Estate Planning Bits

Estate planning when you co-own a company: buy-sell agreements

As a business owner you may wonder what will happen to your business in the event that you are no longer able to run it because of death or disability. The fate of your business is an open question without a buy-sell agreement. You may hope that a partner, shareholder or one of your family members would run it in your absence, but there is uncertainty. The ambiguity surrounding the future of your business can be alleviated, and its continued success secured, through a buy-sell agreement.

Buy-sell agreements are estate planning tools used by members of a partnership and stockholders in closely-held corporations to assure that funds are provided that allow remaining owners to buy the deceased's portion of the business. The buy-sell agreement allows the deceased partner’s or shareholder’s family to retain the economic value of the corporate interest by providing the family the funds to enable them to meet their needs and pay estate administration costs. The agreement also provides the surviving owners a way to avoid interference from the deceased partner’s or shareholder’s family. The buy-sell agreement is usually triggered on a partner’s or shareholder’s death or incapacity. The agreement states who the business is to be sold to and for what cost. Often times this cost is based on a formula set forth in the buy sell agreement.

It is essential that the buyer in the buy-sell agreement have the capital to purchase the business when a death or incapacity of a partner or shareholder occurs. There are three methods that may be employed to ensure this:

1. Saved funds
2. Life insurance, and
3. Installment purchasing plans

The most common funding method is a life insurance policy. These are typically "first to die" policies which pay a death benefit upon death of the first business owner. This type of policy guarantees that funds are available for the buy-out regardless of which partner dies first.

A buy-sell agreement is an important estate planning device that all business owners should consider. Most importantly it prevents disruptions in the management of the business and rifts between the beneficiaries of the business owner’s estate from developing, but it may also be used to reduce estate taxes.

By: Brett A. Kaufman, Esquire

Choosing an Executor/Trustee for your estate

The selection of the executor who will be handling your estate is a very important decision. Often, a person merely suggests that his or her spouse should serve, with the oldest child being the backup. The spouse should not be named if he or she is unable to attend to the duties of the executor, meaning attending to financial and personal decisions, determining whether or not to maintain a residence or sell it, dealing with business issues such as rental properties and closely held business stock, as well as trying to treat family members fairly.

For the aforementioned same decisions, it is also not desirable to name a child simply because he or she is the eldest. The person selected should have the ability to get the job done, attend to all of the affairs of the estate equally and fairly, and also be in a position to select competent counsel, accountants, investment advisors, etc. when needed rather than making decisions on their own.

If a family is unable to decide on the appropriate fiduciary to settle the estate, then it may be best to appoint a family friend, professional advisor, or a bank or trust company to independently attend to all financial and personal matters. If a corporate fiduciary is named, there may be a fee involved, but these fees are not only tax-deductible, and they serve to ensure that the estate will be administered without any prejudice or bias by a family member. This is especially the case where there may be a family business that is either being sold or left to one or more of the children. Due to a potential for self-dealing, which creates an inherent conflict of interest, it is imperative that a person who is, or is not being benefited, not be in charge of all of the financial affairs.

Likewise, if there is a situation where one or more of the beneficiaries be given the right to purchase an asset from the estate at the fair market value or at a discount, this person should not be in a position to make the decision, since he or she will merely be negotiating with himself or herself. Again, there is the appearance of a conflict, which would be inappropriate.

Many clients also request that multiple executors be named, such as all three of their children. This means that all three children must agree unanimously, rather than utilizing a majority situation. All three must work together and facilitate the estate fairly and equally. If this is not a workable situation, then the children will likely be forced to contest the estate and also bring actions against each other for breach of fiduciary duty, or to have one or more of the children removed as the co-executor. This causes delays in estate settlement and significant expense between family members.

If parents feel that their children may in fact work together, then it is perfectly acceptable to name all of them, but parents should discuss this with their children prior to making the selection of the executors. In cases where the family does choose to name multiple family members to serve, they may express their intention to the attorney that the children should not fight, but it is more important for the parents to tell their children their feelings and direct them to work out all differences, or possibly utilize a mediator prior to bringing lawsuits. Sometimes it is more beneficial for the parents to warn their children that they will “come back to haunt them” if they don’t get along!

