million, which will be indexed for inflation.
  • Lowers the gift tax rate to a top rate of 35%.
  • Repeals the estate and generation-skipping transfer taxes, while retaining the stepped up basis rules, in 2024.

Marcum Observations

The new high exemption amount will effectively eliminate the estate tax for most people. The step-up in basis at death would continue to be in effect.

Business Provisions

  • Lower the top corporate tax rate from 35% to a flat 21% (the same flat rate applies to personal service corporations).
  • Eliminates the corporate alternative minimum tax.
  • The dividend received deductions will be reduced to 50% from the current 70% and 65% from the current 80%. This change is to account for the reduced corporate rate.
  • Allows immediate expensing of 100% of the cost of new investments in depreciable assets acquired after September 27, 2017, and before January 1, 2023. (The placed-in-service date will be extended for one year for property with a longer production period).
    • Unlike the present bonus depreciation rules, the asset does not have to be new property; however, it must be the business taxpayer’s first use of such property.
    • Qualified property does not include any property used in a real property trade or business.
  • Section 179 expensing is increased to $1 million for years 2018 to 2022. A phase-out of the Section 179 benefit will begin when the purchases exceed $2.5 million. (Qualified energy efficient heating and air conditioning property will be included as Section 179 property).
  • The Senate proposal to reduce the cost recovery periods of residential and non-residential property to 25 years was not adopted. These remain at 27.5 and 39 years, respectively. However the recovery period for qualified improvement property is set at 15 years. The separate definitions of qualified leasehold improvement, qualified restaurant and qualified retail improvement property are eliminated.
  • Caps will be placed on write offs of business use vehicles. The new caps will be $10,000 for the first year a vehicle is placed into service, (presently, $3,160).
  • Every business, regardless of form, would be subject to disallowance of a deduction for net interest expense in excess of 30% of the business’ adjusted taxable interest. Net interest expense is determined at the tax filer level (e.g., the partnership versus the partner). Adjusted taxable income is business taxable income without regard to business interest expense, business interest income, net operating losses, depreciation, amortization and depletion. Disallowed interest under this rule becomes an indefinite carryover as an attribute of the business (not its owners). Businesses with average gross receipts of $25 million or less would be exempt from the interest limitation rules. (There is also an election for real estate trade or businesses to elect out of this limitation, but the cost is that use of the Alternative Depreciation System is required).
  • Eliminate the deduction under Internal Revenue Code § 199 for domestic production (DPAD).
  • Net Operating Losses (NOLs) would generally not be eligible for a carryback. However, any carryover can be used only to the extent of 80% of taxable income. This rule will apply to losses arising in tax years beginning after December 31, 2017. Additionally, the carryforward period will be indefinite.
  • Research and Development (R&D) costs are subject to potential change. While the R&D credit is retained; for tax years 2022 and later, R&D expenses will not be subject to immediate write-off, but will be subject to mandatory five year amortization (15 years for research outside of the US). On retirement, abandonment or disposition of property, the unamortized basis will continue to be written off over the balance of the amortization period.
  • After 2017, like-kind exchanges will apply only to real property, not held for sale, subject to a transition rule allowing for an exchange for personal property if there is a disposition of relinquished property or acquisition of replacement property by December 31, 2017.
  • No deduction will be allowed for entertainment, amusement or recreation activities facilities, or membership dues relating to such activities or other social purposes. However the current deduction for business meals (subject to the 50% limitation) will be retained.
  • Section 162(m) related to limitations on deductions for compensation to executives has been modified. The exception to the $1 million compensation limit for executives of publicly traded companies for commission and performance-based compensation, will be repealed effective for years beginning after December 31, 2017.
  • Corporations and partnerships with corporate partners with average gross receipts of up to $25 million (indexed for inflation) are allowed to use the cash method of accounting. Existing corporation that meet this gross receipts threshold can automatically change their accounting method.

Marcum Observations

A key element of tax reform was to change the corporate tax rate so as to make U.S. corporations more competitive with those in foreign jurisdictions. This is accomplished by setting a flat 21% rate for regular corporations for tax years beginning after 2017. The law provides no special rate for personal service corporations, which will now be subject to the same 21% corporate rate.

The corporate AMT is repealed. Corporations will be allowed to use certain tax benefits to effectively pay below the new 21% rate.

