TOP TEN REASONS TO DO ESTATE PLANNING
Cushing & Dolan, P.C.
Attorneys at Law
375 Totten Pond Road, Suite 200
Waltham, MA 02451
Todd E. Lutsky, Esq., LL.M
1. TO REDUCE AND POSSIBLY ELIMINATE FEDERAL AND STATE ESTATE TAXES
The general purpose and use of these family revocable trusts are to help an individual avoid the costs associated with the probate process, reduce and in many cases eliminate federal and state estate taxes, and ensure the proper disposition and control of their assets to their family members following their demise. The donor of the trust is generally the individual who creates the trust. The trustee of the trust is the individual who would control the operations of the trust and the assets transferred to it. Example, in a husband and wife situation and assuming the use of 2 trusts, the husband would be the donor or creator of his trust while the wife would be the donor or creator of her trust and both of them would serve as co-trustees on each of their trusts. Upon the death of the first spouse to die the surviving spouse would then serve as sole trustee on both trusts. Since these trusts are revocable and the husband and wife are the trustees, there is absolutely no loss of control over the assets transferred to the trust during the donor’s life. In this regard, the trustee of the trust can manage and invest the trust assets in any way they wish. In other words, there is no investment limitations associated with having assets owned inside the trust. Furthermore, the trustees of the trust can sell trust assets including real estate without any increased complexity or adverse income tax consequences versus owning them in their own name. You are also free to spend or save the money inside the trust anytime or anyway you wish. In essence, there is no operational downside to having a revocable trust and placing your assets in them. It is however important to fund the trust with your assets otherwise they will not operate to reduce estate taxes or avoid probate.
With regard to estate taxes let’s take a hypothetical couple John and Jane who should have two trusts in order for them to more fully take advantage of both their current $5,250,000 federal and $1,000,000 Massachusetts exemption amounts. An exemption amount is the amount of assets an individual can leave to someone other than a spouse without paying any estate taxes. However, keep in mind that one must plan for the future and not just. In this regard, just because your estate is currently worth less than $5,250,000 does not mean you should not do your planning. In addition, remember the Massachusetts exemption is stuck at $1,000,000 and has been since 2006 so you need to plan to avoid state estate taxes a minimum and in turn you can prepare for any future federal estate tax at the same time.
It is important to plan prior to the death of the first spouse because any plan that shifts all the assets to the surviving spouse will result in the loss of one federal, after 2013, and Massachusetts exemption, which is the common result when people have simple wills or own everything jointly.
By leaving everything to the surviving spouse under the unlimited marital deduction could result in a large estate tax liability on the death of the surviving spouse. The federal exemption is currently portable which means the surviving spouse can use the unused exemption amount of the latest deceased spouse but remember this will also expire in January of 2013.
Please do not fall into the trap of relying on this portability of exemption for in addition to having the portability of this exemption expire in 2013, it is also not indexed for inflation, it is not automatic and requires the spouse to file an estate tax return and make an election in order to get it, nor does it allow you to shelter assets from future growth and the Massachusetts exemption is not portable along with a host of other reasons so please do not think that planning is not important just because of this temporary portability of federal exemption.
In our example prior to planning, John and Jane were set up to leave all assets to each other, which is the government’s trap for the unwary. The government allows for something called the unlimited marital deduction which means you can leave as much as you want to your spouse without paying any estate taxes on the first death. This format allows the government to collect more in taxes upon the death of the surviving spouse than would otherwise be the case if some advanced planning had been done. In other words, don’t let the government do your estate planning. Essentially, you must use your exemption while living through the use of gifts, or upon your death, as the government does not allow the surviving spouse, with the temporary exception of portability mentioned above, to use any unused exemption equivalent amount remaining after the death of the first spouse to die. Even in the event you die prior to January 1, 2013 it is important to use as much of the current $5,120,000 exemption as possible so as to reduce and maybe eliminate the future federal as well as state estate taxes.
The assets of the remainder share would be subject to federal and state estate tax on John’s death, but no tax would be due as John would simply utilize a portion of his current $5,120,000 exemption amount upon his demise while the assets of the special marital share will only be taxed at the federal level as this share, coupled with the remainder share, will be equal to or less than the federal exemption amount, thus resulting in no federal estate tax due. Remember, the assets of the remainder share alone will never exceed the Massachusetts exemption amount, thus resulting in no tax due at the state level on the first spouse’s death either.
