Estate Planning Bits

Preserving family harmony while caring for parents

Planning for and taking care of parents is a tricky business. Elder care often puts the caretaker child into a stressful, so-called sandwich generation status, so it is important to be sure that all topics are covered openly among family members in an attempt to prevent any disharmony in the future.

When one child, who is geographically closer to the parents, is attending to most of the care on a daily basis, while other children or family members are living further away, there is often a significant burden on the caretaker. Such caretakers often have the obligation of caring for their parents socially, medically and financially. In addition to these obligations, there is also the responsibility of informing and dealing with remote family members.

It is at this time that the caretaker child should make sure that all necessary documents, medical management and a long-term plan are in order. Sometimes it is beneficial to engage the services of a geriatric care manager independently of all other services to determine and establish a cohesive plan and backup plan in case things get worse or actually improve.

Prior to the elder’s incapacity, it is important to make sure that all documents are in order, not merely in existence, but up to date. This includes assuring that the DNR order, Health Proxy and Power of Attorney are prepared and will be effective when needed, for instance, in the event of a house transfer, obtaining a reverse mortgage, signing documents with a physician, etc.

It is also important to have complete understanding of all the parent’s ongoing expenses to be sure that their needs are being met with sufficient assets and income. If not, then perhaps an attorney with a specialty in insolvency or bankruptcy should be consulted to determine whether assets may be protected by filing a Chapter 7 or Chapter 13 petition with the Bankruptcy Court.

Many times, an individual is merely paying interest on debt such as a home equity loan and making the minimum monthly payment on credit cards, which will never allow the cards to be paid off. If they otherwise qualify, this debt could be discharged to provide for additional disposable income, so the parent may live more comfortably in their home.

Naturally, the forms of ownership of the house, second home, timeshare and all other assets should be reviewed to determine whether the ownership is in the correct name for probate, tax and asset protection purposes if possible.

While it is difficult enough to take care of one’s own matters, it is a greater burden to take on someone else’s, especially if it is your parent’s. Extreme care and caution should be taken to ensure that the plan is workable for all parties, and that lines of communication are open within the family so that all parties are aware and informed of the plan and proposed options for the future.

Having the knowledge and ability to attend to finances is important, but so is the need to be sensitive to interfamily issues so they don’t become problems. This delicate situation requires all parties to be sensitive to the best interests of the parent while concurrently preserving family harmony. It is always best to sort things out within the family rather than having the court resolve the conflicts later.

By: Hyman G. Darling, Esq.

Beneficiary Designations – how your “gift” may have significant tax implications

It is often the case that there is not sufficient thought and time devoted to reviewing the tax issues as they apply to beneficiary designations. Most life insurance is non-taxable, and the receipt of it by the beneficiary is not income taxable, but the death benefit will be includable in the estate for estate tax purposes.

Following are some things to think about.

It is possible that although you don’t currently have a taxable estate (exemption of $2,000,000 in 2008 and $3,500,000 in 2009), your estate may cross that threshold when you accept the death benefit of employer owned insurance, group insurance or accidental death coverage.

In many cases, a term insurance policy should not be owned by the insured because this will merely bring the policy into the estate for estate tax purposes. Since you won’t be taking the money with you upon death, it’s often preferable to have the policy owned by and payable to another, be it family, friends, any revocable trusts, etc.

Relative to IRAs, annuities, and other qualified retirement plans, it is very important to consider the beneficiary of these policies to be sure that the appropriate person, people, or charities are named on the forms. A married individual may receive qualified retirement plan benefits tax free by rolling the funds over into their own IRA.

There is no estate tax or income tax due when one dies and leaves all assets to their living spouse. However, there will be a significant income tax and potential estate tax upon the death of the surviving spouse.

Until recently, one significant drawback was that non-spouse beneficiaries were not eligible for tax deferred transfers to their own IRA. A non-spouse may now have certain options available so that they do not have to pay taxes in a lump sum upon the death of the contributor of the funds. The non-spouse beneficiary may now take these funds over their lifetime, take them in a lump sum distribution, or have them rolled over into a special type of an IRA called a decedent IRA, where they receive the funds over their lifetime. However, these distributions have to be made to what is known as Trustee to Trustee for the benefit of the beneficiary. A person may not elect to merely take the funds on their own, deposit them in an IRA for themselves and claim no income tax status.

A beneficiary may also wish to take what is known as a Stretch IRA. In this case, the beneficiary does not necessarily have to pay all of the income taxes in a lump sum, as he or she spreads the distribution out over their lifetime. By doing so, they are not only deferring their taxes, but also protecting these assets in the event that they are sued, because the assets won’t be available as a lump sum.

In addition, a lump sum receipt of these funds may push the recipient into a significantly higher income tax bracket, since the receipt of the IRA would be at ordinary income tax rates. When added to the recipient’s own income, these funds may push the individual into a significantly higher income tax bracket. By taking the funds as an annuity over their lifetime, the recipient allows the funds to continue to build tax deferred.

Later in life, these funds may be construed as additional retirement benefits, which may permit the beneficiary to retire earlier, since they have a steady stream of income guaranteed for their lifetime.

Sometimes, even when a person is married, it makes sense to consider leaving retirement funds to their children instead of their spouse. If the kids are minors, the funds may be left in a conduit trust that allows receipt of the funds basically tax free, but requires the Trustee to make minimum distributions to the children. However, if the children are young, the distribution, based on their life expectancy, may be relatively small enough that the income taxes they will pay are inconsequential or nominal.

