This is an example of a hypothetical client engagement letter that outlines a typical estate plan. The goal is to provide you with a better understanding of the various aspects of estate and asset protection planning and to outline how to get started in the process.

Cushing & Dolan, P.C.

Attorneys at Law

375 Totten Pond Road, Suite 200

Waltham, MA 02451

Tel: 617-523-1555

Fax: 617-523-5653

April 2015


Todd E. Lutsky, Esq., LL.M


Mr. and Mrs. John Q. Public

375 Totten Pond Road

Waltham, MA 02451

RE:      Estate and Asset Protection Planning

Dear Mr. and Mrs. Public:

I enjoyed meeting with you and look forward to working with you. As we discussed, the first step of the estate and asset protection planning process is to identify and value those assets that would be includible in your estate in the event of your demise. Based on the information provided to me, the value of your gross estate is worth approximately $2,420,000.00, as shown on the attached Asset List.

It is my understanding that you have three children and three grandchildren and both of you are 65 years of age. Many families in this situation are generally concerned about avoiding the costs associated with the probate process, reducing and possibly eliminating estate taxes, protecting assets from the costs of long term care, not giving up control over their assets during their lives, ensuring the proper blood line disposition of their assets following their demise, and protection of their assets from future divorces of their children following their demise. However, the ever-changing world of federal and state estate taxes, revocable trusts, irrevocable trusts, life estates and the whole probate process can be somewhat overwhelming which may result in procrastination planning or no planning at all. The estate planning world need not be that difficult if it can simply be broken down into its component parts. The balance of this article will explore how to begin the estate planning process, the individual aspects of estate and asset protection planning as it pertains to this real life situation, which could be similar to your own.


  1. Value your estate:       By determining the value of your estate it will help you determine if estate tax reduction is an objective of yours and how many trusts will be needed. For example, if you are married and worth more than $1,000,000 in assets then you may need to consider two trusts one for each of you.       This is because the Massachusetts estate tax exemption is $1,000,000 and when you exceed this exemption the family is taxed on the entire value of the estate not just the amount over the exemption. These state exemptions vary depending on the state you reside in. For example, the state exemptions around New England are as follows: Connecticut exemption is $2,000,000, Rhode Island exemption is $1,500,000, Maine exemption is $1,000,000 and New Hampshire does not currently have an estate tax. Through the use of trusts irrevocable or revocable you would be able to double this exemption which in many cases will allow you to reduce and maybe even eliminate your state and federal estate tax liability. Remember the Federal exemption is now at $5,430,000. If you are single and well over a million dollars then more sophisticated estate planning maybe needed otherwise one trust will be a fine first step in the planning process.
  2. What assets make up your estate: The way to begin this process is to determine what assets make up your estate.       Everything you own is part of your estate including, but not limited to, all types of real estate, retirement accounts, Roth IRAs, investment accounts, bank accounts and yes, even all life insurance policies that you own. All of these assets will be valued as of your date of death.
  3. How old are you:       Asking yourself this question enables you to determine if the protection from the costs of long term care is to be an important objective of yours. For example as a rule of thumb if you are over 60 years of age you should consider this as a possible objective. The reason I pick 60 years of age is that it takes five years to protect the assets from the costs of nursing home following the transfer of the assets to the irrevocable trust. Once you have answered this question then you will know if an irrevocable trust is going to be the right one for you. If you wish to protect assets from the costs of nursing home care an irrevocable trust must be used as a revocable trust will never provide such protection. A revocable trust will work for all other aspects of planning including but not limited to avoiding probate, reducing estate taxes and providing a blood line distribution of your assets to your family.
  4. Consider family dynamics: It is important to take a look at your family and see if there are any reasons that you may need to control your assets following your demise. Some issues to consider would be if you have a special needs child, children with drug related issues or that are simply bad with money, but most importantly if you want to protect these assets from future creditors of your children, primarily their future divorces. Either revocable or irrevocable trusts can be drafted in ways that can truly allow you to control your assets from the grave.
  5. How to pick an estate planning attorney: This can often times be the most difficult part of the estate planning process but need not be if you follow a few simple steps. First, make sure the attorney has a master’s degree in taxation and they way you know that is to look at the card and look for the letters LL.M after the attorney’s name. An attorney really should have this level of education if they are going to practice in the estate and asset protection planning field.       Second, ask how much of the attorneys time is spent in the estate planning field during the course of any given year. If the answer is no 100% of the time I would seek a second opinion. The tax code and all its changes is hard enough to keep up with if you do it all the time and would seem to be a tough challenge if you do not. Third, listen closely to the attorney’s explanation of the estate plan that he or she is proposing for you. If at the end of the explanation you do not have a clear understanding or feel like you are leaving with more questions than answers then you may want to seek a second opinion. Finally, please make sure that the attorney gave you a flat fee as to the cost at the end of the meeting. The last thing you want when you leave the estate planning meeting is to be told this will be billed on an hourly rate.       Now let’s apply these ideas to the hypothetical estate planning set of facts mentioned above.


