Estate Planning

This question presents a fairly common issue posed to estate planning attorneys. The solution is also pretty easy to address in your will, trust and other estate planning documents, including any guardianship appointment for your minor children.

First, its important to note that you should not delay establishing an estate plan pending the birth of a new child.  In fact, if your planning is done right you most likely will not need to modify your estate plan after a new child is born.  The problem with waiting is that you cannot know what tomorrow will bring and you could die, or become incapacitated and not having any type of plan is a bad idea. 

In terms of how an estate plan can provide for “after-born” children, there are a few drafting techniques that can address this issue.  For example, in your will, it would refer to your current children typically by name and their date of birth. Then, your will would provide that any reference to the term "your children" would include any children born to you, or adopted by you, after the date you sign your will.

In addition, in the section or article of your will that provides how your estate and assets will be divided, it could simply provide that your estate and assets will be divided into separate and equal shares, one each for "your children." That would mean that whatever children you have at the time of your death would receive a share and thus the will would work as you intend, even if you did not amend it after having a new child. 

On a side note, you should make certain that your plan does not give the children their share of your estate outright while they are still young.  Rather, your will or living trust should provide that the assets and money are held in a trust structure until they are reach a certain age or achieve certain milestones such as college graduation or marriage. Any good estate planning attorney should be able to advise you about this and help walk you through the various options you have available to you.

There are many factors to consider when deciding whether or not to implement Medicaid planning.  If you’re in good health, now would be the prime time to do this planning. The main reason is that any Medicaid planning may entail using an irrevocable trust, or perhaps gifts to your children, which would incur a five-year look back for Medicaid qualification purposes. The use of an irrevocable trust to receive these gifts would provide more protection and in some cases more control for you.

As an example, if you were to gift assets directly to a child, that child could be sued or could go through a divorce, and those assets could be lost to a creditor or a divorcing spouse even though the child had intended to hold those assets intact in case they needed to be returned to you. If instead, you had used an irrevocable trust to receive the gifted assets, those assets would not have been considered the child’s and therefore would not have been lost to the child’s creditor or a divorcing spouse. You need to understand that doing this type of planning, and using the irrevocable trust, may mean that those assets are not available to you and therefore you need to be comfortable with that structure.

Depending upon the size of your estate, and your sources of income, perhaps you have sufficient assets to pay for your own care for quite some time. You should work closely with an attorney knowledgeable about Medicaid planning as well as a financial planner that can help identify your sources of income should you need long-term care. Also, you should look into whether or not you could qualify for long-term care insurance, and how much the premiums would be on that type of insurance.

Before transferring your home to your children, there are several issues that should be considered. Some are tax-related issues and some are none-tax issues that can have grave consequences on your livelihood. 

The first thing to keep in mind is that the current federal estate tax exemption is currently over $5 million and thus it is likely that you may not have an estate tax issue anyway. If you are married you and your spouse can double that exemption to over $10 million. So, make sure the federal estate tax is truly an issue for you before proceeding.

Second, if you gift the home to your kids now they will legally be the owners. If they get sued or divorced, a creditor or an ex- in-law may end up with an interest in the house and could evict you. Also, if a child dies before you, that child’s interest may pass to his or her spouse or child who may want the house sold so they can simply get their money.

Third, if you give the kids the house now, their income tax basis will be the same as yours is (the value at which you purchased it) and thus when the house is later sold they may have to pay a significant capital gains tax on the difference. On the other hand if you pass it to them at death their basis gets stepped-up to the value of the home at your death, which will reduce or eliminate the capital gains tax the children will pay.

Fourth, if you gift the house now you likely will lose some property tax exemptions such as the homestead exemption because that exemption is normally only available for owner-occupied homes.

Fifth, you will still have to report the gift on a gift tax return and the value of the home will reduce your estate tax exemption available at death, though any future appreciation will be removed from your taxable estate. 

Finally, there may be more efficient ways to do this through the use of a special qualified personal residence trust.  Given the multitude of tax and practical issues involved, it would be best to seek the advice of an estate planning attorney before making any transfers of your property.

