Leigh Hilton, L.P. is dedicated to providing you with the peace of mind of
knowing you have made the best legal decisions throughout your lifetime to
protect your loved ones from divorce, creditors and lawsuits. We provide
comprehensive and personalized estate planning counsel to couples, families
and individuals.
We serve our clients by first listening closely to their goals, dreams and
concerns. Then, we work with them to develop superior plans that reflect their
own unique situations, while putting our knowledge and experience to work
for their benefit.
Leigh Hilton, L.P. is committed to helping you understand that the foundation
of estate planning is not just saving tax dollars, but also appreciating the
value of planning for you and your loved ones.
knowing you have made the best legal decisions throughout your lifetime to
protect your loved ones from divorce, creditors and lawsuits. We provide
comprehensive and personalized estate planning counsel to couples, families
and individuals.
We serve our clients by first listening closely to their goals, dreams and
concerns. Then, we work with them to develop superior plans that reflect their
own unique situations, while putting our knowledge and experience to work
for their benefit.
Leigh Hilton, L.P. is committed to helping you understand that the foundation
of estate planning is not just saving tax dollars, but also appreciating the
value of planning for you and your loved ones.
| 1100 Dallas Drive, Suite 100 Denton, TX 76205, Phone: (940) 382-4357, Fax: (940) 591-0991, Email:leighhilton@charter.net |
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No portion of this newsletter may be reused in any way without prior express written consent. Volume 8, Issue 7 4/6/2006, © 2006 LEIGH HILTON, L.P. All rights reserved.
The Daily Plan-It™ - Massive Changes in Medicaid Law (Part 2)
President Bush signed the Deficit Reduction Act of 2005 (DRA 2005) into law on February 8, 2006, which included a sweeping overhaul of the
Medicaid laws. A typographical error calls into question its legality. It is widely anticipated that the error will be corrected and the law will be
effective. Here is part two of our explanation of the changes:
The Transfer Penalty Period
The most comprehensive change under the new law is the change in the start of the transfer penalty period. Under Medicaid law, giving away
assets constitutes an uncompensated transfer. If this occurs, an individual is "penalized" and ineligible for Medicaid benefits. The penalty is
calculated by dividing the amount of the uncompensated transfer by the average cost of one-month's nursing home care in the region where
the applicant lives. The previous law provided that the penalty period began in the month the uncompensated transfer was made. Under the
new law, the penalty period doesn't begin to run until the Medicaid applicant "otherwise qualifies" but for the implementation of a transfer
penalty." Now the penalty will not begin to run until the applicant is residing in a nursing home and depletes his assets to the qualifying levels.
These changes will have a drastic impact on all of our clients. Do your clients know what transfers they made five years ago? In theory, if they
made a $5,000 donation to their church, and four and one-half years later apply for Medicaid benefits, they would be ineligible. The same
applies if an applicant paid for a family member's education, wedding, a down payment on a first home, etc.
Round Down
Under previous laws, many states rounded down the penalty period to the whole number. For example, if an individual transferred $9,000, the
transfer penalty would be 1.8 months ($9,000/$5,000, assuming a $5,000/month cost). In a round-down state, the penalty would be one month.
The new law prohibits rounding down and provides that all transfers that constitute less than one-month’s penalty over any 12-month period
must be aggregated, thereby eliminating the ability to round down.
Community-Based Medicaid
Prior law applied the asset transfer rule only when an individual was applying for institutionalized Medicaid benefits (i.e., in a nursing home.)
Home-based Medicaid services were exempt from the asset transfer rule. The new law applies all asset transfer rules and penalties currently
used for institutionalized care to home based Medicaid services.
Stay tuned for part three of our series, which will cover the Income-First Rule, Long Term Care Insurance, and Loans.
The Daily Plan-It™ - Massive Changes in Medicaid Law (Part 3)
President Bush signed the Deficit Reduction Act of 2005 (DRA 2005) into law on February 8, 2006, which included a sweeping overhaul of the
Medicaid laws. A typographical error calls into question its legality. It is widely anticipated that the error will be corrected and the law will be
effective. Here is part three of our analysis of the changes:
Income-First Rule
Under previous law, states could choose whether to apply the income of the institutionalized spouse to the community spouse before
determining whether the community spouse met the Medicaid income limitations for qualification. If the community spouse had income below
the federal minimum amount required, the community spouse could exempt excess assets that were used to produce income. Now, all states
must use the income-first rule, which requires Medicaid to include the income of the institutionalized spouse with the community spouse in
determining the community spouse's income eligibility.
Long Term Care Insurance
The new law permits a long term care partnership to be instituted in all 50 states. Under the new law, all states will be permitted to offer long
term care partnership policies. In essence, a partnership policy permits an individual to buy long term care insurance that pays for three years
coverage. At the end of this period, the individual will qualify for Medicaid regardless of the amount of assets they have. The caveat, however, is
that any excess income of the individual or his spouse will still be required to be paid toward the cost of care, to the extent the income of the
community spouse exceeds that the minimum monthly maintenance needs allowance.