The remainder and special marital share will also provide that all income must be paid to the surviving spouse for life and remember the surviving spouse is the trustee so a great deal of control is being maintained by the surviving spouse. Additionally, the surviving spouse will be permitted to withdraw principal to the extent necessary to maintain his or her health and support in the standard of living to which they were accustomed as of the date of the death of the first spouse to die. This small restriction is what enables John and Jane to more fully utilize both their current federal $5,250,000 and Massachusetts $1,000,000 exemption amounts, thereby allowing them to transfer currently $10,500,000 of assets to their family federal estate tax free and $2,000,000 Massachusetts estate tax free. In addition, all the assets of the special marital share and remainder share will grow federal estate tax free as such assets will not be included in the surviving spouse’s estate regardless of how much they grow between the date of the death of the first spouse to die and the date of the second spouse’s death. Note, the assets of the special marital share will be subject to Massachusetts estate taxes on the death of the surviving spouse.
Remember the goal is to be able to leave the assets to the surviving spouse but in such a way that the spouse can enjoy the assets while also reducing the estate tax liability on the second death and trusts can accomplish this.
Let’s explore how revocable trusts will actually serve to reduce the estate tax exposure for John and Jane. The first step of the estate planning process is for John and Jane to identify and value all assets that would be includible in their estate upon their demise. As mentioned above, these assets include their cash, marketable securities, residence, vacation home, receivables, any ownership of businesses, qualified plan benefits, IRAs, face amounts of life insurance and any property over which you have a general power of appointment.
These assets are valued at the fair market value on the date of their death. What they paid for these assets is irrelevant. Life insurance can be a tricky asset as many people may have been told that it is tax free. However, life insurance is only income tax free to the beneficiary, but if you die owning it in your own name it is very much estate taxable at its death benefit value.
While a full technical explanation of how the trusts accomplish this tax savings is beyond the scope of this article, it is important to note that without the use of proper trusts it is likely that individuals will not utilize their estate tax exemptions on the first death.
In essence, if you do not utilize these exemptions on the death of the first spouse it generally results in enhanced estate tax liability on the second death. Finally, depending on the value of your estate, it may become clear that for many people, estate taxes are voluntary as they may be easily eliminated through the use of proper family revocable trust planning. For a more detailed explanation of the use of trust for estate tax planning please contact Todd E. Lutsky, Esq. L.L.M at 617-523-1555.
2. TO PROTECT YOUR ASSETS FROM THE COST OF LONG TERM CARE.
There are many people who have assets of around $3,000,000 or maybe even less than one million and they still maybe interested in either asset protection planning or estate planning or both. Although the rules for asset protection planning differ from pure estate tax planning, it is possible to provide both estate and asset protection planning for people who have assets that are over the current federal and/or state estate tax exemption amounts. For people who have assets less than the federal and state estate tax exemption amounts their focus will be primarily on probate avoidance and asset protection planning and will only need one irrevocable trust. However, as mentioned above, the message is for most people some kind of planning is still needed regardless of how much you may be worth. Let’s take an overview of how this type of estate and asset protection planning might be accomplished.
The primary tool for protecting assets from the high costs of nursing home care is an irrevocable Medicaid trust. Most people associate the word irrevocable trust with the relinquishment of control, inflexibility and rigidity. However, I will give you an overview of how these irrevocable income only trusts work and show how such a trust will enable an individual to retain a significant degree of control over their assets during their life, while at the same time, provide creditor protection as well as estate and income tax planning opportunities. In addition, these trusts will serve to reduce the risks associated with transferring assets outright to children.
Remember if assets are transferred to the kids then you as the parent loose all control over the assets, expose the assets to the kid’s divorces and stick the kids with adverse income tax consequences. Finally, this irrevocable income only trust will help to dispel the common asset protection planning myth that one must gift their assets away and give up complete control over them in order to protect them from both the costs associated with long term care and general creditors. Remember, the assets in these irrevocable trusts will be protected from the costs of long term care after five years from the date they are transferred to the trust not only for the children but more importantly for the healthy spouse.
In this regard, as individuals age they begin to become concerned about the potential costs associated with long term care. Their focus may shift to discovering strategies that will protect their assets from both general creditors and the costs associated with long term care. These assets often consist of their home, vacation home, rental property and/or liquid investments including life insurance and IRAs.
However, many individuals are generally reluctant to transfer such assets directly to their children or other family members for fear of relinquishing total control over them. Often, this fear results in procrastination or inaction, thereby leaving the individuals assets at risk for the costs of nursing home care and potentially subject to estate taxes. Instead, an individual may consider transferring such assets to the irrevocable income only trust mentioned above.
