Estate Planning Bits

Special Education/Medical Expense Deductions

A recent ruling by the Internal Revenue Service (IRS) has determined that there is a wide range of special education expenses that may be deducted as medical expenses. Although this is a private letter ruling, which may not be relied upon by other practitioners or persons wishing to avail themselves of similar decisions, it does set a precedent if another person wishes to request a private letter ruling for their own personal situation.

The IRS has explained that “normal education” does not rise to the level of medical care for tax purposes because it is not designed to help someone overcome a medical disability. Accordingly, for education expenses to qualify as deductible medical expenses, a physician or other qualified professional must diagnose a medical condition that requires special education to correct or help the individual to better cope with that condition.

Therefore, if a person is seeking to obtain a tax deduction for medical expenses, which include special education expenses, these expenses must be prescribed to compensate for or overcome a child’s disabilities or to prepare the disabled child for future ordinary education or ordinary living experiences.

For example, the tuition for a child’s schooling at a special school for mentally or physically disabled individuals is deductible. This includes the cost of the ordinary educational expenses as well as any special educational expenses, since the child must attend this special school. The IRS has ruled that the educational services provided are rendered incidental to the medical care provided at the school.

A school qualifies as a special school if the primary focus of its curriculum is to enable students to compensate for or overcome disabilities. This would include treating severe learning disabled children, children with psychological or emotional disorders, or dyslexia as a special need. The determination of whether a school is a special school is made on the basis of the curriculum made available to the child, not the curriculum of the school as a whole.

Naturally, before attempting to deduct these expenses, a professional tax advisor should be consulted to ensure that the deductibility of the educational expense is going to be permitted, otherwise, the deduction may subject the taxpayer to an audit, further disallowance of the medical deduction, and also cause penalties and interest to be assessed.

By: Hyman G. Darling, Esquire

Will Contests – when heirs call into question the validity of a will

Sometimes a person isn’t satisfied with the terms and conditions of a family member’s Will. There may be a feeling that the proposed distribution isn’t fair, not equally representative of what was intended, or a particular individual did not receive an “adequate” share. Unfortunately, a will contest is not the appropriate course of action for distribution dissatisfaction. A will may be contested on several legal or technical grounds.

A will may be contested under the belief that it was produced by fraud or undue influence. This is a difficult presumption to overcome in many cases, as there must be direct evidence that conclusively establishes that the testator or testatrix (the person who wrote the will) was forced or coerced physically or mentally to establish the provisions of a will. Testimony must be presented to convince the judge that the person objecting has evidence that will establish the coercion, undue influence or fraud in forcing the will to be signed.

Another objecting opportunity is the claim that the will was not properly signed. In most states, a will must be signed in the presence of at least two witnesses, and usually requires a notary. Some states may require two or three witnesses without a notary, and there is normally a self-proving affidavit establishing that the witnesses and testator/testatrix were present in the same room at the same time when the will was signed, and that the notary took their acknowledgement that the person signing the will was in their presence, of sound mind, and not under any undue influence or constraint at the time of the execution of the will.

The area that presents the most litigious activity is that of soundness of mind and capacity. It is very difficult to determine one’s capacity on any given day as a person may “drift” in and out due to medication or mental illness. There may also be swings between competency and incompetency. It is important to note that at the time of will execution, the person must be competent in order to understand the nature of his or her assets and what their distribution would be without this signed will.

This is what is commonly known as the natural objects of one’s bounty. Sometimes a medical certificate is obtained from the treating physician of the testator/testatrix to determine that at the time of the will signing, medications may have been taken, or there may have been an issue as to physical or mental lapses. These medical records are valuable if there is a future will contest in the future regarding the clarity of thought of the author regarding the nature of the terms of the will and who was included and who was excluded. Often, years later, the medical records are no longer in existence, or the physician is unable to determine the capacity of the patient at the time he or she was being treated.

Prior to initiating a will contest, the terms of the will must be reviewed in detail, as well as all surrounding factors before expending significant time, emotion, and money in attempting to overturn a person’s written expressions of their intent to distribute their own money upon death.

By: Hyman G. Darling, Esquire

Tax deferred savings may significantly impact income tax liability of heirs.

As reported by the government, the rate of saving in IRAs, 401(k) plans and 403(b) plans has increased dramatically over the past decade. As these assets are only tax-deferred, not tax-free, there must be planning as to the proper distribution and allocation of these assets upon death.

Many individuals have significant assets built up in these plans, and when they die, heirs have several options relative to taking or deferring a portion of the receipt of these assets. Plans must focus on income tax benefits. Even if there is no estate tax liability because the owner of these assets is in a 15% income tax bracket at retirement, the heirs may be in a significantly higher tax bracket.

In the event that there is no estate tax, it may be more beneficial to consider having the owner withdraw more than the minimum distribution as required under the law in order that these assets may pass estate tax-free with lower income taxes to the next generation.

By: Hyman G. Darling, Esquire

Planning for Disabled Family Members

Any family that has a disabled member has to take special care relative to their estate planning. In the event that a child is born who has physical or mental special needs, it is vitally important to establish a special needs trust or supplemental needs trust so that the funds do not pass to this child if he or she is receiving governmental benefits.

In the event that this child were to receive funds outright, then his or her governmental benefits may be put in jeopardy as these excess assets would disqualify him or her from things such as medical care, subsidized housing, food stamps, etc. The special needs trust is available to provide funds to a child without the potential loss of these very important benefits.

By: Hyman G. Darling, Esquire

Revocable Trust – What is it, and how can it benefit me?

A countless number of people are uncertain how to manage their personal property and assets. A revocable trust can assist you in managing your affairs as well as avoiding probate.

