Withholding life support is not an uncommon event. According to the Chairman of the President’s Council on Bioethics, each year there are approximately 1.75 million deaths that occur in healthcare facilities. Of these, 1.5 million deaths (85%) are preceded by an explicit decision to stop or not start medical treatment. It is variously estimated that the number of patients in a persistent vegetative state (ie, where the cerebral cortex is irrevocably injured) ranges between 20,000 to 35,000. There is an additional 150,000 patients in a minimally conscious state, in which there is some minimal interaction with the environment.

End of life issues are not only for the elderly. The three most prominent end-of-life cases -- Teri Schiavo, Nancy Cruzan and Karen Ann Quinlan – all involved people who were in their 20’s when tragedy struck

What is a living will? Most living wills that I have seen appoint an agent to carry out the patient’s desires regarding end-of-life decisions. The patient decides and the agent implements that decision. It is a question of what the patient chooses (ie, substituted judgment) and not what the agent thinks is in the best interests of the patient.

Having a living will would not have avoided the ugly fight. The Schiavo case points out two problem areas with most living wills. Living wills will usually only apply to the terminally ill, most often defined as unavoidable death within six months. The problem was that is was undisputed that Teri Schiavo was not terminally ill. The second problem involves implementing the patient’s desires. The Schiavo fight was a dispute over what those intentions were. Living wills will need to be re-drafted to include more specificity.

Make your intentions known. Michael and Teri Schiavo lived with her parents during the first year of their marriage yet the end of life issue was never discussed.

Florida law was clear. Florida has a surrogate decision making statute that is very similar to Arizona’s. ARS 36-3231. Both statutes name the spouse before the parents. This is also in keeping with our clients who invariably name the spouse before the parents when determining priority of appointment. The statutory order of priority in Arizona is 1) spouse, 2) adult child, 3) parent, 4) "domestic partner", 5) brother or sister and 6) "close friend".

A paradigm shift. Until the 1990 Cruzan case, the medical community was steadfast in opposing the withdrawal of life support. Yet, only 15 years later, the medical community seemed to be quite united in approving the withdrawal. For an excellent book on the Cruzan case, read "The Long Goodbye: The Deaths of Nancy Cruzan" by William Colby. For a very informative panel discussion that included Mr Colby, obtain a videotape of the May 2004 MCBA seminar on end-of-life issues, available from the MCBA (602-257-4200 or www.mcbabar.org.)

An eating disorder may have caused this whole controversy over artificial nutrition and hydration. Terry Schiavo weighed 250 lbs at age 18. She weighed 110 when tragedy struck, apparently due to a severe electrolyte imbalance caused by the weight loss and improper diet

The Schiavo fight started over money. For the first five years after Terri’s heart attack, the husband and parents were in agreement. But then a $1M malpractice verdict was obtained. $300,000 went to Michael Schiavo and $700,000 went to a special needs trust created for Terri’s benefit. There are differing stories as to what happened next. Some sources say the Schindlers wanted half of Michael’s recovery. Other sources say it was a dispute over how the $700,000 was to be spent.

There are three deficiencies that I commonly see in the living wills (including my own) that I have reviewed. First, they often only apply to a patient who has been diagnosed as terminally ill. However, many patients, to include Teri Schiavo, may be gravely ill and in an irreversible condition but are not considered to be terminally ill.

Second, virtually all living wills are premised on the fact that all family members know what the patient would want to have done and are all in agreement on this. But when a dispute erupts, as in Schiavo, living wills are silent on how to address and resolve this.

Third, living wills typically offer very little practical or precise guidance to the decisionmakers beyond some general platitudes about undertaking no heroic measures.

Most living wills specifically apply to a terminally ill patient. But often the term "terminally ill" is not defined, which can create problems for healthcare providers. The most workable option is to use the Medicare definition of "terminally ill", defined as death occurring within six months of the diagnosis if the condition runs its normal course.

But this does not solve all the problems. Several gerontologists have emphasized to me that patients with advanced Alzheimer’s or who have suffered a serious stroke are never considered to be terminal. It would also not include those patients in an irreversible coma or persistent vegetative state as well as those patients who may be conscious but enduring an unacceptable quality of life due to the injury or illness.

As a result, I have revised my living will to address three categories of conditions that will allow the agent or agents to make the decision regarding end-of-life care:

a) an incapacitated person who is terminally ill,

b) irreversible coma, brain death or persistent vegetative state and

c) a greatly diminished and hence unacceptable quality of life.

The first category is for the incapacitated terminally ill patient. I use the Title 14 (probate code) definition of incapacity, ie, the inability to make or communicate responsible decisions about the person.

The second category of a patient’s condition is for an irreversible coma, brain death or persistent vegetative state ("PVS"). Teri Schiavo would have come within this category. Because of the media coverage of Ms Schiavo, I have already had several clients question the appropriateness of using PVS as a standard because much of media raised questions about what a PVS diagnosis meant and even if such a condition actually exists.

Unfortunately, much of this discussion was very inaccurate and misinformed. Since the early 1990’s, PVS has come to be a well-defined and recognized condition. The leading authority is the Multi-Society Task Force on PVS that issued a two-part article in 1994 in the New England Journal of Medicine that set forth the definition and clinical aspects of PVS. A diagnosis of PVS requires no awareness of self or the environment and an inability to respond to any visual, auditory, tactile or noxious stimuli. The distinguishing feature is intermittent sleep-wake cycles, where the patient opens his or her eyes with some reflexive response to external stimuli. But the response is only reflexive. There is no sustained visual tracking of an object or any fixation on a visual target. Likewise, other reflective actions such as gagging, coughing, chewing, blinking, smiling, grimacing or sighing may occur. Most PVS patients have fairly normal breathing and gastrointestinal functions and maintain a normal body temperature but are unable to experience pain, thirst or hunger

There seem to be two main points to emphasize to a client who may have some reservations about appointing an agent if the client should ever lapse into PVS. One point is that the diagnosis can only be made if the patient lacks all awareness. The second point is that at least one month must elapse since the onset of the condition before a diagnosis of PVS can be made. In other words, a doctor cannot make this diagnosis within hours or days of admission to a hospital. This has been a frequent concern of my clients since Schiavo.