Based on the above summary, many current business benefits will face repeal, but the framework specifically retains the R&D Credit, the Work Opportunity Tax Credit, the New Markets Tax credit, a revised Rehabilitation Tax Credit and the Low Income Housing Tax Credit.

Pass Through Entity Taxes

  • An individual taxpayer may deduct 20% of domestic qualified business income from partnership, S corporation or sole proprietorship.
    • The amount of the deduction will be limited to the greater of:
      • 50% of W-2 wages paid by the business or;
      • The sum of 25% of W-2 wages paid by the business and 2.5% of business capital.
      • The wage limitation does not apply if taxable income is less than $157,500 (single) or $315,000 (joint) and applies fully if taxable income exceeds $207,000 (single) or $415,000 (joint).
    • Trusts and estates will qualify for this deduction.
    • The deduction is a post adjusted gross income item.
    • The deduction is not affected by whether the owner is passive or active.
    • For specific service businesses, such as those in accounting, law, consulting, and investing, but not engineering or architecture, the 20% deduction will apply only if the taxpayer’s taxable income is less than $157,500 (single) or $315,000 (joint). No deduction will be allowed if the taxable income exceeds $207,000 (single) or $415,000 (joint).
  • The act changes the long-term capital gains holding period for certain assets held in partnerships engaged in investment and real estate activities (carried interest). After 2017, a three year holding period is created for long-term capital gain treatment of gains for a carried interest (instead of the typical one year requirement).

Marcum Observations

The final bill generally follows he Senate’s approach to the taxation of pass-through entities (S corporations, partnerships or sole proprietorships) and creates a rather complicated deduction for “qualified business income” for tax years 2018 through 2025. The final bill clarifies that the deduction will not be taken in reaching adjusted gross income, though it is available to both itemizers and non-itemizers. In a positive change, the final bill permits this deduction to be used by owners of pass-through entities which are trusts or estates.

The act creates preferential treatment for certain pass through entities by basically permitting a non-itemized deduction of 20%. The reduced amount would then be subject to the new marginal rates. Owners of larger, more profitable, service businesses will likely not be eligible for this deduction.

International Tax Provisions

  • The new law adopts a participation exemption system that provides a 100% deduction for the foreign-source portion of dividends received from specified 10% owned foreign corporations by domestic corporations that are United States shareholders of those foreign corporations. No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to a dividend that qualifies for the 100% deduction.
  • The new law preserves the deemed dividend treatment for investment in U.S. property by controlled foreign corporations, including corporate shareholders that will be entitled to the 100% dividends received deduction.
  • The new law requires that for the last taxable year beginning before January 1, 2018, any U.S. shareholder of a foreign corporation that has at least one U.S. 10% shareholder must include in income its pro rata share of post-1986 accumulated earnings. The 10% U.S. shareholders must determine their deferred foreign income based on the greater of the aggregate post-1986 accumulated foreign earnings and profits as of November 9, 2017, or December 31, 2017, not reduced by distributions during the taxable year ending with or including the measurement date, unless such distributions were made to another specified foreign corporation.
    • The effective tax rates for the deemed repatriation of foreign earnings upon transition to the new participation exemption system are established at 15.5% (for cash and cash equivalents) and 8% (for other earnings).
    • U.S. shareholders subject to the repatriation tax may elect to pay the net tax liability in eight installments (8% in each of the first 5 years, 15% in year six, 20% in year 7, and 25% in year 8.
    • A special rule is provided for S corporations, allowing continued deferral of the transition tax liability, unless a specified “triggering event” occurs (e.g., loss of S status, liquidation, or transfer of shares).
  • The new law imposes a minimum tax on foreign earnings considered to be above a “routine” amount, termed global intangible low-tax income or “GILTI”. The tax is imposed on a current basis, at a full 21% rate, subject to a 50% deduction; additionally, the tax can be offset by a reduced (80%) foreign tax credit. As a result, an overall foreign effective tax rate of at least 13.125% generally will prevent the imposition of residual U.S. tax. The 50% GILTI deduction is reduced after 2025 from 50% to 37.5%.
  • The new law provides a deduction for certain foreign derived intangible income, a variation of the “innovation box” benefit provided by other countries, allowing a 37.5% deduction for income earned directly by U.S. taxpayers from serving foreign markets (foreign derived intangible income). The deduction will result in a 13.125% effective tax rate on foreign derived intangible income. The deduction is reduced after 2025 from 37.5 percent to 21.875%.
  • The new law does not include a permanent extension of the CFC look-through rule of section 954(c)(6). Thus, the look-through rule will remain a “tax extender” that will need to be renewed in order to prevent its expiration after 2019.
  • The new law adopts the Senate’s base erosion and anti-abuse tax (BEAT) approach by imposing a new minimum tax at a rate of 10%. The BEAT is applicable to a more limited subset of multinational groups and, generally is not applicable to cross-border purchases of inventory includible in cost of goods sold. In adopting the BEAT, the Congress rejected the controversial House proposal for an excise tax on certain payments to related foreign parties that would have required multinational groups subject to the provision to choose between the gross-basis excise tax and an election by the recipient of the payment to treat the amount as “effectively connected income” subject to US tax.
  • The new law provides an anti-hybrid rule denying deductions for interest and royalties paid to related foreign persons, where the payments either are not includible or are deductible in the hands of the recipient in its residence country.
  • The new law provides for the denial of a dividends received deduction for hybrid dividends received from a CFC, and treats hybrid dividends as Subpart F income if received by a CFC.
  • The new law provides changes to the definition of intangible property and expansions of the Internal Revenue Service’s ability to apply aggregation and “realistic alternatives” theories in connection with taxing the transfer of intangible property by a domestic corporation to a foreign corporation, and repeals the active trade or business exception for the outbound transfer of other assets to a foreign corporation.

