Estate Planning Bits

Estate Planning for Blended Families: Considerations for cohabitating or married couples with kids from other relationships

The modern family of today is often a mix of spouses, exes, kids, and steps who somehow find a way to make it all work. Estate planning for such an intricate blended family may be a little tricky, and there are lots of factors to consider. 

While traditional estate planning documents are critical, it is also important to consider a prenuptial or a cohabitation agreement. Either one of these agreements should spell out, in as much detail as possible, what will occur if the relationship dissolves, regardless of whether or not the couple is married. 

One of the major issues that this agreement should address is housing. When a couple purchases or rents a home together, if the relationship falls apart, and both parties are liable on a mortgage, what will happen?

Additional life insurance may be necessary if one of the parties is under an order of the court from a prior divorce decree wherein a percentage of assets is required to be maintained for the benefit of children from the prior marriage.

It is also important to consider each party’s health proxy and durable power of attorney. Who will be in charge of making decisions in the unfortunate event that one individual becomes incapacitated?

A will and possibly a trust should also be considered, and provisions within these documents should fairly closely mirror the prenuptial agreement to conform with all of the requirements set forth in that agreement, which may be construed to be a legal contract.

In addition, if there are any requirements under an order of the court from a prior divorce decree, those provisions should also be reviewed and included within one’s will.

When assets of relatively equal value are owned, some couples choose to retain their own assets in the event of a divorce, however, in the event of a death, some additional assets would be left to the survivor. Other options may include a possible phasing in of assets.

Health insurance should also be considered prior to marriage. Both parties may be receiving health insurance from a former spouse. The previous divorce decree, any modifications, and separation agreement should be reviewed carefully ensure that all benefits are maintained or solutions may be implemented.

The issue of life insurance and qualified plans such as 401(k)s, IRAs, 403(b)s, etc. should also be reviewed. It is very important to understand that such assets pass by beneficiary, not by will. Therefore, whoever is named as the beneficiary of these assets will receive them without the need of having those assets pass through probate.

Likewise, if assets are intended to pass to a trust or to individuals listed in a will, it is important to obtain change of beneficiary forms and have them signed and forwarded to the plan administrators at insurance companies when the documents are signed.

The bottom line is that there are many important considerations and decisions to make before remarrying or moving in with another person.

 

Hyman G. Darling, Esq.

Photo credit: Microsoft 

Beware contesting wills and trusts with a no contest clause!

Every once in awhile, there is a case that is worthy of writing about to help our clients understand their rights and obligations.

In some legal documents, lawyers include language known as a no contest clause or an in terrorem clause. This helps to prevent individuals from contesting wills and trusts, and in many states, these are held to be valid so that if a person does contest, they forfeit and lose their rights under the trust or will. In some states, however, these clauses are not valid, and in some instances, they are valid only if the objector to the will or trust is successful.

A recent case in New Hampshire involves a significant estate, (over $100,000,000,) where the decedent left funds in trust. The trustees had the obligation to invest the funds and make distributions, but at one point, some of the beneficiaries objected to many of the decisions of the trustees, but they ultimately resolved the matter by a mutually agreeable settlement which was filed with the court.

A few months later, one of the disgruntled beneficiaries, who still was not happy, proceeded to bring an action against the trust, attempting to remove the trustees, sue for breach of fiduciary duty, and made other allegations and complaints in her capacity as a beneficiary.

This trust contained a no contest clause, and one of the affirmative defenses and arguments of the defendant trustees was basically that the plaintiff beneficiary would forfeit her share if she contested. After many weeks of hearings with many witnesses, including many nationally recognized legal scholars who testified, the court, in a 50+ page decision, decided that the plaintiff did not have a case and enforced the no contest clause.

The plaintiff in this case was not only prohibited from receiving any further distributions based on the in terrorem clause affirmation by the court, but she was also ordered to reimburse the trust for all of the distributions made to her from the date of the filing of her action, as well as pay all of her own legal fees and costs, which were apparently in the hundreds of thousands of dollars.