The third category of a patient’s condition that will authorize an agent to act is if the non-terminal patient is incapacitated and suffering an unacceptable quality of life. The patient may be conscious and somewhat alert but the illness or injury has caused the patient’s condition to deteriorate to the point where live may no longer be worth living. This category would include the advanced Alzheimer’s patient or the patient who has suffered serious and irreparable injury from a stroke.

It is difficult for many of my clients to define or describe exactly when it becomes fruitless to continue treatment and accept a death occurring sooner than it otherwise might. It is also impossible to plan for every medical treatment or possibility.

This is where estate planning practitioners will need to get creative and even seek assistance of the medical community in drafting living wills. Most living wills are couched in terms of treatments, or what the medical community calls "interventions". The typical living will have the client check off yes/no boxes dealing with specific interventions like CPR, dialysis, transfusions or chemotherapy. But this is just a tiny portion of all possible interventions. What of the other thousands of interventions or future interventions not yet invented or widely used?

The doctors that I have spoken with strongly discourage this approach. Instead, they recommend a broad, goal-oriented approach. It focuses on the result the patient wants to achieve and not on how to reach that result. My new, revised living will lists the following criteria for the agent to consider when making a decision:

• Inability to walk without the assistance of others or a wheel chair
• Experiencing pain most of the time
• Experiencing discomfort (such as nausea, diarrhea or weakness) most of the time
• Inability to control my bladder and bowels
• Having a feeding tube inserted into my stomach and/or being unable to be fed by a spoon
• Use of a ventilator that is required to keep me alive
• Inability to recognize family or close friends
• Incurring costs for the provision of medical care that will create a financial hardship for me, my family or other loved ones

The idea is to provide some objective guidance to the decisionmaker. The living will should indicate that any one or more of these criteria tend to support the decision to withhold or terminate life support. In other words, the decisionmaker is not compelled to withhold life support if one or more of the criteria exist. Rather, they are simply factors for the agent to weigh when exercising his or her discretion.

When I began to use this approach, I was surprised with my clients’ reaction. Some wanted to include some of these criteria but not all. Different clients removed different criteria. As a result, I have the client initial which ones they agree with. I am also considering having a blank space next to each criteria and having the client use a scale of 1 to 5 to rank them in order of importance.

This is far preferable to the approach often taken by practitioners that simply authorize the withdrawal of life support treatment if the burdens of treatment outweigh the benefits. Such an imprecise test is an invitation to litigation if a dispute within the family erupts. It will also create problems in those states where legislation may be enacted to impose higher standards in proving the patient’s intentions.

Schiavo emphasizes the need to provide the decisionmaker with some delineated and objective criteria to consider when making the decision. This is not an easy task for the estate planning practitioner who is discussing this with a young and healthy client who has never given much thought to any of this. A goal-oriented approach has worked well for me.

Another difficult issue in the Schiavo case was the dispute that erupted regarding decisions made by Ms Schiavo’s husband/guardian. Virtually every doctor or hospital administrator that I have spoken with have candidly admitted that it is the family member who complains the loudest who will, at least initially, control the decision regarding termination of life support treatment. In other words, a hospital ethics committee will not authorize the withdrawal of life support if there is a family member who is threatening to hire a lawyer or complain to a local television reporter. While estate planning practitioners can argue over whether a hospital can lawfully exercise such authority, it is a foreseeable situation that must be addressed when drafting a living will.

I have made three revisions to my living wills to address disputes. First, I have included a new paragraph, captioned "Resolution of Disputes", that names a particular person to make the final and binding decision in the event of a disagreement.

Second, in that same paragraph, there is a provision that states whom is excluded from the decisionmaking process, such as a troublesome child or in-law. This is to avoid what one colleague of mine has characterized as "the black hat on the white horse", such as the child who has not been in contact with the family for many years but who suddenly appears and wants to control the decision. This provision should prevent this messy situation from impacting the decision.

Third, I have added a paragraph that specifically allows the agent to initiate litigation against the hospital, healthcare provider or family member who fails to promptly implement the agent/decisionmaker’s directives. This is already authorized under the Patient Self Determination Act but it is always a good practice to include this language since this could be the tipping point in having the hospital honor the agent’s decision.

Likewise, a provision should be added that the patient or the patient’s estate will not be responsible for the payment of medical bills for services provided that are inconsistent with the patient’s desires. While this provision may or may not be enforceable, it may cause doctors and family members to think twice when the decision is made. Or a provision may state that any family member will forfeit their inheritance if they contest, interfere with or delay the patient’s expressed desires.

Several other points should be kept in mind when drafting living wills. First, all practitioners should reacquaint themselves with the seminal United States Supreme Court decision in Cruzan v. Director, Missouri Dept of Health, 497 US 261 (1990) that held that there is a constitutionally protected right to refuse any and all health care treatment, to include the provision of nutrition and hydration. A state is permitted to require a surrogate decisionmaker to produce clear and convincing evidence of what the patient’s desires would have been, but it cannot otherwise infringe on that right. Arizona law and the federal Patient Self Determination Act, which largely codified the Cruzan case, requires that all healthcare facilities must follow a living will or other advance medical directive. These authorities should remind practitioners that they should not be constrained by restrictive state laws. This is not a problem in Arizona, where a statutory form is suggested but not required. However, a practitioner can never be sure where the living will may be exercised. Examples of overly restrictive state laws are where a state requires the use of a statutorily-created form, limits the decisionmaking authority to only certain irreversible or terminal conditions or to a certain period of time, requires a doctor’s certification or where the cessation of nutrition and hydration is prohibited. Practitioners should cite to Arizona statutes and indicate that the living will is in compliance with applicable Arizona law.

