Radio Transcript: Senate Bill 301

                In today’s program on Elder Law and Estate Planning, we are going to discuss the continuing changes in the law.  Information for this program has been taken from a variety of sources including Indiana Legal Services and comments by Claire Lewis on behalf of the Indiana Chapter of the National Academy of Elder Law Attorneys also known as NAELA. 

We have previously discussed the requirements of the Deficit Reduction Act of 2005 and the proposed Indiana regulations to imp0lement that Act.  As a result of the draconian regulations proposed by the Family and Social Services Administration, Indiana legislators heard a large outcry from senior citizens and their advocates.  The result was passage by the Indiana legislature of Senate Bill 301.  This Bill has been signed into Law by Governor Mitch Daniels and will become effective October 1, 2009.  This means if you want to make a transfer that will be effective under the existing rules it must be done before October 1, 2009.  While there are several benefits to making a gift under the existing rules, the most important is that the look back period is three years rather than five years.  If you wish to take advantage of the existing rules you should contact an Elder Law or Estate Planning attorney as soon as possible to allow adequate time to do appropriate planning. 

Senate Bill 301 provides that total annual gifts of up to $1,200 may be made to a relative or charity while not disqualifying an applicant who is eligible for the receipt of Medicaid benefits.  In addition, Senate Bill 301 prohibits the Deficit Reduction Act of 2005, also known as DRA 2005, from being retroactively applied in Indiana once those rules go into effect later this year.  Turning to Senate Bill 301, it specifically states that

[B]eginning October 1, 2009, the office of Medicaid policy and planning ([hereinafter the] office), in determining eligibility, may not consider a total of $1,200 per year in contributions by an individual to a family member or nonprofit organization as an improper transfer and may disregard certain contributions. . . .  [T]he office may not apply certain penalties to noninstitutionalized individuals for the disposal of assets. . . .  [T]he  rules adopted by the office of the secretary concerning transfer of assets may not: (1) apply to a transfer of property that occurred before the effective date of the rule; and (2) require an individual to return all assets in order to reduce a penalty period for the transfer of assets. . . .  [B]eginning October 1, 2009, a trustee of certain trusts may not distribute trust property except for state and federal taxes to any person entitled to a payment from the trust until the office has been fully reimbursed for rendered assistance.

Indiana Sen. 301, 116th Gen. Assembly, 2009 Reg. Sess. (Mar. 26, 2009) (emphasis added). 

                Again, the effective date of Senate Bill 301 is October 1, 2009.  NAELA, along with its coalition of community organizations, was instrumental in the passage of this bill which prohibits retroactive implementation of the Deficit Reduction Act among other things.  It is a significant victory for the older adult and disabled populations that we serve. 

                The foregoing is a brief discussion Senate Bill 301.  It should be recognized that the Medicaid rules are complex and ever changing.  If you want to receive the primary benefits of Senate Bill 301 by planning or gifting prior to October 1, 2009 you should meet with an Elder Law or Estate Planning Attorney to make plans to control your financial future.  For a free booklet entitled “Medicaid in Indiana,” call Yoder Law Office at 347-9400 or 1-800-545-6453.  The toll-free number again is 1-800-545-6453.  For further information, you may visit our website at YoderLaw.com.

Trust Elements - Beneficiary

Trust Elements - Beneficiary

A trust has five main elements. First, a settlor transfers some or all of his or her property. Second, the property transferred by the settlor is designated trust property. Third, the trust property designated by the settlor is transferred with the settlor’s intent that it be managed by another. Fourth, the trust property designated by the settlor is transferred for management by a trustee. Fifth, the trust property designated by the settlor is managed by a trustee for the benefit of a beneficiary. This article discusses some aspects of the element of a beneficiary.

At Least One

A trust must always have at least one beneficiary. Originally known as the cestui que use or the cestui que trust, the person or legal entity benefiting from a trust is known as the beneficiary. Whereas the trust holds legal title to the trust property, the beneficiary holds equitable to the trust property. Exactly what a beneficiary’s benefits are depends on the terms of the trust, the discretion given to the trustee, and the actions of the trustee.

