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Many of our older clients are worried about two things – 1. Having the resources to afford long-term care, or qualifying for government assistance if they don’t, typically Medicaid; and 2. They want to leave their house to their heirs if it is one of their primary assets. These concerns are true even for reasonably healthy individuals.
These concerns lead to questions of strategies for those who own their homes and wish to live there as long as possible, but are concerned that one, or both (if they are a couple) will need expensive, long-term care in either an assisted living facility or a nursing home. Is there a way to continue to own your home as long as possible, qualify for Medicaid AND make sure the family home is passed on to the children? The short answer is that it is difficult to accomplish this goal without giving up ownership and taking actions which require long-term planning. This brief article will not explore all the avenues to both preserve assets to pass on to heirs and minimize your “countable” assets in qualifying to Medicaid assistance, but will provide a brief discussion regarding the family home.
The most common strategy many people will employ is to transfer ownership of the home to a child, but continue to live in the home. While this strategy can sometimes “work” – there are several potential problems with this course of action. First, Medicaid utilizes a look-back period for assets that were transferred within 5 years of a person applying for Medicaid. This means that if you transfer ownership of your home to a child (or children) and need to apply for Medicaid within 5 years of the transfer, Medicaid will impose a penalty period during which you will not be eligible to receive benefits. The period is calculated by dividing the value of the assets transferred by the average monthly cost of long term care in the state to arrive at the number of months you will be ineligible. Worse, the penalty period will begin running on the first day you start receiving services and would be eligible for Medicaid, but for the transfer.
The second potential problem, even if the 5 year look-back period isn’t an issue, is that you give up ownership of your home and it is now owned by someone else. While this can often work out just fine, sometimes we can’t always control events in our children’s lives. Events such as lawsuits, accidents, divorce and the loss of a job may put their ownership of “your” house in jeopardy.
You should be very careful in considering options for your home if you are worried about needing long-term care and talk with an attorney specializing in such matters before taking steps on your own.
Tim Brynteson is a partner with Otis, Bedingfield and Peters LLC in Loveland. Tim’s practice emphasizes on business transactions, real estate, business succession planning, estate planning, probate administration, and tax controversies and can be reached at 970-663-7300 or email@example.com.
Chalk one up for property rights. The U.S. Supreme Court just changed the playing field for wetland permitting, notably tipping the balance toward landowners and developers seeking clarification of whether their planned activities require Army Corps of Engineers authorization. Moreover, in somewhat of a rarity in environmental cases, the court did so unanimously.
The Clean Water Act requires a landowner to obtain a Corps permit before working in “waters of the United States,” a phrase that defines the reach of the Act. Contrary to what one might expect, it often is not clear whether a property contains such waters. Therefore, the Corps has long provided property owners Approved Jurisdictional Determinations that state the agency’s definitive position on whether a project area contains protected waters.
If the Corps determines that a planned project area does not contain protected waters (a negative JD), the project can proceed without a permit. A negative JD generally gives the property owner a five-year “safe harbor” for work in the evaluated area. However, if the Corps determines that the area contains protected waters (a positive JD), the landowner typically seeks Corps authorization before proceeding.
In this case, a company in Minnesota sought to expand its existing peat-mining operation to nearby lands. Before doing so, it requested an Approved JD from the Corps for certain wetlands in the expansion area. The Corps issued a positive JD based on the wetlands’ “significant nexus” to a river some 120 miles away. Moreover, the Corps indicated to the company that the required permitting process would take years and be very expensive.
Corps regulations specifically allow a party to appeal an Approved JD to a higher level within the Corps. The company pursued such an appeal, but the Corps affirmed its original determination. The company then sought review of the Approved JD by a court.
For years, courts have supported the Corps’ position that Approved JDs are not judicially reviewable. This recently began to change, causing inconsistencies among the lower courts. The Supreme Court accepted this case to definitively resolve the issue.
The authority of a court to hear such an appeal turns in part on whether the agency action at issue — here, the Approved JD — has legal consequences. The Corps has long argued that Approved JDs effectively have no legal consequences because landowners still have the options of applying for a permit and appealing any unsatisfactory results, or proceeding without a permit on the theory that the Corps’ Approved JD is faulty.
All eight Supreme Court justices (the late Antonin Scalia would have made it nine) rejected the Corps’ position, finding the agency’s articulated options inadequate. The court observed that getting a permit can be time-consuming and expensive, citing a study from 1999 showing that permits, such as the one required here, take an average of 788 days and $271,596 to obtain. (These figures have likely risen significantly since then.) Moreover, a positive JD deprives landowners of the five-year safe harbor, exposing them to potential civil penalties of up to $37,500 per day, and even higher criminal fines and imprisonment. The court found these to be tangible legal consequences that make Approved JDs appropriate for judicial review.
The Corps’ response to this decision is difficult to predict. Since the Clean Water Act does not require the Corps to issue Approved JDs, the agency could simply stop the practice. However, one justice warned the Corps about such a move.