Marcum Observations

The international provisions of the final bill move the United States towards a territorial system of taxation. The existing worldwide system is not entirely abandoned, as the new law provides for certain carryover provisions that allow the United States to tax certain categories of foreign earnings of U.S. companies. Specifically, the GILTI tax provisions and the minimum tax on intangible income continue to provide the U.S. with the ability to tax foreign earnings of U.S. companies.

The participation exemption provisions of the new law provide for the long overdue movement of the U.S. to align itself with the rest of the world in terms of allowing the tax-free repatriation of foreign earnings of domestic corporate subsidiaries. The participation exemption applies only to corporate shareholders of foreign corporations and as such, individual and pass-through shareholders of foreign corporations will continue to need to plan for the potential deferral of foreign earnings. Further, the transition tax on the mandatory, deemed repatriation of accumulated post-1986 earnings and profits will require analysis of pre-2018 reporting of foreign earnings. Taxpayers will also need to assess the short-term cash impact of the deemed repatriation provisions, as taxable income inclusions may result with respect to pre-2018 tax years.


The new law is likely to contain many technical glitches and will probably require technical corrections, fixes and adjustments to policies. Your Marcum Tax Advisor will keep you posted on any such revisions.

Source: Marcum, LLP


Diane Giordano
Partner, Tax & Business Services
Mark Chaves
International Tax Co-Leader
Michael D’Addio
Principal, Tax & Business Services

Julie Gross Gelfand
Director of Public Relations & Communications
Douglas Nakajima
International Tax Co-Leader
Jeffrey Winkleman
Partner-in-Charge, Corporate Taxation

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Estate Planning Basics: Asset Protection – Part 1

CunninghamLegal – The Living Trust Lawyers

Estate Planning Basics: The American Academy of Estate Planning Attorneys offers great information on the subject of Estate Planning. This article offers an introduction to the basics of Estate Planning with an initial focus on protecting your assets. When thinking about your assets and how you want them handled in your Estate, working with an experienced lawyer can help put your mind at ease, but more importantly, can help you better understand the different options available to you.

Read the entire article: Asset Protection in Estate Planning

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Families Spend More To Care For Their Aging Parents Than To Raise Their Kids

CunninghamLegal – The Living Trust Lawyers

This is an eye-opening article from Forbes on the cost of caring for aging parents. You might be surprised to read that it costs families more to care for a frail older adult than to raise a child for the first 17 years of her life. Planning for these costs now will prepare you and your family for the future.

Read the entire article here: Costs of Caring for Aging Parents

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Estate Tax and Gift Tax Coming to an End?

CunninghamLegal – The Living Trust Lawyers

The year 2017 is bringing changes to the estate and gift tax exemption, the annual exclusion as well as a possible repeal of the estate tax due to President Trump and a Republican majority in Congress.