Let’s take a typical example. Assume Jeff and Julie, a married couple, living in Massachusetts, who are generally healthy, age 75, have two children, own their own home worth approximately $700,000, other liquid investments worth approximately $800,000 and are concerned about avoiding the costs associated with the probate process as well as protecting their assets from both the costs associated with long term care and general creditors as well as reducing and possibly eliminating federal and state estate taxes.
The solution may be to divide and transfer all or a portion of these assets to two irrevocable Medicaid trust in much the same fashion as discussed above for the revocable trusts. This funding of the trusts is also important to help reduce the estate taxes as explained with revocable trusts mentioned above and like with the revocable trusts any such transfers are not gift or income taxable events. While these irrevocable trusts will have to file an income tax return no taxes will be due at the trust level. Since, these trusts are designed as grantor trusts so that all the income will flow through and be reported on your personal income tax return just like it use to be prior to the creation of these trusts. The trusts will provide that both Jeff and Julie will be the donors. They could serve as trustees in Massachusetts but the safer approach would be for a child to serve as trustee while the parents retain the right to remove and replace the trustees anytime and for any reason this way they retain a large degree of control over the trusts. In addition, the trustees will retain the ability to make mandatory distributions of the income from the trust to Jeff and Julie during their lives. Furthermore, they would retain a significant degree of control over the assets transferred to the trust including, but not limited to, the ability to determine how such liquid investments should be invested, the ability to sell any such trust assets, specifically including the home. In addition, when the home is sold you will still be able to keep your $500,000 if married or 250,000 if single capital gains tax exclusion associated with selling your home.
Finally, if you wanted to use the money to buy a new home directly into the trust if would not reset your five year Medicaid look back period. Finally, there are not investment limitations on assets that are transferred to the trust. In other words, you can invest in any type of financial assets that you could have invested in with your money had it not been put into this trust.
In addition, you as the creator of the trust will retain the power to change the dispositive provisions of the trust via a limited power of appointment. This power simply gives you the ability to rethink how you leave your assets as life events change after the trust is created. For example, you may want to leave more assets to the grandkids than you’re originally thought and this power would allow you to make that change and the change would not impact the five year Medicaid look back period.
Distributions of principal can be made to a class of people you choose generally, children of all generations or siblings or nieces and nephews etc who in turn can transfer the assets back to you if needed. In the event they do not cooperate then you can exercise the power to change the beneficiaries and threaten to cut that person out. These powers alone generally provide the individual with a much greater sense of independence and control during their life than would otherwise be the case with outright transfers to the children in which no such controls are in place.
If assets are transferred outright to the children the parents have no control over how they are invested, no right to the income, no ability to decide if an asset like the home can be sold without getting the permission of the children and will have lost control over the proceeds from the sale, and the assets transferred would be all exposed to the kids creditors such as divorce or financial difficulty. In addition, transfers to the kids also results in adverse income gift and estate tax consequences plus if the house were sold and the kids owned it they would receive and early inheritance, all of which can be avoided by instead transferring the assets to these irrevocable Medicaid income only trusts.
3. YOU DO NOT WANT TO IMPOVERISH YOUR SPOUSE
This section is designed to show what assets are at risk for the nursing home costs and one way in which they are commonly taken to pay for the sick spouse’s care that leaves the healthy spouse financially strapped after the death of the sick spouse. While there are many other risks to a couples assets I find the loss of a pension due to the income first rule is most troublesome. Many people rely on pensions to live and if that source of income is gone it can really cause financial troubles. The goal is always to try preserving assets so they can be reinvested to generate lost income as it is very difficult to save income from the nursing home when one spouse is admitted. The best way to save assets for each other is through advanced planning and the use of the irrevocable trust mentioned above.
In the event no advanced planning is done it is important to know what assets are countable and what income you are able to keep last minute and then to understand how the income first rule can take your pension and or future source of income when one spouse is institutionalized without any advanced planning done.
Planning for the Single Person – Assets at Risk: All assets over $2,000
|Joint Bank Accounts|
|IRAs, 401(k)s, Roth IRAs, etc.|
|Vacation Homes & Rentals|
Planning for the Married Couple – Assets at Risk: All assets over $115,920
|Joint Bank Accounts||$115,920|
Community Spousal Resource
|IRAs, 401(k)s, Roth IRAs, etc.||Allowance This is the maximum|
|Life Insurance||Amount a Healthy spouse is|
|Vacation Homes & Rentals||Allowed to keep prior to the sick spouse entering a nursing home.|
Medicaid Asset and Income Rules for Married Couples and Spousal Impoverishment
Community Spouse May Keep:
- Home if primary residence
- $115,920 assets such as bank and investments accounts
- $1,891.25 per month of income as a Minimum, which is known as the minimum monthly maintenance needs allowance.
