Estate Planning Bits

Post-death tax implications and options

When a person dies, there are certain decisions and elections that have to be made that will have a far-reaching effect on the beneficiaries, whether or not there is a surviving spouse.

The first decision is whether the surviving spouse should elect to receive a distribution from a retirement plan in a lump sum, elect to have it payable over his or her lifetime, or allow it to be kept “as is” and decide that it should be taken within five years from date of death.

Naturally, many issues need to be reviewed before a decision is made. They include the health, wealth, and needs of the surviving beneficiary, and the tax consequences of either accepting or postponing the receipt of the funds for tax purposes. Each one of these considerations could take significant time, with pages of options and considerations, but suffice it to say that significant attention must be given to these issues before a final decision is made.

Another important consideration is whether the beneficiary should in fact accept the assets that are being left to them. There is a technique called a disclaimer, which allows a person to renunciate or basically refuse to accept an asset, a part of the asset, or specific assets that they may inherit from a person.

The net effect of a disclaimer is that by not accepting them, the assets will pass to those persons who would have inherited the property had that primary beneficiary not survived. If that person who disclaims a gift has significant assets and does not need any more, they could merely disclaim them, and then their children can receive them. In this case, there is no gift made, as the person who is left the assets refuses them, and therefore, the gift passes essentially from the decedent to the younger generation.

Naturally, there are many specific requirements of a disclaimer, but a few key ones include: the person who is disclaiming may not be insolvent, must exercise a disclaimer within nine months of the date that the interest in the assets vest in them, and if a person is not competent, then either their agent under their power of attorney or a conservator must sign for them, if permitted.

Another important consideration is whether to select a fiscal or calendar year for the estate. The estate need not pick the same year as the taxpayer, which is normally December 31st. By doing so, income may be spread out for a longer period of time and taxed at a lower rate. Also, the taxes may be deferred for the year, so that the funds in the estate may be maintained and will be invested and reinvested during the administration of the estate. Of course, there may be issues relative to state income taxes that should be attended to before making decisions relative to the federal tax issues.

Although many individuals feel they can attend to an estate of a person who dies without legal assistance, there are significant practical and potential tax traps that may not be known to a non-professional. Therefore, it is always best to obtain professional advice even in the relatively “simple estates” before proceeding with any final decisions regarding settlement of estates, especially those with potential tax issues.

by: Hyman G. Darling, Esq.

Gift tax annual exclusion to remain unchanged in 2010

The Internal Revenue Service recently announced that the 2010 gift tax annual exclusion will remain unchanged at $13,000. The annual amount of the exclusion is based upon the Consumer Price Index, and the exclusion has increased gradually from $10,000 in 1997 to $13,000 in both 2009 and 2010.

As such, so long as your gifts to an individual are less than $13,000 in 2010, there is no gift tax return required to be filed and no gift taxes are due. A married couple can gift $26,000 to each individual, as each spouse receives an exclusion without creating a gift tax liability.

This is a great opportunity for a family to transfer wealth to their respective children or grandchildren. For example, Frank and Hilary are a married couple in their 70’s with two children and four grandchildren. A gift in the amount of $13,000 from each Frank and Hilary to each child and grandchild could remove $104,000 a year from their estate. In the event that Frank and Hilary continued this gifting plan for 10 years, they could remove over $1,000,000 from their taxable estate. Provided that the current federal tax rate is 45%, this could potentially save Frank and Hilary approximately $450,000 in estate taxes in the event that the survivor (Frank or Hilary) dies with assets in excess of the federal estate tax threshold.

In addition, there is a $1,000,000 lifetime exemption from the gift tax. This means that even if a taxpayer gives more than $13,000 to a single recipient in a given year, the gift amount above $13,000 will not be subject to tax unless the taxpayer has already given a total of $1,000,000 in taxable gifts in their lifetime.


By: Todd C. Ratner, Esq.

Understanding the purpose and benefits of Pooled Trusts

There has been much discussion relative to Pooled Trusts, and it is important to understand what they are and when they may be utilized. A Pooled Trust is nothing more than a trust that is established by a non-profit organization, which also administers it.

Each individual who contributes money to a Pooled Trust will have their own segregated account, similar to how a retirement plan may be established by an employer, where all the money is pooled together, but each person has their own separate fund. Each particular separate trust fund is administered with the needs of the beneficiary paramount to the use of the assets and income.

