The advantages of using a trust as a beneficiary of a retirement plan include creditor protection for heirs, ensuring the "stretch-out", and ensuring that the retirement plan stays in the family. A Wall Street Journal article recently highlighted some of these advantages. It can be read here.

However, when a Roth IRA conversion is involved, there is yet another trust advantage. If death occurs before the recharacterization deadline (October 17, 2011 for 2010 conversions), the executor can elect to recharacterize the deceased Roth IRA owner's account. This could be a valuable tax saving move if the Roth IRA has dropped in value. However, unless the estate is the named beneficiary (this should never be done), the executor is powerless to implement the election, since the executor does not have title to the account. Rather, the cooperation of the beneficiaries is needed.

Will they cooperate? If they really want a Roth IRA, then probably not, since there is no such thing as a post-death reconversion. If they will not share in the tax savings, then again, probably not. For example, when a Roth IRA is left to grandchildren and the rest of the estate to children, the children are the only ones to benefit from the recharacterization. From such situations, disputes could arise, and then litigation. To head off such trouble, use a trust as a beneficiary of the Roth IRA. The trust should mandate that the trustee cooperate with the executor's election. No approval of a court or of a beneficiary would be needed.

Be sure to advise your clients of the many advantages of using trusts as beneficiaries of retirement plans. And, if a Roth IRA conversion is involved, be sure that the trust anticipates the possibility of a post-death recharacterization by giving appropriate directions as described above.

For more information regarding this topic, please e-mail your requests to Salvatore J. LaMendola, or call Sal at (248) 457-7204.

Recently, the Detroit Medical Center and its affiliates have been sold to Vanguard Health Systems, Inc., and will now be operated as a for-profit entity. For clients who have named the DMC or any of its affiliates (i.e., Children's Hospital, Kresge Eye Institute, Rehabilitation Institute of Michigan, Karmanos Cancer Institute, etc.) as beneficiaries under their wills and/or trusts, they will need to amend their estate planning documents. For example, if the Detroit Medical Center, or one of its affiliates, is a beneficiary of a charitable remainder trust, failure by the client to remove and replace with a qualifying charitable beneficiary before the end of the income beneficiary's interest will likely result in a reduction in the anticipated charitable income tax deduction.

For more information regarding this topic, please e-mail your requests to Julie L. Cavanaugh, or call Julie at (248) 457-7228.

Funds to Move People from Institutions into the Community. The federal government, through the newly enacted Community First Choice Program, will offer states that develop community support programs for people with disabilities partial Medicaid reimbursement. In order to receive these federal funds, states would have to create specialized programs that specifically help people with special needs who require an institutional level of care move into the community. Most of the suggested programs will focus on providing in-home support and attendants.

Insurers Will Not be Able to Refuse Coverage for People with Pre-Existing Conditions. One of the most talked-about provisions of the new law prevents health insurance companies from denying coverage to people with pre-existing medical conditions. People with special needs who do not receive comprehensive health insurance coverage through government programs or a relative's health insurance have routinely been denied private coverage because of their special needs. The new law prevents insurance companies from denying coverage based on these pre-existing conditions. This portion of the law will not apply to coverage for adults until 2014, but children with pre-existing conditions should be covered under the new law this year.

No Lifetime Limits on Coverage. No matter the amount of care an insured receives, he or she will be able to keep her insurance coverage.

Children Can Remain on Parents' Policies Until Age 26. Parents will be able to keep children on their medical insurance until their children reach age 26, whether or not they are in school.

Extension of Mental Health Parity. The Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 recently took effect for group insurance plans covering more than 50 people. This law requires plans that include coverage for mental illness to provide that coverage on an equal footing with coverage for other medical conditions. For example, insurers are no longer allowed to charge higher co-pays for visits to mental health professionals than they would for visits to medical doctors. The health care reform law extends mental health parity to all plans, regardless of the number of participants, and it goes one step further by including mental health care as "essential" care that plans are required to cover.