So you have credit card debt, overdue mortgage payments, or suddenly need to buy a new car. We’ve all been there. You need money now, and your retirement accounts continue to climb. Fortunately, many employers allow you to take out loans on these accounts, but should you really begin spending that money before you retire?

On one hand, there are benefits to borrowing from your retirement accounts. You are essentially borrowing your own money, so the payments you make, plus interest, go back into your account. Since it’s your own money, these payments do not affect your credit score, and most 401(k) loans have relatively low interest rates.

However, there are many risks associated with taking money from accounts like your 401(k). It is recommended that you see a financial advisor before making this decision to address the cost and potential ramifications of the loan.

First consider the reason for taking out a loan, and the multiple options that you face. A dire emergency is the only recommended cause for borrowing from these accounts; some plans even require it. If you’re looking to spend the money on something more frivolous, like a family vacation or a new entertainment system, however, you should consider alternate financing options.

The downside to these loans comes in handling the repayment plan. Interest paid to your own account sounds easy enough, but these payments are subject to taxes. Furthermore, once money is borrowed from your retirement account, it is no longer eligible for tax-deferred growth. Payments you make on the loan come from after-tax assets, so the money you repay into your account can end up getting taxed for a second time once you withdraw after retirement.  

A standard 401(k) loan allows you to borrow up to half of your balance, with a maximum of $50,000. Normally, you have up to five years to repay the loan. Failure to do so within the five-year period means your loan will be deemed an early withdrawal, and will be subject to taxes as well as a 10% early withdrawal penalty.

If you are looking to borrow money from your retirement accounts, carefully consider your repayment plan in advance. It’s especially important to make certainthat you are secure in your employment; if you leave or lose your job, your loan payments will be due within 90 days. Consider borrowing only if interest on a loan from your retirement plan would be less than that of another loan alternative. A final tip: Continue contributing to your 401(k) while you pay off the loan to lessen the impact on your savings.

#1 Establish a Comprehensive Plan

Most estate planning attorneys will say that no person should use a “do-it-yourself” will kit to establish their estate plan.  If you have a child with special needs, it is extremely important to seek competent legal counsel from an estate planning lawyer with special needs planning experience before and during the process of writing your will.

In your estate plan, make sure that any bequests to your child are left to his or her trust (see #2, below) instead of to the child directly.  Your will should also name the person or persons you want to serve as guardian of your child (see #3, below).

Once your estate plan is complete you should give copies to all the guardians and executors named in the will.

#2 Establish a Special Needs Trust
A special needs trust is the most important legal document you will prepare for your child.  In order to preserve your child’s eligibility for federal financial benefits like Supplemental Security Income (SSI) and Medicaid, all financial assets for your child should be placed into this trust instead of being held in your child’s name.  This is because federal benefit programs restrict the amount of income and assets the recipient may have.  If your child has too many financial assets, he or she could lose his eligibility for important federal assistance programs.

You can use this trust as a depository for any money you save for your child’s future, money others give as a gift, funds awarded in a legal settlement or successful lawsuit, and other financial assets.

Should you create a special needs trust if your child doesn’t currently have any financial assets?  Yes.  Once you create the special needs trust, then the trust can immediately become the named beneficiary of any life insurance policies or planned bequests, either yours or family members’.

#3 Appoint a guardian and complete necessary guardianship papers
Like any parent, you worry about who will care for your child if you were to die before the child becomes an adult.  Unlike other parents, you worry about who will care for your child and provide guidance even after he or she is an adult.

A legal guardian is the person who will care for your child after your death and until the child turns 18.  If your child is unable to live independently, then you can either make arrangements for adult care or discuss your preferences with the appointed guardian.

As you consider choices of a guardian for your special needs child, consider how much time is required to raise a child with special needs.  Who do you know who can respond to the challenge?  Who do you know who has already formed a bond with your child?

After you make a choice, ask the individual if he or she will accept the responsibility of serving as your child’s named, legal guardian.  It is never wise to keep this decision a secret.  Also, discuss with your selected guardian how he or she will probably still have responsibilities toward your child even after his or her 18th birthday.

#4 Apply for an adult guardianship
Even if your child is still a minor, you can start planning now for when he or she reaches the age of majority.  When children turn 18, the law considers them adults and able to make their own financial and medical decisions.  If your special needs child will be incapable of managing his or her own health and finances, consider a legal guardianship.