Another point to consider concerns the termination of the provision of hydration and nutrition. The media in Schiavo repeatedly referred to "starving her to death" and of the pain that would result to Ms Schiavo. This is not so. Patients do not starve to death in these situations. It is the lack of hydration that results in death. Withholding hydration causes death much faster than withholding nutrition. The lack of hydration creates renal (kidney) failure that causes a fairly painless death, usually within days and always within a month of the withholding. It also overlooks that food or fluids can be very distressing to a dying patient by making it harder for the patient to breath and increasing the need for suctioning. It can also increase pressure on tumors, thereby increasing pain. Food and fluids can also induce nausea, diarrhea or swelling.

It should also be kept in mind that most of the justices in Cruzan stated that artificially-administered hydration and nutrition is a medical treatment. It requires consent by the patient or agent and a skilled clinician to implant and remove the feeding tube. There is nothing natural or non-invasive about it.

No written document can take the place of a thorough discussion among family members about end-of-life issues. The silver lining of Schiavo is that, hopefully, more of these discussions have and will take place. Practitioners drafting living wills are simply trying to memorialize that discussion. The objective is to allow the agent/decisionmaker to make the best decision they can with the least amount of guilt. The agent should be able to say "That’s what Dad would have wanted us to do". If so, the drafting attorney has done an exemplary job.

It helps to have clients elaborate on their thoughts and goals for end-of-life issues by reviewing and completing a values questionnaire. There are a number of good questionnaires on the Web. Two of the best are the Values History Form published by the Institute for Ethics of the University of New Mexico Health Sciences Center, available at http://hsc.unm.edu/ethics/advdir/vhform_eng.shtml and the Caring Conversations questionnaire published by the Center for Practical Bioethics in Kansas City, available at www.practicalbioethics.org/mbc-cc.htm.

Two useful sources for drafting living wills are the popular Five Wishes booklet that can be purchased for $5 from www.agingwithdignity.org and the Lawyer’s Tool Kit for Health Care Advance Planning published by the ABA’s Commission on Legal Problems of the Elderly, available at www.abanet.org/elderly.

For a very compelling insider’s view of a family’s end-of-life ordeal, read Long Goodbye: The Deaths of Nancy Cruzan, an excellent book written by William H. Colby, attorney for the Cruzan family, available from www.longgoodbye.org.

The past several years have seen a drastic drop in estates exposed to the estate tax, so that practitioners may be overemphasizing its importance and frequency. According to the Statistics of Income Division of the IRS, the figures are as follows:

Year # of FET returns # of FET returns FET returns as

From AZ % of persons dying

2006 49,050 713 unavail

2005 45,070 615 unavail

2004 65,039 1,262 unavail

2003 73,128 1,014 unavail

2002 99,603 1,417 1.17

2001 108,071 1,706 2.11

2000 108,322 1,660 2.18

1999 103,979 1,965 2.30

1998 97,856 1,628 2.19

1997 90,006 1,309 2.12

1996 79,321 1,252 1.80

1995 69,755 1,180 1.63

This sharp decline is not an anomaly. IRS projections are that the drop in 706 filings will continue:

2007. 30,400
2008. 28,900
2009. 26,700
2010. 17,600
2011. 7,000
2012. 55,100

According to Tax Analysts and ACTEC, 24 states now have some form of state estate and/or gift tax. They are: Connecticut, Illinois, Indiana, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, Washington and Wisconsin plus the District of Columbia. For most of these states, the estate tax exemption is $1M. However, Ohio’s exemption is only $338,000 and New Jersey, Rhode Island and Wisconsin have a $675,000 exemption.

This means that simply because an estate is not subject to federal estate tax does not mean there will not be state estate consequences. This will occur most often where clients own out-of-state real estate, such as a family cabin.

There is no estate tax allocation statute in Arizona. After the Fogelman case, 197 Ariz 252 (CA1, 2000), it is probably malpractice not to include an allocation provision in the will or trust. Simply allocating this to the residue of the probate estate can be a disaster if title to assets is passing outside of probate.

Suggested clause:

Do not ever overlook the existence of loans or gifts to the children, especially if they are in unequal amounts or if not all children are aware of the loans/gifts. In my experience, this is probably the single biggest cause of family discord after the client has died. Establish if it is a gift or loan. If a gift, is it an advance of an inheritance? If a loan, is it to be forgiven? If so, is the forgiven amount to be included in the beneficiary’s share of the estate? Obtain whatever documentation exists verifying the gift or loan since these may disappear post-mortem. Has a large expense been undertaken for one child but not another, such as paying for a college education?

Involvement of children.

Inquire of the client if a meeting with the children should be held. Some clients resist this, some welcome it. I prefer that the children be involved to some extent, especially if there is any Medicaid/ALTCS planning to be done. There are often concepts and strategies that are difficult for the client to fully understand. Having a child present creates comfort and reassurance for the client. The attorney can also make sure that the children receive the information first hand rather than through the parent who may not understand some of the subtle issues.

Warn the client that the attorney-client privilege is waived if a client discusses the communication with a third party, such as a child, or if a third party is present during the communication with the attorney. Alexander v. Superior Court, 141 Ariz 157 (1984); Tripp v. Chubb, 69 Ariz 31 (1949); State v. Beaty, 158 Ariz 232 (1988); State v. Sands, 145 Ariz 269 (CA2, 1985).

Beware of the child who is actively involved in having the client draft a new will. The recent case of Mullin v. Brown, 210 Ariz 545, 115 P 3d 139 (CA2, 2005) should be setting off alarm bells. It is the first case to discuss the ramifications of Estate of Shumway, 198 Ariz 323 (2000) regarding the shifting of the burden of proof in a will contest. At issue was the following jury instruction, which the Court upheld:

Shortly before death, Chris Jr. had his grandfather change his will, leaving the entire estate to him and disinheriting Chris’ brother, who under a prior will was a 50% beneficiary. Chris Jr. also emptied a joint account and had the decedent issue a new deed for certain, unspecified gas and oil interest. The will in question had been prepared by an

attorney.