No Notice Required

The beneficiary of a trust need not be notified of the existence of the trust. After a beneficiary becomes aware of the existence of a trust, the beneficiary may decline or disclaim any benefits of the trust.

Definite Beneficiary Or Not

A trust may have one beneficiary. A trust may have several beneficiaries. If a trust is not created to benefit a charity, it must have definite human beneficiaries, because trust are usually enforced by the beneficiaries. If a trust is created to benefit a charity, it does not have to have definite human beneficiaries, because a charitable trust is usually enforced by the state attorney general.

If a trust does not have definite beneficiaries and is not created for the benefit of a charity, it is deemed to be an unenforceable trust. An unenforceable trust is an honorary trust. The trustee may carry the trust out if the trustee so desires, out of sentiment or moral duty, but there is no one who can force the trustee to carry out the trust.

Class

The beneficiaries of a trust may be a group or class of persons. The group or class of persons must be ascertainable. Who the beneficiaries of a trust will be cannot be totally left at the discretion of the trustee.

Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.

Estate-Tax Valuation — Real Property

The value of any real property as of a given date is subject to widely differing opinions. If there is no market for the property, it should be valued at (a) the highest price available, or (b) the amount it will bring as salvage, whichever is greater. If there is a market for real property held by the estate, the factors that you (and/or a professional appraiser) should consider are the following:

1. The nature and condition of the property, its physical qualities and defects, and the adequacy or inadequacy of its improvements
2. The size, shape, and location of the property
3. The actual and potential use of the property and how it is affected by development trends and economic conditions (Is the neighborhood getting better or worse?)
4. How suitable the property is for its actual or intended use
5. Changes in zoning restrictions
6. The size, age, and condition of the buildings (degree of deterioration or obsolescence)
7. The market value of other properties in the same area
8. The value of the net income realized from the property (Rentals are often capitalized, which means the value of the rent is projected to derive a value for the asset. For example, a building that yields $10,000 a year in net rentals probably is worth some multiple of $10,000, such as five times. Once rental has been capitalized, it must be adjusted for depreciation.)
9. Prices at which comparable property in the same area was sold at a time near the applicable valuation date (providing it was an arm’s-length transaction for the best price obtainable)
10. How much it would cost to duplicate the property after taking depreciation into account (Your appraiser must separate the cost or value of land from the total value. The cost of reproducing the building, using present cost figures, has to be estimated, and then the loss in value due to depreciation is subtracted from the total of the other two figures.)

Unusual facts

If property in the estate is sold within a reasonable time after death, the IRS usually accepts the amount received as its value. This assumes, however, that it was sold in an arm’s length transaction. If property is sold at auction, the price is generally accepted if it appears that no other method would have resulted in a higher price.

Land may have substantial value for federal and state death-tax purposes even though it doesn’t produce income and even though there is no active market. If land is in or adjacent to a settled community (such as at the edge of an expanding shopping center), it might be worth far more to the shopping-center developer than to a potential buyer in the residential market. Real estate, just like all other assets, must be valued at its “highest and best use” price rather than at the lowest figure the property might bring.

Special Valuation of Certain Farm and Certain Business Real Property

Let’s assume the decedent was a farmer. Let’s also assume that the farmland is surrounded by new housing developments. The estate-tax value of the land as farmland might be considerably lower than the value of the land if it were subdivided and used for single-family dwellings. The tax law allows you to value farmland (and certain business real property) at its “special use” value. For example, you could value farmland as such rather than as land subdivided and developed.

Essentially, the requirements for special-use valuation are the following:

1. On the date the decedent died, the property must be in use as a farm for farming purposes or in a trade or business other than farming.
2. The property must make up a significant portion of the decedent’s gross estate.
3. The property must pass to a “qualified heir” — a member of the family, an ancestor, a lineal descendant, the spouse, the spouse of a descendant, or a lineal descendant of a grandparent.
4. The property must have been owned by the decedent or a member of her family and been used a farm or closely held business for at least five of the eight years prior to death; during that time the decedent or a member of her family must have been materially involved in the operation of the farm or other business.

