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Long Island's Elder Law, Special Needs & Estate Planning Firm

Friday, February 17, 2012


Researchers found that a simple questionnaire can help differentiate individuals experiencing normal age-related memory loss from those likely to be developing dementia.

Note that those who often repeated questions, statements, and stories on the same day also were at very high risk for the development of amnestic mild cognitive impairment.

A simple questionnaire can help differentiate individuals experiencing normal age-related memory loss from those at risk for developing dementia, most notably by their orientation to time and patterns of repetitive speech, researchers found.

On the 21-item Alzheimer's Questionnaire, patients having trouble remembering the day, month, year, and time of day were almost 18 times more likely to have amnestic mild cognitive impairment, a precursor to dementia, according to Michael Malek-Ahmadi, MSPH, and colleagues from the Banner Sun Health Research Institute in Sun City, Ariz.

Those who often repeated questions, statements, and stories on the same day also were at very high risk, the researchers reported online in BMC Geriatrics.

Distinguishing mild cognitive impairment, particularly when associated with memory loss rather than loss of other functional domains, can be clinically challenging and time consuming, and brief screening tools are sorely needed as the aging population expands, according to the researchers.

"Additionally, as new therapies for Alzheimer's disease transition from being symptomatic to disease-modifying, identifying individuals who are at risk or in the earliest stages of the disease will be crucial in determining and improving disease outcome," they wrote.

A pilot study by these researchers recently showed good sensitivity and specificity for the Alzheimer's Questionnaire, with responses about various aspects of memory and related cognitive concerns being provided by caregivers or other informants.

To see if certain components of the questionnaire were particularly accurate in pinpointing these types of impairments, Malek-Ahmadi's group compared responses among 47 patients who had been diagnosed with amnestic mild cognitive impairment and 51 controls who were participants in a program involving posthumous brain and body donation.

The diagnosis of cognitive impairment had been made clinically and with neuropsychological testing, with scores on verbal memory recall measures falling 1.5 standard deviations below normal ranges for age and educational attainment.

Cognitively normal participants all scored higher than 1.5 standard deviations on the neuropsychological tests.

The Alzheimer's Questionnaire assesses memory, language, orientation, visuospatial competence, and functional capacity by a series of yes/no questions such as, "Does the patient have trouble remembering to take medications?"

On almost all questions, significantly more "yes" responses were seen for the cognitive impairment group.

Regression analysis determined that, along with repetitive speech and disorientation as to time, two other questions were highly predictive.

One was whether the patient has trouble dealing with financial matters such as paying bills, and the second was if the patient showed an impaired sense of direction, according to the researchers.

Further analysis indicated that the four identified items could account for a substantial proportion of the variance between patients with amnestic mild cognitive impairment and those who were cognitively normal.

"These data indicate that problems with orientation to time, repeating statements and questions, difficulty managing finances, and trouble with visuospatial orientation may accompany memory deficits in amnestic mild cognitive impairment," the researchers stated.

Source:  Nancy Walsh, MedPage Today, 2/212

UPDATE:  Once again, Spousal Refusal is on the New York State budget chopping block.  There is a current proposal in the budget bill that, if becomes law, would make the use of Spousal Refusal available ONLY to those with absent spouses.  Although these proposals are not law at this time, the window to use certain planning techniques is apparently closing.  With these impending restrictions looming, advance planning is needed now more than ever.  Stay tuned!