In these types of situations, it is necessary that the spouse sign off on the beneficiary form. This is simply a requirement of Federal Law. A person may not exclude their spouse from being their beneficiary unless the spouse signs a written, notarized waiver. If they are willing to accept this waiver, additional planning may be considered that utilizes a retirement plan for the benefit of the children. However, one must take into consideration income taxes, estate taxes and the need for one spouse to survive on only his or her income upon the death of other spouse.

It is always important to obtain qualified legal and tax advice prior to making any beneficiary designations.

By: Hyman G. Darling, Esq.

Sharing critical estate planning and financial information with your children, and how to do this if you want to keep the details private

A few years ago I presented an Estate Planning Program to employees of the Wall Street Journal. Most of these people were rapidly approaching retirement, and by now, they probably are retired.

They were all very interested in planning for their future, but there was one special attendee who was a writer for the Journal. A couple weeks after the presentation, I read his article in the Wall Street Journal about the importance of planning to save taxes, avoid probate, protect assets for long-term care situations, and generally to do estate planning for the right reason, that is to ensure that funds and assets will pass to the appropriate parties at the appropriate times. The article went on to explain the need for all of the important documents, planning and obtaining good counsel for the plan. However, toward the end of the article, the author talked about the importance of discussing the plan with his parents, but since he could not discuss this issue with them personally, he merely stated that he hoped they were reading the article.

My recommendation to many of my clients is to not discuss all of the details of their plan with their children, but to make sure that the kids have a complete and accurate picture of their assets all in one place. This includes copies of bank statements, financial records, life insurance policies, tax returns, etc.

Many people don’t want to make this information available to their children now, but they should at least tell their kids where their important papers are and who is in charge, such as their financial advisor, insurance agent, lawyer, accountant, banker, trust officer, etc. If they don’t do this, their kids will spend a significant portion of their time when their parents either become incapacitated or die, searching for all of the information. Your children will also need access passwords to get information that may be stored on your computer.

In your case, you may have an open family relationship and be willing to discuss planning issues with your children. This includes not only end of life decisions such as life support, organ donation and funeral arrangements, but also discussion about who may be in charge of making financial, medical, and other decisions in the event of your incapacity or death. Although this may lead to the opening of Pandora’s Box and causing family disharmony when children who think they should be in charge find out that they are not, at least all parties within the family will be educated about what you want and what plan has been prepared.

If you are not interested in sharing all of this private information, you may provide a list of items and where the documents are kept, where safe deposit boxes are and located, where the keys are maintained, where passports, veteran’s administration documentation, medical insurance cards, and other important information is maintained. At least then, if there is an emergency, someone will have access to this information, whether it be your child, a trusted advisor, your lawyer or another family member.

Frequently, after a plan is completed in our office, the parents wish a full disclosure to be made (possibly not about all assets,) but about the plan itself, and they want to share the plan with their children. We may consider having an open family discussion with some children being present in the office and some available by conference call or video conferencing in order to allow the entire family to be informed as to the client’s intentions. This serves the purpose of educating all parties so that they will know the intent, goals and objectives of their parents, while at the same time “clearing the air” of any misinformation that may have been implied or presented to any party in the past. If a child asks a question that a parent is not willing to answer, the issue is delicately averted if that is my client’s desired result.

By: Hyman G. Darling, Esq.

Your beneficiary designations – are they up to date?

Often, the assets that an individual plans to pass through their Will are carried out as desired. However, it is important to remember that only assets in a person’s name alone pass through probate. Assets that are joint or payable by a beneficiary designation, such as life insurance or retirement benefits, do not pass through probate, but rather, pass outright to the beneficiary.

Therefore, it is very important to consider and properly designate the names and back-up beneficiaries on retirement plans and life insurance, which are often times greater than other assets that may pass through a Will.

If you are single, you should check your beneficiary designation to ensure that your life insurance and retirement benefits pass to the desired beneficiary and in the correct proportion. For example, if you’re single without children, you may want your siblings or nieces and nephews to be your beneficiaries instead of your parents. Your parents could be elderly and institutionalized, which would mean that funds left outright to them will merely be used for long-term care expenses.

If you are single with a minor child, and if your child is the beneficiary of those benefits, he/she will receive them at age 18. In the meantime, a guardian may have to be appointed by the Probate Court to hold those funds for the benefit of your child, and the guardian may in fact be your divorced, former spouse.

If you are married, you would normally name your spouse to be the beneficiary of life insurance proceeds, but there should also be a secondary beneficiary in case you both die together in a common disaster. In this case, it may be appropriate to designate that the beneficiary is a trust for the benefit of your children, rather than leaving the funds outright to them. If there is no beneficiary designation made, then the balance of the funds that are paid by the insurance company will be payable to your estate, and thus have to pass through the probate process, making the distribution more costly, time consuming and public.

Regardless of your life situation, your beneficiary and back up beneficiary designations should be reviewed often to ensure that they are properly completed. For instance, you may have made your spouse the beneficiary designation of a life insurance policy, but what happens if you are now separated or divorced? Upon your death, the beneficiary designation is payable under a contractual relationship, regardless of what your Will says, and therefore, the proceeds will be payable to your ex-spouse, which is probably not what you want.

Many beneficiary designation forms also permit a portion to be paid to multiple beneficiaries rather than having all funds left to one particular beneficiary. Whether a specific beneficiary receives a dollar amount or a percentage of the proceeds, the form should be reviewed often and kept with all your other important papers, such as the policy itself, your Will, Health Care Proxy, Power of Attorney, and Trust, if applicable. As much care should be taken to complete these important forms all the rest of your legal documents.

By: Hyman G. Darling, Esq.