#5 Prioritize your savings account
Parents of special needs children quickly learn that their children need many resources and equipment that insurance and school systems do not cover.  The more financial assistance you can give your child, the better.  Start saving as early as possible for your child’s lifetime needs – just remember to not open the savings account in your child’s name

Savings can help pay for therapies, equipment, an attorney to advocate for your child in the school system, or a special education expert who can help you make sure your child is getting access to all the programs he or she qualifies for.

#6 Plan for your child’s adulthood
Early planning for your child’s adult years will help you bring the legal and financial picture into sharper focus.  Will your child continue to live with you?  If so, will he or she need in-home assistance?  How often?  Do adult day care programs for people with special needs exist in your community?  How are they rated?

Is your goal for your child to live independently?  If so, what support will he or she need?  Will your child live in a group home, an assisted living community, an apartment with on-site nursing care, or another type of situation?  The earlier you research available options in your community, the sooner you can add your child’s name to the waiting list for the living situation you both prefer.

#7 Write a letter of intent
A letter of intent is not a formal legal document.  It is more like a manual of instruction, containing your wishes for your child’s upbringing.  In the best case scenario, you would give this letter of intent to your child’s chosen guardian and to anyone else who will play a significant role in his or her life after your death. 

• What is your child’s daily routine?  What kind of weekly and monthly routine does she have?
• What does he find especially comforting?  What frightens her?  What are favorite foods, books and movies?  Be as detailed as you wish.
• List all of your child’s health care and educational providers.
• List all current medications, doses and schedules.
• List all allergies.
• Are there people you don’t want your child to spend time with? Be specific.
• Are there people you want your child to spend time with? Who?
• Are there activities you especially want your child to try, such as sports or arts and crafts?

Update this letter at least once a year.  Keep a copy wherever you keep copies of your will.  And be sure to give a copy to your child’s appointed guardian.

#8 Talk with family members
Either in person or in writing, explain the major decisions you have made to important family members.  It is especially important to explain to generous grandparents and other relatives why they must not leave gifts of money – or inheritances – directly to your child.  Give relatives the information about your child’s special needs trust and instruct them to leave any financial gifts to the trust.  Similarly, explain that family members should designate the trust – not the child – as the beneficiary of life insurance policies and so forth.

If you have made decisions you fear will be unpopular (such as naming a guardian), consider explaining your reasons directly to family members whom you fear will be unhappy.  You could also consider including the named guardian in these difficult conversations.

The process of planning for your special needs child’s future may seem long and arduous at times, but you will experience a great relief when the major pieces of the plan are in place.  Creating a plan for the future will allow you to relax and enjoy the present with your child and family.

Often estate planning focuses on the “big picture” issues, such as who gets what, whether a living trust should be created to avoid probate and tax planning to minimize gift and estate taxes. However, there are many smaller issues, which are just as critical to the success of your overall estate plan. Below are some of the issues that are often overlooked by clients and sometimes their attorneys.

Cash Flow
Is there sufficient cash? Estates incur operating expenses throughout the administration phase. The estate often has to pay state or federal estate taxes, filing fees, living expenses for a surviving spouse or other dependents, cover regular expenses to maintain assets held in the estate, and various legal expenses associated with settling the estate.

Taxes
How will taxes be paid? Although the estate may be small enough to avoid federal estate taxes, there are other taxes which must be paid. Depending on jurisdiction, the state may impose an estate tax. If the estate is earning income, it must pay income taxes until the estate is fully settled. Income taxes are paid from the liquid assets held in the estate, however estate taxes could be paid by either the estate or from each beneficiary’s inheritance if the underlying assets are liquid.

Assets
What, exactly, is held in the estate? The owner of the estate certainly knows this information, but estate administrators, successor trustees and executors may not have certain information readily available. A notebook or list documenting what major items are owned by the estate should be left for the estate administrator. It should also include locations and identifying information, including serial numbers and account numbers.

