Estate Planning Bits

Equal is not always fair when it comes to your kids & your estate plan

During my initial consultation with clients, we talk about providing for their children upon death. Many clients want to divide their assets equally among their children. In theory, this tends to make a lot of sense. However, in reality, treating your children equally is not always fair.

Oftentimes, issues such as how much the parents contributed to the education of one child, or whether or not a child took on the role of caregiver, thereby sacrificing time and salary, tend to be overlooked. Parents tend to wear rose-colored glasses when it comes to envisioning that their children will be able to work out any issues that may develop. In the event that these sensitive issues rise to legal battles, they can be divisive and devastating and to your family. Because of this, ongoing communication and careful planning can alleviate many of problems before they arise.

One planning solution that can add liquidity and flexibility to an estate is life insurance. This added liquidity can provide parents with the ability to distribute assets both creatively and practically. A “second-to-die” policy that pays off after both you and your spouse die may be a fairly inexpensive and optimal solution. Even better, a properly designed Irrevocable Life Insurance Trust would eliminate the life insurance from being estate taxable.

By: Todd C. Ratner, Esq.

Steve “Air” McNair truly erred – how proper estate planning would have saved his family both money and grief now

As a quarterback in the National Football League, Steve McNair reportedly earned in excess of $75 million dollars over his career. Notwithstanding McNair’s vast wealth and blended family, (as it has been reported that he had two children born out of wedlock,) McNair did not even have a basic will. Without a will in place, McNair died “intestate,” an therefore, state laws will determine who inherits his estate upon his death. As such, the following preventable issues will now have to be addressed:

Laws of Intestacy: According to Tennessee intestacy laws, McNair’s wife is only entitled to only one-third of the estate, and his children will be entitled to the remaining two-thirds. McNair may have intended that a greater percentage be provided to his spouse. As an aside, under the Commonwealth of Massachusetts intestacy laws, both McNair’s spouse and the children would be entitled to fifty percent of the estate.

Estate Taxes: McNair did not plan to shelter any portion of his estate from federal or state estate taxes. Consequently, the assets of his estate will ultimately be subject to both state and federal estate taxes, which will reduce the eventual distribution to his family. McNair failed to use the unlimited marital exemption and to yield the benefits of a Credit Shelter Trust.

Conservatorship: Since all of McNair’s children are under the age of 18, each mother will have to petition the court to be appointed legal conservator of their child’s inheritance.

No staggered distribution: When each child reaches the age of 18, their entire inheritance will be provided to them outright. It is often preferable to stagger the children’s distribution ages to a later point in time to ensure that they have the requisite financial wherewithal to handle such a large sum of money.

Probate: It appears that McNair owned property in Mississippi. If so, McNair’s family may have to probate his estate in both Tennessee and Mississippi, resulting in additional legal fees, costs and publicity.

In the event that Steve McNair had created an estate plan, he may have left more to his spouse, protected his children’s inheritance well beyond the age of 18, avoided the public scrutiny of his affairs, and saved his loved ones momentous money in legal fees, estate taxes and other costs.

By: Todd C. Ratner, Esq.

10 common estate planning pitfalls

1. Not having a Will: Personal wishes, whether written or oral, will most likely not be followed in the absence of a will. Without a plan, your assets will pass to your heirs according to your state’s laws of intestacy.


2. Not funding your revocable living trust: A property drafted trust will prevent putting your loved ones through the expensive, lengthy and emotionally draining court probate process. 


3. Failing to understand the impact of life insurance proceeds: Many people do not realize that life insurance proceeds are normally included in the estate of the deceased, which can result in approximately 50% of the proceeds going to the IRS instead of your intended beneficiaries. Depending upon the situation, an Irrevocable Life Insurance Trust may be appropriate.


4. Failing to adequately plan for children with special needs: A child with special needs risks being disqualified from receiving SSI benefits and may have to use their inheritance to pay for their care. Depending upon the situation, a Special Needs Trust may be appropriate.


5. Not properly planning for incapacity: People are living longer, and therefore the risk of lacking capacity during your lifetime is increasing. Only with proper estate planning can you be sure that your health and financial affairs will be taken care of in the event of your inability to take care of them yourself.


