Estate Planning Bits

Selecting a Trustee is serious business.

When creating a trust, you have to select a person or institution to hold legal title to property and administer this property for the benefit of others. This person is known as the trustee. Trustee selection is an important step in the estate planning process because if the appropriate trustee is selected, he or she will ensure the successful administration of your trust.

The duties of a trustee are not similar to those of an executor. A trustee’s duty could carry on for generations, unlike the executor, whose duty might only last for one to two years. A trustee owes many duties and responsibilities to the beneficiaries of the trust, and thus the trustee may be liable if he or she puts his own interests before those of the beneficiaries.

Some of the basic requirements of a trustee include:

• Capacity – a trustee cannot be a minor, insane, or mentally incapacitated.
• Administration skills – a trustee must keep accurate records and file the appropriate tax returns. If the trustee does not have these skills, he or she must be able to engage a person who can advise and aid in the administration of the trust. Even with an advisor, the trustee has the final say in trust decisions and will be held accountable for those decisions.
• Communication skills – a trustee must be impartial and possess the discretion necessary to deal with delicate matters.

You may choose family members or professional trustees to administer your trust. Family members can be good trustees because they typically know the your wishes and often do not charge a fee to serve. The drawbacks to having a family member as a trustee include a lack of experience with record keeping and lack of knowledge of the tax consequences associated with a trust. Additionally, family members can sometimes find it hard to be impartial when making trust decisions.

Professional trustees, including banks, trust companies, accountants, and lawyers, are generally experienced when it comes to the efficient and accurate maintenance of a trust. They are also impartial when it comes to making decisions. However, professionals are compensated to administer the trust, and they often have no connection to the beneficiaries or possess any understanding about family situations, unless the trust creator provides this insight.

After deciding on a trustee, it is also important to select a successor. In the event of the death, incapacity, or resignation of the original trustee, a successor trustee will ensure the continued administration of your trust. And finally, if the duration of your trust is expected to be infinite, it may be prudent to name a bank or trust company to serve as successor trustee, since they will always be available to serve.

By: Hyman G. Darling, Esquire

Who should own your life insurance policy?

Most people own life insurance that is payable to a third party. It is customary to name your spouse as the beneficiary, with your children being contingent beneficiaries in equal shares. Conversely however, there are benefits to not owning life insurance at all.

Any life insurance that you own is included in your estate for estate tax purposes, regardless of whom the beneficiary is. Naturally, there is no tax between spouses, as there is an unlimited marital deduction for all assets passed to the surviving spouse. However, if your spouse predeceases you, then the death benefit, not the face amount of the policy, will be includable in your estate for estate tax purposes. This may cause a significant tax problem in that a whole life policy or a term life policy (which has no cash value,) has a significant value upon death. The total death benefit received by the beneficiary is normally income tax free, but there is a tax based on the total value of the estate of the decedent/owner.

The key to reducing these taxes is this: If any other party owns the policy for a period of three years prior to your death, and if certain technical requirements have been met, the policy proceeds will not be estate taxable upon your death. In a case where there is a significant amount of life insurance, it is normally recommended that either your children own the policies, or in the alternative, an irrevocable trust own them.

In some policies it is also possible to name a contingent owner. This may be important in a situation where a policy owner, such as a spouse, predeceases the other spouse. Rather than having the policy revert back to the surviving spouse, which will be a part of his/her estate, the decedent could nominate a trust or his/her children to be the contingent owners of the policy. Since the spouse’s policy does not pay off any proceeds until his/her death, he/she has already relinquished control of it, and it is highly unlikely that he/she will care about regaining possession of the policy since the proceeds are only going to be payable to the children upon death.

Likewise, it is very important to consider the beneficiary and contingent beneficiary of a policy. If your spouse is named as the first beneficiary and there is no contingent beneficiary appointed, then his or her death results in no beneficiary at all. As a result of this circumstance, proceeds will normally pass through as dictated by your Will. If no Will exists, then proceeds will pass by the laws of intestacy to the heirs-at-law who are entitled to receive your assets.

