Estate Planning Bits

Crisis planning upon institutionalization

When a loved one is institutionalized, your financial situation may be impacted. Here are some tips to help you transition:

1. Engage competent counsel. It is very important to ensure that the lawyer you have selected is knowledgeable in elder law. This sub-specialty of estate planning allows lawyers who are specially trained to assist with tax, estate planning, and asset protection planning for the benefit of a client.
2. Review tax issues. Any time there is a gift, transfer, or any transaction involving real estate, stocks, bonds, and often CD’s or bank accounts, income tax, estate tax, and gift tax consequences must be reviewed. Whether assets pass during lifetime or at death make a significant difference in whether there will be a capital gain or no gain. Similar rules apply relative to real estate, especially whether a person obtains their exemption from tax upon the sale of the principal residence. Tax rules change frequently, and therefore, it is important to be sure that the advisor and accountant are involved in the planning process.
3. Purchase a pre-paid funeral plan. In most states, including Massachusetts, it is permissible to pre-pay a funeral or establish an irrevocable trust for one’s burial expenses. At the current time, any reasonable expenditure as a pre-paid expense is allowable if part of a irrevocable contract. Most funeral homes are aware of the rules of Medicaid eligibility, and if married, the husband and wife are both permitted to pre-pay their funerals without any look-back period.
4. Open burial account. In addition to pre-paying a funeral, any person who is applying for Medicaid is also permitted to have a $1,500 burial account. This account must be listed as a burial account, and no funds may be added in the future or withdrawn except for interest, which may accrue on this account during its lifetime. Again, there is no disqualification period for setting up an irrevocable burial account even when a person is already institutionalized.
5. Purchase a new vehicle if allowable. A reasonable amount may be spent on a car if the person who is institutionalized has a spouse living in the community who is not institutionalized. Transportation is not a necessity, but the regulations permit a car to be purchased. That is not to say that a “luxury car” should be purchased upon a spouse entering a nursing home, but rather, a reasonable sum may be expended.
6. Purchase new home and make home improvements. In the event that a person is renting and has sufficient assets to purchase a house or condominium, this may be an acceptable transaction so long as there is a community spouse who is living at home. However, if a person is institutionalized and is single, without any reasonable likelihood of returning to the community, then clearly, a purchase is not allowable. There are special rules regarding purchases of real estate with one or more names, as well as mortgages and reverse mortgages, all of which are techniques that require special attention. In addition, home improvements and renovations are allowable so long as there is a community spouse living in the premises.
7. Purchase personal items or household goods. Certain items of tangible personal property are allowable to be purchased. These would include new furnishings, carpeting, a new television, clothing, and other goods that are allowable under the regulations. Again, the rules regarding these items vary from state to state and are also changed within a state frequently, so attention must be paid to the regulations regarding asset purchases.
8. Pay debts if legitimately eligible to be repaid. The payment of debts is also allowable, including paying on a mortgage. Other debts, such as outstanding medical bills, credit card bills, etc. are allowable, but the bills may be carefully scrutinized to ensure that the goods charged are for the institutionalized person and/or their spouse.
9. Take a vacation if possible. If able to, the expenditure of money on one’s self is allowable, including the taking of a vacation. However, paying for a vacation for an entire family would be frowned upon. But, as opposed to having funds spent on long-term care, a person may expend funds on himself, such as taking that long deserved and anticipated vacation.
10. Review all proposed expenditures with an elder law attorney before making any payments, decisions, or gifts. Before taking any action in all of the above options, it is vitally important to check with a qualified attorney, preferably an elder law attorney, who will be able to look at each particular situation individually to determine the best course of action. There are no two situations that allow any “boilerplate” technique to be taken, but rather, similar to medical care, each person is looked at individually, and a plan is prepared for their specific situation regarding family, assets, and proposed care.

By: Hyman G. Darling, Esq.

Tax consequences of non-US citizen inheritances

In most situations, a person leaving money to their spouse has what is called an unlimited marital deduction. This means that there is no limit on assets that will be taxed from one spouse to another so long as the surviving spouse is actually a legal spouse, receives the money, and in most cases, is a U.S. citizen.

However, unlimited amounts may not be left to non-citizen spouses because the government is concerned that in the event that the surviving spouse were to receive the funds without any tax, he or she could leave the country and the U.S. government will never have their chance to tax these assets for estate tax purposes. Therefore, there are limitations on the amount that a non-U.S. citizen surviving spouse may receive without any estate taxes.

With good planning, there is a Trust that may be utilized to provide the non-citizen spouse with funds after the death of the U.S. citizen spouse, called a Qualified Domestic Trust (QDOT.) When this Trust is in existence, the estate tax deduction and marital deduction may be utilized to defer taxes until the death of the surviving spouse.

