Improved Planning Technique: Funding A Psk With An Annuity
Personal Services Contracts ("PSKs") are widely used in Florida as a Medicaid spend-down tool and allow for immediate Medicaid eligibility
. If used alone, the PSK poses three non-Medicaid problems: (1) excessive income taxes, (2) loss of control, and (3) an unequal inheritance. However, if the PSK is coupled with an immediate annuity and a PSK Annuity Settlement Trust, the problems can be avoided.
PROBLEM - EXCESSIVE INCOME TAXES: If the child is given a lump sum payment at the commencement of the PSK plan the IRS will require the child to pay income taxes on the entire amount. This will lead to more taxable income as a result of being in a higher income tax bracket.
SOLUTION: Since the PSK is drafted so that the child only receives compensation after providing actual services, the income taxes are limited to the amount of compensation received in a given year.
PROBLEM - LOSS OF CONTROL: If the child is given a lump sum payment at the commencement of the PSK plan the child can prematurely spend the funds, or lose then in a divorce, lawsuit, or bankruptcy. Additionally, if the child predeceases the parent care recipient the funds can be lost in an estate plan.
SOLUTION: Since the immediate annuity only makes monthly payments to the child, the child cannot lose the funds - no dominion or control.
PROBLEM - UNEQUAL INHERITANCE: If the parent predeceases the term of the PSK the child receives a windfall of the remaining funds.
SOLUTION: Since the parent is the annuitant of the immediate annuity, the monthly payments remaining flow directly to the PSK Annuity Settlement Trust following the death of the parent. The trust can equally distribute them amongst the child and his or her siblings - equal inheritance.
We know, we know. Using annuities can be confusing and convoluted. Who do you designate as the owner? Who is the annuitant? Can you name whomever you want as beneficiaries? What will happen if mom or dad, or the caregiving child, predecease the term of the annuity? Where do the residual benefits go? And how will you explain the entire process to your clients?
We get it. And that's why we've created an easy-to-use flowchart to explain the process.
The PSK Annuity Settlement Trust
The sole purpose of this document is to ensure that care will continue to be provided to mom/dad should it still be needed. If mom/dad is still living and the child providing care has passed, an alternate care provider must be appointed and the funds will be utilized in a new PSK plan. If mom/dad has passed, and care is no longer required, the funds will be distributed accordingly. A sample document is available upon request.
Income Tax Consequences
From the IRS' viewpoint, in that the child providing care never had dominion or control over the cash payment in exchange for care, the child providing care only pays federal income taxes on the annuity payments that he or she receives in a given calendar year. The reason for this relates to the fact that mom/dad sent the annuity application, along with the premium payment, directly to the insurance company, and the child never acquired any right to cancel the annuity contract, or seek a full refund.
Employee Compensation
You should always encourage your client to meet with an accountant to ensure that taxes and wages are properly reported to the IRS. Tax forms, including a Form W-4P must be filed with applicable taxing authorities.
by: Dale M. Krause
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