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A Better Partnership


Oct 2005
October 03, 2005

Estate Planning Focus - Fall 2005

Topics included in this issue:


Planning for Nursing Home Care

By David E. Waterstradt

The average annual cost of nursing home care in Michigan was in excess of $64,000 in 2005. Individuals with investment assets of less than one million dollars will be hard-pressed to avoid a serious deterioration in their financial situation if faced with a long-term stay in a nursing home. The asset base required to finance a nursing home stay by two spouses is even higher.

Because of the high cost, over 65% of nursing home residents rely on Medicaid to pay for their care. Medicaid is a federally funded, state-administered program that pays for medical treatment, including nursing home care, for individuals who have exhausted their own assets. Planning to qualify for Medicaid is an important aspect of estate planning for many people.

The rules on qualifying for Medicaid change often. For example, federal law mandates that each state implement an estate recovery program to recover the cost of care from the estates of deceased Medicaid recipients. Michigan has yet to establish such a program. However, it may soon do so. Governor Granholm publicly supports adoption of estate recovery in Michigan.

Currently, the basic requirements to qualify for Medicaid are that (1) you reside in a Medicaid-qualified nursing home due to a medical need for long-term care, (2) your medical and nursing home expenses exceed your income, and (3) your countable assets do not exceed $2,000.

Certain assets are not countable. For example, the Medicaid recipient's home, regardless of value, is an exempt asset. There are many other categories of exempt assets. A common method of Medicaid planning is to reduce countable assets by converting them to exempt assets.

In the case of a married couple, if one spouse enters a nursing home, the assets of both husband and wife are considered together. The countable assets owned by either spouse are totaled. The spouse who remains at home (known as the "community spouse") is allowed to keep a portion of the countable assets, up to a maximum of $95,160 in 2005 (known as the "community spouse resource allowance"). Certain planning methods are available to maximize the community spouse resource allowance.

In certain situations, it may be possible for one spouse to qualify for Medicaid even if the community spouse has assets that greatly exceed the community spouse resource allowance. This usually involves the establishment of a Spousal Annuity Trust or the purchase of commercial annuities. When used correctly, these techniques can convert excess countable assets into a stream of income for the spouse that remains at home while allowing the nursing home spouse to immediately qualify for Medicaid.

Giving away assets in order to qualify for Medicaid is known as divestment. The rules provide for a 36-month look-back period from the date of your Medicaid application to determine whether any divestment occurred. A 60-month look-back period exists for transfers to certain trusts. Divestment results in a penalty of Medicaid ineligibility for a period of time. However, this does not mean that gifts are illegal. Gifts can still be made but careful planning is necessary to ensure that sufficient funds are retained to pay for care during any period of ineligibility that results from the gifts.

Finally, Medicaid planning should be given some thought when preparing your estate planning documents. In particular, a Durable Power of Attorney allows your agent to take actions on your behalf if you are incapacitated. If properly drafted, it can be an especially effective tool to authorize your agent to qualify you for Medicaid.

Because the Medicaid rules change frequently, before applying for or taking any action to qualify for Medicaid, you should contact an attorney who can advise you as to the current rules.

2005 Charitable Giving Incentives

The Katrina Emergency Tax Relief Act has suspended temporarily some limitations on deductibility of certain charitable cash contributions made between August 28 and December 31, 2005 ("qualified contributions"). Usually an individual taxpayer who itemizes deductions may only deduct charitable cash contributions to public charities or governmental units/agencies of up to 50% of the taxpayer's adjusted gross income. The Act allows individuals to deduct 100% of these charitable cash contributions for federal income tax purposes in 2005. The Act does not change the treatment of noncash contributions. The Act also exempts from this favorable treatment charitable gifts made to supporting organizations or to public charity donor advised funds.

Under present law, a taxpayer's itemized deductions (other than medical expenses, investment interest and casualty, theft or wagering losses) is reduced by 3% of the taxpayer's adjusted gross income in excess of a certain threshold. For 2005, the adjusted gross income threshold is $145,950 ($72,975 for a married taxpayer filing a joint return). Under the Act, the charitable contribution deduction up to the amount of qualified contributions paid during 2005 is not treated as an itemized deduction for purposes of the overall limitation on itemized deductions.

Annual Gift Tax Exclusion to Increase

The annual exclusion amount individuals can gift to others without paying gift tax and without filing gift tax returns is scheduled to increase on January 1, 2006, from the current $11,000 per person per year to $12,000 per person per year.