6. Business planning: With a properly executed plan, you can choose who will own and control your business upon your death, which increases the likelihood of the business continuing as a viable operation.


7. Not preparing for minor children: If you have minor children, you should have a will nominating personal guardians for the children, in the event that both you and your spouse should die prior the children reaching the age of 18. Without a plan, the court will decide without your input where the kids will live and who will make important decisions about their money, education and life.


8. Improper beneficiary designations: Not updating the beneficiary designations on bank accounts, life insurance, IRAs and other assets can lead to unintended beneficiaries.


9. Not periodically updating an estate plan: Generally, people do not like to discuss dying, and therefore people often want to simply execute their estate plan documents and be done with it. However, economic, family, and health changes require revisions to your estate plan.


10. Doing it yourself: Even if a self-prepared will or trust is legally enforceable, estate planning is a complex legal process requiring knowledge in several areas of the law, including estate law, tax law and property law as starters.

by: Todd C. Ratner, Esq.

Pet trusts coming to Connecticut

When estate planning for pets was first introduced, there were no statutes or other legal standards in place to rely on when crafting a plan to provide ongoing care for pets after the death of the owner. Fortunately, pet trusts have become more widely recognized and desired, and many states are finally recognizing the validity of them. As of October 1, 2009, pet trusts will be valid in Connecticut.

The new Connecticut law allows pet owners to set up enforceable trusts to provide ongoing care for their animals. Such a trust would continue until the last surviving animal passes away. Under the statute, a pet owner must name a “trust protector,” who will act on behalf of the animals and ensure they receive proper care.

When planning for a pet, there are many concerns to be addressed. For example, it is important to determine who will serve as the pet’s caretaker, and if establishing a trust, who will act as the trust protector. It is also important to remember that a pet will pass through the owner’s estate as personal property; therefore, the owner’s Last Will and Testament may need to be updated. In addition, the plan should address the final disposition of the pet, including guidelines for when euthanasia would be appropriate.

If you’re interested in learning how to ensure that your pets are properly cared for upon your death or incapacity, it is important to consult a pet estate planning attorney who understands how to set up these complex trusts.

by: Gina M. Barry, Esq.

10 perils of joint tenancy

Joint tenancy is a form of co-ownership. Often, owning an asset such as a home or bank account under a joint tenancy relationship is advantageous. For example, when one of the co-owners dies, joint ownership typically provides the surviving co-owner instant access to the jointly held property, eliminating the need for probate. However, joint tenancy can have its perils.

1. Control Issues: By providing someone with co-ownership, you give them control of your asset. If you add another person as co-owner of your home, you cannot sell or mortgage the home unless that person agrees.


2. Creditor Issues: If creditors seek out your co-owner for outstanding debt owed, the creditors may be able to obtain part of your home or bank account that is held in joint tenancy.


3. Relationship Issues: If you and your co-owner experience a falling out, the co-owner may be able to take all of the money out of the bank account without your approval.


4. Substitute for Will Issues: Many times, parents of several children will place one child’s name on an account and assume that that child will divide assets equally among all siblings. However, this method provides no stipulations over control of the money. The surviving co-owner can do with it what he pleases, with no legal obligation.


5. Uncertainty Issues: Unplanned ownership of property often leads to unwanted results, especially for people unable to manage assets.


6. Tax Issues: Careful planning to eliminate or reduce estate taxes can be completely thwarted by an inadvertently created joint tenancy that passes property outright to a surviving joint owner.


7. Long-term Care Issues: Careful planning to reduce long-term care financing can also be thwarted by an inadvertently created joint tenancy that passes property outright to a surviving joint owner.


8. Marriage Issues: Individual property may become marital property once it is transferred into a joint tenancy.


9. Incompetency Issues: In the event that a co-owner becomes incompetent, part of the property may go into a conservatorship, making it burdensome if the other joint tenant wants to sell some or all of the jointly held property.


10. Distribution Issues: Joint tenancies deprive you of the flexibility of a will or trust in which you can stagger the distribution ages of the beneficiaries. In a joint tenancy arrangement, the joint tenant receives the asset all at once.

By: Todd C. Ratner, Esq.

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.

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.