Caution Income First Rule May Bankrupt Healthy Spouse: Beware of loss of sick spouses income and upon sick spouses death the pension maybe lost forever leaving survivor to struggle with little income and depending on how long the sick spouse was in the nursing home prior to death there may also be very little assets left to generate the lost income needed to live on.
Institutionalized Spouse must be allocated:
- All remaining assets and must spend them down until there is only $2,000 left before being approved for Medicaid eligibility. In other words all assets over the $115,920 mentioned above will be as risk and needs to be spent on the nursing home.
The Income First Rule and Spousal Impoverishment:
Example: Husband has a pension of $2,000 per month while the wife gets $500 per month from social security. Husband checked the box on the pension that it ends when he dies. They own a home together worth $500,000 and have $300,000 of investment and bank account assets. They also have a $500,000 life insurance policy to make up for the lost income following the husband’s death. The husband just entered a nursing home and no advanced planning has been done. Assume the nursing home costs $12,000 per month.
Impact of Income First Rule: The spouse will be given the home and the first $113,640 of assets and will get at least $1,838 per month income. Since she only has $500 coming in she will be given $1,391 (1,891-500) per month of the sick spouse’s income so as to get her up to the minimum income required by the state for the healthy spouse. The income gets allocated before the assets. The balance of the assets $184,080 (300,000 – 115,920) will be allocated to the sick spouse and spent on his care until there is only $2,000 left which is the amount the sick spouse is allowed to keep. This amount of assets should last about 15.5 months (184,080/12,000 per month). In addition, the state will force the liquidation of the insurance policy that was designed to replace the lost income following the sick spouse’s life. The result could be that upon the death of the sick spouse the healthy spouse could be left with the home, $115,920 in assets and social security of $500 per month because remember the pension died with the husband. This really means that the surviving spouse will have to sell the home in order to make ends meet. In other words the healthy spouse has been impoverished and may even need to file bankruptcy. Protect your spouse and do some advanced trust planning.
4. ENSURE YOUR ASSETS GO WHERE AND HOW YOU WANT THEM DISTRIBUTED
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 remember 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. 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 Massachusetts exemption equivalent amounts, with the exception for the temporary portability rule mentioned above. 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.
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.
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 Pour-over will. A pour-over 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.
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 probate process may be avoided by simply utilizing revocable trusts.
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 below. 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.
5. TO ENSURE YOU AVOID THE WHOLE PROBATE PROCESS
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 appointed, as 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. 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 that the time involved with, as well as the cost of, probate can be substantial.
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.
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. 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. 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 and 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 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.
6. TO HELP WITH FINANCIAL ISSUES IN THE EVENT OF YOUR INCAPACITY
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 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 it 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.
The final 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 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.
7. TO HELP WITH MEDICAL DECISIONS IN THE EVENT OF YOUR INCAPACITY
A healthcare proxy allows you to appoint someone else to make not only 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 Massachusetts of the uniform probate code a person cannot be admitted to a nursing home by someone else unless they 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.
8. TO PROTECT ASSETS FROM GOING TO CHLDREN WHO ARE NOT GOOD WITH HANDELING MONEY OR LARGE ASSETS
By using trusts as part of your estate plan you will have far more power to control where you assets go, when they get there and how they get there. There are many families who have children that are just too young to handle money, or maybe they are just not to good with money, or maybe there is a drug problem or even a special needs situation or just to make sure the assets stay in the family. Some folks may even want to protect these assets from future divorces or creditors in general. Regardless of the reason trusts can help make sure your wishes are carried out. There is really not limit to how a trust can be crafted in order to carry out your wishes. We will just explore a few more common options below.
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, except in the case of Sue. Some people like to hold assets in trust for a particular child like sue in this case or for all of 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 and prior to such ages allow the trustee to make distributions to such child for their health education welfare and support. This generally allows the children to mature in case that is an issue with your children. 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. This is just a typical way to keep the assets in the bloodline but by itself does not protect against future divorces which will be discussed below. You should discuss your own wishes with your estate planning attorney.
9. TO PROVIDE FOR SPECIAL NEEDS CHILDREN OR GRANDCHILDREN
If you have a special needs child you should consider a special needs trust to provide for that child. These special needs trusts are generally utilized when the family has a special needs child who may be receiving some kind of governmental benefits. The family’s concern is generally that they must disinherit their special needs child in order to ensure that they continue to receive the governmental benefits they may be entitled to. However, this is just not the case. Instead, when the family is doing estate planning and creating either their family revocable trusts or family irrevocable trusts, as the case may be, they should inform the planner of their special needs child and discusses the implementation of a special needs trust. This special needs trust can be built directly into their family revocable or family irrevocable trust. Other planners may establish a separate special needs trust all together but this is not always needed and should be discussed on case by case bases.
