Chronic Illness: Estate, Financial and Related Planning

1. Chronic Illness:Estate, Financial and Related Planning Martin Shenkman, CPA, MBA, JD 90 Million Americans live with Chronic Illness – Planning Needs to be Tailored

2. Caveats Nothing in these slides or any accompanying presentation is to be considered legal or professional advise. The information is merely provided for educational purposes and no action should be taken without the individual consulting his or her own tax, estate, legal, financial, investment, insurance and other advisers.

3. Introduction to Chronic Illness Planning • There are some 90 million Americans living with chronicillness or disability. • For those of more limited means planning for governmentprograms and special needs trusts – SNTs is vital. Thisplanning has been addressed in other programs andresources and will not be the focus of this presentation. • People living with chronic illness and disabilities have a range of planning issues in addition to government programs and SNTs that will be explored. • Living wills, health proxies, HIPAA releases and more need to be tailored to reflect each persons personal situation, current health status and disease course. • Many people living with chronic illness or disability have high net worth and need specialized investment, estate and other planning.

4. Income Tax Considerations of Disability • Income taxation of settlements • E.g. suit against employer or partners fordiscrimination, damages, back wages,etc. must be allocated to each tax category. • Legal fee deductibility and the AMT Trap. Code Section 62(a)(20) may permit deduction against AGI. • Disability insurance income tax considerations • Income tax free if paid personally. • Improvements to homes • Tax deduction as medical expense or addition to basis. • Other

5. Income Tax Considerations of Disability • IRC Sec. 62(a)(20): Costs involving discrimination suits, etc. • Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination…The preceding sentence shall not apply to any deduction in excess of the amount includible in the taxpayer's gross income for the taxable year on account of a judgment or settlement (whether by suit or agreement and whether as lump sum or periodic payments) resulting from such claim.

6. Income Tax Considerations of Disability • IRC Sec. 62(e):Unlawful discrimination defined. • For purposes of subsection (a)(20) , the term “unlawful discrimination” means an act that is unlawful under any of the following: • (1) FTC Section 302 of the Civil Rights Act of 1991 ( 2 U.S.C. 1202 )….. • (3) FTC The National Labor Relations Act ( 29 U.S.C. 151 et seq.). • (4) FTC The Fair Labor Standards Act of 1938 ( 29 U.S.C. 201 et seq.). • (5) FTC Section 4 or 15 of the Age Discrimination in Employment Act of 1967 ( 29 U.S.C. 623 or 633a ). • (6) FTC Section 501 or 504 of the Rehabilitation Act of 1973( 29 U.S.C. 791 or 794 ). • (7) FTC Section 510 of the Employee Retirement Income Security Act of 1974 ( 29 U.S.C. 1140 ). • (8) FTC Title IX of the Education Amendments of 1972 ( 20 U.S.C. 1681 et seq.). …. • (16) FTC Section 102, 202, 302, or 503 of the Americans with Disabilities Act of 1990 ( 42 U.S.C. 12112 , 12132 , 12182 , or 12203 ).

7. Investment & Financial Planning for Clients with Chronic Illness and Disability • Tailor an investment plan in light of the client’s specific circumstances, not generalizations or assumptions. • Each chronic illness differs from other chronic illnesses. • Each client’s experience is unique to that client. • Client’s can have varying experiences over time. • Risk profile and time horizon: • Not the same as for “other” clients. • Risk may be affected by fear, medical costs, or need to retire early. • Time horizon can vary – new drug therapies can change.

8. Investment & Financial Planning for Clients with Chronic Illness or Disability • CGAs = Charitable Gift Annuities – unique consideration and importance to those with chronic illness. May have strong desire to give back to organizations combating their illness • Coordinating CRTs and other planning with the client’s overall investment strategy • Managing assets for the disabled client now and through the progression of their illness

9. Investment Goals • Liquidity: Investors with chronic illness might generally prefer more liquidity. Expenses might be higher, so might the “rainy day fund”. Others, may not. • Short vs. Long Term: Depending on illness long term planning may be essential. Don’t focus only on short term. • SNTs: Some need them, many don’t. • Budget Projections: Standard assumptions about inflation and expenditures may not be reasonable to assume. • Risk Tolerance: Might be higher or lower than other investors – it depends on circumstances and objectives.