Normally, a person will contribute funds to a Pooled Trust when it is not otherwise economic to establish a self-settled trust, and a person has received funds from either a law suit, retroactive Social Security benefits, lottery winnings, or an inheritance. The major benefit of the Pooled Trust is that one doesn’t have to spend a significant amount of legal fees and accountant fees in establishing this trust, as the individual is merely joining in the trust with all other members. The master trust is established by the entity itself, and each individual signs a joinder agreement when they make their contribution to it.

Most of the time, when a person contributes funds to the Pooled Trust, they are looking to preserve their eligibility for government benefits including Medicaid, housing assistance subsidies, food stamps, fuel assistance, etc. There are also Pooled Trusts that will accept funds from a third party, such as a parent, who may not have an appropriate trustee to serve to hold funds and administer them for their disabled child.

The significant difference in the trust is that the self-settled fund, or the one that is funded by the beneficiary, requires a payback of some of the funds to the State for payments made during that beneficiary’s lifetime. The so-called third-party trust, which is funded by the parent or grandparent, need not have any payback provisions, but rather, these funds may be distributed to other family members, friends, or charities upon the death of the disabled beneficiary.

However, most Pooled Trusts are utilized for people with disabilities who receive funds from a personal injury settlement, inheritance, etc. and are receiving government benefits. With the receipt of these funds, the individual will be disqualified from maintaining their benefits, and in the event that person were to make transfers of gifts to others, there would be a restrictive time period when they would not be able to maintain eligibility. By transferring these assets into the Pooled Trust, there is no waiting period or disqualification period for continued eligibility, and they continue to receive all of their current services and benefits. The downside is that the funds in the Pooled Trust are in fact not available to them, and a trustee must utilize those funds for their benefit, subject to the rules and restrictions of the programs from which the individual is receiving benefits. In addition, there is a payback of a portion of the benefits upon death.

The intention is that during the lifetime of the beneficiary, the trustee will utilize these funds for the beneficiary’s needs that are not otherwise provided for by governmental services. This may include taking trips, purchasing furniture, adapting the house for handicap purposes, or even a purchase of a car or van, if appropriate.

Actually, it may be more appropriate to establish a separate trust rather than utilizing a Pooled Trust. In every state there is probably at least one Pooled Trust that is available, and in some states there are multiple Pooled Trusts from which to choose. In addition, there are national Pooled Trusts that are available to or for the benefit of any resident of one state that may also be transferred to a Pooled Trust for a different state in the event that the beneficiary moves after the initial trust is established.

As always, good specialized legal assistance should be obtained before one contributes any funds and creates a fund within a Pooled Trust.  

By: Hyman G. Darling, Esq.  

No, you can’t just give away your money - Clarifying the look-back period relative to asset protection

Hardly a day goes by when I don’t have a client who tells me that they can give away a certain amount of money free and clear, avoiding look-back periods for long-term care planning. They inform me that their neighbor, friend, or cousin told them that this is allowable. I then have the unfortunate task of telling them that they are wrong and that most states that have enacted the Deficit Reduction Act. After February 8, 2006, the rules relative to gifts changed.

Regardless of the amount, any gift that is made is a transfer and is subject to a look-back period of five-years for Medicaid purposes. This doesn’t mean that the State will take that money, but rather, that the State will not pay for the donor’s long-term care costs until the five-year look-back is exhausted, or in the alternative, until all the gifts that have been transferred are used to pay for the institutionalized person’s care.

The sum that most clients feel that can be gifted (erroneously) without a look-back is $10,000. This amount actually relates to the annual amount that can be gifted on an annual basis to as many individuals as the donor wishes without the need to file a gift tax return. However, the exemption in 2009 for gift giving on an annual basis is $13,000 per donee per year. This is only a tax amount gift, and is not a Medicaid or asset protection plan exempt amount. A gift of $13,000 from a parent to a child will constitute a non-taxable gift, but this gift will carry with it a waiting period of five-years relative to Medicaid qualification.

Far too often, family, friends, and other non-professional advisors provide well-intended but erroneous advice that can lead to significant adverse consequences if relied upon. If in doubt, it is always appropriate to contact a professional accountant, attorney, or other financial advisor for the appropriate and up to date laws relative to gifts, Medicaid planning, taxes, etc.

If you don’t know how to find a qualified lawyer, you may contact your local bar association or the National Academy of Elder Law Attorneys.


By: Hyman. G. Darling, Esq.