The Court began by noting that "A presumption of undue influence arises when one occupies a confidential relationship with the testator and is active in preparing or procuring the execution of a will in which he or she is a principal beneficiary. See In re O'Connor's Estate, 74 Ariz. 248 (1952). The precise issue on appeal was under what circumstances does this presumption cease? The Court emphasized the statement made in Shumway that "`[W]here a confidential relationship is shown the presumption of invalidity can be overcome only by clear and convincing evidence that the transaction was fair and voluntary."' Id. ¶ 16 (alteration in Shumway), quoting Stewart v. Woodruff, 19 Ariz. App. 190, 194 (1973). The court noted that "[t]his is a difficult standard of

proof ".

Do not tiptoe around this issue. The elderly are constantly talking about their health. It is usually their foremost concern. They have no problem having a frank discussion about it.

Confirm any current conditions. Ask them what medications they are on and what they are for. This may tip you off to potential issues of incapacity or susceptibility to undue influence. Ask about any hospitalizations or significant medical treatments in the previous several years. Are there any future major treatments in the foreseeable future?

Confirm what all this is costing them and compare this to their finances. Where is this heading? Are these costs greater or expected to be greater than their income? How is the shortfall met (ie, from what assets and how often)? If there is a shortfall and unless the estate is well into six figures, the elder law practitioner must consider the issue of participation in the Arizona Long Term Care System (ALTCS) program.

Note that, as discussed below, the new Medicare Part D will in most instances cover nearly all prescribed medications beginning January 1, 2006 for those who have enrolled.

Planning for the payment of current or future healthcare costs is a continually increasing portion of my practice. This issue creates more anxiety among seniors than any other issue, replacing the two prior standbys -- death and taxes.

There is one very important and effective planning tool involving trusts and AHCCCS that is very frequently overlooked by practitioners. This involves creating a supplemental benefits trust that will protect the assets of the first spouse to die from exposure to the nursing home costs of the surviving spouse as well as preventing the disqualification of the spouse who is on ALTCS when the other spouse dies. The other aspect is to avoid the estate recovery process when the spouse receiving ALTCS benefits dies. Both aspects are governed, in part, by federal statutes and regulations, primarily 42 USC 1396p, 20 CFR 1103 et seq and Social Security POMS SI01120, as well as state statutes, such as ARS 36-2934.01 and the AHCCCS Policy and Procedures Manual.

Other portions of this outline will deal in detail with AHCCCS/ALTCS eligibility issues. The issue revolves around the amount of funds that the non-ALTCS spouse can retain. For 2007, this amount is between $20,328 and $101,640. Let’s assume that the non-ALTCS spouse has $50,000. The problem is what happens to this $50,000 if the non-ALTCS spouse dies before the ALTCS spouse? If the will of the non-ALTCS spouse leaves the entire estate (ie, all $50,000) to the ALTCS spouse, then the ALTCS spouse will be over-resourced and lose ALTCS eligibility.

Rather than simply disinherit the spouse, a "supplemental benefits trust" can be created for the benefit of the surviving spouse who is receiving ALTCS benefits. This is basically a fully discretionary trust. The theory is that, since the surviving spouse has no right to a distribution, the trust corpus is deemed unavailable for ALTCS eligibility purposes. AHCCCS Eligibility Manual 708.02 & 803.04; 42 USC 1396p(d)(2)(A)

To draft a testamentary trust that will not render the surviving spouse ineligible for benefits, I use the following language:

For more guidance on drafting these types of trusts, see the leading treatise on this, Third-Party and Self-Settled Trusts: Planning for the Elderly and Disabled Client, 3^rd edition by Clifton B. Kruse, published by the American Bar Association and available through the ABA, Amazon.com and other booksellers.

Note that this is not a special needs trust for the disabled as authorized under 42 USC 1396p(d)(4)(A).

Other advisors.

Determine who are the accountants, insurance agents and financial advisors that the client may be using. These advisors may be telling your client something very different than what the attorney is. Make sure everyone is on the same page and understands the concepts involved. Unfortunately, other advisors may be quick to criticize something they do not understand and, since they have had a much longer relationship with the client, these advisors often have more credibility with the client. The attorney can never be too careful here. The attorney also needs to confirm certain information, such as beneficiary designations.

Pre-paid planning for funeral and burial.

Does the client desire to be cremated or buried? Where will the burial be? Will organs be donated? Will an autopsy or other post-mortem examination be done? Who should be notified? What kind of marker and epitaph? It is often best to have these arrangements made in writing while the client is alive. ARS 36-831.01. If client does pre-pay, keep record of receipts since I have had mortuaries inexplicably lose any record of pre-payment. Pre-planning also greatly alleviates the grief of immediate family members who are spared the emotionally wrenching decision of choosing a casket and the like. Family members are also in a very vulnerable state that could lead to unnecessary expenditures. See my attached form entitled "After Death Instructions".

There have also been some very important recent developments in Arizona regarding the creditor protection now afforded life insurance policies and annuities. ARS 20-1131 and 33-1126 codified and extended the creditor protection set forth in May v. Ellis, 208 Ariz 229 (2004). These statutes provide for unlimited creditor protection of life insurance policies and annuity contracts that are at least two years old and name a family member as beneficiary.

It has been my experience that the use of irrevocable trusts has decreased dramatically over the past ten years. This is probably due to adverse income tax issues stemming from the 1993 tax bill and the increased popularity of alternative entities such as family limited partnerships.

The primary advantage of an irrevocable trust is that the property owned by the trust will be out of the grantor’s estate for estate tax purposes. If it is unlikely that a grantor will have a taxable estate, then a revocable or testamentary trust will usually work just as well. The other two advantages are that it can provide creditor and other spendthrift or incentive-laced protections for non-grantor beneficiaries and, as with any properly drafted trust, it avoids probate.

There are two primary disadvantages of irrevocable trusts. One that clients often need to be reminded of time and again, is the loss of control by the grantor. IRC 2511. A related problem can be inflexibility. Both of these problems may be ameliorated by the use of a trust protector, a concept that is becoming increasingly popular. See "Trust Protectors" by Alexander A. Bove Jr. in the November 2005 edition of Trusts & Estates. The other disadvantage is the very high income tax rates applicable to trusts. For 2006, trusts hit the highest 35% bracket at $10,050 of taxable income. By contrast, an individual taxpayer does not hit the 35% bracket until she reaches $336,550 of taxable income. This means that you either fund the trust with non-income producing property (non-rental real estate or shares of stock) or qualify the trust for grantor trust status, as discussed below.