Ways to make a bequest

There are generally eight accepted ways to make a bequest in your will or trust.

1. Specific Bequest: This is a gift of a specific item or cash amount to a specific beneficiary. For example, “I give my wooden baseball bat to my son, Jake.” If that specific bequest has been disposed of before death, the bequest fails and no claim can be make to any other property.
2. General Bequest: This is usually a gift of a stated sum of money payable out of the general assets of the estate. It will not fail, even if there is not sufficient cash to meet the bequest – even if other estate assets need to be sold. For example, “I give $30,000 to my daughter, Hannah.”
3. Contingent Bequest: This is a bequest made on condition that a certain event must occur before distribution to the beneficiary. For example, “I give $30,000 to my son Mark, provided that he enrolls in college before the age of 21.”
4. Residuary Bequest: This is a gift of all the “rest, residue and remainder” of your estate after all other bequests, debts and taxes have been paid. For example, let’s say that your estate is worth $600,000, and you intend to give a child $30,000 by specific bequest and the residuary estate to your spouse. If the debts, taxes and expenses are $100,000, there would only be $470,000 left for the surviving spouse. Most people prefer to divide their estates according to percentages of the residue rather than specifying dollar amounts to ensure that your beneficiaries receive the proportions you desire.
   
   The additional items below are optional considerations when the bequest is made to charity.
5. Unrestricted Bequest: This is a gift for our general purposes, to be used at the discretion of a governing body. Charitable organizations prefer this type of bequest because it allows the organization to determine the most pressing need for the funds at the time of receipt.
6. Restricted Bequest: This type of gift allows you to specify how the funds are to be used. It is advisable to consult with the charitable organization prior to making the bequest to confirm that your intent can be fulfilled.
7. Honorary or Memorial Bequest: This is a gift given “in honor” or “in memory of” someone.
8. Endowed Bequest: This bequest allows you to restrict the principal of your gift, requiring the charitable organization to hold the funds permanently and use only a small percentage or the income they generate. Creating an endowment in this manner means that your gift can continue giving indefinitely.

by: Todd C. Ratner, Esq.

Alternatives to estate planning Trusts

When a person passes away, assets in their name alone will pass through probate. Even if the person has a Will, the Will must be probated in order to provide orderly distribution of the assets as intended. However, some people go to great pains to avoid probate.

One option is to establish a living Trust. Any assets in the Trust at the time of death are not probated, and thus also avoid the court proceeding that allows for the estate to be settled without probate publicity and expense, while also normally providing for a more expeditious settlement. However, this does require establishing a separate document that must be signed, and assets must be transferred to the Trust prior to incapacity or death. Otherwise, the assets may have to pass through probate upon death in order to then flow into the Trust through the Will.

An alternative would be to make the asset joint, which provides for survivorship. If either of the joint owners dies, then his or her share passes to the other joint tenant. However, in the event that one person becomes involved in a divorce, gets sued, has credit problems, etc., then that share of the assets may be countable and accessible by that person’s creditor. This is far from the intended result, but it will be the situation if the person does not remove their name from the account prior to the problem occurring.  Also, in the event that the person who established the joint account dies, then the entire account is owned by the surviving joint owner, which may not be the intended result.

Another alternative would be to add a beneficiary to certain assets. Certainly, life insurance policies, IRAs, 401(k) Plans, and other similar retirement assets may list a beneficiary. Upon the death of the owner, the assets pass outright to the beneficiary without the need for probate, and most entities will also allow for multiple beneficiaries, as well as contingent beneficiaries. These forms should be updated from time to time to be sure that the proper names and allocations are listed, as family issues and relationships change.

It is also an option to name a beneficiary on stock accounts and bank accounts. The stock accounts can be worded transfer on death or TOD, while the bank accounts may be worded as payable on death or POD. Upon the death of the owner, the beneficiary merely needs to verify the death of the owner with a certified death certificate, and the funds will be transferred directly to their name. This also occurs without the need for probate and provides the owner with the security of knowing that the assets will not be available to the beneficiary until death. There are pros and cons of each of the above techniques, and it is important to be sure that the correct decision is made for each particular asset.

By: Hyman G. Darling, Esq.