You can choose one of the various formulas to reduce the values of the farmland from its “highest and best use” value (such as the price a developer might pay) to its value as farm (or business) real property.

If there is no comparable land, or if you choose to value the farm in the same way you might value qualifying closely held business real estate, do one or more of the following:

1. Capitalize the income that the property can be expected to yield for farming purposes over a reasonable period of time under prudent management using traditional cropping patterns for the area (taking into account soil capacity, terrain configuration, and other relevant factors).
2. Compare sale prices of other farms or closely held business land in the same geographical area but far enough removed from metropolitan resort areas to eliminate nonagricultural use as a significant factor in the sale price.
3. Consider any other factor that fairly values the farm (or closely held business) property.

Watch out for recapture of the tax benefit: If, within ten years after the decedent’s death and before the death of the “qualified heir,” the heir disposes of it (by selling or giving it to someone outside the family) or no longer uses it as a farm or for business purposes, the estate-tax benefit because of the lower valuation is “recaptured.” The tax savings is lost and all the tax that would have been paid by choosing the “highest and best use” valuation must now be paid.

Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.

An Overview of Personal Representatives

An Overview of Personal Representatives

In most instances, when a person dies owning property of any real value, it is necessary to appoint someone to administer the estate. That person (it could be one or several persons, a bank or trust company, or both) who acts for, or “stands in the shoes of,” the deceased is called the personal representative. The duties and responsibilities of the personal representative, and even the title of the personal representative, may change depending on the state laws and circumstances involved, but the need for such a person (or persons) is shared by all.There can be other issues for the personal representative to handle aside from those involving financial considerations. For example, a decedent might have had a child from a previous marriage for whom he was paying support. There could have been an outstanding agreement under which the decedent, or the decedent and his wife, was to purchase real estate, with the settlement or closing date after the date of the decedent’s death. Even if the decedent’s affairs were precisely in order and there were no outstanding personal or business debts, a personal representative might be necessary to distribute the decedent’s assets among his spouse and the children. There are, in fact, few situations in which property of a decedent can be transferred at death without the appointment of a personal representative.The Executor or Executrix

The title of the personal representative depends on the method by which he or she (or it, in the case of a bank or trust company) was selected or appointed. If a deceased specifically names a person or institution to act for him or her in his or her will, and if the will is accepted as valid, the named personal representative is known as the executor (male) or executrix (female). In cases when more than one individual or an individual and an institution are appointed to act, the joint designation is usually executors. Corporate entities (banks and trust companies) are also called executors.

The Administrator or Administratrix

If the deceased left no valid will, and therefore has failed to designate his or her personal representative, a personal representative (called an administrator) is appointed by the Probate Office or the Register of Wills office having jurisdiction over the decedent’s estate. This usually takes place in the state and county of the decedent’s domicile. In most instances, state statutes stipulate the person who is entitled to be the administrator.

Usually, the order of preference is similar to the order in which an estate passes to the family of someone who dies without a will. In other words, the spouse or adult children are usually named administrator. It is possible, however, that a more distant family member could be named, or even creditors or other strangers to the estate and to the decedent. If the decedent failed to take advantage of his right to name a personal representative, and if no persons with do relationships are available, the court, in its discretion, might appoint someone unknown to the decedent and unfamiliar with his affairs. This is often the case when the court is concerned about possible conflicts of interest or the rights of creditors or other beneficiaries.

Duties and Responsibilities

When a person dies, her property must be collected. After debts, taxes, and expenses are paid, the remaining assets are distributed to the decedent’s beneficiaries. Distribution is determined by the person’s will, or the intestacy laws (laws that govern the distribution of your estate if you die without a valid will) of the state in which the decedent was living at the time of death. It is the executor’s or the administrator’s responsibility to collect and distribute the assets and to pay me death taxes and expenses of the decedent.