By: Hyman G. Darling, Esquire

Making tax-free gifts

In many estate plans one will typically see a gifting program being implemented. The IRS allows you to give up to $11,000 of property per person in a calendar year without any federal gift or estate tax implications. That means I could give $11,000 each to my three brothers, nephew, and neighbor for a total of $55,000 and not have any tax consequences occur. The receiving party would also have no tax consequences to worry about.

The problem, however, is that in order for this to work, each gift of $11,000 must be a “completed” gift. This means that in order to qualify for the $11,000 annual exclusion, the gift must be one of a present interest. The recipient must be entitled to the immediate use and enjoyment of the transferred property.

This kind of gifting is a good planning method in certain aspects, however, sometimes people do not want to give outright control to the ultimate beneficiary, and would prefer to have some kind of control over the property. The problem with this kind of “control” issue is that the gift is no longer deemed to be a present interest, which would qualify for the annual exclusion; instead the control causes the gift to occur at a point in the future, and it is not applicable for the exclusion.

In order to fix this issue, people started to make gifts to trusts in connection with the annual gift exclusion. In 1968, the Ninth Circuit Court of Appeals clarified that certain trusts could be established in order to qualify for the gift tax exclusion. This determined that such gifts made to a trust, in which a trust provision allowed the beneficiaries to withdraw amounts contributed to the trust within 30 days from the date the gift, were exempt from gift tax. Due to the withdrawal provision established in the trust, the “power” to withdraw, whether or not exercised, allowed the beneficiaries to have a “present” interest in the gifted property.

The Internal Revenue Service maintains that in order for this type of planning to qualify for the annual exclusion, the beneficiaries must also possess a sufficient beneficial interest in the Trust. Despite this position, the Tax Court ruled that as long as the beneficiaries have the ability to withdraw, and the Trustee has no right to refuse such withdrawal, then the exclusion will be allowed.

This is not to say that all withdrawal powers will be allowed. The IRS will continue to litigate abusive uses of the withdrawal power if it merely represents an overly broad withdrawal provision. But for now, the ability to make gifts to a trust and still qualify for the annual gift tax exclusion remains allowable as long as you meet the requirements set forth.

The pitfalls of children and caseworkers doing Medicaid planning for nursing home residents

Very often I receive calls from people desiring assistance relative to their parents. These folks may have already been transferred to a long-term care facility either directly from home or from a local hospital. It is at this time that the children want to protect their parents’ money.

However, all too often children inform me that after their parent entered a facility, they themselves went to the bank and withdrew funds which they are either currently holding or have already been deposited into their own account. The child’s first concern is invariably something such as “what do I do with the money?” or “I believe I am only allowed to keep $10,000.00.”

However, the $10,000.00 sum they have in their heads really has nothing to do with Medicaid planning. What they are thinking of is the maximum annual gift tax amount, which has been raised to $11,000 per donee per year, with a maximum lump sum lifetime amount of $1,000,000. This may be transferred without filing a gift tax return, but it does matter relative to Medicaid planning.

The problem lies in the child’s withdrawal and depositing of the funds in their own account. In fact, withdrawal of any funds without having them re-titled in the parent’s name is in fact a transfer and will disqualify the parent for long-term care expenses. The amount of the disqualification period is based on the average monthly cost of the nursing home amount, which changes annually, but is currently $232 a day in Massachusetts.

Once I determine all the facts, I can provide the family with accurate advice as to exactly how much of the gift should be kept and how much should be returned to the parent. Once all of the information is received, such as the actual cost of the nursing home care, income, current expenses, medical insurance and prescription drugs, a calculation may be made which will codify the amount that may be gifted without causing the Medicaid recipient to be disqualified for a longer period than otherwise would be necessary.

Very often, there may be a caseworker who is assigned from either the hospital or long-term care facility who offers to provide the family with assistance for long-term care planning. However, most of these individuals are engaged by the facility, and therefore do not have the best interests of the recipient at heart. The caseworker’s job is to ensure that the application is correctly submitted and approval is obtained from Medicaid, so that the facility will not lose any months of payment.