The primary form of an irrevocable trust that most practitioners will use is an irrevocable life insurance trust (ILIT). Other forms of irrevocable trusts commonly used are grantor retained income trusts (GRITs), grantor retained annuity trusts (GRATs), grantor retained unitrusts (GRUTs), charitable remainder trusts (CRTs), charitable lead trusts (CLTs) or qualified personal residence trusts (QPRTs).

There is no magic to drafting an ILIT. The main issue is to avoid being snared by IRC sec. 2036 for estate tax purposes. Sec 2036 allows the IRS to include the trust in the estate of the grantor if the grantor retains possession or enjoyment of the property held by the trust or has the right to designate the person who have possession or enjoyment of the property. As a result of sec 2036, the grantor cannot be the trustee or beneficiary of the beneficiary nor can the grantor have the authority to later name or remove a successor trustee or beneficiary (so be careful with powers of appointment). Because of community property issues, I am reluctant to name the spouse in either of these capacities although many practitioners will disagree with me. This means that, in my practice, an ILIT is for the benefit of the children with another family member or professional fiduciary serving as trustee.

There are three other technical aspects that the practitioner needs to be aware of. One concerns Crummey powers, Crummey v. Commissioner, 397 F2d 82 (9^th Cir, 1969), which deals with giving the beneficiaries a present, not future, interest in the trust. A future interest will not qualify as a present interest for gift tax purposes. In order for the contributions made by the grantor to the trust to qualify as a completed gift, the beneficiaries must be given the right to have immediate access to those contributions for at least a reasonable period of time, generally 30 days. See also Estate of Cristofani, 97 TC 74 (1991), Estate of Kohlsaat, TC Memo 1997-212, Rev Rul 81-7 & IRC sec 2503(b)

The IRS hates Crummey powers, so this warrants special attention. The customary Crummey notice will suffice but note that, contrary to the understanding of many practitioners, such notices are not required as long as the beneficiaries are aware of the withdrawal right. Estate of Holland, TC Memo 1997-302.

Also, consider placing a "5&5" limitation on the withdrawal right. If the withdrawal right can exceed that and the right is not exercised (which is usually the case), the lapse is treated as a gift by the beneficiary and all sorts of adverse tax consequences can result under IRC 2514(e) and 2041(b). One solution is that have an accumulating or "hanging" power for those withdrawal rights not exercised. Rev Rul 85-88 & PLR 8901004.

Another technical area involves income taxes for the trust. This has really hurt the usefulness of irrevocable trust since the trusts have extremely high or "compressed" tax rates. This is particularly so if the trust is a dynasty-type trust meant to accumulate rather than distribute income. This tax issue often makes a family limited partnership look very attractive.

The conventional solution is to have the trust qualify as a grantor trust for income tax purposes, in accordance with IRC sec. 671 through 678. The two most common provisions are to allow the grantor to substitute assets of equivalent value or to allow the grantor to borrow assets without requiring adequate security for the loan. Estate of Jordahl, 65 TC 92 (1975), PLRs 9247024 & 9843024. See also Rev Rul 2004-64. Because of the grantor trust status, contributions by the grantor to the trust will not trigger income tax on the appreciation of the asset. PLR 9535026

Make sure that valid, current beneficiary designations exist. Do not simply assume all is in order since, with the consolidation of many banks and brokerage houses, records are misplaced or lost with increasing frequency. Second, make sure they are current. Be especially vigilant if the client has been divorced since the designations often still reflect the former spouse. The provisions of ARS 14-2804 (where the divorced spouse is disinherited) does NOT apply to 401(k)'s and other ERISA plans. Egelhoff v. Egelhoff, 121 SCt 1322 (2001). Third, consider obtaining copies of the signature cards for any POD accounts since banks are often sloppy in maintaining these designations. For a horror story on this that cost a client of mine $1 million, see the now-depublished case of Estate of Moore, 435 Ariz Adv Rep 9, 97 P3d 103 (CA1, 2004). Fourth, if a trust is named as beneficiary, make sure the trust will qualify as a "designated beneficiary" under the minimum distribution rules. For a string of recent favorable rulings in the area, see PLRs 200615032, 200616040, 200620025 & 200708084 and Q&A 16 of IRC Notice 2007-07

It has been clear for some time that there is creditor protection afforded to retirement plans by ERISA, as was held in several important decisions rendered in the 1990’s by the United States Supreme Court, most notably Patterson v. Shumate, 504 US 753 (1992). The 2005 bankruptcy legislation greatly expands this creditor protection.

What is protected?

This requires a patchwork analysis. First, there is a new section 541(b)(7) that provides unlimited creditor protection for all deferred compensation plans under section 457 of the Internal Revenue Code ("IRC") and for all tax-deferred annuities under IRC section 403(b). I most often see section 457 plans with government employees and section 403(b) plans with teachers.

Second, there is a new section 522(b)(3)(C) of the Bankruptcy Code that protects "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code". This is the key provision that will protect most people. IRC sec. 401 covers all pensions and defined contributions plans. IRC sec. 403 applies to plans administered on behalf of employees of school districts, churches and other tax-exempt entities. IRC sec. 408 covers all IRAs, to include SEPs and SIMPLEs. IRC sec. 408A covers Roth IRAs. IRC sec. 414 applies to plans administered by predecessor employers and certain partnerships and sole proprietorships. Plans under IRC section 457 (deferred compensation) are afforded protection already mentioned. IRC sec. 501 covers plans for employees of tax-exempt entities.

Prior to this new law, there seemed to be a distinction between ERISA assets (ie 401(k)s) and non-ERISA assets (IRAs, SEPs and Keoghs). ERISA assets were clearly protected but it was not clear if this protection extended to non-ERISA assets. This distinction is now gone – as long as the asset is exempt from taxation, it will come within the protection of the new section 522.