The estate and gift tax exemption is increasing this year as expected. As a refresher, the estate and gift tax is a tax on the transfer of assets either during life (gift tax) or at death (estate tax). The new exemption amount allows an individual to give away during life or at death $5.49 million without being subject to the tax. A married couple can double their exemption amount with portability, but portability requires the surviving spouse to make the election on a timely filed estate tax return (9 months after their spouse’s death).

The annual gift tax exclusion is still $14,000. The annual gift tax exclusion is the amount of money you can give away without being subject to gift tax. For example, if an individual gives $16,000 away, then they will have to report $2,000 of the gift ($16,000 minus the gift tax exclusion) on a gift tax return, thus, using a sliver of their $5.49 million of exemption.

President-elect Trump and the Republicans in Congress have their sights on a repeal of the estate tax, so 2017 may bring some historic changes. Interestingly, there has been little to no mention of repealing the gift tax. With the outgoing estate tax, there may be incoming changes for step-up in basis rules. However, like the current estate tax, the step-up in basis rules will have little impact on the vast majority of Americans. Trump’s tax plan will cap a step-up in basis on capital gains up to $10 million held at death (currently unlimited) and disallow contributions of appreciated assets into private charities.

Written by: Stephen M. Wood | Attorney at Law | CunninghamLegal | Camarillo Office | www.cunninghamlegal.com |  (805) 484-2769

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Out of the Box – What happens when property is not titled in your trust?

CunninghamLegal – The Living Trust Lawyers

I often tell clients to consider a living trust like a box with instructions written on the side.  Assets, including real estate, bank accounts and brokerage accounts are put into the box.  The writing on the side of the box instructs a person (called the “Trustee”) what to do with the items in the box after someone dies.  Assets are “put” into the box by deeding the real estate to the Trust, and by changing account holders on a financial account.  Since personal items like furniture do not have deeds or documents of title, the person’s Will, (called a “Pour-Over Will”) transfers those items to the trust.

What about Probate?

The question remains – what happens when an asset is not properly titled to the trust, or said differently, what happens when an asset is not “in the box”?  The quick and unfortunate answer is that the trustee may need to open a court administered Probate.  Probates can be protracted and expensive, and Probate avoidance is one of the primary purposes of a trust.  There is however an easier and expedited court procedure in California which will transfer the assets into the trust so that the estate can be administered without further delay.  This article outlines that process.

Funding a Trust

Transferring assets into a trust is called “funding the trust.”  How would an asset not make it into the trust?  First, it may never have been put into the trust.  This can occur  during drafting when the person or firm preparing the trust either does not provide trust funding as part of their services, or simply fails to follow through with the funding.   Also, if a person is establishing a trust without the advice of an attorney, the trust may not get property funded.  In other situations such a mortgage refinance, a bank may require that real property be removed from the trust.  However, the property is often not put back into the trust after escrow closes.  In any of these situations, the failure to title assets in the trust will cause expense and delay when someone dies.  Worse yet, during this time, the trust beneficiaries will not receive their share of the trust.

Heggstad Petition

In order to address this problem, California Courts allow what is known as a Heggstad Petition.  This Petition is named after the case, Estate of Heggstad, (1993) 16 Cal. App. 4th 943 which first discussed this concept.  Using the Heggstad case as precedent, courts allow trustees to file an administrative petition asking that assets found outside of the trust be properly transferred to the trust.  In order to do so, the person filing the petition must show that the specific asset is mentioned in the trust, and that the trust creator (called a “Trustor” or “Grantor”) intended that the property be in the trust.  Courts will look to language in the trust specifically mentioning the asset.

In some trusts, the real property is not specifically mentioned.  A recent case called Ukkestad v. RBS Asset Finance, Inc. (2015) 235 Cal. App. 156 loosened the requirement that the asset be specifically mentioned if the trust states that “all personal and real property…wherever situated” be held in the trust.  Although the Ukkestad case makes the process easier, it is still preferable to have a specific reference to the assets subject to the petition.  As Ukkestad is a relatively recent case from 2015, it can take time to see how other courts will interpret and implement this rule of law.

Contact Us for Help

Situations with unfunded trusts can be complex and difficult for a trustee to navigate.  Our firm has the experience required to assist with any number of problems or questions regarding your personal estate plan, assisting you as a trustee, and filing Heggstad Petitions.  Please contact our office to schedule an appointment with one of our attorneys.

–Preston Marx, Esq.