In-house caseworkers are not qualified to provide assistance in the process of planning, and very frequently, do not give their “client” the best information for preservation of assets. Sometimes it is best to pay for a short period of time, often times it may require the purchase of an immediate annuity, and at other times, it is important to consider requesting a hearing where the community spouse may be entitled to keep all or a significant portion of the total spousal assets.

Since the institutionalized spouse is allowed to have only $2,000.00, it is important to review all of the available options before making a final decision as to the best plan available for the family.

By: Hyman G. Darling, Esquire

New Medicare law pays for nursing home care required to maintain the patient’s quality of life

Hospital patients are often transferred to nursing homes for their recovery and rehabilitation. A recent change in the Medicare rules will impact those who pay for this nursing home care. Under the previous rules, in some cases, Medicare paid for the first 20 days of care in a skilled nursing facility. After 20 days, the cost would be split between the Medicare patient and Medicare itself. This would continue for up to 80 days, providing that the resident needed rehabilitative services or therapies.

Under the previous rules, Medicare would pay only if the resident was showing signs of progress. Once a healing plateau was reached, Medicare ceased making payments. Many times an appeal was necessary to obtain Medicare payments, as the rules and restrictions were such that once the person reached this certain level and was not improving, Medicare would “cut them off.”

Under the new rules, Medicare will now pay as described above if the resident continues to improve and continues to show some progress, or if the care is required to maintain the patient’s quality of life. This significant change impacts anyone receiving Medicare benefits who was in a hospital for at least three days and then transferred to a skilled nursing facility for healing or recuperation. Please note that Medicare continues to pay only if the resident was institutionalized in a hospital for three continuous days and then discharged directly to a long-term care facility that accepts Medicare payments.

In the event that a person is institutionalized and requires long-term care, Medicare should always be the desired payer initially, and in the event that a denial is obtained, an appeal should be made to attempt to have a portion of the balance of the 80 days paid by the government through Medicare.

By: Hyman G. Darling, Esquire

How do I choose a trustee?

Many times clients ask, “Who should I select to serve as my Trustee? Should I name a family member, a local that has a trust department or a professional financial advisor?” By nature a trust is a financial instrument that is created to last many years for the benefit of certain people. Due to a trust’s longevity it is very hard to predict how the laws or investment strategies will change over the duration. Therefore, it is to the advantage of the trust maker to select a trustee who will provide the quality supervision you intend when establishing the documents.

In some cases the trust maker will serve as the trustee to his or her own trust. If you have a revocable trust, and serve as the trustee, your service ends upon your own incapacity or death. If you create an irrevocable trust then you must usually name someone to serve as a trustee. Therefore, it is reasonable to conclude that no matter which trust you form, at some point in time, a person other than yourself will have to serve as trustee.

A trustee has several responsibilities. The main responsibility is to interpret and carry out the trust maker’s instructions. Such interpretation should be done impartially and without any conflict of interest. Some other responsibilities include:

· Addressing the needs of the beneficiaries
· Holding assets of the trust in a secure manner
· Preparing accountings for the trust
· Maintaining detailed records
· Complying with tax laws/filing returns

Since there is a great deal of responsibility and commitment that goes along with a trust, you should select a trustee that you have confidence will provide the level of service needed in order for your trust to function properly. Sometimes a single individual might not have the time commitment to properly address all the needs of your trust. A local bank may be subject to certain state regulations which do not offer the best environment for investing or reporting the trust assets, or worse still, the local bank may go through several mergers. A professional trustee in another state may have more favorable regulations, but may not be in touch with your wishes due to a lack of local connection.

Individuals, local banks, and professional trustees all have good and bad qualities when it comes to trust administration. Your ultimate trustee determination relies most upon your confidence that the person or entity chosen will best comply with your wishes.

What defines a qualified employee retirement plan?

A qualified employer sponsored retirement plan is governed by the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA,) and must comply with very strict guidelines. If an employer does meet all the requirements of plan qualification, the employer is entitled to a “current” income tax deduction for the contributions they make to the plan on behalf of the participants, and the employee is able to defer income taxes on all plan contributions and earnings. Thus, the employee is allowed to store money away (defer it) without having to pay any taxes UNTIL they receive distributions from the qualified plan.