While many executors and administrators perform these designated tasks in an expeditious and prudent manner, this is not always the case. Moreover, state law usually holds the personal representative to the standard of care of a “reasonable, prudent individual” under all circumstances. What is reasonable and prudent to the executor when performing his tasks, however, is not always so to the beneficiaries, especially retrospectively.

The various decisions to be made by the personal representative can often cause complaints by the beneficiaries. Sometimes complaints escalate into lawsuits against the executor(s). If the court feels that the personal representative has not acted reasonably and in the best interests of the estate and beneficiaries, the executor or administrator can be surcharged, which means that the executor is personally liable or undue mistakes made in the administration of the decedent’s estate.

Fees

A question often arises concerning the fees to which a personal representative is entitled for services rendered to the estate. The first place to check is the statutory law of the state where the estate is probated. Some states have standard fixed fees. There are also local county rules and customs that govern what the personal representative is entitled to charge.

Professional executors such as banking and trust institutions advertise fixed-fee schedules. However, with estates in excess of $1 million it may be possible to negotiate a lower fee. These negotiations occur between the prospective executor and the person making the initial designation (the individual desiring to name the institution as personal representative in her will). An attorney who specializes in estate administration may be helpful in negotiating a lower fee for a large estate.

In all cases, the executor or administrator is entitled to reasonable compensation for services. Fees should not be determined solely on the basis of the assets of the decedent; they should also take into account the nature of the work involved, the time spent, the complexity of the problems, the professional background and competence of the executor, and the ultimate results and benefits passed on to the heirs.

Remuneration for services should bear a reasonable relationship to the time spent as well as the quality of work and results achieved. The personal representative should keep a detailed record of time spent, services performed, and expenses paid on behalf of the estate. Furthermore, the executor should make periodic written progress reports to the beneficiaries and, if the situation permits, submit periodic bills for services rendered. In any event, before any work is begun, negotiate and settle (in writing) the issue of fees based on an estimate of complexity and other issues.

Psychologically, many beneficiaries have their shares “spent” before they receive them. The subsequent announcement that the personal representative expects to receive a significant portion of that amount for services performed doubtless will be met with some serious resistance. This is especially true if the beneficiaries were not periodically apprised of the work being performed and had no prior knowledge of the anticipated amount of the personal representative’s fee. It is much easier to have a frank discussion of fees early on when the beneficiaries are aware of the complexities of the personal representative’s duties and are anxious to have someone else take on this responsibility.

When the personal representative is an immediate member of the family, problems about fees are less likely to occur. For example, if the widow is the executrix and the sole beneficiary, it might be far more advantageous for her to receive the net proceeds of the estate as an inheritance rather than to charge an executor’s fee that will ultimately come out of her own pocket. The executor’s commissions or fees are taxable for income-tax purposes, and often at a higher rate than if the sole tax involved is the state inheritance tax-or even, in some instances, the federal estate tax

Finally, there is the question of the division of the fee when two or more individuals are serving as coexecutors or coadministrators. When they are individuals, the fee usually is divided equally (although in a few states each executor could receive a full commission). But when a corporate executor is serving with an individual coexecutor, courts often award the corporate executor (bank or trust company) a higher percentage. For example, in Pennsylvania the bank would receive its usual fee and the individual executor would be awarded one half of the bank’s fee. Of course, if the decedent has specifically provided for the payment of fees in the will, the courts in most instances are guided by the decedent’s wishes.

Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.

Executors - Investing Estate Assets

Executors - Investing Estate Assets

After paying all of the estate’s debts and expenses, or perhaps while waiting until it is time to pay them, what does an executor do with all of the estate’s money? Is the executor responsible for actively investing the estate assets? Many people are under the mistaken impression he is.In fact, unless the will or the laws of the particular state specifically direct otherwise, the executor is under no duty to invest the estate funds. His primary responsibilities include discovering and collecting estate assets, paying all appropriate debts and expenses, and distributing the balance to the beneficiaries. This is not to say, however, that he need not pay attention to existing investments or that he can leave funds idle. At the very least, any cash or liquid funds should be deposited into interest-bearing bank accounts. In this context, he is not necessarily bound to search for the highest income-producing investment; his first consideration must be protection of the principal, even if it means accepting a lower return.