Also note that these protections apply to all states. Most states allow or require its residents in bankruptcy to use that particular states’ list of exemptions, so that the federal exemptions are of no consequence. Not so here – debtors in all states must use the exemptions, which they will want to do anyway since the new exemptions are much more generous than that offered under most states’ law.

How much is protected?

It would have been nice if the new legislation had stopped there – creditor protection for any tax-exempt retirement asset. But Congress added a new section 522(n) to the Bankruptcy Code that deals with IRAs. The section begins with limiting protection for IRAs to $1 million but then creates three exceptions to that amount. First, the section does not apply to SEPs or SIMPLEs, which will have unlimited protection like other retirement assets.

Second, the statute states that the $1 million exemption amount is made "without regard to amounts attributable to rollover contributions" from other protected retirement accounts. The conventional wisdom from nearly all the commentators I have read is that this means that rollover IRAs will have unlimited protection so that $1 million plus all rollover IRAs will be protected. But at least one prominent commentator has interpreted this to mean that the aggregate amount of all IRAs is the $1 million. He reasons that the "without regard" language means that it does not matter if the sources of the funds are rollover funds – there is a $1 million cap, period.

The third exception is that the $1 million cap "may be increased if the interests of justice so require". No criteria, definitions or guidance is given as to what exactly this means.

This bill was enacted less than two weeks after the United States Supreme Court had issued its decision in Rousey v. Jacoway, 125 SCt 1561 (2005) that held that, in bankruptcy, IRAs, which are non-ERISA assets, were afforded the same creditor protection as ERISA plans. The new legislation has made much of Rousey dead letter law but there are situations where the Rousey holding can still be used. Rousey held that an IRA was protected to the extent the funds were "reasonably necessary for the support of the debtor or his dependents". In most situations, it is difficult to envision situations where the need for support would exceed the $1M statutory exemption. But persons with disabilities or parents with disabled children could conceivably exceed this amount so Rousey remains an important case for them.

The legislation also overrules the controversial Supreme Court holding in Yates v. Hendon, 541 US 1 (2004) that held that there is no creditor protection for retirement assets where the only participants were the business owner and family members. This meant that sole proprietors and other one-person or husband-and-wife businesses lost this protection. The new section 522 ignores this distinction and places these businesses on equal footing with all other qualified plans

Who is protected?

Clearly, plan participants come within the protections outlined above. But what about surviving spouses and other people who inherit an IRA or other qualified plan assets? It appears that these situations will be afforded protection. The new section 522(b)(4)(D) specifically extends protection to any rollover, so any surviving spouse should be protected. But what about other beneficiaries? As long as the funds remain in a tax-exempt account, the creditor protection should be maintained. But what of funds that are simply withdrawn from the account? An apparent drafting lapse may work to the beneficiaries’ advantage. The new section 522(b)(4)(C) states that "a direct transfer of retirement funds from 1 fund or account that is exempt from taxation…. shall not cease to qualify for exemption…by reason of such distribution". It seems quite clear to me that the drafters forgot to include the phrase "to another account exempt from taxation" regarding the transfer. Whether this will be subject to a technical corrections bill remains to be seen.

Note that, unlike other provisions, there are no time restrictions on when contributions to retirement accounts can be made. In other words, a person can make maximum contributions to a 401k or a SEP, file for bankruptcy the next day and the funds should be protected.

Another favorable development is the amendments to sections 541(b) & (c) that protect IRC section 529 college savings plans and Coverdell education accounts. Any of these accounts that name a child, grandchild, stepchild or stepgrandchild as a beneficiary will be protected. Any contributions made prior to two years of a bankruptcy filing are protected as long as they did not exceed the amounts that are tax-qualified under the IRC. This will be in the $250,000 range for most 529 plans and, for Coverdell accounts, will be the accumulation of the $2,000 maximum annual contributions per beneficiary. For contributions made within one to two years of filing, only an aggregate amount of $5,000 per beneficiary will be protected. Contributions made within one year of filing will not be protected in any amount.

Arizona has adopted the Uniform Premarital Agreements Act that provides for the enforceability of a prenuptial agreement as long as the factors set forth in ARS 25-202 are met. The primary stumbling block is ARS 25-202(c)(2)(a) that requires "fair and reasonable disclosure" of both parties’ financial matters. Unless otherwise unconscionable, the agreement will be upheld and enforced. Schlaefer v. Financial Management Service, Inc., 196 Ariz 336 (CA1, 2000).

In reviewing pre- and postnuptial agreements, I also review the disclosures and whether both parties were represented by counsel. Then make sure that the terms are consistent with the will, trust and other dispositive designations. Also look for any sunset provisions where the agreement ends if the parties remain married for a certain number of years.

I am always surprised at how many clients are unaware of the tax code provisions that allow for unlimited tax-free gifting for the payment of tuition and/or medical expenses under IRC sec. 2503(e). The rules are fairly simple. Treas Reg 25-2503-6. Payments must be made directly to the school or provider. In other words, reimbursing someone for their expenses will not qualify. The payments must be for tuition only, not room & board or other related educational expenses. Since the payments must be made to the educational institution, contributions to 529 plans do not come within protection but would still qualify for the annual exclusion.

A recent Private Letter Ruling 200602002 gave a big boost to prepaying tuition. In this PLR, the donor had three children and six grandchildren. The donor wanted to enter into a separate written agreement with a school to prepay tuition for each of his six grandchildren. Under the terms of the agreement, the donor would prepay the total annual tuition for each grandchild through the 12th grade. The agreement provided that tuition could increase in subsequent years and if it did the donor or the parents would be responsible for any tuition increase. The agreement provided that the tuition payments were non-refundable and that the pre-payment did not afford the grandchildren any special rights or privileges over any other students at the school and the prepayment did not guarantee enrollment.

As for medical expenses, the expense must meet the test of deductibility under IRC 213, as discussed below. Note that this appears to cover health insurance premiums.