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Avoiding a Medi-Cal Recovery Claim on a Personal Residence

CunninghamLegal – The Living Trust Lawyers

Avoiding a Medi-Cal Recovery Claim on a Personal Residence

In order to qualify for Medi-Cal, an individual must have limited income but may have unlimited assets due to the expansion of Medi-Cal under the Affordable Care Act. Medi-Cal expansion has made it easier for an increasing number of Californians to qualify for Medi-Cal. Although this is welcome news to many, it also presents an unanticipated consequence for many. Note that long term care Medi-Cal, which pays for care in a skilled nursing facility, is still an income and asset tested benefit, meaning that assets are still considered for eligibility purposes. For long term care Medi-Cal, some assets are considered “exempt,” meaning that Medi-Cal will not consider that asset in determining eligibility. For example, the personal residence is an exempt asset.

What is the unanticipated consequence for a Medi-Cal recipient? Medi-Cal recovery.  When a Medi-Cal recipient dies, exempt property remaining in the recipient’s name becomes available for Medi-Cal to seek reimbursement for benefits it has paid out during the recipient’s lifetime.  Not everyone who has received Medi-Cal is subject to Medi-Cal recovery, Medi-Cal only seeks recovery for benefits paid out when a recipient is over age 55, or when a recipient of any age is cared for at a skilled nursing facility or other similar institution.  Medi-Cal recovery claims are often very large and must be paid by assets left over in the estate.

Many people I speak with are surprised to hear that Medi-Cal recovery is avoidable with proper planning.  For purposes of this article, I will be focusing on avoiding recovery of the personal residence since it is typically the most valuable exempt asset and probably the asset Medi-Cal seeks recovery against the most. Perhaps the simplest way to avoid a Medi-Cal claim against the personal residence is to transfer it out of the estate before death or to do a retained life estate.  There are some downsides though to these methods.  In most cases, we advise transferring the personal residence to an irrevocable Medi-Cal Asset ProtectionTrust (“MAPT”) for the following reasons: (i) IRC Section 121 Exclusion; and (ii) Step-up in Income Tax Basis.

  • IRC Section 121 Exclusion

Oftentimes, the personal residence is sold during a Medi-Cal recipient’s lifetime for various reasons. If the home is in the recipient’s name, the personal residence will now be converted to a non-exempt asset, cash, and the recipient will no longer qualify for Medi-Cal. To overcome this result, the recipient may transfer the home to a loved one; however, if this is done, the sale will no longer qualify for the IRC 121 exemption for the first $250,000 of appreciation. The result is similar with a retained life estate as the portion of the sale attributed to the remainder beneficiary will not qualify for the exemption.

If the personal residence is sold after it has been transferred to a MAPT, the sale will not only qualify for the IRC 121 exemption, the cash resulting from the sale will also not be counted as an asset of the recipient.  Now the recipient has cash to supplement their care and the sale results in little or no capital gains tax.

  • Step-up in Income Tax Basis

Generally speaking, when an appreciated asset is transferred because of death, that asset will receive a step-up in income tax basis, meaning that the tax basis becomes the asset’s fair market value on the decedent’s date of death.  Conversely, if an asset is gifted away during lifetime, that asset keeps the same basis that the donor had.  With a MAPT, property will receive a step-up in basis on the recipient’s death.  A property with a retained life estate will also receive a step-up in basis.

For example, let’s say Suzanne bought her personal residence for $50,000 and it now has a fair market value of $500,000. If Suzanne gifts that property to her children to avoid a Medi-Cal recovery claim and her children then sell the personal residence for $500,000, the children now have to pay capital gains tax on the $450,000 of gain. If the property is transferred to a MAPT and Suzanne dies when the fair market value of the house is $500,000, the children will receive a stepped up basis from $50,000 to $500,000.

There are many other advantages of the MAPT, such as asset protection and retained control and flexibility by the recipient.  Planning for Medi-Cal and avoiding a Medi-Cal recovery claim is definitely not a one size fits all approach, it is very important to obtain help from an attorney who is knowledgeable about Medi-Cal rules and who has experience is this area. I have done this type of planning for many clients which has literally saved people hundreds of thousands of dollars in taxes and Medi-Cal recovery claims.

If you would like to discuss this strategy further, please don’t hesitate to contact me. We also offer free initial consultations for Medi-Cal planning.

–Stephen Wood