A trust is an agreement that determines how a person’s property is to be managed and distributed during his lifetime and upon death. A revocable trust typically involves three parties: the grantor, the trustee, and the beneficiary.

• The grantor is the person who created the trust, and usually the one that provides funding for the trust. There can be more than one grantor of the trust, such as a husband and wife who create a trust jointly.
• The trustee is the person who holds title to the trust property and manages it. Often, the grantor will also be the trustee, during their lifetime. A successor trustee can be named in case of the grantor’s death or inability to manage the duties of the trust.
• The beneficiary is the person or persons who will receive income or principal from the trust. A revocable trust is beneficial because not only is it established during a person’s lifetime, but it can be amended as well.

In creation of a revocable trust, a legal document known as a “trust agreement” is prepared by an attorney and then signed by the grantor and trustee. The grantor transfers property to the trustee, which is held for the benefit of the beneficiary. The grantor can either amend or revoke the trust at any time, to take into account any circumstances that may arise, such as marriage, divorce, death, disability, or even a simple change of mind.

Most revocable trusts become irrevocable at the time of the death of the grantor. That way other individuals cannot amend the trust.

Another advantage is that property held in a revocable trust cannot be subject to probate administration. Probate is a formal court process where a judge oversees the distribution of your estate. This saves expense because the value of property is not considered. It also preserves privacy, as the administration of the trust remains private, rather a typical probate preceding that results in a public revealing of asset amounts and the identity of the beneficiaries. In addition, the delay encountered with probate is often avoided, which results in quicker distribution of property to the beneficiaries.

Although revocable trusts can be costly, they are a worthwhile investment.

A common misconception however, is that revocable trusts replace a will. A will should still be created because it allows you to name guardians for any minor children that you have, as a trust cannot do this. If you do not have a will, your estate will be distributed according to state law. A will also permits you to disinherit a specific family member if desired.

By: Gina M. Barry, Esquire

Medicare prescription drug coverage FAQs

Many senior citizens are overwhelmed with the high costs of prescription drugs. The Medicare Rx Education Network is a program that is expanding its services to include new prescription drug coverage. Due to the Medicare Prescription Drug Improvement Act of 2003, voluntary prescription drug coverage for forty two million seniors, as well as others with disabilities, is being offered.

Starting January 1, 2006, the new prescription drug benefits will cover a variety of medicines, which can be beneficial for cutting your costs in the future. The new drug benefit is an insurance that will offer dependable and affordable access to medications.

You may not see the need for Medicare prescription drug coverage now, but it may be beneficial if your health declines as your age. Unexpected illnesses can also occur, and being protected is reassuring and helpful.

This program requires a monthly premium payment and co-payments depending on the type of plan that you select and where you live. The standard plan is $37 per month plus deductibles. If your income is low, you may be eligible for reduced premiums. Many different plans are offered, and they vary by drugs covered, pharmacies in their network, premiums and co-payments.

Those eligible for Medicare can sign up between November 15, 2005 and May 15, 2006. If you sign up prior to December 31, 2005, coverage will begin on January 1, 2006. If you sign up later, your coverage will begin on the first day of the month following the month you joined.

By: Gina M. Barry, Esquire

Remarriages require special estate planning considerations

With the divorce rate reaching 50%, remarriages require estate planning. The first spouse to die may wish to ensure that assets are available to and for the benefit of his or her children of a previous marriage. Perhaps a trust will need to be established for these children.

Alternatively, one may establish a trust for the benefit of his or her spouse, such that the individual will receive income and/or principal at the discretion of an independent trustee, with the remainder of the funds being distributed to children of the first marriage. In this way, the surviving spouse is protected during his or her lifetime, but the trust will ensure that the principal passes to the children of the first marriage, as opposed to leaving all assets to the surviving spouse, who could leave all assets to his or her own children upon his or her death.

There may also be a need to establish a trust fund for grandchildren’s education or medical purposes.

By: Hyman G. Darling, Esquire

The advantages of a Revocable Trust

A Revocable Trust, also known as an Inter-Vivos Trust or Living Trust, occurs when an individual places property in trust for their own benefit during their lifetime, with the remainder to go to their heirs. This person can retain control over the property as the trustee, and can give themselves the right to change, amend, or revoke the trust.

So why bother giving up ownership of your property, if you will retain essentially the same ownership control in a Revocable Trust? The existence of a Revocable Trust provides considerable advantages on the date of your death.

First, property you own at the date of your death must go though probate before it can be distributed to your heirs. Probate can be a costly and time-consuming procedure. It encompasses the probate process, executor, and attorney’s fees, and it can potentially take years before your assets are fully settled. However, probate only applies to assets which you actually “own” in your name, and once your assets are placed in a Revocable Trust, the trust “owns” these assets. Since you are the trustee and beneficiary during your lifetime, you have total control of the assets held in the trust.

Second, with a Revocable Trust, when you pass away your “successor trustee” will take control of the property. This trustee can instantly begin to manage your estate, and your heirs will be able to benefit from your estate right away. Unlike a Will, where there is a gap between the date of your date and the appointment of an executor or administrator, the trustee begins to manage your estate immediately. You retain complete control of your assets during your lifetime, and your estate gets to benefit from the assets at the moment of your death.

Third, a Revocable Trust provides you with confidentiality and privacy in the management and distribution of your assets. Since probate is a court proceeding, it is open to public inspection. This means the management and valuation of your assets is open to public display. With a Revocable Trust, the trustee manages your assets privately. The trustee can distribute assets to your family without first obtaining the court’s approval.

While there are costs involved in the creation of a trust, the advantages associated with the Revocable Trust may make it a good option for your estate plan.

By: Brett A. Kaufman, Esquire