The most common mistake, particularly among persons not represented by counsel, is to transfer highly appreciated property rather than having the property past via inheritance or other death-related transfer. If this is done, the donee will have a carry-over basis rather than a stepped-up basis. IRC 1014 & 1015. For many, and probably most, of our clients, the step-up in basis is the single biggest tax break available to them, so be careful not to inadvertently lose it. Yet many clients, including those previously represented by competent counsel, are not aware of this distinction. When discussing annual exclusion gifting or other gifting, warn clients to consult with you if they are planning on some form of gifting other than cash.

This is seldom an issue with most gifting but it can crop up in three settings. First, any transfer of life insurance policies are subject to the three year rule. IRC 2035(a). Second, any payment of gift taxes made within three years of death are brought back into decedent’s estate, so avoiding the "tax upon the tax" with estate taxes will not happen. IRC 2035(b). Third, the amount of tax deferral for certain businesses available under IRC 6166 will not apply to any property transferred within the three year period. IRC 6166(k)(5) & 2035(c)(2).

A taxpayer will recognize gain to the extent that property is transferred where the encumbrance exceeds the basis. Johnson v. Comm., 495 F2d 1079(6^th Cir, 1974); Estate of Levine, 634 F2d 12 (2^nd Cir, 1980). The facts of the Johnson case are typical – taxpayer had a basis of $11,000 in stock. At the time of the gift, the stock had an FMV of $500,000 but there was a loan against the stock in the amount of $200,000. Taxpayer was deemed to have a gain of $189,000 by reason of the transfer.

Basis cannot exceed the FMV of the property on the date of the gift. The donee is limited to using the FMV as the basis. IRC 1015(d).

For a high-income taxpayer, be wary of gifting assets that are generating tax-exempt income, such as municipal bonds, or that generate a large deduction, such as depreciation.

The 2006 passage of the Deficit Reduction Act ("DRA") has increased the lookback period from three years to, eventually, five years. Currently, any gift made after July 2003 will come within the lookback period and will be subject to a period of ineligibility. Also note that the DRA also requires that the ineligibility period will not commence until an application is submitted in which the applicant would be otherwise eligible but for the transfer. Under prior law, the period began to run when the gift was made. This change has the effect of greatly lengthening the period of ineligibility.

All is not lost if, after death, you are presented with a trust that has little or none of the funding (ie, transfer of title into the trust). In Arizona, there is little authority as to what exactly one must do to transfer an asset into a trust. California has a line of cases beginning with Estate of Heggstad, 20 Cal Rptr 2d 433 (CA1, 1993) that concerned a revocable trust that was "self-settled", meaning it was created by Mr Heggstad to hold title to his property while he was alive. He was both trustee and beneficiary while he was alive. Mr Heggstad owned real estate but he never executed a new deed transferring the land into the name of the trust. The issue before the court was whether the land could be considered trust property.

The court ruled that the land was trust property. It held that there was:

20 Cal Rptr at 436.

The only other case on point, reaching the same result, is the Kansas Supreme Court's decision in Taliaferro v. Taliaferro, 921 P2d 803 (Kansas, 1996). That case had similar facts -- a written declaration of trust but title to the grantor's assets (mainly shares of stock and a life insurance policy) was never changed. Citing Heggstad, the court ruled that:

921 P2d at 806.

Both cases rely heavily on the Restatement of Trusts, particularly section 17. After these cases were decided, a new draft of the section, now numbered as section 10, has been released. There is no significant change and the precise issue is now covered in subparagraph (c) of section 10 and comment (e), stating that "a trust may be created without a transfer of title to the property". .

These cases were cited to the Court of Appeals in the case of Estate of Moore, 97 P3d 103, 435 Ariz Adv Rep 9 (CA1, 2004), that adopted the Hegsted rationale but determined that the assets could not be considered trust property for other reasons. Note that this case was ordered depublished by the Arizona Supreme Court so its precedential value is slight.

While this approach may serve in a pinch, the better course is to execute funding instruments – deeds, assignments, beneficiary designations, etc – to avoid the issue as to whether a transfer actually took place or was intended.

My office routinely has the client complete an omnibus assignment, a copy of which is attached to these materials. The assignment essentially states that all property is transferred to the trust. The idea is that this assignment will serve as the equivalent of a pour-over will without the probate proceeding.

But the better practice is to clearly and unequivocally transfer assets into the trust.

The book that is generally considered to be the leading authority on the funding of trusts is "The Funding of Living Trusts" by Carla Neeley Freitag, published by the Real Property, Probate and Trust Law section of the American Bar Association.

43% of all Americans who reach age 65 will eventually enter a nursing home

21% will stay at least 5 years

34% will stay 1 – 5 years

19% will stay 3 -- 12 months

26% will stay less than 3 months

Average length of stay – 2.3 years

Early stages of Alzheimer’s -- $2,000.00 per month

Mid-stage Alzheimer’s -- $3,000 to $5,000 per month

Mid-level skilled care -- $5,000 to $6,000 per month

Ventilator -- $12,000 to $15,000 per month

24 hour at-home care -- $15,000 per month

Many of the studies are rather dated. The study generally considered the best and most recent is by "Long Term Care Over An Uncertain Future: What Can Current Retirees Expect?" by Kemper, Komisar & Alecxith in the journal Inquiry, Vol 42, pp. 335-350. Note that this study shows a significant difference in gender – 58% of men over the age of 65 will require some form of LTC as compared to 79% for women.

1. WHO PAYS?

   44% paid by patient’s own funds

   38% paid by Medicaid (ALTCS)

   11% paid by Medicare

   7% paid by long term care insurance

2. 3 WAYS TO PAY

   Option #1: Pay as you go

   Option #2: Medicaid (ALTCS)

   Option #3: Long term care insurance

   Option #1: Pay as you go

   Not covered by health insurance

   Very limited coverage Medicare

   Must have been discharged from hospital within previous 30 days

   Only covers daily skilled nursing or skilled rehabilitation (as opposed to custodial care)

   1^st 20 days paid in full by Medicare

   Next 80 days – co-pay of $128.00 per day

   After 100 days – No further Medicare payments – patient pays all costs

3. ALTCS ELIGIBILITY RULES

In Arizona, Medicaid = ALTCS (Arizona Long Term Care System).