You can make an unlimited number of annual exclusion gifts; however, you can only gift up to the annual exclusion amount per donee each year. If gifts exceed the annual exclusion amount in any calendar year, a gift tax return is required to be filed. If you are married, both you and your spouse can gift up to the annual exclusion amount per donee each year.

To qualify as an annual exclusion gift, the gift must be of a present interest and complete. This means that the recipient of the gift must have immediate use, possession or enjoyment of the gift, without restriction.

Annual exclusion gifts can effectively transfer large amounts of assets from one generation to the next, tax free. For example, a married couple with two children who are each married and five grandchildren could gift a total of $216,000 per year, beginning in 2006, to their children, their children's spouses, and their grandchildren, tax free.

If you would like more information about how you can take advantage of annual exclusion gifts to achieve your estate planning objectives, please contact a member of our Trusts & Estates Group.

What to do With the Small Education Trust

By Carl W. Dufendach

Many individuals have established education trusts for children or grandchildren. These are normally established using lifetime gifts fitting within the annual exclusion, currently up to $11,000 per year per person. There are different types of trusts that can be used to provide for education, but in general they are irrevocable trusts with a trustee other than the person contributing property to the trust. They last at least until the child reaches college age.

For various reasons, sometimes these trusts may remain relatively small. The low value of the assets held by the trust may not warrant the ongoing administrative duties and expenses, such as tax return preparation, to keep them viable. Often, provisions in the trust would permit the trust to be closed down, but the child is still a minor unable to handle the assets, and the alternative of a Uniform Transfers to Minors Act account may not be desirable. In addition, the "Kiddi Tax" may apply for children under age 14.

Recent changes in the Internal Revenue Code have provided individuals with other planning options in meeting the high cost of college education. One of these tools, the 529 Plan, may be a perfect solution for the trustee to provide for education but eliminate the ongoing administrative work and tax cost both in terms of return preparation and taxes owed on the funds in the trusts. The tax code, and now Michigan law for Michigan Education Savings Program, clearly permits a trust to establish and own a 529 Plan for the benefit of the beneficiary of the trust. If the assets of the trust are placed in the 529 Plan, after filing a return for the year of the transfer, the trust will no longer have taxable income requiring the filing of an annual income tax return. Inside the 529 Plan, the assets can grow tax free. If they are used for education expenses, the eventual distribution from the Plan also comes out tax free. The trustee is treated as the participant of the 529 Plan, and may control and use the funds in the Plan for the beneficiary. If the beneficiary never attends college, the funds may still be withdrawn, subject to a 10% penalty on earnings in the Plan. That penalty may be partially or completely offset by the administrative expense savings through the years.

As the trustee embarks on the process of liquidating the trust assets and purchasing the 529 Plan, he or she will need to take into account the tax aspects of the liquidation. The final tax return for the trust, although not designated a final return because there could later be taxable income for the trust, will need to report income, both capital gain and ordinary income, and pay tax to the extent income is not distributed to the beneficiary.

529 Plans replace the need for a separate education trust for some families. In given circumstances, the liquidation of the existing education trust assets and purchase of a 529 Plan may help the trustee meet the parent's or grandparent's objective of providing educational assistance and keep the control with the trustee without closing down the trust and distributing the trust assets to the child for whatever use the child may choose. The 529 Plan definitely provides the planner with a new tool which can be used to meet a client objective.

Introduction to Asset Protection Planning

By James J. Steffel

Asset protection planning should be considered in virtually every estate planning arrangement. It can involve arrangements to protect your present ownership interests (we'll call that Self-Protection Planning or "SPP") or the future interests of your beneficiaries (we'll call that Beneficiary Protection Planning or "BPP"). BPP is significantly easier to achieve and often overlooked in the name of simplicity. It basically involves continuing your beneficiaries' interests in properly structured trusts for the duration of the desired protection period. This relatively uncomplicated BPP provides for superior protection than your beneficiaries can achieve through SPP.

The least-complicated form of SPP involves protecting your personal assets from claims arising from your business activities. As a general rule, this can be accomplished by conducting your business activities through a properly formed and operated corporation or LCC to limit the claims of your business's creditors to the assets owned by your business. The main exception to this general rule applies to malpractice-related claims regarding professional services (such as claims against doctors, lawyers, architects and other licensed professionals). This exception and concerns regarding potential claims arising from nonbusiness activities (such as the operation of automobiles, the ownership of swimming pools, etc.) have generated numerous, more complicated and potentially controversial forms of SPP.

