By: Matthew M. Shafae, Attorney
Litherland, Kennedy & Associates, APC, Attorneys at Law
Elections have consequences. On January 3, 2017, the 115th United States Congress met for the first time, with both houses controlled by the Republican Party. On January 20, 2017, our Republican president-elect will be sworn in as President of the United States. For the first time in a decade, two branches of our federal government will be controlled by one political party. And this president will also have the opportunity to fill at least one vacancy on the United States Supreme Court. With the incoming administration, we face the possibility of dramatic changes in our federal tax policy, and in our social and health policies.
A large component of estate planning is having peace of mind. Good estate planning is premised on knowing that you have provided for almost all possible contingent scenarios that may arise in your life, and that you have provided for your loved ones after your death. When there is uncertainty in the law, it is increasingly difficult to achieve that peace of mind when you are not sure that you have provided for every situation.
The coming months and years pose greater uncertainty and challenges for seniors, the disabled, and medically needy Americans. Social and health policy are now at the forefront of the political arena. Potential changes to national social and medical programs may impact millions of Americans now receiving government benefits.
Below is our forecast of the proposed and anticipated policies of the in-coming administration as they relate to estate planning, seniors, and those who are medically needy. We base this analysis on official statements made by the administration, on reports in the press, as well as educated contemplation.
Social Security and Medicare
On the campaign trail, President-elect Trump has stated that he does not intend to cut Social Security or Medicare. But the man heading the Trump transition team’s social security effort, Michael Korbey, is a former lobbyist who has long advocated cutting and privatizing the program. Similarly, Paul Ryan, who represents mainstream Republicans and is the current Speaker of the House, has long advocated privatizing Medicare. In addition, Ryan has advocated raising the qualifying age of Medicare from 65 to 67.
Another potential loss to retirees is the potential repeal of the Affordable Care Act (ACA), also known as Obamacare. Currently, many of those who have retired early, who do not qualify for Medicare, are guaranteed acceptance under the ACA. The ACA also took steps toward extending the solvency of Medicare.
Preserving the fiscal health of both Social Security and Medicare is one of the main challenges facing this administration. How to achieve solvency in the face of impending Social Security bankruptcy, and how to avoid privatized health care for the elderly are going to be huge obstacles to overcome. Unfortunately, there is not much more information to provide a clear direction as to how the administration will move forward, or how it intends on achieving its stated goals. Those who are soon to be retirees should be on notice to remain vigilant and, to the extent possible, have a contingency plan in place in the event that they are forced to redirect their retirement plans.
Also potentially on the chopping block is the Department of Labor’s “fiduciary rule”, which is another protection for retirees. The “fiduciary rule” mandates that financial advisors offering retirement advice and products act in the best interest of the investors. Trump and other Republicans have stated that they want to do away with this signature protection for retirees.
Medi-Cal is a federal program administered by the Center for Medicare and Medi-Cal Services (CMS). The program is implemented at the state level by each state’s own Medi-Cal plan. Here, in California, it is implemented as Medi-Cal. Recently, the Affordable Care Act (ACA) has expanded Medi-Cal coverage (Medi-Cal expansion) to allow people who earn less than a designated income to receive health insurance through the Medi-Cal program. President-elect Trump’s nominee to head CMS, Ms. Seema Verma, previously designed Indiana’s Medi-Cal program, which required the poor to make nominal payments toward their healthcare before receiving federal Medi-Cal funds. If Indiana’s Medi-Cal plan is any indication, there may be dramatic changes to Medi-Cal policy under the leadership of Ms. Verma.
Long term care costs are quickly becoming a larger concern due to our aging population. Medi-Cal provides substantial relief to those incurring long term care costs who cannot pay for those services. Currently, the federal government shares all the Medi-Cal costs with California. Due to the success of Medi-Cal, and the increase in enrollment due to the Medi-Cal expansion, enrollment is at an all-time high. Since federal funding is predicated on state-level enrollment, this means that Medi-Cal funding is also at an all-time high.
But President Trump wants to cap the funding and give the states one fixed grant—called block grants. Block grants are supposed to provide states with more flexibility in how they spend the grant money, but for California it means receiving less funding than it currently receives. Since Medi-Cal has such high enrollment, it can command more funds from the federal government. With block grants, the federal government would issue funding based on pre-ACA enrollment, and it would be a static amount. If block grants are implemented, Medi-Cal would either need to cut services or reduce enrollment.
We need to keep an eye on this development. Without knowing how Medi-Cal will be funded and by how much the funding changes, if at all, it is challenging to forecast the viability of the program.
Possible Tax Proposals – Gift, Estate, Income, and Capital Gains
Below is a chart our office has developed to compare the current tax laws with what the Trump administration says it plans to propose, as well as what House Republican leadership has stated.
The estate tax is currently a flat 40% tax rate on large estates. The current estate tax exemption amount is currently set at $5,000,000 per taxpayer, and it has no expiration date. It is indexed for inflation, which means the exemption amount increases every year (for 2017, the exemption amount is $5,490,000). For single estates valued less than $5,490,000 (or $10,980,000 for married couples) there is no estate tax due.
President-elect Trump and the House Republicans have stated their desire to repeal the estate tax. However, they will need 60 votes in the Senate to permanently repeal it. In any event, this is not much of a concern for the clear majority of estates.
The Trump administration has yet to put forth any specific proposals regarding special needs protections. However, special needs residents may be adversely affected if Medi-Cal is funded by block grants. As described above, if Medi-Cal funding is reduced, California may have to reallocate—or worst, restrict—its funding for both governmental and non-governmental providers. The reach of the proposed Medi-Cal block grants could negatively impact the benefit of special needs trusts, which maximize assets for the person with the disability.
On another front, special needs education may be impacted by recent Trump administration cabinet nominations. Betty DeVos, an outspoken advocate for charter schools and the dismantling of publicly funded schools, is Trump’s nominee for Secretary of Education. Expanding options for primary and secondary education may come at a price of reduced procedural and substantive protections of the Individual with Disabilities Education Act (IDEA), and may even limit the funding formula that follows eligible individual students.
There are no specific proposals that relate to any potential changes in veterans’ benefits. However, proposals made before the election by some Republicans were aimed to restrict access to need-based programs, such as Aid and Attendance, which provides financial assistance for veterans and spouses of veterans who need higher levels of home care assistance. Veterans will need to remain aware of any potential legislative or regulatory restrictions to benefits and plan accordingly.
How to Proceed
So what does it all mean? To put it simply, we still need to wait and see on a lot of the specifics. What we can glean from this administration’s cabinet appointments, the political majority in Congress, and the President’s statements themselves is that we should brace ourselves for potential restrictions on benefits and protections to some of our most vulnerable citizens—seniors, retirees, veterans, and the medically needy. For the average American taxpayer, there will likely be some changes in the way that you are covered for healthcare, and you will likely need to plan more aggressively for retirement.
We will continue to work hard to remain ahead of any changes and to keep you informed of anything we find that may impact your estate plan. In the meantime, we must remain vigilant and proactive in our planning strategies and techniques. If you are concerned whether any of the above potential changes may impact your estate plan, do not hesitate to contact us for a complimentary one-hour estate plan review at (408) 356-9200 or (831) 476-2400.
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