Again, life insurance is normally established so that it will pass without the need for probate, but when your beneficiary predeceases you, unless you change the designation, the proceeds will pass through probate court. A problem may come into play if your spouse is incapacitated to the extent that he or she is unable to make informed decisions. In this case, the beneficiary form may not be adjusted, and unfortunately, even his/her power of attorney or guardian will not have the specific authority to change the beneficiary designation without a special court order.

Therefore, when purchasing an insurance policy or upon reviewing an estate plan, it is important to review the owners, contingent owners, beneficiaries, and contingent beneficiaries of the policy. In most cases, there is no fee or cost to contact the agent serving the policy to re-determine the appropriate parties to the contract.

By: Hyman G. Darling, Esquire

All parents of minor children should consider a Letter of Intent.

When parents contemplate the possibility of dying prematurely or suffering a catastrophic illness, they are naturally concerned about what will happen to their children. Parents of disabled children are often especially concerned about the quality of their children’s lives should the parent become unable to provide needed care.

These concerns can be addressed by writing a Letter of Intent. This is a document in which parents include important information about their child’s history, personality, interests, care, development, needs and current situation. It also includes the parents’ hopes and expectations regarding the child’s future.

Although a Letter of Intent is not a legally binding document like a contract or a will, courts and future care providers will rely on it for guidance and insight into the needs of a child who can no longer be cared for by his or her parents. It serves as a voice on behalf of a child whose parents can no longer be that voice.

Writing a Letter of Intent can be a highly emotional experience. Sometimes parents forget that the Letter of Intent is ideally intended as a guide to others to help foster the child’s independence and growth into an independent adult. It is not a compromise document intended to accommodate the convenience of other relatives, nor is it a tool for controlling and restricting the child’s future life and choices. As such, it is advisable to have the child participate in the writing of the Letter to the extent possible.

What To Include

Parents should begin their Letter of Intent by stating their child’s full name, date and place of birth, and Social Security number. It should also include contact information for anyone who should be informed of any catastrophe that befalls the parents.

This list might include relatives and trusted friends. When mentioning relatives, it is useful to provide the child’s family history, including birthdates and any special attachments or relationships the child has developed with particular family members. Parents might also include contact information for lawyers, clergy, financial advisors, their respective employers’ human resources departments, local agencies that have records concerning the child’s situation and the child’s school. In the case of dependent adult disabled children, this list might also include the child’s employer.

Letters of Intent are then typically divided into sections that address any or all of the following areas:

1. Financial and other supports
   The financial supports section often includes information concerning government benefits received by the child and arrangements with a corporate guardianship or cooperative master trust program for the child’s care. This is also where one might include an adult child’s employment or the type of future employment the parent anticipates for a minor child.
2. Living arrangements
   The living arrangement section often includes the parents’ recommendations for the child’s housing. Such recommendations often include the best location (example: in the town where child has spent his or her life,) type (example: with a particular relative,) and qualities (example: a nonsmoking home for a child with asthma)
3. Programs/services
   The programs/services section often includes the type of school or educational program the child is or should be enrolled in, therapies or services the child needs, any necessary routine medical care, the child’s typical routine or schedule (example: what does the child need to do to get ready for school)
4. Personal preferences
   The personal preferences section is where parents discuss in detail the child’s personality and activities. This section is where parents often discuss matters like the child’s food and clothes preferences, favorite personal items, his of her ability to handle particular chores and other responsibilities, favorite hobbies and religious preferences
5. Abilities
   The abilities section is similar to the personal preferences section except that it focuses exclusively on the child’s level of independence and ability to handle various aspects of everyday life. This section often includes information on the child’s level of independence in getting around the community (can the child drive a car or take a city bus without supervision?) It also covers handling money skill and ability to make other decisions. This section might also focus on the child’s ability to communicate with others, and/or to read and understand written communications.
   
   

Once the Letter of Intent is finished, the parents should ask their attorney to review it. Although this is not legally binding, it should conform to the parents’ wills to avoid potential future probate problems. A Letter of Intent should also be updated periodically to reflect changes in the child’s situation.

A Letter of Intent can help alleviate the concerns of parents who are worried about how their child will be cared for in the event of their death or catastrophic illness.