ALTCS is division of AHCCCS

Over 65 years of age Any age

Automatic eligibility Means-tested

Hospital and doctor visits Nursing home

Never have to repay for care received Estate recovery

ELIGIBILITY

Two tests – income test and asset test

Income test – cannot exceed $1,869.00 per month

Includes ALL income, regardless of tax characterization

Asset test – cannot exceed $2,000.00 in countable assets

Countable assets are everything except:

Primary residence

Equity in home cannot exceed $500,000

Automobile – no limit on value

Prepaid burial plan

Can be done for both spouses

Must be irrevocable

$1,500 burial fund -- for flowers, cost of service, etc.

Must be in a separate, designated account

Only if no prepaid burial plan

Household goods and personal effects

Artwork and antiques are excluded

Combined income cannot exceed $3,738.00 ($1,869.00 X 2)

If more than $3,738.00, then use "name on check" rule plus one-half of all jointly titled checks. The total for that particular spouse cannot exceed $1,869.00.

"Snapshot date": look to when ill spouse entered the nursing home, even if it is well before applying for ALTCS

Take total combined countable assets and divide in half

Healthy spouse gets to keep his or her one-half

Minimum of $20,328.00

Maximum of $101,640.00

Ill spouse must "spend down" his or her one-half to $2,000.00

Problem: you have $2,000.00 in income but your cost of care is $5,000.00.

Solution: create trust with all of person’s income (not assets) assigned to the trust to pay ALTCS for cost of care

Cannot be used if monthly income exceeds private pay rate:

$4,781.99/$4,445.00 for single person

Double this amount for married couple or use "name on check" rule.

Sheltering funds in excluded resources

Purchase a home if none owned

Must be done before entry into nursing home

Pay down mortgage

Do repair work or modify and improve home

New roof, paint, carpeting or A/C

Add garage or enclose carport

Build a pool

Purchase burial insurance

Policy is irrevocably assigned to mortuary

Purchase the parcel of land next-door

Must be contiguous

Purchase automobile

Unlimited value if necessary for medical treatment

Travel to doctor’s office should be "necessary"

Otherwise, FMV cannot exceed $4,500.00

Only one car per couple

Purchase burial plan

Create burial fund up to $1,500.00 per spouse

Must be in separate account designated as such

Purchase new household goods

New furniture or appliances

Useful to buy items for "homier" nursing home

Travel or take a vacation

Purchase a single premium immediate annuity

Converts an asset into an income stream

Always compute effect on share of cost

MARRIED COUPLES AND MMMNA

In most cases, healthy spouse will be able to retain most, if not all, of the couple’s income under the concept known as "minimum monthly maintenance needs allowance" or "MMMNA". This means that healthy spouse is entitled to minimum monthly income of at least $1,712.00 but cannot exceed $2,541.00

GIFTING

Be very, very careful in this area, especially since the enactment of the Deficit Reduction Act passed in February 2006. In Arizona, it takes effect for all transfers made after July 1, 2006

Includes any transfer for less than FMV

AHCCCS has de minimus amount of $400 per month

Solution – deed home out of trust to the owner/grantor prior to application.

PLANNING THAT WILL NOT WORK AND OTHER PROBLEMS

IRAs and other retirement entities are not excluded (ie, they are countable assets) unless they are annuitized. Same with cash value of life insurance policies and deferred annuities. Liquidating these accounts can create big income tax problems.

Estate recovery – ALTCS will file claim in probate court for cost of services rendered once ill spouse has passed away.

Solution – title property so that title passes outside probate. Jointly titled assets between spouses work very well here but can be a disaster if healthy spouse dies first.

Problem – ARS 14-6102 broadens ALTCS’s estate recovery options but has not actively enforced these collection rights. Beginning in mid-2005, AHCCS has begun filing liens on real estate owned by AHCCCS patients but there are four important exceptions.

Only applies to medical services rendered to persons over the age of 55.

2. Cannot be asserted against a surviving spouse.

3. Cannot be asserted if the patient is survived by a child under the age of 21.

4. Cannot be asserted if the patient left a surviving child of any age who is blind or is disabled under the criteria set forth by Social Security.

In other words, AHCCCS can only pursue a lien against an unmarried person with no minor or disabled children.

$12,000 annual exclusion gifts – a tax concept. Does not apply to ALTCS situation.

Divorce & marriage -- Divorce is suitable only when healthy spouse has a large amount of sole and separate (ie, pre-marital) property.. From an ALTCS standpoint, marriage is not recommended if future spouse is likely candidate for nursing home.

Do not forget share of cost. Ill spouse is only entitled to keep $93.45 per month. ALTCS will allow payment of health insurance premiums and non-covered medical expenses such as non-emergency dental and eye care, hearing aids and chiropractic care

Third party guarantees of nursing home bill are unenforceable and probably illegal (ie, children cannot be forced to pay for parents’ care). 42 CFR 483.12(d)

Cannot disclaim property that is about to be inherited or is otherwise due to applicant or spouse (except that healthy spouse can inherit or disclaim if it occurs after snapshot date)

Loss of control on health care matters once ALTCS is paying

Very limited services in certain areas – dental, occupational therapy, experimental treatments, most routine foot care

Most (at least 75%) nursing homes accept ALTCS patients. Always check on this if patient is initially going to pay with his or her own funds so that patient can remain in same facility once ALTCS assumes responsibility for payment

ALTCS provides VERY limited coverage for assisted living facilities

Only provides for care that is 1) "medically necessary" – must prevent death, treat or cure disease, ameliorate disabilities or prolong life; and 2) at risk of institutionalization

Care at ALFs is considered to be "supervisory care"

ALFs are not considered to be a "nursing facility". Come within characterization of "Home and Community Based Services" -- will cover personal care and homemaker services but NOT room and board

Where to go for help in finding placement in a nursing home:

Adult Care Connection

4811 East Calle Ventura

Phoenix, AZ 85018

602-840-5461

www.adultcareconnection.com