CLASS Plan Allows Voluntary Purchase of Long-Term Care Insurance. As previously mentioned in an April 2010 e-update, the new health care reform law includes the CLASS (Community Living Assistance Services and Supports) Plan, a program that allows individuals to purchase long-term care insurance from the government. While the benefits are modest compared to the average cost of nursing home care, it could be used instead to pay for a range of services that would help people stay in their homes. The CLASS program could be of greatest use for those people with special needs who do not require full-time nursing home care, but who will need additional in-home care as they get older.

New Office Will Help Integrate Medicaid and Medicare Benefits. A sizable number of people with special needs, known as "dual eligible" beneficiaries, receive both Medicaid and Medicare. The health care reform law will create the Federal Coordinated Health Care Office to coordinate between the two programs and encourage the states to provide a higher level of care to dual eligible beneficiaries.

Dramatic Expansion of Medicaid. Current federal regulations require states participating in the Medicaid program to provide coverage for children in families living under the federal poverty level, and to extend coverage to their parents in certain situations. Although people who qualify for Supplemental Security Income (SSI) often obtain Medicaid benefits, most adults who do not have severe disabilities and who do not have children have a hard time getting Medicaid. Under the health care reform law, states must offer Medicaid to all adults making less than 133 percent of the poverty level by 2014. This dramatic expansion of Medicaid could provide benefits to many people with special needs who do not otherwise qualify for the program because they are able to work, albeit in low-paying jobs. States that want to begin offering these benefits immediately can apply for federal funding of Medicaid expansion as early as last week.

Higher Medicaid Payments to Doctors. It can often be difficult to find doctors who accept Medicaid because of the program's low reimbursements, which average only 72 percent of rates paid by Medicare. In 2013 and 2014, Medicaid's reimbursements to doctors will rise to the same level as Medicare, making it more likely that a doctor will participate in the program.

Additional Training for Workers Who Assist People with Disabilities and Funding for Research. The new law also designates funds for the training of behavioral health workers who assist people with special needs. Funds are also set aside for private research institutes devoted to researching mental illness.

For more information regarding this topic, please e-mail your requests to Brenna D. Mansfield, or call Brenna at (248) 457-7227.

The United States Supreme Court, through its denial of a petition for certiorari, refused to accept for hearing the case of V. R. DeAngelis et. al. v. Commissioner. The petition was filed by a group of doctors and their S corporations involved in the case. Among the key issues in the case is whether or not life insurance premiums paid by a partnership to a welfare benefit plan established pursuant to IRC Section 419A were deductible for income tax purposes.

Briefly, four doctors were the sole owners of separate S corporations. Two of the four doctors established a partnership to provide medical and surgical services to their patients through the four doctors. The four S corporations were the owners of this partnership. In the early nineties, each of the S corporations paid money to this partnership, which in turn made contributions to a welfare benefit fund. This fund used the contributions to purchase and pay the premiums on whole life insurance policies on the spouses of the doctors, as well as the office manager for the partnership.

The IRS determined that the partnership could not deduct the contributions ($585,000) it paid to the welfare benefit plan because the payments were not ordinary and necessary business expenses under IRC Section 162(a). The Tax Court upheld the IRS's determination, deciding that the payments (except for the insurance policy on the life of partnership's office manager) were not ordinary and necessary business expenses of the partnership. The doctors argued that the expenses for life insurance premiums were, indeed, deductible as a business expense and that the welfare benefit plan met the requirements of IRC Section 419A(f)(6). The U.S. Court of Appeals for the Second Circuit affirmed Tax Court opinion. Therefore, the Supreme Court's refusal to accept hearing of this case upholds the Second Circuit's holding and brings the judicial consideration of DeAngelis to a close.

For more information regarding this topic, please e-mail your requests to Thomas P. Cavanaugh, or call Tom at (248) 457-7218.