It is important, therefore, to be sure that before contesting any case, you read all of the language of all documents, including any amendments or codicils, to determine whether there is the no contest clause. If so, you must make a difficult decision whether to proceed and gamble away your rights in your attempt to void the document, because if you are not successful, the net effects will likely be financially devastating.

Not only did the above plaintiff lose the case, but she had to repay funds received as well as pay all her own costs and expenses. She is now removed as a beneficiary from this trust, thus providing the other beneficiaries with significantly more money.

As unhappy as she may have been with the prior trustees, and for whatever other reasons she brought the action, she certainly would have been better off merely maintaining her status quo as an unhappy beneficiary.

 

Hyman G. Darling, Esq.

Photo credit: Microsoft 

 

Medicaid planning - making smart decisions to preserve your assets

While married individuals have plenty of benefits and options available to preserve their assets, while also securing Medicaid eligibility, a single person may not have quite the same opportunities. This is true because a married couple’s assets are counted in total when determining the assets available for expenditure on long-term care. A single person’s income is countable towards long-term care expenses, except for an allowance for medical insurance and $72.80 per month for a personal needs allowance.

Even a Prenuptial Agreement will not hold up to protect a couple’s assets in the unfortunate event that one spouse becomes incapacitated and needs long-term nursing home care.

So what should one do? Divorce?

Well, that is one option, and Attorney Darling appeared on the Today Show regarding this topic. But there are other options. Unfortunately, the choices are not optimal, since you will have to part with your assets irrevocably five years before you become ill. This means that your assets have to be either gifted or transferred to a trust. You may also transfer your house to your children, with or without the right to live in it, (called a life estate,) or you may consider purchasing long-term care insurance.

The previous law included a three-year waiting period, but that changed in February of 2006, so any transfers made prior to that time are “grandfathered in” under the prior rule, where the waiting period would exempt those assets.

In any event, it is not an easy decision to transfer assets outright, without future use of them, and it is also important to comply with the rules, since there is not much gray area in this process. In order to comply with the exceptions to the rules, the regulations must be followed carefully and strictly. Mistakes are often not forgiven and very difficult to fix when there is a crisis situation.

Anyone dealing with these issues should not rely on advice given to them by their friends, neighbors, or other individuals, but should seek the counsel of a qualified elder law attorney. That is the only way to assure that you are making the correct decisions.

 

Hyman G. Darling, Esq.

Photo credit: Microsoft   

 

Asset protection tools: private annuities and promissory notes

Until recently, if you entered a long-term care facility and wanted to apply for MassHealth, you would have to purchase a commercially offered annuity in order to qualify for Masshealth sooner than if you expended all of your own funds first.

Of course, if you are single, the annuity would have to be based on specific charts and tables issued by the social security administration and approved by MassHealth, and the income from the annuity would also have to be spent on your long-term care. The Commonwealth would also have to be the named beneficiary on the annuity in order to reimburse the state upon your demise, up to value of services provided by MA. 

If you are married, then your at home spouse (community spouse) would be able to receive income from the annuity and not have to utilize those funds for your care in an institution. 

As the commercial annuity may not pay a rate of return that was commensurate with what you want to receive, and due to the fact that it may not have been obtainable in a relatively short period of time, it is no longer as attractive as used to be. Many insurance companies no longer write short-term annuities that comply with the regulations of the Medicaid authorities, and it is increasingly difficult to find highly rated companies that sell these qualifying annuities.

 In the past, a private annuity was available for you to transfer assets to your children, who would then sign an agreement promising to pay the annuity amount to you for whatever period of years was appropriate in your particular case. The Medicaid authorities have basically shut down the opportunity to use private annuities, as they claim that the funds held by children may not be protected from lawsuits, divorces, etc., and therefore, the annuity was not as “commercially sound” as an annuity sold by a licensed insurance company. 

However, a recent case has changed the landscape of annuities, and now private annuities may be utilized for long-term care planning. If your children are not as responsible and trustworthy as you desire, then a private annuity may be re-insured by a commercially acceptable annuity company, which would guarantee that the funds will be available regardless of whether your children pay the premiums. 