By: Brett A. Kaufman, Esquire

Establishing domicile affects your income and estate taxes

Where a person lives is considered their domicile and he or she may have as many residences desired. For instance, you may live in your “home” for a period of time during the year, spend summers at your beach house and winters in your ski chalet. However, you may have three residences but only one domicile.

The domicile is determined by where you spend most of your time. In order to establish it, the typical rule is that six months and one day of use of the property determines your domicile, and anything less than that is less than one-half year. In addition to the use and time spent in your domiciled residence, the taxing authorities normally look to determine other issues such as where you vote, where your car is registered, where you attends your house of worship, and to whom contributions are made on a charitable basis. There is no one determinable factor that conclusively establish your domicile, but rather, all of the factors combined are considered.

Domicile is usually important for determining where you will be taxed, both for income and estate tax purposes. Usually, this is important if you have sufficient income relative to domicile affecting taxes. For example, in Connecticut the income tax rate is approximately 5% but there is no income tax in Florida, (although there is an intangible tax.)

Naturally, a significant consequence of domicile will be where you pay estate taxes upon your death. Again, a state such as Massachusetts, which has a threshold of only one million dollars, as compared to Connecticut, which has a threshold of two million dollars, compared to Florida, which has no estate tax, is important if you have greater than one million dollars in assets.

Normally, the IRS is not in a position to care where you were domiciled, since federal tax laws do not vary from state to state. However, each individual State will be concerned with domicile relative to its attempts to collect as many dollars as possible, both during your lifetime and at death.

In a recent audit by a state where domicile was in question, the State looked at all of the aforementioned factors and additional areas such as phone bills, charge card statements and bank statements. The state was attempting to establish that the person made cell phone calls from another state as opposed to the state within which the taxpayer was attempting to claim domicile.

In addition, the state looked at charge card statements to determine dates and where charges were made by the decedent. They also reviewed bank statements to determine where withdrawals were made from ATM machines. And consideration was given to records such as plane tickets and gasoline credit cards to establish where the taxpayer actually was at any given time.

In short, before attempting to change domicile, it is vital to dot your “I’s” and cross your “T’s”, as well as review the requirements of each state with both counsel and a qualified accountant to ensure that your intents and purposes will be fulfilled. If not, both states could tax the you as a resident, (not a non-resident.) This would cause taxes to be due in two jurisdictions, which is not what you want.

By: Hyman G. Darling, Esquire

Help! I can’t afford my real estate taxes.

With the reevaluation of property at full and fair market value in Massachusetts, many individuals have determined that they can no longer comfortably pay for real estate taxes. Some individuals have felt that they could not afford to pay the taxes and ongoing expenses of a house, and therefore, have sold their homes and moved to subsidized living arrangements, or possibly moved in with other family members.

Fortunately, in Massachusetts, there are programs to help an individual meet his or her real estate tax obligations. Each town assessor has the authority to grant a deduction from $175 to $500 from a real estate tax bill. Some of the exemptions and deferral opportunities are as follows:

1. You are a single person who is a sole owner or joint owner and are at least 70-years-old prior to the beginning of the fiscal year, which is July 1 for all cities and towns in Massachusetts.
2. You and your spouse are both joint owners, and one of you is at least 70 years of age prior to the beginning of the fiscal year.
3. You are married and one of the spouses is the sole owner who is at least 70 years of age prior to the beginning of the fiscal year.
4. There are other options available, such as a veteran or a surviving spouse of a veteran, a blind person, a surviving spouse of a police officer or fire fighter killed in the line of duty, minor children of the police officer or fire fighter who was killed in the line of duty, and other specialized exemptions.

In addition to the categories stated above, you must also meet the requirements of income and assets relative to the qualifications. If your property is held jointly with another person, then the other person’s income and assets may also be counted, but you merely have a life interest in the property, where there is a deed to the remainder beneficiaries, and you hold the life estate, this may also qualify you for the abatement.

