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March 30, 2022
By: Anthony B. Ferraro

What can you gain by correctly funding (transferring) assets as part of the estate planning process on the long-term care (LTC) journey?

Creating estate planning documents — wills, trusts, various beneficiary designations – can be challenging. However, when it comes to 1) funding (meaning transferring or retitling) assets into estate planning vehicles, or 2) changing beneficiaries for estate planning reasons, new issues arise.

What is funding?

Funding sounds mysterious, but basically it refers to either transferring assets into a newly created estate planning vehicle or changing the beneficiary designation of the asset.

Some vexing issues in funding:

  • Income tax consequences: If you were to change the ownership of your IRA or 401 (k) to a newly created trust, you might be very unhappy because you will be triggering all of the deferred taxes and they will be due immediately rather than spread over a longer time. That would not be a good result.
  • New identification: Sometimes it is necessary to obtain a federal employer identification number (FEIN) when you have created a new estate planning vehicle (for example a trust or a corporate entity) and intend to place assets within this vehicle.
  • Breach of contract provisions: By transferring real estate with a mortgage on the property, you could unknowingly trigger the due on transfers clause.
  • Gift tax and income tax consequences: By transferring assets out of one individual’s ownership and into the next individual’s ownership, you could trigger gift tax consequences. By transferring assets from one individual during their lifetime to another individual as a gift, the person receiving the gift will receive an income “tax basis” equal to the income tax basis of the person giving away the asset. That means if your aging family member is transferring their home to you, and the home was purchased many years ago at a low price, you as the receiving party of the gift, will take the identical low tax basis that the person giving away the asset had. That means when you sell the property there could be a large gain. By contrast, if you had waited until the person died, you would get a “step up” in tax basis — the value of the property at the date of the death. That tax basis could be much higher and thereby result in less capital gain tax when you, the recipient of the property, sell the property later.
  • Real estate tax consequences: By transferring assets out of one individual’s ownership and into the next individual’s ownership, you could be losing the ability to enjoy certain local real estate tax incentives such as the senior freeze and senior exemption.
  • Bad timing of transfers: By transferring assets too early or transferring assets too late, you could squander opportunities to properly transfer assets in a way that can protect them from the devastating costs of long-term care. It may be more prudent to hold onto property until you are ready to enter long-term care. On the other hand, sometimes it is wise to transfer assets away long before entering long-term care. These are decisions that must be made based on the facts and circumstances at hand with qualified elder law counsel to select the most optimal time to transfer assets, if at all.
  • Bad method of transfers: Many people wish to transfer assets to their loved ones upon their death. However, what many people fail to understand is that the transferring of assets to loved ones can result in a disaster if at the time of the transfer, challenges are brought against them by: 1) an anticipated long-term care stay with the expectation of Medicaid eligibility, 2) creditors, 3) predators, 4) divorcing spouses, 5) business failures, or 6) bankruptcies. Sometimes it is more appropriate to not transfer assets outright into the hands of the recipient, but rather to transfer the assets into a discretionary trust, for the benefit of the recipient. These trusts are administered by professional, independent, third-party corporate trustees to ensure that the assets can be fully protected against the threats mentioned above.