If, on the other hand, the will instructs him to invest estate funds or state law imposes some duty to invest, then he must do so, and when doing so, he is under the same duties as a trustee. That is, he must follow the “prudent man rule,” which basically suggests that he invest in securities of well-established companies with long-term dividend records or in bonds with ratings that are considered safe and suitable for this type of investment. Most states have what is called a “legal list” of investments that are considered suitable for funds held by fiduciaries, such as executors and trustees. Investments in securities included on the legal list or that are similar in all other respects, therefore, will usually be acceptable investments for an executor who is obliged to invest.

Occasionally, the executor “inherits” a questionable investment that the deceased was holding during his lifetime and is faced with the choice of making an unauthorized sale or watching the investment gradually sink in value. In such a case, he is not obliged to sell, but prudence should motivate him to ask the court and/or the beneficiaries for permission to do so. Obtaining the permission of either would normally take the executor off the hook for selling or failing to sell.

If the questionable investment consists of something the executor cannot sell, such as shares of stock in a small or privately held company, then he is under no obligation to take action other than to exercise his right to vote as a stockholder of the company and to keep aware of the status of the stock and the company.

An executor who is not obliged to invest would be well advised to avoid doing so and should simply place the funds in a safe bank, or if there are large sums of money, perhaps in U.S. treasury bills or notes. If an executor is not under a duty to invest but decides to do so anyway, he can be personally liable for any losses resulting from a bad investment, even though he acted in good faith, unless he can show that he made the particular investments at the beneficiary’s specific request or at the court’s direction.

The risk of personal loss for bad investments can be a serious one, especially where there are two or more executors and the investments are entrusted to one of them; this often happens when a family member and a professional person, such as an accountant, are named co-executors. Usually the nonprofessional will let the professional do the investing, paying little or no attention to what he does with the funds, unaware that he could be personally liable for the professional’s bad judgment.

An executor has to keep estate assets reasonably invested, yet at the same time keep investments liquid enough to pay the estate’s debts, taxes, and expenses, and distribute each beneficiary’s share when the executor completes probate.

Once the executor knows how large the estate is and what types of assets the estate encompasses, he can begin to estimate what debts the estate must pay and what specific cash bequests he will have to make. He also has to “guesstimate” how much money he will need to pay taxes and administration expenses. He has an obligation to determine whether the estate has sufficient liquidity to meet financial demands. If the estate does not, it is the executor’s duty to formulate an orderly investment plan to increase estate liquidity. If there is not enough cash to pay these expenses when the time comes (but there was enough value when he took over as executor), he could be “surcharged for speculating on the continued maintenance of estate values.”

To avoid these problems, an executor should take the following steps:

1. Value assets as quickly as possible.
2. Draw up a list of estimated debts, taxes, expenses, and other cash needs.
3. Compute the difference between “liquidity” (the cash he will have) and cash needs.
4. See how much of the estate consists of cash or “near cash” (bonds or savings instruments with a maturity date prior to the date he will need cash).
5. Decide which permanent assets should be sold to meet the estate’s needs if his analysis shows he does not have enough cash.
6. See if any assets should be disposed of immediately to avoid destruction or loss (including stocks or bonds that may fall in value or vacant non-income-producing real estate).
7. Consider selling small or odd-lot holdings as well as underproductive assets. Confer with beneficiaries and obtain their written approval before the executor makes any sales.
8. Surrender certificates of deposit to the issuer before maturity. This can be done without penalty when the owner dies.

Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.

Basic Trust Types and Formation

Basic Trust Types and Formation

Express Trusts

An express trust can be either private or charitable. The main difference is that the beneficiaries in a private trust are identifiable persons while a charitable trust cannot be for the benefit of identifiable persons. A charitable trust must be for religious, charitable, educational, or benevolent purposes, and cannot name only a few individuals to receive the benefit. If a charitable trust fails to name a specific charity, a court will redirect the trust property to a recipient that most closely appears capable of carrying out the charitable purpose.