Let’s begin the journey by exploring the probate process which can be best described through three basic points. First, probate can be a somewhat costly adventure for the estate as an attorney is generally hired to help the executor through the process. The legal costs may range from 2-4% of the value of the probate estate. The probate estate consists of the value of all the assets John and Jane died owning in their own name. The process begins by the attorney filing a petition to get the executor, which is also called the personal representative, appointed. This is important since the executor named in the will would have no authority until such appointment is complete. This process will usually require notifying all of the legatees of the appointment and hoping that none of them object. The heirs at law will have 30 days to object to the appointment. There will also be the filing of a first and ultimately a final accounting along with an inventory of all the probate assets. In addition, there may be the need to file an estate tax return, form 706, an estate income tax return, form 1041 along with any state estate tax returns that may be required. The entire process takes approximately one year to complete provided there is no litigation.   This is not a complete list of items that need to be accomplished but demonstrates the time involved with, as well as the cost of, the probate process.

The second point is that John and Jane will sacrifice any privacy with regard to what they own as well as their corresponding values, as the probate court is open to the public thus allowing anyone to look at their file.   In this regard, an inventory will be filed with the court that lists all the assets that they owned in their individual names along with corresponding values. The administration of your estate can be delayed for substantial periods. There is also the possibility of a challenge to your will, as the will is an estate planning document that must go through the probate process. Many people think that just because they have a will that they will avoid probate and this is generally not the case at all since the will is the one document that must be filed with the Probate court following your death.

Finally, and perhaps the most important reason to avoid probate is that the probate process exposes all of John and Jane’s assets to any creditors that they or their estate may have which remain unpaid at the date of their death. With regard to time, the estate must remain open for at least a period of one year following the death of the decedent to allow creditors an ample opportunity to file a claim against the estate. Notice is given to the creditors by requiring the estate to publish the death of the decedent in a local newspaper for seven days. In addition, during this time the family may only take the assets subject to divestiture, which simply means that if a claim is filed against the estate, that such beneficiary may have to give up the inherited asset to satisfy the claim. This is why many assets are not distributed to family members until the estate is settled. Some common creditors are unpaid medical expenses, credit cards or possibly a particular state’s department of medical assistance, (i.e. Medicaid) which has the ability to file a claim against the estate in order to recover any nursing home expenses paid on behalf of the decedent. In fact under recent law changes, the executor of the estate is now obligated to notify the state’s Medicaid estate recovery unit that an individual has died so that they have an opportunity to assert a lien against the probate assets to recover any nursing home benefits that the decedent may have received.

For these and many other reasons, John and Jane desire to avoid probate and the best way to accomplish this is for them to simply die not owning assets in their own name.   John and Jane will accomplish this through the use of two irrevocable trusts. Assets that are owned by irrevocable trusts are not considered to be owned in your own name and therefore avoid the probate process. Revocable trusts will accomplish the same thing but they will not protect assets from the cost of nursing home care, which is an objective of John and Jane’s. This trust approach is probably the simplest and safest way to avoid probate.

In the event one did not want a trust probate can still be avoided in a number of other ways. For example, simply make sure that every bank or investment account, has a designated beneficiary listed or a payable on death designation listed as these types of assets will also avoid the costs associated with the probate process and pass directly to whom you have listed. However, it is very important that when doing this that you have listed everyone who is to participate in this particular distribution otherwise you run the risk of disinheriting a person that you never intended to.   It is also possible for John and Jane to avoid probate by owning their assets jointly as jointly owned assets pass by operation of law to the surviving joint owner and not through the probate process. However, this is a trap for the unwary as often the surviving spouse, who will now be the sole owner of the assets, will forget to add another name to the account and die owning them in his or her own name, thus causing such assets to pass through the probate process. However, even if Jane, as the surviving spouse, added her children’s names to her assets, which would solve the probate problem, it often creates many other problems such as exposing her assets to her children’s creditors, loss of some control and/or divorce issues along with adverse estate tax consequences just to name a few. Therefore, this author recommends the use of trusts as a simple yet safe approach to avoiding probate as well as reducing future estate tax liability.


John and Jane insist that they need wills and believe that these documents are the most important part of their estate plan. However, while they still do need wills they are not the most important document in their estate plan. Remember, the planning objectives are to avoid probate, reduce or, if possible, eliminate estate taxes and protect assets from the cost of nursing home care. A will simply does not accomplish any of these goals for single or married couples as the will is the only estate planning document that gets filed with the probate court.