10. Investment Planning • Understand disease trajectory and its impact on expenditures, life expectancy and other factors. • Needs analysis. • Target retirement age and impact on risk and asset allocation. Example: May need more aggressive allocation to equities and alternatives to create sufficient wealth by an early retirement age. • Needs analysis. Consider an independent evaluation. • Consider self funded trusts versus outright gifts because of uncertainty. • Annual meetings are vital to document a pattern of investment planning and keep abreast of health and other developments. • Power of attorney and/or revocable trust – who will be signing the IPS?

11. Disability Considerations • Buy sell and other Business Agreements. • Shareholder/Partnership/Operating Agreements. • Buyout and other business arrangements. • Employment agreements. • Disability provisions. • Bands. • Definitions • Disability policy. • Reviewing disability policy calculations • Residual disability • Issues of undefined terms • Income and other calculations • Dealing with disability insurance company abuse.

12. Competency Issues • Don’t make assumptions about cognitive impairment. • Parkinsonian masked faces does not mean incompetence. • Many neurological diseases have widely different impact on different people. • Alzheimer’s disease will also result in dementia. Multiple Sclerosis cognitive impact less severe and does not affect most. • May impact differently at different times during the day or med cycle. • What is current status. • Getting someone to open up. • Getting the professionals comfortable / knowledgeable enough. • Physician/neurologist letter. • Legal not medical decision.

13. Competency Issues (continued) • What is likely future trajectory of client’s illness. • How to plan now to address future changes. • What is disease course likely to be. • Can changes be monitored periodically so adjustments can be made. • New drug therapies may change. • Documenting Competency. • Physician/neurologist letter. • Legal determination by attorney. • Client statements. • Complexity of matter involved influences degree of competency required to handle it. • Potential for overall harm to client from matter – more harm greater competency is necessary. • Video tape or not to video tape – not a simple issue.

14. HIPAA Releases Essential To Planning • HIPAA is the affectionate acronym for the Health InsurancePortability and Accountability Act of 1996 (Pub. L. No. 104-191, 110Stat. 1936 (1966)); 45 C.F.R. Sec. 164 (2002). HIPAA, as amended(it takes multiple efforts to perfect such complexity), protects yourrights to your confidential medical information, “Protected Health Information” or PHI, for short. • Maintaining the confidentiality of PHI means protecting it against being made available or being disclosed to unauthorized persons or processes. • Addressing HIPAA, and how your medical information should be disclosed generally, are vitally important. If you’re ill, can your daughter-in-law the doctor get to see your patient chart to monitor your care? If you’re a successor trustee, and the current trustee is forgetting to pay insurance premiums and respond to correspondence, can you replace her? Your partner is disabled and you need to take over your professional practice, how can you obtain the requisite physician letter mandated in your shareholders’ agreement to demonstrate his incompetence to be able to trigger the replacement provision?

15. HIPAA Releases -1 • Writing: The authorization should be in writing and should acknowledge that you are making it voluntarily. • What: It should describe the health information to be disclosed.This could be your entire medical record, or only specified components. You might specify that your medical records between certain dates be released. The HIPAA paradigm is that only as much info should be disclosed as necessary. • Who: Which medical provider should make the disclosure? This could be a specific physician or hospital or a list of providers. A broader approach could be used to indicate a category of providers. For example, “any physicians, hospitals or other medical providers who have provided treatment, other medical services or payment for same, from June 1, 2004 through and including the date of this Authorization”.