A second difference is that a charitable trust can be perpetual while a private trust is subject to certain time limitations in which the benefits must vest; i.e., become absolute.

Implied Trusts

A resulting trust is imposed by a court when an express trust fails. A constructive trust is a remedy that a court uses to prevent unjust enrichment in cases involving fraud or wrongful conduct. A trustee has no duties to perform in either a resulting or a constructive trust because the title to the property is held by the beneficiaries.

Formation

A person can create an express trust either during life or at death. A trust created during life is known as an inter vivos, living, or lifetime trust. A trust created by a provision in a valid will is known as a testamentary trust. The required elements for a valid trust are a trustor, a trustee, trust property, and beneficiaries.

(1) Trustor — also called a “settlor,” “creator,” or where a trust is testamentary, “testator.” The trustor must have capacity to transfer title to the trust property.

(2) Trustee — holds title to the trust property for the benefit of the beneficiaries. A trustor can also be a trustee of a trust. If the trustor does not name a trustee or if the named trustee resigns, dies, or is removed and no alternate trustee is designated in the trust document, a court will appoint someone to serve as trustee. In some jurisdictions, minors and incompetents cannot serve as testamentary trustees.

(3) Trust property — also called “res,” “corpus,” or “principal.” The trust property must be identifiable from the facts known at the time the trust is created. Property that a trustor expects to own at a later time but has no current right to transfer cannot be the subject of a trust. In some jurisdictions, an unfunded trust is valid if its only purpose is to hold proceeds from certain non-probate property such as retirement plans or life insurance policies.

(4) Beneficiaries — may sue the trustee for breach of duty or to enforce the terms of the trust. If at the time the trust becomes effective, the beneficiaries are impossible to ascertain, the trust fails and reverts to the trustor. Beneficiaries must be ascertainable or the trust is invalid. If a testamentary trust is invalid for lack of specific beneficiaries, then the property is held in a resulting trust. A trustor can also be a beneficiary of a trust. Beneficiaries do not have to be notified of or accept a trust in order for it to be valid. Beneficiaries must be human although there are exceptions for trusts to benefit pets and to take care of graves.

All express trusts must be in writing. In some jurisdictions, there are specific signing requirements necessary to create an inter vivos trust such as witnesses or acknowledgement before a notary public. A trustor must intend to create a legally enforceable obligation and although no specific language is required, words simply expressing the wish or desire to benefit another should not be used. Delivery of the trust property’s title to the trustee is also required.

A trust may be formed for any purpose that is lawful and not against public policy. Unlawful conditions include those that encourage divorce or separation, conditions that discourage having children, conditions that are a complete restraint on marriage, and provisions that demand the destruction of property. When a condition is illegal, the beneficiary obtains the trust property free of such condition.

Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.

Housing - Federal Public Housing Programs - § 231 Housing Mortgage Insurance For The Elderly

Housing - Federal Public Housing Programs - § 231 Housing Mortgage Insurance For The Elderly

The § 231 program provides low-interest, fixed-rate mortgage loans to housing developers for either construction or rehabilitation of rental units occupied by the elderly or the handicapped. Through this program, lenders are insured against losses on mortgages given to build or substantially rehabilitate housing for the elderly and handicapped. Certain requirements must be met regarding the size and type of units, and only certain individuals and families are eligible to live in units developed under § 231.How Is Assistance Is Provided And What Are The Terms Of Assistance?

Under § 231, the Department of Housing and Urban Development (HUD) provides mortgage loans to enable developers to renovate or construct housing for use by the elderly or handicapped. Nonprofit, public, or private sponsors are eligible to receive the assistance as long as there are at least eight units in the housing.

Nonprofit and public sponsors may receive up to 100 percent of the building’s replacement cost, while others may only receive assistance at 90 percent. The length of the loan is the lesser of 40 years or 75 percent of the remaining economic life of the building.

Three charges are associated with obtaining § 231 assistance: (1) an annual mortgage premium, which is .5 percent of the mortgage amount; (2) an application fee, which is $ 3 per $ 1,000 financed; and (3) an inspection fee, which is $ 5 per $ 1,000 financed.