A simple will is what most people have and it generally provides that upon the death of one spouse all assets are to be transferred to the surviving spouse. For a single person the simple will just direct where there assets are to go following their demise. This type of will does not provide any estate tax planning benefits as the first spouse to die will waste his or her federal and/or applicable state exemption equivalent amounts. This is because the government allows a spouse to leave an unlimited amount of assets to the surviving spouse without paying any estate taxes, but the result is that the deceased spouse’s exemption amount has been wasted and all the families assets will now be owned by the surviving spouse who only has one exemption amount left to offset the estate taxes with. The end result is usually a larger amount of estate taxes would be due on the second death than would have been the case had trusts been used in connection with a pour over will instead of a simple will as part of the overall estate plan. Due to the increase in the federal exemption to $5,430,000 effective January 1, 2015 and the addition of portability to these Federal exemption amounts, the Federal estate tax is not as large a problem as the applicable state estate tax may be as such exemptions are significantly lower than the Federal exemption. See above for a list of New England state estate tax exemption amounts. This aspect of estate planning will be explored in more detail below.

Many families fall into this trap of believing a simple will is all that is needed in an estate plan. I recall a family that came into the office at about 70 years old, three children all doing well, with about $2,000,000 in total assets with all assets being jointly owned or with designated beneficiaries attached to them, who wanted a basic will. I then proceeded to ask a few questions as it relates to estate planning in an effort to address items they may not have considered in the estate planning process. For example, I asked if they wanted to eliminate their estate tax, if they wanted to avoid probate even on the second spouse’s death, if they wanted to protect the assets from the nursing home and if they were concerned about protecting assets from their children’s future divorces following their demise? The answer to all of the above was a resounding yes. Then I explained how a simple will does not accomplish any of these items. The family was surprised and happy to learn how to do all of these things with basic estate planning. Please do not fall into this trap of believing a will is all your need when it comes to your estate planning.

The will has two major functions: first, to distribute the assets to the family how and when they desire, and second, if they were young enough to have minor children it serves to appoint a guardian. With regard to the distribution of their non tangible assets, a will is not required as revocable or irrevocable trusts can accomplish this same objective. We will discuss irrevocable trusts in more detail below.

However, even if you have a trust the will shall still be responsible for the distribution of your tangible personal property. Tangible personal property includes such things as jewelry, home equipment, china, fixtures appliances, furniture etc. However, this definition specifically does not include coins, metals, money, real estate etc. The tangible personal property can be disposed of by a list prepared by the decedent. These are items that generally do not get transferred to a family trust and thus must be addressed by the will.

Notwithstanding the foregoing, it is still important to not only have a will, but also to distinguish between a simple will and a pourover will. A pourover will, unlike the simple will defined above, is one that will catch any assets that John or Jane end up owning in their own name as of the date of their death and make sure that they are transferred to their respective revocable or irrevocable trusts as the case maybe. This is important because after establishing their trusts, it is very possible that during their lives they may purchase other assets or open up some investment accounts in their own name. Although these assets would in fact have to go through the probate process, at least they will be put into their respective revocable or irrevocable trusts, as the case may be, which should serve to reduce their estate tax exposure and the proper distribution of their assets following their demise.

In the event John and Jane died without preparing a will, their property would be distributed according to the laws of the state where they reside at death. This is generally known as an intestate succession statute. Depending on the state the property may pass very differently than they might expect. Massachusetts has recently adopted the uniform probate code that impacts how assets pass when a person dies without a will. A complete discussion of how assets pass when you die without a will is beyond the scope of this article but suffice it to say that if you are not going to do any estate planning at all, please at least do a will to ensure your assets get where you want them to go.

Assets which you own jointly with another person, such as bank accounts and real estate, will pass to the surviving co-owner while assets which have a beneficiary designation, such as qualified plan benefits, IRAs and life insurance, will pass to the named beneficiary. At the very least a last will and testament assures you that your property will pass according to your wishes and not the wishes of the state. However, this whole process may be avoided by simply utilizing revocable trusts or irrevocable trusts depending on your estate planning goals.