16. HIPAA Releases -2 • Term: When does the authorization to disclose PHI expire?This could be: “upon a child attaining age 21”. It could be “2years from the signing of the authorization”. “Upon theconclusion of my court case” may suffice for a litigation matter, although issues of appeals,etc. might warrant consideration insetting the parameters. “One yearfrom death”. • Revocation: A statement that you retain the right to revoke any authorization to disclose your PHI. Any revocation, however, is not binding on a medical provider until they receive it. This minimizes the issue of their liability for disclosing information based on an authorization they held prior to the revocation. • Re-Disclosure: The release may state that certain information, such as HIV testing results, cannot be disclosed by the person receiving it. However, the release should also acknowledge that once other information is disclosed, it may thereafter be re-disclosed by the person receiving it without the HIPAA safeguards.

17. HIPAA Releases -3 • Purpose: The purpose for the disclosure should be explainedThis might be limited to the minimum information to determinewhether you have the ability to function as a trustee or should bereplaced, or only that information necessary to underwrite you forlife insurance. • Signer: If you are signing the authorization the signature line should merely state that you are the patient. If, however, another person is signing for your, the authorization should state that that person qualifies as your personal representative under and that they have authority to make health care decisions for you.

18. Estate Planning for the client with Chronic Illness - Overview • Health proxies • What they areand why they are important • What is different for the chronically ill client • Revocable living trusts • What they are and why they are important • Boilerplate forms are useless or worse • What can and should your client have? • Powers of attorney • What they are • Options: Springing vs. not; General vs. Special • Why standard forms don’t suffice • Living wills • What they are and why they are important • Address specific health issues

19. Estate Planning for the client with Chronic Illness - Overview • Powers of attorney • What they are • Options: Springing vs. not; General vs. Special • Why standard forms don’t suffice • The problems of triggering a springing power are common to all clients. If a client is insistent on a springing power, even a client with a chronic illness, the power may only have to be triggered once, when the level of incapacity reaches a point where an agent has to permanently take over. Most MS clients have long periods when they are capable of handling all financial matters.

20. Estate Planning for the client with Chronic Illness - Overview • Powers of attorney - Continued • These may be interrupted by brief periods of exacerbations lasting days or weeks when it is difficult or impossible to cope without an agent’s assistance. These exacerbations are unpredictable, and even the causes that trigger them are uncertain. • If the appointment of the agent is effective immediately upon execution, unencumbered by the springing mechanism, the agent will be able to help during a short term exacerbation or relapse, and then can cede control back to the client as soon as feasible. With a springing power, by the time the agent can legally demonstrate the principal’s disability, the attack may have resolved.

21. Estate Planning for the client with Chronic Illness - Overview Living wills • What they are and why they are important • Address specific health issues • Example: Since AD can only be confirmed 100% through a brain autopsy, many suffering with AD will wish to include a specific consent in their living will directing that a brain autopsy be permitted and their brain be donated to promote scientific research into AD. Religious issues should be addressed if pertinent in this regard.

22. Estate Planning for the client with Chronic Illness - Overview • Health proxies • What they areand why they are important • What is different for the chronically ill client • Example: Alzheimer’s disease: Given the progressive nature of AD and the certainty of cognitive issues, a guardianship designation should be included in the health care proxy (or a separate guardian designation prepared). Some state laws expressly permit this.

23. Estate Planning for the client with Chronic Illness - Overview • Revocable living trusts • What they are and why they are important • Boilerplate forms are useless or worse • What can and should your client have? • The typical revocable trust is drafted with the grantor as sole trustee. For a client with advanced Parkinson’s or Alzheimer’s the client may not be a trustee at all. However, the MS client may be best served by a hybrid approach. Naming the MS client as a sole trustee may prove problematic during an exacerbation, the occurrence, duration or severity of which cannot be predicted. Not naming the MS client as trustee cedes control from a client who generally has the capacity to make decisions. Relying on a transition to a successor trustee not only creates the expected issues with triggering the transition (as with a springing power of attorney), but also, the complete removal of the MS client as trustee may be unwarranted. Most clients would want to resume their involvement when an exacerbation resolves. A better approach for the MS client might be to have the MS client and another person as co-trustees from inception, with either being granted authority to act independently to take the actions that might be required during periods of an MS exacerbation.