There is an extensive application process that developers must follow, starting with determining the feasibility of the project and compiling a full-fledged appraisal or feasibility application. Some of the considerations are the architectural merit of the project, the market’s need for the housing, the developer’s ability to repay the loan, the availability of community resources, and the zoning of the property.

Who Is Eligible To Live In § 231 Housing?

Only those at least 62 years of age and those with disabilities are eligible to live in § 231 housing.

Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.

Department of Defense Health Care Benefits

Department of Defense Health Care Benefits

The United States Department of Defense (DOD) provides health care coverage to its members through its own facilities, military facilities, and private health care providers, although the cost of the care may vary depending upon the recipient and the location of the services provided.Department of Defense Health Care System and Military Facilities

When space is available in DOD facilities, the DOD may provide service retirees with care in those facilities. The DOD may also choose to provide care to retirees in military facilities, again if space and resources are available to do so. However, when space or resources are not available, the DOD pays most of the cost of privately obtained care through the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS).

TRICARE for Life

Until fairly recently, military retirees at least 65 years old received their sole health care benefits through Medicare. However, in 2001, a new law granted retirees who were enrolled in Medicare Part B lifetime rights to health care benefits under TRICARE, as well. For those retirees, Medicare serves as their primary health coverage, and TRICARE serves as a secondary payer, functioning much like a Medigap insurance policy, only without a premium.

Military retirees are eligible for TRICARE for Life if they have at least 20 years of honorable service, are eligible for Medicare Part A, and are enrolled in Part B of Medicare. Former military members retired due to medical disability are also eligible for TRICARE for Life. However, not only are the retirees themselves eligible, so are their dependents, including their spouses, widows and widowers, children, and elderly parents.

Also in 2001, military retirees covered under Medicare Part B became eligible for pharmaceutical coverage under TRICARE’s Senior Pharmacy Program (TSPP). TSPP covers the use of military base pharmacies, when available, as well as a national mail order program and a network of retail pharmacies. Both provide low-cost prescription drug service.

Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.

Asset Management - Viatical and Senior Settlements

Asset Management - Viatical and Senior Settlements

In a viatical or senior settlement, a person who owns a life insurance policy sells the policy for a lump sum payment, usually a percentage of the policy’s face value, to a buyer. The buyer of the policy then becomes the beneficiary, pays the premiums, and receives the full amount of the insurance when the original owner dies. Viatical settlements can be risky for both the sellers and the buyers and should be evaluated carefully.A senior settlement is simply a viatical settlement in which the seller is at least 65 years old.

How Does a Viatical Settlement Work?

Because viatical settlements depend upon the type and amount of the policy, as well as the owner’s age and medical condition, the owner first provides this information, including the policy and premium information, as well as medical records and releases. Typically, a medical expert then reviews medical information and provides a life expectancy for the owner. The amount paid depends upon many things, such as the policy owner’s age, the owner’s health, and economic conditions and the rating of the insurance company purchasing the policy. If the seller and buyer agree upon the amount to be paid, they execute a contract and change the policy beneficiary. Payment is then issued.

What Should Sellers Consider?

There are both advantages and disadvantages to selling life insurance policies in viatical settlements. The most obvious advantage is the immediate use of income from the sale proceeds. Additionally, sellers who are terminally or chronically ill can exclude from their taxable income any part of the settlement up to the amount they paid for premiums throughout their ownership of the policy. Eligible sellers must either be permanently and severely disabled or must have a life expectancy of less than two years.

However, several disadvantages may follow viatical settlements, as well. For instance, creditors may be more able to collect on outstanding judgments and eligibility for cash assistance programs may be stifled.

What Should Buyers Consider?

Buyers of life insurance policies owned by others should carefully investigate before investing. Although the federal government does not regulate viatical settlements, most state governments regulate the insurance industry, and other offices, public and private, can often provide valuable information, as well. For example, buyers can ask the state regulatory board whether the company is licensed to handle viatical settlements, and information about complaints and lawsuits against companies is also sometimes available from that board. State attorney general offices and Better Business Bureaus also maintain information about complaints and lawsuits. Finally, it is often wise to consult with private attorneys or financial advisers before entering into viatical settlements.