Finally, it is important to understand the role of the executor of a will prior to choosing one. The best definition is simply to carry out the decedents final wishes but that job may vary depending on several factors. If a trust is established and it has been funded prior to the death of the decedent then the role of the executor is reduced to handling only the probate assets (i.e. only those assets in the name of the decedent on the date of death). Remember, the assets owned by the trust are not part of the probate estate and would be the responsibility of the trustee and not the executor. The executor for the most part will hire the probate attorney and generally work with that attorney to complete the probate process as described above. If the total value of the probate estate is less than $15,000 then the estate is referred to as a voluntary administration and the executor’s job may only last a couple of months otherwise it could take up to one year. The executor is also responsible for distributing the tangible personal property mentioned above and if there is no list then the executor must use his discretion in distribution keeping in mind the preferences of the decedent. Sometimes this can be more difficult than dealing with the money and real estate if not held in a trust. So keep this in mind when choosing an executor and remember it is not always the oldest child. Finally, prior to accepting the role of executor it may be a good idea to see if there is already family tension and or if some one is being disinherited as this may make your job much more difficult and time consuming.


Don’t forget your health care proxy, living will and durable power of attorney! You have a right to die and not be kept alive by artificial means. You must, however, make this known prior to any such disability. If you do not make this known, it will be up to a judge to decide what your intention would have been had you been able to make the decision for yourself regarding your disability. Invariably, friends and family members will have a difference of opinion as to what your intentions might have been. As a result, legal proceedings relative to the termination of life support can be long and expensive. Avoid these problems by setting forth your intentions in a “living will”. A living will is essentially your statement to the world that when all hope is lost, medically speaking, you do not want any heroics and would like to be allowed to pass away in peace and without it being unreasonably prolonged. Although these living wills are not currently legally recognized in Massachusetts they are recognized in many other states and always provides guidance in that time of need.

However, the health care proxy is slightly different. Unlike the living will in which you make this decision yourself, the healthcare proxy allows you to appoint someone else to make not only these life and death decisions but also a whole host of other medical decisions for you when you cannot. As mentioned above, these decisions are not just limited to dealing with a situation when all hope medically is lost, but instead may include giving consent for a surgical procedure, permission for prescriptions drugs, consent to admit someone to a long term care facility and many other important medical decisions. This is more important now than ever since the adoption by many states of the uniform probate code. A person cannot be admitted to a nursing home by someone else unless they have a health care proxy in place. In the event there is no health care proxy then the family member will have to apply for a guardianship in order to place the family member into the nursing home, which is time consuming and expensive.

It is also important to note that only one person can serve as health care agent at any given time. Generally, husband and wife serve as health care agents for each other and then name at least one alternate in case something happens to either of them. Many people want to name more than one child as an alternate but only one can be named at a time. Parents usually struggle over this but remember all the children are likely to discuss the medical situation with each other prior to any decision being given to the doctors involved. The policy behind the statue is that the doctor is going to need a decision and not a group of fighting family members. Finally, when picking a health care agent I suggest that you try to remove the emotion from the decision and choose a child or a person that you feel has the best ability to deal with emotional and medical situations. This person is not always the oldest child.

It is also important to make sure you have a Health Insurance Privacy and Accountability Act (HIPAA) form prepared which will enable you to appoint family members to obtain your medical records even if you are not incapacitated. Although your healthcare proxy should be updated to include this HIPAA language and related information, you should still have this separate HIPAA form since the health care proxy is only designed to operate if you are incapacitated. This HIPAA form enables the appointed parties to get your medical records even if you are capable but perhaps just unable to get them. Generally, this HIPAA form appoints the people listed in your healthcare proxy as the people who have access to your medical records. This should be yet another factor to keep in mind when choosing your healthcare agent.

Finally, be sure to keep the probate court away from your business affairs by designating a friend or relative as your attorney-in-fact to act on your behalf should you become disabled. This is known as a durable power of attorney. Essentially, this document allows another person to make financial decisions on your behalf, including but not limited to, accessing your bank or investment accounts, IRA accounts, safety deposit boxes, signing your name to pay bills or transfer and convey real estate. Without one of these documents you would have to get a guardianship and or a conservatorship in place for your family member and then basically ask the court for permission to do things for that person. This process can be time consuming and costly. The real problem is the time it takes to be permitted to take a simple action like transferring the family home to a child in order to protect it from the costs of long term care. This is especially problematic if the family member is already in the nursing home. I have seen a situation where the individual went to the nursing home without having a power of attorney in place. By the time the guardianship was in place and the permission was given to transfer the home to the caretaker child the parent had died and a Medicaid lien attached to the house that must be paid prior to transfer. This all could have been avoided and the home easily protected from the nursing home if a durable power of attorney was in place.