Friday, February 3, 2012

Trusts and Trust Taxation

Two Categories of Trusts: Revocable and Irrevocable
Revocable Trusts
A revocable trust is a trust which can be revoked or amended by its creator at any time and without anyone's consent. Of course, the creator of the trust retains the unrestricted control of the trust assets so long as he or she is competent. After the creator's death, the trust usually continues for traditional estate planning purposes.
When planning for a family member with special needs, his or her parent(s) or other relatives often create a revocable special needs trust but expect to delay funding until the creator's death. The trust creator may declare the trust irrevocable at any time and may even provide for an automatic shift to irrevocable status under a specific circumstance, such as funding by someone other than the trust creator. Revocable trusts give the creator significant flexibility to address changes in the lives of those expected to be involved in the future administration of the trust.
Irrevocable Trusts
Irrevocable trusts are the other (and more commonly used) category of trusts used in special needs estate planning. The primary characteristics of an irrevocable trust are that the creator cannot amend the provisions of the trust and cannot spend trust funds for the benefit of anyone other than the beneficiary unless the terms of the trust document specifically authorize it. Sometimes the trust document grants the trustee a limited right to amend certain provisions if changes in the beneficiary's life justify or require an amendment. For example, this need could be triggered by the beneficiary moving to another state with different laws or policies, or by changes in trust, tax, or public benefits law.
SNTs created by and funded with the assets of the parents, grandparents or other relatives are called "third-party" SNTs, whether they are irrevocable at the time of creation or become irrevocable later. SNTs funded with assets of the beneficiary are called "first-party," "self-settled" or "Medicaid payback" trusts and must be irrevocable from the beginning. First-party trusts can receive and hold any assets of the beneficiary, such as his or her injury settlement funds and gifts and inheritances left directly to the beneficiary.
Whether a first- or third-party irrevocable SNT, the creator is prevented from accessing the funds unless those funds are to be spent for the benefit of the trust beneficiary according to the trust's terms.
Trust Taxation
Family members should have a general understanding of the basic income tax rules that will apply to the trusts they create for their loved ones. Where is the trust's income reported? Who is responsible for the payment of tax on the trust's income? The remainder of this article addresses questions like these.
Revocable Trusts
Revocable trusts are the simplest of all trust arrangements from an income tax standpoint. Any income generated by a revocable trust is taxable to the trust's creator (who is often also referred to as a settlor, trustor, or grantor) during the trust creator's lifetime. This is because the trust's creator retains full control over the terms of the trust and the assets contained within it. Typically during the creator's lifetime, the taxpayer identification number of the trust will be the creator's Social Security number. All items of income, deduction and credit will be reported on the creator's personal income tax return, and no return will be filed for the trust itself. Revocable trusts are considered "grantor" trusts for income tax purposes. One could think of them as being invisible to the IRS and state taxing authorities. Grantor trusts are discussed in more detail below.
Irrevocable Trusts
Most irrevocable trusts have their own separate tax identification numbers, which means that the IRS and state taxing authorities have a record of the existence of these trusts. Income of a trust that has a tax identification number is reported to that tax identification number with a Form 1099, and a trust reports its income and deductions for federal income tax purposes annually on Form 1041. There are two primary taxation categories of irrevocable SNTs: (1) grantor trusts and (2) non-grantor trusts.
Grantor Trusts
If a trust is considered a grantor trust for income tax purposes, all items of income, deduction and credit are not taxed at the trust level, but rather are reported on the personal income tax return of the individual who is considered the grantor of the trust for income tax purposes.
The concept of who is the grantor can sometimes be confusing, especially in the context of a first-party SNT. For income tax purposes, the grantor is the individual who contributed the funds to the trust, not necessarily the person who signs the trust as the creator. Generally all first-party trusts (those funded established with the beneficiary's own assets) are considered grantor trusts for income tax purposes and so all of the items of income, deduction and credit will be reportable on the beneficiary's personal income tax return.
Third-party SNTs can also be created as grantor trusts, as sometimes the creator of the third-party SNT wants to remain responsible for payment of the income taxes during his or her lifetime. In those instances the creator of the trust retains certain rights which cause the trust to be treated as a grantor trust for income tax purposes. At the time the creator of the trust passes away or otherwise relinquishes the rights causing the trust to be a grantor trust, the trust's income will no longer be taxable to the grantor, and the trust will no longer be considered a grantor trust.
Non-Grantor Trusts
When a trust doesn't qualify as a grantor trust for income tax purposes, how is the trust taxed and who pays the taxes on the income?
To the extent the trustee of a non-grantor trust pays expenditures on behalf of the beneficiary of the trust, the trust receives a deduction, and all or a portion of the trust's income will be taxed to the beneficiary. This relates to a provision in the Internal Revenue Code that states distributions to or for the benefit of a non-grantor trust beneficiary carry out income to that beneficiary. For example, if in 2012 a taxable trust generated $3,000 of interest and dividend income, and the trustee made distributions of $5,000 for the benefit of the beneficiary in 2012, all of the $3,000 of income would be treated as having been passed out to the beneficiary and thus taxable to the beneficiary on his or her personal income tax return.
Though at first blush this may not seem ideal, in many cases the result is good because the beneficiary, earning little or no income, is in a low income tax bracket. The beneficiary will often have his or her own personal exemption ($3,800 for federal income tax purposes in 2012), and in many cases the standard deduction available for individual taxpayers ($5,950 in 2012). Unless the beneficiary has other sources of taxable income, the only trust income ultimately taxable to the beneficiary will be the amount of income that exceeds the total of the beneficiary's standard deduction and personal exemption.
By contrast, to the extent that trust income is not distributed to or expended on behalf of the beneficiary in a given year (or by March 5th of the following year), that retained income is taxed to the trust. Using the same example above, if a taxable trust generated $3,000 of income in 2012, and only $1,000 was expended on the trust beneficiary in 2012, $1,000 of income will be passed out and taxable to the trust beneficiary, but the remaining $2,000 of income will be taxable at the trust level.
Dramatic Differences in Tax Rates
Understanding the income tax treatment of taxable trusts is important because trusts have highly compressed tax brackets. For 2012, trusts reach the highest federal tax bracket of 35% at taxable income of $11,650 (except for capital gains, which are taxable at a lower rate). By comparison, the tax rate for single taxpayers on taxable income of $11,650 is only 15%. The highest federal tax bracket of 35% does not apply to most individual taxpayers until their taxable income reaches $388,350. In addition, many states also tax the income of trusts.
Taxable trusts have a very small exemption of only $100. (If the trust requires that all income be distributed annually, the exemption is $300, but a SNT should not have such a requirement.) If the third-party SNT and its beneficiary meet certain requirements, the trust can be considered a Qualified Disability Trust (QDT) for federal income tax purposes and allowed a larger exemption. The next issue of The Voice will discuss the QDT, the higher federal income exemption QDTs are allowed, and when a third-party SNT can or should be drafted as a QDT.
Family members and the professionals helping them often fail to consider and discuss the various options available in establishing a SNT and how choices affect the taxation of the trust. Being aware of the income tax aspects of these commonly used estate planning tools can help the attorney and client make choices that can minimize the federal and state income taxes payable at different stages of the trust's existence. Failing to consider these consequences may result in unintended contributions being made to the IRS. As one can glean from this article, trust taxation is a complex but very important topic. Families and trustees need to work with a practitioner who has both knowledge and experience with SNTs and trust taxation.

Source:  www.specialneedsalliance.com