The advantage of this type of plan is that employers receive the deductions that they want, and employees receive the tax-deferred contributions to retirement accounts that they want. Employees also receive ERISA protection in that deferred contributions are free from claims of creditors and protected from bankruptcy proceedings. This is one of a few loopholes in the new, more stringent bankruptcy laws.

Why is it so important to die with a will?

The process of probate is really the effective transfer of property upon death from one person to various family, friends, and charities. There are two means by which a person may leave assets to pass through probate.

Intestate

The first method to pass assets through probate is called intestate. This is when a person dies without a will. Without a written will, each state defines the beneficiaries of the estate. For instance, in Massachusetts, a surviving spouse is entitled to 50% of the assets while the children are entitled to the other 50%. In situations where there may not be any living children, then the surviving spouse may receive a larger share, but the other share will pass to the decedent’s next of kin, which could be parents, brothers, sisters, nieces, nephews, etc.

In addition, when one dies intestate, the court requires that the person who will serve as administrator file a petition. This is often when conflict begins since there may be more than one individual who wishes to serve as the fiduciary of the estate. When objections are made or when there are competing petitions for a fiduciary, this requires a hearing before the court. This increases legal fees, levels of emotion, and often “airs the dirty laundry” when one person feels aggrieved or that the distribution is unfair.

Testate

The preferred alternative is when one dies testate, when he or she has executed a valid will in writing. In this case, a person has designated to serve as executor under the will rather than leaving it to chance or decision by a judge.

In addition, the executor is given the power to serve without filing a surety bond, which is often expensive and is based on the value of the assets in the estate. For every year the estate is opened, the bond premium must be paid, and it will be not be cancelled until the executor files an account with the court and the account is allowed. This normally takes at least one-year, since in most cases, creditors have a right to file claims against the estate for one year from date of death. Therefore, since the estate almost certainly goes into the second year of probate, the bond premium to be paid for at least two years. This entire process is eliminated when an executor is given the authority within a will to act without the necessity of having to buy a bond. The executor would already be bonded, which means that his word is his bond that he or she will faithfully perform all of the duties as required under the law.

More importantly, within a will, a decedent is entitled to list those to whom he or she wishes to leave assets, and in what proportions. As a precaution against a beneficiary or another contesting a will, a clause may be inserted that specifies that any contest by an individual invalidates his or her right to inherit, whether or not he or she is named in the will as a beneficiary. Often times, a “token” sum is left to a beneficiary with the understanding that he or she will not contest the will. If there is a contest, then this amount is forfeited and left to other individuals or charities within the will.

A will is relatively straightforward, and is not terribly difficult to prepare. Once a will is written, changes may be made by a simple document called a codicil. However, in the event that there are several changes, it may be easier and preferable to draft a complete revision. One benefit to drafting a new will is that it revokes all prior wills. It also has the benefit that a person listed or excluded in a prior will cannot see that his or her share has increased or decreased.

By: Hyman G. Darling, Esquire

Beware: You may owe MA estate tax although exempt from Federal estate tax

The Federal Tax Act of 2001 established estate tax exemptions of $1,500,000 in 2005, $2,000,000 in 2006 and upwards to $3,500,000 in 2009. There is currently no Federal estate tax for 2010, and it resorts back to $1,000,000 in 2011. The likelihood of the final repeal of the tax for years after 2010 is only speculative. There will be several Congressional elections and one Presidential election before that time.

The magnitude of this exemption may make you initially presume that since you are not wealthy your estate will not be subject to the estate tax, and therefore estate planning is unnecessary, but this is often a false presumption. Adding up the value of your assets can be an eye opening experience. By the time that you account for your home, investments, retirement savings, and life insurance policies, you may find yourself above the taxable amount.

Furthermore, the exemption amount for estate taxes due to Massachusetts is much lower than the federal amount. In 2005, MA imposed a tax on all estates over $950,000, and this amount increases to $1,000,000 in 2006. This amount will remain at $1,000,000, unlike the gradual increases for the Federal estate tax. Therefore, it is now possible to owe MA estate tax and not owe any Federal estate tax.

It is easy for an estate to exceed the MA State exemption and very common for one to meet the federal exemption once all of one’s assets are taken into account. The impact of these estate taxes can be minimized by meeting with an experienced estate planning attorney.

By: Brett A. Kaufman, Esquire