However, the one thing that is different about the durable power of attorney verses the other documents mentioned above is that this one becomes effective the moment you sign it and it survives your incapacity but not your death. This technically means that who ever you give this power to could go take money out of your bank account the very next day even if you are perfectly healthy. On the one hand these powers of attorney are very useful as they enable things to get done quickly and without court involvement, but on the other hand you must be careful who you appoint because there is no court involvement. Generally, husband and wife serve for each other and this seldom creates any problems since most of the assets prior to doing any planning were likely owned jointly anyway thus permitting complete access to the assets by each other. However, when choosing the alternate power of attorney, please try to pick someone who is fiscally responsible, good with money and all financial matters. Always try to remove emotion when choosing these fiduciaries meaning it is not always your oldest child.

In the event you absolutely cannot find anyone you can trust to have this type of financial authority currently, then you can opt for a springing durable power of attorney. This is a power of attorney that does not take effect until you are incapacitated. This way at least no one will have the current ability to take any of your assets. The problem with this approach is that you may need to get the court involved in order to determine just when the individual is incapacitated enough for the power of attorney to spring into existence. This could defeat the very reason a power of attorney was established to begin with. Perhaps the answer is to simply create the general durable power of attorney mentioned above and do not give a copy of it to the power holder while you are healthy for this would prevent it from being used as the financial institution would have to have a copy of it in order for it to be used.

Another question that frequently arises with these powers of attorney is how long do they last and how frequently should they be updated? The legal answer is that they never expire until you die. Although this may seem like common sense, but you the power holder cannot use the power of attorney at all once the person who granted the power has died.   After all this rule makes sense since the purpose of the document is to be used when someone is incapacitated and that may not be for a long time following the execution date.   Now in practice I have heard financial institutions turn the power holder away if the power of attorney document is more than 2 years old. If this happens you may need to go to a higher authority in the bank and or call your attorney who drafted the document to have him/her explain to the bank that the document is still valid as it does not expire till the death of the person who granted it. This should be less of a problem going forwards because of the adoption by Massachusetts and most other states of the Uniform Probate Code which has added several powers to the durable power of attorney, the most important of which to provide language in the document that tells the banks that they will be responsible for damages that result if the power of attorney is not reasonably accepted regardless of the age of the document. I suggest that if you have an old power of attorney that you get it updated to reflect these new powers.

Finally, some folks have businesses in which only one spouse is actively involved and may not want that spouse to have power over the business since he or she may not understand that business. In these situations a person may have two powers of attorney one for personal and family use and one designed and limited just for business use. The business power of attorney is designed to have specific powers that are limited to operating a particular business. You would then appoint a person, maybe a child that is involved in the business or your business partner as the power of attorney on this document. This can be very important in making sure the business continues to run smoothly in a time when the individual involved is incapacitated.


While many state estate tax exemptions remain low, the Federal estate tax exemption amount has been reset to $5,430,000 effective January 1, 2015 and is so-called “portable”. This means that if the exemption is not used upon the death of the first spouse to die, the surviving spouse is able to use the unused exemption amount. In theory, this means that all assets could be left to the surviving spouse and the surviving spouse would be able to use not only his or her exemption, but also the unused exemption attributable to the first spouse to die. However, relying on portability of exemptions could cause more harm than good and is not the recommended approach by this author.

It remains important to utilize the federal exemption, as there is one major problem with the recent legislation. Portability is not automatic, as it will require an election to be made upon the death of the first spouse to die and require estate tax return filings, which would not otherwise be required. Second, leaving all assets to the surviving spouse will likely result in unnecessary estate taxes since the state exemption is not portable. Essentially the state exemptions must be used either before or at death.   Third, the federal exemption upon the death of the first spouse to die is not indexed for inflation and does not protect against future growth of your assets. We did briefly discuss the benefits associated with revocable trusts in terms of reducing the costs associated with the probate process and estate tax liability, as well as insuring the proper disposition and control of your assets following your demise. However, the revocable trusts cannot protect your assets from the costs associated with long-term care and general creditors; both now concerns of yours.

In order to accomplish both of John and Jane’s goals, which include the reduction or elimination of estate taxes and the protection of assets from the costs of nursing home care, we will establish two irrevocable trusts. The need for one or two trusts is generally dictated by the size of one’s estate, because John and Jane’s estate is over $1,000,000 (which is the Massachusetts exemption amount) they require two trusts. This will enable you to better utilize your federal and Massachusetts exemption equivalent amounts, thereby reducing and possibly eliminating both your federal and Massachusetts estate tax exposure. If you live in another New England state just insert your state exemption amount into this example. Upon the death of the first spouse to die, his or her trust will break down into two sub-trusts known as the marital and remainder shares. The marital share will be funded with the exact amount necessary to eliminate federal and Massachusetts estate taxes. These amounts will depend on the size of the decedent’s estate as well as the exemption equivalent amount in effect for the year of death. In other words, this type of trust will work today as well as when the federal or state exemption amounts may change in the future. The marital share will provide that all income must be paid to the surviving spouse; and distributions of principal to anyone are prohibited. The remainder share will provide that all income will be made payable to the surviving spouse for life. Distributions of principal to the surviving spouse from either share are prohibited; however, distributions of principal from the remainder share are permitted to be made in favor of the class consisting of your children of all generations, or any class of beneficiaries that you may select, either at the trustee’s discretion or at your discretion.