In a concurring opinion, Justice Anthony Kennedy stated that the Clean Water Act, especially without the JD procedure, raises “troubling questions regarding the government’s power to cast doubt on the full use and enjoyment of private property throughout the nation.” In other words, dropping the practice of providing Approved JDs may prompt heightened scrutiny of the Corps’ authority under the Act. The court will likely soon have an opportunity to scrutinize the Corps’ Clean Water Act authority when, as most expect, it reviews a controversial rule defining which “waters” the Act protects.
Assuming the Corps continues its practice of issuing Approved JDs, this decision will change the dynamics between the Corps and landowners. Landowners will gain leverage in the JD process. The prospect of a resource-consuming judicial appeal will make the Corps less likely to push the envelope on JDs and more likely to seek common ground. Landowners should carefully consider the legal implications of this case, and how it ties into other recent Clean Water Act developments, before discussing planned projects with the Corps.
John Kolanz is a partner with Otis, Bedingfield and Peters LLC in Loveland. He focuses on environmental matters and can be reached at 970-663-7300 or JKolanz@nocoattorneys.com.
Choosing the appropriate entity for a new business is not as easy as one might think. Most people tend to gravitate towards a limited liability company, or LLC, for its relative ease of formation and asset protection, however there are various other entities that can be beneficial for an emerging business. The various entity types, including C and S corporations, LLCs, and partnerships all have aspects that can be useful to a new business and should be examined before selecting an entity.
Businesses with Multiple Owners
If the new business entity will have multiple owners with different rights and interests when it comes to control, income, business losses, or assets upon liquidation, ownership rights may need to be structured differently for each owner.
If the new entity is a C or S corporation, ownership is limited to company issued stock and those owning the majority of outstanding stock control the business, whereas partnerships and LLCs are flexible and can customize and define control and interests through the entity’s operating agreement. The ability to customize LLCs and partnerships can allow the owners to set up a business structure that can take into account the differences each owner may bring to the business.
Earnings Bailout Potential
Further, it is important for the new business owners to fully understand the earnings bailout potential of various entities. With S corporations, LLCs, and partnerships, it is fairly easy to remove earnings from the business and pass them on to the owners. In this case the profits generated by the business are taxed directly to the owners, so the distribution of profits in the form of dividends or partnership distributions will not carry tax consequences for the entity. However, when a C corporation distributes earning to owners, or shareholders, in the form of dividends, the dividend distribution is not deductible to the corporation. Instead, it is double taxed, once to the entity and once to the owner, which can be a huge hit against company profits. This tax trap can be avoided if the shareholders are employed by the corporation and receive earnings in the form of taxable compensation. The compensation would then be deductible to the corporation, which results in a tax at shareholder level only.
A new entity can also benefit from utilizing losses generated by the business. The threshold issue is whether the losses should be retained by the entity or passed through to the owners. Losses generated by C corporations are retained in the business and can be carried backwards or forwards to be deducted against earned income. This can be a valuable tool in lowering the business’s tax liability once the business makes a profit, but the shareholders never benefit from the losses of the business. In an S corporation, LLC, and partnership, losses can be passed through to the owners. For example, when losses are anticipated in the first year of the business, passing the losses on to the owners may generate tax advantages if the owners have other taxable income against which those losses can be offset.
Ability to Restructure
Additionally, the ability of an existing organization to restructure without being penalized can be a helpful tool for a business down the road. For a C corporation looking to restructure, the options are limited. If it converts to a partnership or LLC, the corporation will recognize gain on all its assets, and the shareholders will recognize gain on the liquidation of their stock, leading to tax liability. An S corporation and other pass through entities, on the other hand, can convert without triggering the type of gain and tax consequences you would see with a C corporation.
Estate Plan Integration
Although most people do not consider it when starting a business, it is also important to integrate a new business entity with the owners’ estate plan. Owners may want to shift income to a lower tax bracket, freeze or slow down the growth of an estate, or utilize the annual gift tax exclusion. To make use of these options, LLCs and partnerships provide the best options and flexibility.
Potential of Sale
Finally, although most people will not think about it when beginning a business, it is important to consider the possibility of selling the business or going public. If the business is an S corporation, partnership, or LLC when the assets are sold, the gains realized on the sale of the assets are taxed to the owners in proportion to their interests in the business. In a C corporation there will be taxes levied on the proceeds at the corporate level and then upon distribution to the shareholders. The shareholders will pay capital gains tax on the difference between the amount they received in distribution and their individual basis in the corporation’s stock. While there are ways for C corporations to mitigate their tax liability, it would be easier to sell a business if it was not a C corporation. However, if the company is funded with outside capital, as many emerging companies are these days, and the plan is to eventually go public, then a C corporation is the only option. The interests of outside investors and potential gain that can be found on the public market may trump any of the other concerns discussed above.
Deciding which type of entity to use for a new business venture may not be a difficult decision for some, but it is important to look at all the factors before creating the entity. The above discussion does not address every factor to consider nor is it a thorough discussion of the factors mentioned. The point is to make sure to fully analyze and understand how the choice of entity decision can help or hinder the goals of the business.