When planning was not completed before the death of the citizen spouse, it is possible that a significant tax may be due. In this case, there may be an alternative. The surviving spouse may then petition the immigration service to become a U.S. citizen. If this occurs prior to the filing of the estate tax return, which is normally due within nine months of date of death unless an extension is obtained, changing of the status of the surviving spouse to that of a U.S. citizen will negate the unfortunate tax ramifications.

If this is not an option due to choice or because the time limitations have already expired, then in the event that the first spouse to die had established a Trust, it is possible to file a petition with the court of competent jurisdiction to amend the Trust and reform it to qualify as a Qualified Domestic Trust. If this is the case, then the Trustee of the QDOT must be a U.S. Citizen or a U.S. Trust entity, as that person or entity is personally responsible for filing tax returns and withholding taxes when necessary. The Government wants to ensure that anyone responsible for the tax liability on this exception in the tax code meets their requirements and that the government has the ability to pursue them in the event that the trustee does not pay the required taxes.

There are also significant limitations on the transfer of funds from a citizen spouse to a non-citizen spouse during lifetime, and it is important to track these transfers for current as well as future gift and estate tax consequences.

It is usually a better tax result when both spouses are US citizens, but sometimes, one spouse elects to return to their native country and does not wish to become a U.S. citizen. This is certainly an option, but the tax effects should be reviewed prior to making that decision.

By: Hyman G. Darling, Esq.

The significance of Health Care Proxies and Durable Powers of Attorney for spouses and children over age 18

Often it is assumed and anticipated that a husband or wife can make decisions for their spouse. A physician may allow the spouse to make decisions for an incapacitated spouse, sometimes there is a dispute between the children and spouse, or possibly between children of a prior marriage and the spouse. If this happens, the matter will have to be decided by a guardianship or conservatorship hearing that will determine who has the authority to make the decision as well as what the end result of the decision will be.

Since every citizen of the United States has the right to make their own personal, health, and financial decisions, they should also select who they may wish to serve for them in the unfortunate event of their incapacity. All too frequently it happens that a person doesn’t have the necessary documents, and a court proceeding is necessary. This process can be emotionally draining, expensive, and time consuming. It makes a private matter very public regarding details of the medical situation, current assets, and the court’s requirement that a bond to be filed to guarantee that the fiduciary will not dissipate the assets improperly.

In most states, it is also necessary that an attorney represent the family in pursuing the involuntary guardianship proceeding. Although a spouse may have endorsed checks all through their spouse’s lifetime, upon incapacity, they will not have the authority to make any major decisions, such as withdrawing funds from an IRA, dealing with life insurance companies, attending to stock transfers or sales, or even signing income tax returns without the necessary authority.

Preparing a Durable Power of Attorney will allow a spouse or whoever is designated to make the decisions when incapacity sets in.

Therefore, not only is the set of documents for incapacity (Power of Attorney and Health Proxy) necessary for spouses, they should also be considered when children reach the age of eighteen, as they are in a position to make legal decisions for themselves. Unfortunately, when a legal-age child becomes incapacitated, a court proceeding is necessary to attend to their affairs if proper documentation is not in place.

by: Hyman G. Darling, Esq.

GRAT - What is it and how does it work?

The GRAT or Grantor Retained Annuity Trust allows the transfer of assets, be it real estate, business interests, or other assets to an Irrevocable Trust. A person then receives an annuity payment from the Trust for a specific period of time, and at the end of that period, the Trust terminates, and the assets pass to the children, grandchildren, or other person who is named as the Trust Beneficiary.

There is probably more discussion about what a GRAT is than there are actual clients who execute this type of estate planning document. Since right now we are uncertain about the exact future of the federal estate taxes, including exemptions and rates, you may wish to be proactive and take advantage of benefits before the rules change. However, as oftentimes there are detriments where there are benefits, this is one of those situations where there is a significant benefit due to the very low interest rates as well as depressed values of assets.

When a transfer is made to a GRAT, a gift is made for gift tax purposes, but the person is not taxed on the present value of the annuity, since the Grantor who establishes the Trust is keeping those payments. The lifetime exclusion of $1 Million, (not $13,000.00 as most people believe,) is utilized to avoid or reduce the tax on the gift of the Trust remainder. Since this is a discounted amount, and it is based on interest rates and value of the assets, a significant portion of the assets may be transferred at this time at a much reduced value than they were a year or so ago. Since the annuity stream is based on the interest rates, that results in a lower taxable gift of the remainder, yet any future appreciation will not be subject to gift tax because the gift is made at the inception of the gift, not at the value of the gift when the trust terminates, hopefully having those assets appreciated.

If this becomes a bit more complicated than necessary or desired, then keep in mind that a person may still give up to $13,000.00 a year to as many different individuals as they want every year (this is the 2009 figure) without having to file a gift tax return. Any amount in excess of $13,000.00 per donee per year will require a gift tax return. But again, there is no gift tax due until the total value of all gifts exceeds $1,000,000.00 over the lifetime of the donor. In addition, please keep in mind that recipients of gifts do not pay income tax on their receipt of the gift.

by: Hyman G. Darling, Esq.