With advanced planning you can always be covered in the event of an untimely death from an estate tax planning standpoint but most importantly, by planning and funding the trust you will also start the all important five year look back period running in the event you needed nursing home care prior to your demise.

These small restrictions associated with the Marital and Remainder shares will enable each of you to more fully utilize both your Massachusetts and Federal exemptions, thereby enabling you to transfer currently up to $2,000,000 and $10,680,000 (or double whatever exemption is then available), worth of assets to your family, Massachusetts and Federal respectively estate tax free, as well protect your assets from the cost of long-term care. If you are a single person then your trust will just not have these separate shares and you will simply be able to take advantage of your own federal and state exemption amounts upon your demise as well as avoid the costs associated with the probate process. However, all of the nursing home protection attributes of the trust will work just the same for a single person as it does for a married couple, which will be discussed below.

With regard to long-term care, in the event you were to be admitted to a nursing home, the government would break your assets into countable and non-countable assets. Your most significant non-countable asset is your home, which retains its non-countable status as long as you are residing there or are medically able to return home. However, owning your home in your own name will cause it to be includible in your probate estate, which is costly and will subject the value of the home to Medicaid estate recovery provisions. As we discussed, the balance of your assets are currently considered countable and therefore at risk. With regard to the assets not transferred to the irrevocable trust, in the event one of you were to enter a nursing home, the government would require the first $119,220 to be allocated to the healthy spouse and allow an institutionalized individual to retain only $2,000, before it would approve Medicaid benefits. For single people, basically all of your assets are considered at risk as the state only lets you retain the $2,000 prior to becoming eligible for Medicaid benefits.

If is very important to fund the trusts during life as it is the funding of the trusts that start the five year nursing home clock running among other things. In this regard, you will transfer your interest in your home equally to your respective irrevocable trusts. To help balance Jane’s estate against the high value of John’s 401K account we will transfer the vacation home located in Delray Beach, Florida to Jane’s irrevocable trust. You will also transfer your interests in the Somerville rental property, New Hampshire condo, land in Cape Coral Florida, your non-qualified investment accounts and half of your bank accounts equally to each of your respective irrevocable trusts. However, you should leave the balance of your personal checking or savings account outside of the trusts as it may be receiving your direct deposit social security and/or pension checks. You should also make your respective trusts are the designated beneficiary on your life insurance policies. Finally, your retirement accounts must stay outside the trusts so as not to create adverse income tax consequence. These are assets which you should spend first as they remain at risk for nursing home costs, but again cannot be transferred to the trusts without adverse income tax consequences.

In addition, once these trusts are funded, you will continue to enjoy the ability to live on the income that the trust assets are generating as well as manage and invest the assets in the same manner that you enjoyed prior to placing them inside the trust. Nonqualified investment or bank type accounts can be placed into these trusts buy simply changing the name on the accounts to the name of the trust. You can even continue to rent your Somerville and New Hampshire properties and live off the income generated. Finally, the trust will not produce any adverse income tax consequences during you life as the trust is a grantor trust and this aspect of the trust will be discussed in more detail below.

It is very important to follow specific rules to maintain the integrity of the trusts and protect the assets from the cost of long-term care. During your life, all income from the trusts is required to be paid to you. The trusts also prohibit distributions of principal to or for your benefit. This is the provision that protects the principal from being a countable resource for Medicaid eligibility. Distributions of principal, however, are permitted in favor of your children of all generations, or whatever class of beneficiaries you choose, either at the trustee’s discretion or at your discretion. This is your back door or escape hatch from the trust for once gifts of principal are made to a child, grandchild or any class of designated beneficiaries that you select, that child, or beneficiary although under no obligation, can give it back to you. Plus you will always retain the right to change the beneficiaries of the trust if they do not cooperate. This is called a limited power of appointment and will be discussed in more detail below, but nevertheless does enable you to retain a great deal of flexibility and control over the assets in the trust during your life, while at the same time protecting them from the cost of long term care. Finally, the transfer of the real estate to the trust will ensure that you avoid probate in Massachusetts, New Hampshire or Florida, or any state in which you may own property. This is very important because many folks are not aware that they must go through probate in each state they own real estate in their own name following their demise.