Similarly, a promissory note, which is basically an obligation to pay money back, is in the same category. In this situation, you would loan money to your children, who would pay it back to you, thus converting a countable asset, which otherwise would have been spent on long-term care, to a stream of income that is paid monthly. This lower amount that is paid allows you to qualify for benefits sooner, but in the event of your death, then the balance of the funds will have to be paid back to the state up to the amount that the state paid for your care.

In this situation, it is also a viable option to obtain a commercially sold annuity, which basically covers the promissory note, so in the event that your children do not or cannot pay you back due to financial or personal issues, then the insurance company will make the payments. 

In both examples above, you will qualify for Medicaid sooner rather than later and still has some funds available for your personal needs. The private annuity and promissory note are now potentially protected techniques that can allow a Medicaid applicant to attempt to preserve some assets and allow Medicaid benefits to kick in sooner. 

Naturally, they are exceptions under the law, and these asset protection techniques must be properly established you will not be approved for Medicaid eligibility.

 

Hyman G. Darling, Esq.

Photo credit: Microsoft   

 

Selecting the best option for college savings

There are several alternatives to paying for college education. In one of the most popular scenarios, a family pays out of pocket from disposable income and if necessary, obtains loans from any governmental sources or possibly from a private resource such a home equity loan on a primary residence.

If the child is young enough, it may be more advisable to start saving money in a better type of savings plan such as a so-called Section 529 Plan or an Education Savings Account (ESA.) There are benefits and detriments of each type of plan, so you must make an intelligent decision about your selection based on family circumstances.

A Section 529 Plan allows funds to be deposited into an account, and so long as the funds are used for education, any income or growth earned on the account is withdrawn tax free. A further benefit is that the beneficiary of the plan may be changed if the initial beneficiary elects not to attend college or perhaps obtains a full scholarship and doesn’t need the money. A substitute beneficiary may be named who may utilize the funds for his or her education.

There are, however, some disadvantages. If the funds are not used for education, then there is a 10% penalty and income taxes will be assessed on the funds that are withdrawn that otherwise would have been withdrawn tax free.

Also, in the 529 plan, the selection of investment vehicles may be limited, as most states have elected only one investment source for the funds, so if a particular investment company is desired, a plan must be obtained within that particular specific advisor.

Also, the transfer of the funds within the 529 plan are limited. There is basically no limit on the amount that can be put in a 529 plan, as a parent may fund the plan as well as a grandparent. Since the gift exclusion on an annual amount is $13,000.00 per year, a significant amount of money may be placed in the 529 plan at any time.

Alternatively, with the ESA, contributions for beneficiaries are subject to a maximum dollar amount, currently $2,000.00 for 2012. This amount is also proposed to be reduced in 2013 and later years at the rate of $500.00. In addition, the ESA contribution is phased out as the donor’s modified adjusted gross income rises. When the single individual has income of $95,000.00 to $110,000.00, the contribution is basically phased out. For married individuals, the limits are $190,000.00 to $220,000.00.

However, these limitations do not apply to 529 plans. Also, in an ESA, in order to maintain the tax advantage, all distributions and funds must be distributed by the age of 30. This is also not the case with a 529 plan, as funds may be continued to be held in the plan for children, grandchildren, or any other beneficiary.

Another choice is to merely have funds placed in a Uniform Transfers to Minors Act Account. In this situation, the funds earn interest, which is taxable and payable at the rate of the child. Subject to the limitations and restrictions of the so-called “kiddie tax,” the funds may have income tax consequences, but the funds are withdrawn after taxes when used for education, since they have already been income taxed. However, based on the particular state law, the Uniform Transfers to Minors Act Account must be withdrawn by the age of 18 or 21, thus the child has unlimited access to the funds at that particular time.

How college savings are held may also affect the child’s ability to obtain financial aid. All of the aforementioned techniques may have a detrimental affect on the ability to obtain aid, but if the funds are available within a family, strong consideration should be made to prefund the education as opposed to relying on financial aid or private funding.

 

Hyman G. Darling, Esq.