There are also specialized situations for deferral of real estate taxes if you aren’t able to live in the house due to income requirements, and also be unable to pay real estate taxes, which may consume a significant portion of your disposable income. Every board of assessors has the authority to grant a tax exemption or deferral, but again, it must be applied for, usually on an annual basis, to maintain a continued exemption.

By: Hyman G. Darling, Esquire

What Guardianship is and why you want to avoid it

Certainly, it is always preferable for a person to have a valid health care proxy and durable power of attorney that will allow another individual to serve for them in the unfortunate event of incapacity. If one has not drafted and signed a health care proxy and durable power of attorney, and becomes mentally or physically disabled, another person or social service agency will need to petition the local probate court for an appointment of guardianship.

In order to proceed with a guardianship, the first step is to obtain a medical certificate from the physician treating the individual. This medical certificate must clearly state the medical condition and the need for a guardian to serve, establishing that the purported ward no longer has the ability to make personal, social, medical or financial decisions for herself/himself. Once this document has been obtained, it is necessary to petition the court for authority to become the guardian, and the court will then issue a notice called a citation, which has to be published in the newspaper where the purported ward currently lives. There is a date by which any person may object to the guardianship proceeding, and if no objection is made, then the hearing may be scheduled.

At the time of the hearing, it is possible that a new medical certificate will have to be obtained, since the current one on file may be over thirty days old. If that is the case, another visit to the physician will be necessary for issuance of a new medical certificate.

In some jurisdictions, the court will also request the presence of the party over whom authority and control is sought. If the person is unable to attend the hearing, then a motion may be filed with the court to exempt the requirement. Naturally, however, if the matter is contested, the person and all parties must be in attendance unless otherwise excused.

Once the court is satisfied that the person is incapacitated and the suitability of the petitioner is approved, the court will then investigate the assets of the person to ensure that proper safeguards are in place. When assets are in fact an issue, and the person is not qualified for medical assistance through governmental or state Medicaid authorities, the court may impose what is known as a corporate surety bond in an amount equal to the assets of the ward. This will require the bonding of the guardian, and if this person has any prior felonies or misdemeanors, he or she may not be able to be bonded. If this is the case, then another person will have to be substituted as the guardian, which may mean a further hearing to inform the court.

Once appointed and bonded, the guardian must file an inventory with the court, and also an annual accounting that must be reviewed by the judge and approved. If the accounting is not filed, the bond will continue to run and be paid on an annual basis until such time as the accounting is completed, filed, and allowed by the court.

Naturally, there are annual filing fees in addition to the initial filing fees, publication charges and legal fees in establishing the guardianship. As stated earlier, all of these requirements, fees, and the time-consuming process of petitioning for the guardianship may be eliminated with valid planning documents, such as the health care proxy and durable power of attorney.

By: Hyman G. Darling, Esquire

Social Security earnings test – is it worth it to work?

One of the provisions of the “senior citizens” Freedom to Work Act of 2000 is that the Social Security retirement earnings test is eliminated in the calendar year in which the person reaches his or her full benefit retirement age for the month of, and after, such attainment. However, the earnings test continues to apply to benefits received prior to the month the applicant reaches his or her full benefit retirement age.

Social Security beneficiaries under the full benefit retirement age who have earnings in excess of the annual exempt amount are subject to a $1.00 reduction in benefits for every $2.00 earned over the exempt amount ($12,000 in 2005, and $12,480 in 2006), for each year before the year during which they reach the full benefit retirement age. However, in years where the person reaches the full benefit retirement age, earnings in excess of the annual exempt amount ($31,800 in 2005, and $33,240 in 2006) are subject to a $1.00 reduction in benefits for every $3.00 earned over the exempt amount. Social Security benefits are not affected by earned income beginning with the month the person reaches his or her full benefit retirement age.

It is important to note that for any Social Security beneficiary who is under full retirement age, the earnings test determines whether their benefits are going to be reduced based on their earned income. This is earned income and not unearned income, which has the adverse effect on the benefit amount. There are significant and substantial other tests to make relative to the year, month of birth date, etc., when applying for benefits, and it is very important to contact the Social Security office at least six months prior to retirement, especially if continued employment is considered.

By: Hyman G. Darling, Esquire