Loans
The new law requires that loans made by the Medicaid applicant must be actuarially sound to avoid having them considered "available
resources" when determining eligibility. It prohibits balloon payments, and requires payments under the loan to be "equal." The loan will be
required to be paid out over the life expectancy of the applicant.
Our Conclusions
The states will have the option to adopt the new rules retroactively to the date of the president's signature. While the law is effective upon the
date of the president's signature, the implementation from a practical standpoint could take years. While planning is affected immediately,
applications for Medicaid benefits are not likely to be impacted for at least 6 to 12 months, depending upon your state's ability to implement
these changes. The burden will now fall on nursing homes and family members to ensure that they can provide documentation for the
previous five years of a resident's financial transactions. This will likely see an increase in the number of claim denials, and reduce revenue for
nursing homes with current residents who are unable to qualify for benefits. The impact of DRA 2005 will take years to determine. The story is
far from over.
The Daily Plan-It™ - Retirement Plans: Know the Differences
The purpose of a retirement plan is simple: to help an individual save for the day when he can kiss the 9-5 lifestyle goodbye. However, the
government allows certain types of early withdrawals just in case someone needs access to these accumulated funds before that golden day
arrives.
All Withdrawals are not Created Equal
The Internal Revenue Service has set forth specific guidelines overseeing early withdrawals from 401(k)s and IRAs. These include situations
like the permanent disability or death of the IRA owner; the need to pay for non-reimbursed medical expenses; funds to pay for a first-time
home purchase; and assistance in paying for higher education costs, to name a few. While there are similar and overlapping conditions
between the various retirement plans, they are not always the same.
Accountants Should Know Better
Keith Jones, an accountant, resigned from his position at Deloitte & Touche in 1999 to pursue a PhD. In 2001, he withdrew a total of $30,369
from his Deloitte 401(k) plan to pay for his educational expenses. While Mr. Jones properly reported the distribution as income on his tax
return, he failed to pay the 10 percent early withdrawal penalty. The eagle-eyed IRS noticed the error and sent Jones a delinquency notice.
Jones, believing he was in compliance with the rules, filed a petition in the Tax Court.
The Tax Court Speaks
According to Sec. 72(t), a penalty of 10 percent is required on early withdrawals (before the owner reaches age 59 1/2) from retirement plans,
except for exemptions enumerated under the law. While there is an exemption for higher education expenses, it only applies to distributions
from IRAs, not 401(k)s.
Tell it to the Judge
In his defense, Jones argued that he always had the ability to transfer the funds in his 401(k) to an IRA he just didn't. The Tax Court held that,
even though the difference between a 401(k) and IRA are only a matter of form, the penalty exemption applies exclusively to an IRA. And no
matter how you slice it, a 401(k) is not an IRA, and the Court has repeatedly adhered to this position.
Lessons Learned
It's imperative that advisors be cognizant of the rules and regulations covering retirement withdrawals and early payment penalties. Otherwise,
a client may inadvertently lose money to the tune of a 10 percent penalty. As this case shows, even accountants don't always know best.
Back to Article List
The Daily Plan-It™ - Massive Changes in Medicaid Law (Part 2)
President Bush signed the Deficit Reduction Act of 2005 (DRA 2005) into law on February 8, 2006, which included a sweeping overhaul of the
Medicaid laws. A typographical error calls into question its legality. It is widely anticipated that the error will be corrected and the law will be
effective. Here is part two of our explanation of the changes:
The Transfer Penalty Period
The most comprehensive change under the new law is the change in the start of the transfer penalty period. Under Medicaid law, giving away
assets constitutes an uncompensated transfer. If this occurs, an individual is "penalized" and ineligible for Medicaid benefits. The penalty is
calculated by dividing the amount of the uncompensated transfer by the average cost of one-month's nursing home care in the region where
the applicant lives. The previous law provided that the penalty period began in the month the uncompensated transfer was made. Under the
new law, the penalty period doesn't begin to run until the Medicaid applicant "otherwise qualifies" but for the implementation of a transfer
penalty." Now the penalty will not begin to run until the applicant is residing in a nursing home and depletes his assets to the qualifying levels.
These changes will have a drastic impact on all of our clients. Do your clients know what transfers they made five years ago? In theory, if they
made a $5,000 donation to their church, and four and one-half years later apply for Medicaid benefits, they would be ineligible. The same
applies if an applicant paid for a family member's education, wedding, a down payment on a first home, etc.
Round Down
Under previous laws, many states rounded down the penalty period to the whole number. For example, if an individual transferred $9,000, the
transfer penalty would be 1.8 months ($9,000/$5,000, assuming a $5,000/month cost). In a round-down state, the penalty would be one month.
The new law prohibits rounding down and provides that all transfers that constitute less than one-month’s penalty over any 12-month period
must be aggregated, thereby eliminating the ability to round down.