 

Photo credit: Microsoft  

Estate planning for same-sex and unmarried couples and singles

There are many unique legal issues to consider relative to the estate planning process for same sex couples, couples who have not decided to get married, and single people. Although many of the planning techniques are similar, since there is no “legal” relationship, special documents must be prepared in many cases.

Naturally, it is important that a Will be given the due consideration in the planning process, but often other required documents are not given as much attention, and they may actually be more important. This “lifetime planning” is relative to your Health Proxy and Power of Attorney, which may allow another person to make decisions for youl upon your incapacity.

Power of Attorney:

Your Power of Attorney is a very important document, since it controls decisions over your finances upon incapacity. Care should be taken to be sure that when a person is named, that individual has business sense, is trustworthy, and also has the time to manage and direct your investments if you cannot do so for yourself. If this document is not prepared, then a conservator will have to be appointed by the Probate Court, and this process often times becomes time consuming, expensive, and emotionally draining.

In this document, a partner or close friend may be named instead of a direct family member. A family member may be displeased with your choice, but once the document is signed, your backup agent is in charge of all financial affairs in the unfortunate event of your incapacity, regardless of your family members’ wishes. Keep in mind though that death revokes the Power of Attorney, and therefore, this document is not used for post-death decisions.

Health Proxy:        

Your Health Proxy is also an important consideration. This person may be someone different than the one serving as Power of Attorney, but it should be someone who is close to you and will who carry out your wishes. Within this document, there should also be a backup person named in the event that the primary decision-maker is unable to make decisions due to their own illnesses.

Once again, a family member may be somewhat aggrieved that they are not making these decisions, but it can be written such that the decision maker should consult with a family member, but need not heed their advice when making decisions. Within this document, there should also be language regarding funeral and final disposition arrangements, so that there will be no question as to who is in charge and what will happen. In addition, whether or not you wish to be an organ donor should be included in this document as well as on your license.

Will/Trust:   

Needless to say, your Will is also an important document, and you should pay particular attention to who is in charge of your estate as your personal representative. This person will be in charge of making all distributions and decisions, attending to tax matters, and possibly closing your business if your own one. If this person is not able to serve, consider who the backup will be, and if there is no appropriate person, perhaps a bank or trust company can serve in this role.

Within your Will, there may also be a memorandum regarding how specific items of tangible property shall be distributed and to whom. Often, these items are more sentimental than material in value, but they could cause a significant dispute. The objective is to prevent dispute with this document.

If a Trust is to be used, often the named personal representative is also serving as the trustee, with specific instructions as to how your assets should be divided. Again, within this document, it is sometimes anticipated that a family member may not be pleased with the ultimate disposition of your assets, and therefore a specific clause may be included within the document that specifies who your family are and who shall not be a beneficiary under your Trust/Will.

In order to further protect your named beneficiaries, it is often advisable to have a so-called “no contest” clause in the document. This means that if an individual is not satisfied with the amount they are receiving, and if they were to challenge the Will on any grounds, and even if they are successful, they will lose a part of their inheritance, and thus relinquish what otherwise would have passed to them. This clause puts the possible objector in a precarious situation, since they would be forfeiting their distribution in order to attempt to gain more. They must give significant thought regarding whether they wish to challenge the document and forfeit the amount that was left to them prior to moving forward with that case.

Although there are many other considerations, it is important that an unmarried person or members of a same sex couple pay attention to the way assets are held and how they are to be distributed before making a decision to finalize their estate planning documents.

 

Hyman G. Darling, Esq.

 

Photo credit: Microsoft  

Why your estate plan should change with your life

It is important to periodically review your will and estate plan, especially in light of the following changes in your life….

Children

Most parents are concerned about how their children will be cared for in the event that both parents die. It is imperative to name a guardian for your minor children within your will. Also, parents should consider a trust if they wish to stagger financial inheritance distributions for their children, instead of having the kids receive a lump sum at the age of 18.

Marriage

It is important to note that your spouse does not automatically become the executor of your estate. Furthermore, you want to assure that your assets are distributed according to your intentions. In the event that you die without a will, also known as dying “intestate,” the state in which you reside will dictate the distribution of your assets.