Operationally, upon the death of the surviving spouse, the trustee of either the family revocable or family irrevocable trusts would divide and allocate the property into as many equal shares as there are children of the donor then living and children of the donor then deceased leaving issue then living. In the case of a share allocated to a then living child of the donor, with the exception of the special needs child, the trustee may likely distribute out the assets to those other children free and clear of all trusts or in any manner they dictate, as described above. However, the share of trust assets allocated to the special needs child would be held in a special needs trust for the benefit of that child. This way the special needs child could enjoy the benefits of the assets held in the trust while continuing to receive any governmental benefits in which he may be entitled. The trustee of the special needs trust, who is often times a sibling or other family member of that special needs child, can then use the assets in the trust to enhance the life of the special needs child. Therefore, it is important to realize that if you have a special needs child, you do not have to disinherit that child and in fact can provide benefits to him through this type of trust while ensuring that he retains his governmental benefits he may be entitled to.
These trusts are generally funded through the family revocable or irrevocable trusts as mentioned above. If they are going to be funded during the life of the parents of the special needs child then the funding would be the same as mentioned in the revocable trust section. There will be a separate income tax return, form 1041, needed to be filed by these trusts every year. These trusts will generally not be grantor trusts and will have to pay income taxes at the trust level.
10. TO PROTECT ASSETS FROM YOUR CHILDREN’S FUTURE DIVORCES
The general purpose of an inheritors trust is to provide creditor protection to the children when they receive the inheritance from their parents. With regard to creditors, this would include general creditors, financial difficulties including bankruptcy, accidents, and most importantly future divorces of the children following the receipt of an inheritance from their parents. The donor or creator of this trust is the parents.
With regard to funding the trust the parents would generally establish this trust as part of the estate planning process, but is typically not funded until the death of the parents. The family revocable trust or family irrevocable trust would generally provide that upon the demise, the assets of the trusts would be divided according to the parent’s wishes and then allocate each established share and corresponding amount to a separate inheritors trust for each such child. This is in essence how the trust gets funded but the trustee will then have to retitle the assets as directed in the trust.
These trusts are known as third party trusts. A third party trust is a trust created by someone else, in this case the parents, for the benefit of that particular child. A self settled trust is one in which the donor creates it, the donor funds it, and often times the donor controls it and even enjoys the benefits while the donor is living. These trusts have both a general and an independent trustee. The general trustee of the inheritors trust is usually the specific child for whom the trust is created. The general trustee is in charge of making all the managerial or investment decisions regarding the trust assets and in essence runs the entire trust. The general trustee also has the ability to remove the independent trustee, but must replace the independent trustee with somebody not related or subordinate to him. There can be additional restrictions placed on this removal and replacement power depending on the wishes of the parent. The general trustee also has the ability to change who the beneficiaries of his inheritors trust are as life goes on. This is important, as the trustee may have children whose life events change over time and should be afforded the opportunity to change, among that group of children and grandchildren, how they receive assets and what assets they receive upon his demise. Remember, the goal of these trusts is to provide creditor protection but also to make the child feel like they actually received their inheritance by allowing them to control and manage the trust assets.
The inheritors’ trust also needs a separate independent trustee in addition to the general trustee mentioned above. This independent trustee is generally a sibling of the child for whom the trust was created but is not limited to a family member. The independent trustee’s only job is in his or her sole and absolute discretion to determine when principal can be paid out of the trust to the child for whom the trustee was created. This is significantly important for if the child for whom the trust was created has a divorce following the death of the parents, and the spouse’s attorney wishes to pursue the assets in the inheritors trust as part of the marriage, the child could simply say, “they are not mine, but you certainly can ask my brother if he is interested in withdrawing them for me.” Remember, the independent trustee does not have to make a withdrawal from the trust; it is in his sole and absolute discretion, thereby providing the protection from future divorces. The term sole discretion in a third party trust does not provide a property interest that can be forced in a court of law. Please make sure there are not ascertainable standards coupled with the trustee’s discretion such as for health or educational purposes as these are property interests and can be forced in a court of law.
Securities offered through Securities America Inc., Afember FINRAISIPC and advis01y services offered through Securities America Advisors. Armstrong Advis01y 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 pwposes 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 isfamiliar with the particular laws of your state. AT 692550- July 2013