We discussed the possibility of you serving as trustees. There is support for this position under the case of Gerard H. Leger v. Commissioner of Division of Medical Assistance, where a Superior Court judge ruled that while such action was an “unappetizing maneuver” it did not contravene any applicable rule or regulation. As we further discussed, the state has challenged trusts where the grantor has retained too much control and/or benefits. You have therefore elected to serve as trustees of your trusts currently. The other approach would be for a child to serve while you retain the right to remove and replace the trustee at any time and for any reason but the replacement trustees then could not be either of you. This retained removal power really keeps you in charge of the trust and makes the trustee a mere figure head.

As discussed above, with regard to your residence, we will prepare a deed transferring such property equally to your respective irrevocable trusts. In this regard, I indicated that by retaining a joint and legal life estate in your residence, you would retain the right to live there for the rest of your lives as well as the opportunity to obtain a reverse mortgage in the event your living expenses exceeded your liquid savings. However, I also indicated that in the event you decide to sell your property, a portion of the proceeds would be split between you, as life tenants, and the irrevocable trusts. The proceeds flowing into the irrevocable trusts would be protected from the costs associated with long-term care, while the balance would be allocated to you directly and now subject to the risk for the cost associated with long-term care. The proceeds allocated are determined by a government chart, which associates your age at the time of sale to an ownership percentage in the property. This life estate arrangement will also enable you to maintain any veterans or residential real estate tax abatement that you are currently enjoying. We will also prepare a deed transferring the Delray Beach, Florida property directly to Jane’s irrevocable. Finally, we will prepare deeds transferring the real estate located in Somerville, Cape Coral, Florida and your New Hampshire property equally to your respective irrevocable trusts.

As trustee of the trusts you will have the ability to sell and manage the trust property. Also, the trust will provide you with a significant degree of control during your lives, including, but not limited to, the ability to remove and replace the trustees as well as change the beneficiaries of the trusts, via a limited power of appointment. This is the limited power of appointment we mentioned above which really enables you to retain control over your assets and your family even though the trust is irrevocable. If the children do not cooperate you can cut them out. However, from a much less threatening perspective, during your life things change and you may want to leave more assets to the grandkids than you initially thought or maybe one child needs more help financially and you would like to change your wishes, this paragraph allows you to make such changes even after the trust is completed. Any such change in beneficial designation will also not impact the 5 year Medicaid look back period. In addition, this form of ownership will provide some creditor protection in the event any of your beneficiaries encounter financial difficulties prior to your demise. This form of ownership will also provide you with some general creditor protection during your life.

These trusts are grantors trusts during life under IRC 674(a) so that all items of income, deductions and credits, if any, attributable to the trust assets, including the property will be reported on your individual income tax return. In other words, you will continue to pay all of the income taxes associated with any such trust income at your lower individual rates; just like you did prior to establishing these trusts. We will help you obtain a federal employer identification number for each trust. Having a separate identification number for each trust preserves the integrity of the trust as a separate entity for Mass Health purposes. To the extent taxable income is received, Form 1041 (Federal) and Form 2G, or corresponding state trust tax form, will need to be filed each year on or before April 15th, but the trusts do not pay income taxes. The income and expenses attributable to the trusts will be taxable or deductible, if at all, to the grantor on your personal income tax return, as mentioned above.

Also, you will retain the capital gains tax exclusions associated with the sale of your primary residence. In the event you were to sell your home during your life, you would be able to avail yourselves of$500,000 capital gains tax exclusion, provided you have owned and used such property as your primary residence for two of the last five years and were married on the date of sale. Finally, you will be able to complete this entire transaction without the need to acquire any permission from your beneficiaries regardless of whether you or your children were serving as trustee. Remember, if the child trustee did not want to sell the property you would simply remove and replace him as trustee, as well as disinherit him. If single, you would still be able to avail yourself of the $250,000 capital gains exclusion you are entitled to as a single person. In addition, if you chose to sell your home and use the proceeds to buy a smaller home this transactions will not reset the Medicaid five year waiting period since you did not place anything new into the trust you simply reinvested what was already in there.

The transfer is an incomplete gift for gift tax purposes since you retain the right to designate the final beneficiaries under Treasury Regulation 25.2511-2(c). No gift tax returns are required to be filed to report the transfer to the trusts except if you wish to disclose the transfer to commence the running of a statute of limitations. In this case, no gift tax returns are intended to be filed since the trust assets will be included in the estate under IRC 2036(a). 

As we discussed, there is a five-year “look back” period associated with the transfer of your assets to these irrevocable trusts. Therefore, if a Medicaid application is filed within five years of the date the property is transferred to the trusts, the transfer must be identified as a disqualifying transfer. Essentially, the property would not be completely protected until five years after the date of transfer. It is important to note that this 5 year waiting period applies even if you gift assets directly to your children but without all the risks associated with putting assets in the hands of children while you are still living. Remember, very little good can ever come from gifting highly appreciated assets to your children while you are living. This type of transfer not only exposes the assets to the kids creditors and divorces, you also loose all control over the asset and create potential unnecessary income tax consequences.