Divorce

In most states, a divorce revokes the provisions of a will that apply to the former spouse, which will require the need to create a new will. In addition, you should review your durable power of attorney, health care proxy, beneficiary designations, and other estate planning documents to ensure that they concur with your new distribution and planning intentions.

Remarriage

If you wish to separate your assets and nullify your inheritance rights to each other’s estates, a prenuptial agreement should be contemplated. Also, if you and your new spouse have children from prior marriages, a distribution plan should be discussed to assure that all children are provided for as intended. 

Middle Age

As you age, your assets tend to grow. It may be likely that when you initially executed your estate plan, you did not have the assets that you do now. In the event that you have assets including but not limited to a house, retirement plans, brokerage accounts, life insurance, etc… that exceed the Massachusetts threshold of $1 Million, an estate tax may be owed upon your death. As such, you may wish to consider trusts that facilitate sheltering these assets from MA estate tax.

Death of Spouse

Upon the death of a spouse, you may need to draft a new will or designate others to become your health care agent and durable power of attorney. Further, there may be advantages to disclaiming some of your inheritance for the benefit of contingent beneficiaries, such as your children. This is true especially if your estate has potential estate tax implications.

Life changes, and so should your estate plan. An experienced estate planning attorney should be able to assist you to assure that your plan is current as you navigate your ever-changing life.

Todd C. Ratner, Esq.

Photo credit: Microsoft  

 

Special Needs Trusts and qualified funds

Often a person who wants to leave funds to his or her disabled child is advised to not leave the funds outright, as they may push the recipient over the threshold for assets and income and disqualify the child from receipt of governmental benefits. A better option is to have the funds left to a Special Needs Trust, where they are distributed at the sole discretion of a trustee, therefore, providing for continuation of governmental benefits without disqualification.

However there are complications to having a trust receive funds outright, such as tax implications, since in most cases, none of the funds have been taxed. Of course, this is not true for assets such as Roth IRAs and non-retirement benefits. 

It is important for a parent or grandparent to consider having funds distributed to a Special Needs Trust because, when a trust receives funds, a substantial portion of the money received may be in the highest income tax bracket, (35%,) since trusts and estates have significantly higher income tax brackets and lower thresholds of exemptions than individuals. It may also be preferable to have the funds distributed over a period of time, such as a stretch IRA, or using a conduit trust in order to allow the funds to be available for the beneficiary, but not have the funds taxed at the higher bracket. 

It is important to note that a Special Needs Trust must be properly drafted to qualify as a designated beneficiary under the current IRS rules and regulations. In many cases, the beneficiary must be an individual, the ultimate beneficiaries must be clearly enumerated and designated, and a Special Needs Trust may not include a charity as a potential beneficiary. Certain beneficiaries must be also named with life expectancies.

In some cases, it may be advisable to merely allow the trust to pay the tax and invest the net proceeds, but this decision must be identified and discussed prior to the naming of the trust as the beneficiary of this qualified plan. 

Hyman, G. Darling, Esq.

 

Photo credit: Microsoft  

Pooled trusts, Medicaid, and Section 1414: what this means for special needs benefits recipients

The general rule relative to Medicaid eligibility it that all transfers/gifts from a person are considered to be available to them for 5 years from the date of transfer, thus denying the person from obtaining institutionalized benefits. 

This includes any portion of a trust that could be payable to them. However, with all rules, there are exceptions, and Congress has exempted certain trusts from Medicaid’s available resource provisions and from the transfer penalty provisions that apply to Medicaid long-term care services, so long as the trusts meet certain requirements. 

For example, a special needs trust allows money to be set aside to provide for the special needs of individuals who require, or may someday require, Medicaid benefits, without affecting the beneficiary’s eligibility for these benefits. Likewise, a pooled trust is a type of special needs trust that is managed inexpensively by pooling large numbers of accounts, while providing disabled people with financial resources to be used for a variety of their needs. 