The more sophisticated forms of SPP should be based upon your individual priorities and concerns. There are no "one-size-fits-all" arrangements. Which tools and techniques should be employed depend on all the facts and circumstances surrounding your individual situation. Some of the most important factors to be considered include: (1) your primary risk concern(s), (2) your risk tolerance, (3) the status of your marital relationship, (4) the type and value of assets to be protected, and (5) the time and costs to implement and administer the various techniques.

The first factor above is usually the most important, and it generally translates to the questions of "from whom do you need protection" or "from what do you need protection." The answers to those questions usually reveal one of the three following client objectives: (A) desired protection against long-term care costs (generally achieved through long-term care insurance, Medicaid exemption planning or Medicaid divestment planning – see "Planning for Nursing Home Care" in this newsletter); (B) desired protection against marital claims (generally achieved through prenuptial agreements and various trust arrangements which can be complicated by significant disclosure requirements and various spousal protection statutes that apply to probate assets and qualified retirement plans); or (C) desired protection against potential third-party creditors (such as patients, clients, guests, etc.). This last category represents the broadest form of SPP and is usually achieved through the application of various property-related laws or the use of very specific types of trusts.

SPP via property-related laws include: (i) investing in assets that are exempt under state or bankruptcy laws, such as real estate held as tenants by the entirety or interest in qualified retirement plans, (ii) placing assets in multiple member entities that involve restrictions on the transfer of interests which can limit creditors to relatively ineffective charging orders, and (iii) spousal transfers or gifts to others (including irrevocable trusts without retained interests). Specific SPP-related trusts now fall into the following three categories:

  1. Offshore Trusts. These are irrevocable trusts established in foreign jurisdictions with favorable anti-collection laws. They are the most expensive and most complicated, but if properly implemented, can provide the greatest degree of protection.

  2. Domestic Asset Protection Trusts ("DAPTs"). These are irrevocable trusts primarily established in six states that now have specific statutes to insulate assets from creditors. DAPTs are a less expensive alternative to offshore trusts and, when properly structured and funded, can afford significant protection. Michigan is not a DAPT statutes state.

  3. Family Wealth Preservation Trusts. This is a relatively new Oklahoma statutory scheme that attempts to shelter up to $1,000,000 of Oklahoma-based assets from claims when they are held in a specific type of revocable trust with an Oklahoma-based trustee. Although untested, this arrangement should at least put you in a better position to negotiate with creditors should the need arise.

Overriding all asset protection planning techniques are fraudulent transfer acts which exist in every state (42 of which have adopted the Uniform Fraudulent Transfers Act). These statutes basically provide that any transfer made for the purpose of avoiding the collection efforts of creditors, especially transfers without full consideration that render the transferor insolvent, violate public policy and are therefore void. These rules generally apply to transfers made with known creditors, although new theories are emerging that could extend some of these limitations to probable or even unknown creditor scenarios. The bottom line with regard to the differing fraudulent conveyance acts is that asset protection planning must be done before any claim to be protected against actually arises or becomes likely.

Now you know some of the many ways to protect your assets. The desire for asset protection planning should be considered in every estate planning arrangement. Although each asset protection planning technique has its own burdens, risk factors and uncertainties, there is one certainty:  If you wait until your desire for asset protection planning becomes a need, it will be too late. If you are in a high risk profession or think you should consider asset protection planning, don't wait until the fraudulent conveyance act will circumvent your efforts.


We are pleased to welcome a new member to our practice group:

David E. Waterstradt, an attorney and economist, has joined Warner Norcross & Judd LLP as Senior Trusts and Estates Council. David concentrates his practice on trust and estate planning, elder law and real estate law. He will practice in the Firm's Muskegon office. Prior to joining Warner Norcross, David was a partner in the Muskegon law firm of Even & Franks. He has also served as an economist for both the state of Michigan and the U.S. Bureau of Labor Statistics.

A native of Mason, Michigan, David is a member of the American Bar Association, the State Bar of Michigan, the Muskegon County Bar Association and the Lake Michigan Estate Planning Council. He is a member of Our Savior Lutheran Church in Muskegon and Extended Grace Mission in Grand Haven.

David may be reached directly at 231.727.2698, or e-mail him at


Estate Planning Focus


Editor: Susan Gell Meyers

Trusts & Estates Group Chairman: Mark K. Harder

Estate Planning Focus is published by Warner Norcross & Judd LLP to inform clients and friends of new developments. It is not intended as legal advice. If you need additional information on the topics in this issue, please contact your Warner Norcross attorney or any member of the Firm's Trusts and Estates Group.

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