Policy buyers should also secure written evidence of their status after the sale, of the seller’s health status, and of the company’s ability to pay the policy proceeds when the seller dies.

Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.

Concerns about Variable Annuities

Concerns about Variable Annuities

An annuity may be a wise investment because it can pay income to the annuitant for the rest of his or her life. The amount of that income can be fixed or variable. In a fixed annuity, the income payment is typically guaranteed. In a variable annuity, the income amount will fluctuate based on the performance of the investment portfolio. This makes the variable annuity a higher-risk investment, and a variable annuity almost always should be viewed as a long-term investment vehicle. Commercial annuity issuers typically charge various fees to administer, manage, underwrite, and transfer the annuity account to another investment account. When an annuity contract is transferred or replaced, a surrender charge typically applies. Under the new policy, a new surrender period begins again. Commercial annuity issuers may charge additional penalties for early withdrawal.

Seniors have been particularly vulnerable to unscrupulous annuity sellers and fraudulent sales tactics with regard to variable annuities. Currently, there are numerous investigations of commercial variable annuity issuers involving a tactic called “switching.” As mentioned above, fees are typically imposed when a variable annuity account is transferred or switched into a different account. Several annuities sellers and brokerage firms have been charged or are being investigated for unreasonable and unnecessary “switching,” which has provided a windfall in commissions and profits to securities sellers and brokerage firms. The New York Attorney General is currently investigating whether an insurance company allowed lucrative trades for certain investors but did not allow them for other investors. Another company has recently been fined for misrepresenting annuity contract terms and provisions, forging transfer and other documents, and failing to provide suitable investment advice to clients.

California has passed new legislation (amending its insurance code) that targets insurance agents who prey on senior citizens. The new law requires an insurance agent to give a senior citizen written notice in advance before visiting a senior citizen’s home to sell annuities or to make a sales pitch. The senior citizen must be advised of the right to have family members or friends attend, and the insurance agent must also give the names of others who will accompany the agent to the home. The law also addresses “switching.” Agents are prohibited from making materially inaccurate presentations to induce a senior to buy a new policy where a surrender charge must be paid to replace the existing annuity and the purchaser will not receive a substantial financial benefit over the life of the new annuity. Additionally, the law protects seniors from annuity sales that promise to qualify them for Medi-Cal assistance (the state equivalent of Medicaid). The law also increases fines for false and misleading advertisements with regards to the sale of insurance and annuities. All persons who sell annuities must satisfactorily complete eight hours of training before selling annuities as of January 1, 2005.

The National Association of Insurance Commissioners (NAIC) adopted a model regulation in 2003 that establishes standards and procedures for sales of annuities to senior citizens. The seller must provide suitable advice and make recommendations about the purchase or exchange of an annuity based on the senior citizen’s ascertained and actual financial situation and needs. The seller or insurer is “off the hook” if the senior citizen does not provide relevant information that has been requested. An insurer must have a system in place to monitor and supervise any recommendations. Compliance with the National Association of Securities Dealers Conduct Rules regarding suitability will satisfy the requirements for variable annuities. The model regulation exempts recommendations involving direct-response solicitations and certain funded contracts covered under federal law.

Senior citizens should always be aware and beware of hard-pressure sales tactics, a promise that sounds too good to be true, and a promise of tax-exempt income payments. While this list is not exhaustive, alarm bells should go off in the following circumstances:

• You are being asked to switch or replace your variable annuity policy
• You are being asked to give your agent a power-of-attorney to authorize transfers or replacements
• You are being asked to transfer or replace your variable annuity policy without a full explanation and disclosure of surrender charges and new surrender periods
• You are being asked to transfer or replace your variable annuity account with one that offers a substantially similar rate of return
• You are being offered a bonus to transfer, replace, or maintain the account

Copyright 2008 LexisNexis, a division of Reed Elsevier Inc.