In 2005, Pennsylvania enacted limitations (Section 1414) on the use of pooled trusts, which imposed restrictions based on: 

• The disabled individual’s age;
• The characteristics of the expenditures trusts can make to the disabled person; and
• What percentage of any funds remaining in the trust after the individual’s death can be retained by the trust to assist other individuals.

The Act also included a death penalty provision that allowed for termination of the entire trust for all beneficiaries if the trustee violated the act as to any beneficiary. 

In response to this legislation, two Pennsylvania pooled trusts, and related plaintiffs, filed suit seeking to enjoin the Department of Public Welfare from enforcing the provisions of section 1414 that restrict Medicaid eligibility and require a minimum of 50% state reimbursement from the pooled trust. A federal court, in the recently decided case of Lewis v. Alexander, ultimately held that much of Section 1414 is unenforceable because it is more restrictive than what is permitted under federal Medicaid law. 

Specifically, the Lewis court held the following provisions unenforceable because they are in conflict with, and more restrictive than, controlling federal law: 

• The provision that requires the beneficiary to have special needs that cannot be met without the trust;
• The age requirement, And the court concluded that disabled people age 65 and older may form a pooled special needs trust;
• The expenditure restrictions that required all distributions to have a reasonable relationship to the needs of the beneficiary;
• The 50% pay-back provision, which states that a pooled trust may only keep 50% of the remainder left in the account after the death of a beneficiary without an obligation to reimburse the state for Medicaid expenses. The court held that pooled trusts may elect to keep the entire amount remaining in the beneficiary’s account at death; and
• The court negated the death penalty provision.

Although the court enjoined the Department of Public Welfare from applying or enforcing the aforementioned restrictions, the remaining provisions of Section 1414 are still valid. 

The decision in Lewis is a significant victory for clients, as it clarifies that disabled people age 65 and older are permitted to form pooled special needs trusts. This provides elder law attorneys and their clients with an additional planning tool for a disabled person, even when it appears that a long term institutionalization may be at hand. 

Of course, there are some adverse consequences, such as the fact that the funds are not repaid to the family after the death of the beneficiary. However, the funds are available during that person’s life without the need to spend them for daily care, which is usually a preferred option, as opposed to spending the funds on long term care expenses, which would otherwise cause the entire sum to be expended without any possibility of use of the funds for non-necessary expenses. 

This case is an important victory for people with disabilities and their families since it does provide an alternative in the long term planning process. The area of special needs trust planning often requires updating and conforming to laws and regulations that may change. Therefore, anyone considering establishing a pooled trust or similar option should be sure to engage a qualified professional before merely signing up to fund a pooled trust.

 

Hyman G. Darling, Esq.

 

Photo credit: Microsoft  

Contesting an end of life marriage – dealing with a surprise beneficiary

Over the past several years, some estate litigation cases have included the marriage of a person who was close to death, whether an elder or a younger person with limited life expectancy. These cases are different than those such as Groucho Marx and Anna Nicole Smith, where one party was relatively young and one was relatively old, but the older person was not necessarily in an end of life situation. 

Sometimes these situations are basically marriages of convenience, and although “legally performed,” may be construed to be a sham. For instance, in recent history in New York, there were two cases that reached the courts in which the marriages were contested. In both cases, the marriages were declared to be invalid based on the incapacity of one of the parties.

Unfortunately, if you are a beneficiary or an heir in these situations, your primary recourse is to object to the will or file an action to set aside the marriage as being void based on incapacity. 

Sometimes a caregiver marries their “boss,” thus having superior rights to inherit than children, especially when a will and other testamentary changes are made, such as beneficiaries on life insurance policies and retirement plans. In several such cases, the children did not even know that their parent had married until after the funeral, and it is very difficult to obtain testimony about a person post-death. 

It is certainly easier to attend to an elder loved one’s affairs through a power of attorney and possibly a trust than have to litigate these situations, which costs time and significant expense and is also emotionally draining. In any case, it is important to know what your loved one owns for assets and attend to their affairs yourself to help assure that the plan proceeds without the interference of surprise, unwanted beneficiaries later in life or after death.

Hyman G. Darling, Esq.

Photo credit: Microsoft