Since the trust assets will also be includible in your estate under IRC 2036(a) (1), the trust property will obtain a so-called “step-up” in basis upon death.   Therefore, in the event your beneficiaries sold any such trust property shortly after your demise, there would be little or no capital gains tax to be paid by your beneficiaries. It is my understanding that this may be important to you, as your real estate and/or investments may have increased in value over the years. The trust assets will pass outside your probate estate, which not only reduces your probate costs, but also means the property would avoid the Medicaid estate recovery provisions.

Upon the death of the survivor of the two of you, the trustee will divide and allocate the trust property into as many equal shares as there are children of yours then living, children of yours then deceased leaving issue then living. In the case of a share allocated to a then living child, such share shall be paid out and distributed, free and clear of all trusts. In some cases people like to hold assets in trust for their children until they reach certain ages like staggered distributions at say ages 25 30 and 35 years of age. Maybe the trustee can distribute one third of the child’s share at each age listed above. This generally allows the children to mature in case that is an issue with your children. However, during the staggered time period the trustee would generally have the discretion to distribute assets to such child for things like health, education, maintenance and support reasons. Sometimes special needs shares can be added to preserve governmental benefits for a special needs child. In the event either of your children does not survive you, that child’s share will be held for the exclusive benefit of your grandchildren from that child rather than for the benefit of that child’s spouse. This property will be held in a continuing trust for the benefit of such grandchildren until no such grandchildren are under 25 years of age.

Finally, more and more people want to protect assets from future divorces of their children following their demise. In this regard the trustee would divide the assets into equal shares for the kids, but hold the shares in trust for their lives. John and Jane’s children could serve as co-trustees. During their lives, distributions of income or principal can be paid out to them but at the other trustee’s sole discretion. Upon a child’s demise, if that share has not been depleted, it will be held in trust for that child’s children and not his spouse. This arrangement will provide creditor protection, including from future divorces, for your children as well as generation skipping tax benefits in the event a child of yours dies and has not depleted his share. These are some examples of how you can leave your assets to your family but of course you should consult with your estate planning attorney to discuss your own wishes.

Any assets you retain should be owned jointly as jointly owned property passes by operation of law and not through the probate process. With regard to your retirement accounts, these assets will also avoid probate, as the property will pass to the designated beneficiary and outside of probate. Additionally, I suggested that you retain your retirement accounts outside of the trust in an effort to cover a portion, if not all, of the related disqualification period created from the initial transfer, as these assets cannot be currently transferred to the irrevocable trust without incurring an income tax consequence. However, as we discussed, each of you should change your contingent beneficiaries on your IRAs to be your respective irrevocable trusts, in order to further reduce your estate tax exposure. In the future, you may consider transferring additional assets to the trust, in order to further reduce amounts that would otherwise be required to be “spent down” in the event you were to be institutionalized. Mass Health will apply a 60 month look back period to each transfer.

In addition to the irrevocable trusts and deeds, we will prepare new Wills, health care proxies, HIPAA release forms, durable powers of attorney and living wills for each of you.

Please note that you have not yet selected your successor executor(s), health care agent, or power of attorney. Please provide us with the full names, including the middle initial of the individuals that you would like to fill these positions.

If you have any questions or need additional information, please do not hesitate to contact me. Thank you.

Very truly yours,

Todd E. Lutsky, Esq. LL.M


                                                           ASSET LIST                                                      _

Real Estate (home-joint)$600,000
Florida-Delray Beach (joint-vacation home)$350,000
Ski and Lake Condo NH (joint) rental$150,000
Two Family Somerville, MA (joint) rental$500,000
2 Parcels of Land-Cape Coral, FL (joint)$75,000
401K (John)$300,000
403b (Jane)$105,000
Investments (joint)$100,000
Bank Accounts (joint)$200,000
Life Insurance (group term)$40,000 
Total Estate$2,420,000


Securities offered through Securities America Inc., Member FINRA/SIPC and advisory services offered through Securities America Advisors. Armstrong Advisory Group, Cushing & Dolan and The Securities America Companies are unaffiliated. Representatives of Securities America Inc. do not provide legal or tax advice. The scenarios provided are for illustrative purposes only and not intended to represent client experiences of Armstrong Advisory Group or the Securities America companies. Please consult with a local attorney or tax advisor who is familiar with the particular laws of your state. April 2015 – AT 1161833.1