Community-Based Medicaid
Prior law applied the asset transfer rule only when an individual was applying for institutionalized Medicaid benefits (i.e., in a nursing home.)
Home-based Medicaid services were exempt from the asset transfer rule. The new law applies all asset transfer rules and penalties currently
used for institutionalized care to home based Medicaid services.
Stay tuned for part three of our series, which will cover the Income-First Rule, Long Term Care Insurance, and Loans.
The Daily Plan-It™ - Massive Changes in Medicaid Law (Part 3)
President Bush signed the Deficit Reduction Act of 2005 (DRA 2005) into law on February 8, 2006, which included a sweeping overhaul of the
Medicaid laws. A typographical error calls into question its legality. It is widely anticipated that the error will be corrected and the law will be
effective. Here is part three of our analysis of the changes:
Income-First Rule
Under previous law, states could choose whether to apply the income of the institutionalized spouse to the community spouse before
determining whether the community spouse met the Medicaid income limitations for qualification. If the community spouse had income below
the federal minimum amount required, the community spouse could exempt excess assets that were used to produce income. Now, all states
must use the income-first rule, which requires Medicaid to include the income of the institutionalized spouse with the community spouse in
determining the community spouse's income eligibility.
Long Term Care Insurance
The new law permits a long term care partnership to be instituted in all 50 states. Under the new law, all states will be permitted to offer long
term care partnership policies. In essence, a partnership policy permits an individual to buy long term care insurance that pays for three years
coverage. At the end of this period, the individual will qualify for Medicaid regardless of the amount of assets they have. The caveat, however, is
that any excess income of the individual or his spouse will still be required to be paid toward the cost of care, to the extent the income of the
community spouse exceeds that the minimum monthly maintenance needs allowance.
Loans
The new law requires that loans made by the Medicaid applicant must be actuarially sound to avoid having them considered "available
resources" when determining eligibility. It prohibits balloon payments, and requires payments under the loan to be "equal." The loan will be
required to be paid out over the life expectancy of the applicant.
Our Conclusions
The states will have the option to adopt the new rules retroactively to the date of the president's signature. While the law is effective upon the
date of the president's signature, the implementation from a practical standpoint could take years. While planning is affected immediately,
applications for Medicaid benefits are not likely to be impacted for at least 6 to 12 months, depending upon your state's ability to implement
these changes. The burden will now fall on nursing homes and family members to ensure that they can provide documentation for the
previous five years of a resident's financial transactions. This will likely see an increase in the number of claim denials, and reduce revenue for
nursing homes with current residents who are unable to qualify for benefits. The impact of DRA 2005 will take years to determine. The story is
far from over.
The Daily Plan-It™ - Retirement Plans: Know the Differences
The purpose of a retirement plan is simple: to help an individual save for the day when he can kiss the 9-5 lifestyle goodbye. However, the
government allows certain types of early withdrawals just in case someone needs access to these accumulated funds before that golden day
arrives.
All Withdrawals are not Created Equal
The Internal Revenue Service has set forth specific guidelines overseeing early withdrawals from 401(k)s and IRAs. These include situations
like the permanent disability or death of the IRA owner; the need to pay for non-reimbursed medical expenses; funds to pay for a first-time
home purchase; and assistance in paying for higher education costs, to name a few. While there are similar and overlapping conditions
between the various retirement plans, they are not always the same.
Accountants Should Know Better
Keith Jones, an accountant, resigned from his position at Deloitte & Touche in 1999 to pursue a PhD. In 2001, he withdrew a total of $30,369
from his Deloitte 401(k) plan to pay for his educational expenses. While Mr. Jones properly reported the distribution as income on his tax
return, he failed to pay the 10 percent early withdrawal penalty. The eagle-eyed IRS noticed the error and sent Jones a delinquency notice.
Jones, believing he was in compliance with the rules, filed a petition in the Tax Court.
The Tax Court Speaks
According to Sec. 72(t), a penalty of 10 percent is required on early withdrawals (before the owner reaches age 59 1/2) from retirement plans,
except for exemptions enumerated under the law. While there is an exemption for higher education expenses, it only applies to distributions
from IRAs, not 401(k)s.
Tell it to the Judge
In his defense, Jones argued that he always had the ability to transfer the funds in his 401(k) to an IRA he just didn't. The Tax Court held that,
even though the difference between a 401(k) and IRA are only a matter of form, the penalty exemption applies exclusively to an IRA. And no
matter how you slice it, a 401(k) is not an IRA, and the Court has repeatedly adhered to this position.
Lessons Learned
It's imperative that advisors be cognizant of the rules and regulations covering retirement withdrawals and early payment penalties. Otherwise,
a client may inadvertently lose money to the tune of a 10 percent penalty. As this case shows, even accountants don't always know best.
Back to Article List
“helping you plan for the two most important things in your life: everything you own
and everyone you love”
and everyone you love”