24. Charitable Planning for the Chronically Ill Client • Tailor charitable planning to coordinate with the needs and personal objectives of the chronically ill client or the client’s chronically ill loved one • CGAs – Charitable Gift Annuities • Watch % of assets committed • CRTs for wealthier clients • Creative uses of CRTs • Charitable bail out of closely held business which will have to be sold as disease progresses • Management, certainty, cash flow • CLTs – see attached

25. Charitable Lead Trust Example -1 Sue, a widow, has a substantial estate. Her son and only heir, David, is age 52 and has PD. He continues to work and is self supporting, although his income is declining as his symptoms have made it more difficult to work the hours he has been accustomed to. Sue wants to reduce both the potentially substantial estate tax she faces, while ensuring her son’s financial future. Shifra establishes a charitable lead annuity trust (CLAT) for her son. Sue has her attorney prepare a trust agreement and obtain a tax identification number. The trustee sets up an account with the wealth management firm Sue has used for many years. Sue then donates $1 million dollars to the CLAT.

26. Charitable Lead Trust Example -2 The named charity will receive $60,000 per year for the next 25 years. Sue directs that this be used to address specific charitable objectives she feels strongly about, so long as the charity deems a need for such goals. Sue does not receive an income tax charitable contribution deduction at the time of the gift (although if she had structured the CLAT as a grantor trust she could). Assume that Sue has made prior gifts to her heirs totaling $800,000, using up $800,000 of the $1 million gift tax exclusion available (the amount any taxpayer can gift without a gift tax). A $1 million gift could generate nearly $400,000 in gift tax cost [($1 million gift – $200,000 remaining exclusion) × 50% assumed tax rate].

27. Charitable Lead Trust Example - 3 However, because of the annuity payment of $60,000/year for 25 years, the value of the eventual gift to her son David is reduced. Had Sue set up such a CLAT in 2007 the gift would have been reduced to about $200,000, and no gift tax would be due on the transfer. Because of the decline in interest rates, if Sue had set up such a CLAT in May 2009 she could shorten the duration of the charitable lead interest (the number of years the charity would receive $60,000 prior to her son David receiving the balance of the trust) to 20 years, and the value of the gift to David would have been only $56,000. The lower interest rates would have enhanced the gift tax advantages of the CLAT.

28. Charitable Lead Trust Example - 4 From a personal perspective, not only has Sue provided substantial benefit to her chosen charity, but she has provided a retirement plan for her son to ensure his financial security into old age. In 20 or 25 years (depending on when the CLAT was funded), when David reaches age 60 or 65, the CLAT will end, and he will receive a distribution of the remaining trust assets. Sue’s wealth manager believes that it is reasonable for her to realize a 7.5% return on the CLAT portfolio, given the long time horizon. As such, her son David will receive not the original $1 million she gave to the CLAT, but possibly in excess of $2 million when the trust terminates. Sue is confident that this amount will more than adequately fund her son’s retirement years.

29. Conclusion • Don’t make assumptions – Ask questions • Understand the specific impact on the specific person and what it means to their planning and to the planning of their loved ones • Be creative, often a little “tweak” to a standard planning technique can work wonderfully to help • Empathy [understanding, being aware of, being sensitive to, and vicariously experiencing the feelings, thoughts, and experience of another], not sympathy

30. For additional information • Estate Planning for People with a Chronic Condition or Disability available from Demos Health. See http://www.demosmedpub.com/prod.aspx?prod_id=9781932603668. All proceeds to charity. • www.laweasy.com section on chronic illness. • www.twitter.com follow martinshenkman for updates