Creditors
Your estate can’t be settled until all creditors have been paid. As with your assets, be sure to leave your estate administrator a document listing all creditors and account numbers. Be sure to also include information regarding where your records are kept, in the event there are disputes regarding the amount the creditor claims is owed.

Beneficiary Designations
Some assets are not subject to the terms of a will. Instead, they are transferred directly to a beneficiary according to the instruction made on a beneficiary designation form. Bank accounts, life insurance policies, annuities, retirement plans, IRAs and most motor vehicles departments allow you to designate a beneficiary to inherit the asset upon your death. By doing so, the asset is not included in the probate estate and simply passes to your designated beneficiary by operation of law.

Fund Your Living Trust
Your probate-avoidance living trust will not keep your estate out of the probate court unless you formally transfer your assets into the trust. Only assets which are legally owned by the trust are subject to its terms. Title to your real property, vehicles, investments and other financial accounts should be transferred into the name of your living trust.
 

The “ostrich syndrome” is part of human nature; it’s unpleasant to observe that which frightens us.  However, pulling our heads from the sand and making preparations for frightening possibilities can provide significant emotional and psychological relief from fear.

When it comes to Alzheimer’s disease and other forms of dementia, more Americans fear being unable to care for themselves and burdening others with their care than they fear the actual loss of memory.  This data comes from an October 2012 study by Home Instead Senior Care, in which 68 percent of 1,200 survey respondents ranked fear of incapacity higher than the fear of lost memories (32 percent).

Advance planning for incapacity is a legal process that can lessen the fear that you may become a burden to your loved ones later in life.

What is advance planning for incapacity?

Under the American legal system, competent adults can make their own legally binding arrangements for future health care and financial decisions.  Adults can also take steps to organize their finances to increase their likelihood of eligibility for federal aid programs in the event they become incapacitated due to Alzheimer’s disease or other forms of dementia.

The individual components of advance incapacity planning interconnect with one another, and most experts recommend seeking advice from a qualified estate planning or elder law attorney.

What are the steps of advance planning for incapacity?

Depending on your unique circumstances, planning for incapacity may include additional steps beyond those listed below.  This is one of the reasons experts recommend consulting a knowledgeable elder law lawyer with experience in your state.
 

1. Write a health care directive, or living will.  Your living will describes your preferences regarding end of life care, resuscitation, and hospice care.  After you have written and signed the directive, make sure to file copies with your health care providers.
    
2. Write a health care power of attorney.  A health care power of attorney form designates another person to make health care decisions on your behalf should you become incapacitated and unable to make decisions for yourself.  You may be able to designate your health care power of attorney in your health care directive document, or you may need to complete a separate form.  File copies of this form with your doctors and hospitals, and give a copy to the person or persons whom you have designated.
    
3. Write a financial power of attorney.  Like a health care power of attorney, a financial power of attorney assigns another person the right to make financial decisions on your behalf in the event of incapacity.  The power of attorney can be temporary or permanent, depending on your wishes.  File copies of this form with all your financial institutions and give copies to the people you designate to act on your behalf.
    
4. Plan in advance for Medicaid eligibility.  Long-term care payment assistance is among the most important Medicaid benefits.  To qualify for Medicaid, you must have limited assets.  To reduce the likelihood of ineligibility, you can use certain legal procedures, like trusts, to distribute your assets in a way that they will not interfere with your eligibility.  The elder law attorney you consult with regarding Medicaid eligibility planning can also advise you on Medicaid copayment planning and Medicaid estate recovery planning.

What is Estate Tax Portability and How Does it Affect Me?

At the end of 2012, the entire country watched as major changes were made to income tax  laws with the adoption of the American Taxpayer Relief Act of 2012 (ATRA). The act also made significant changes in estate tax laws.

Estate Tax Portability

One important change is that the estate tax portability law is now permanent.  Estate tax portability means that the unused portion of the first-to-die spouse’s estate tax exemption passes to the surviving spouse.  The current estate tax exemption is $5.43 million ($5 million with adjustments for inflation).  This means that a married couple’s total estate tax exemption is currently $10.86 million ($10.86 million in 2015).  For example, a husband dies with $2 million in separate assets.  He has $3.43 million remaining in his estate tax exemption, which passes to his wife, giving her a total of $8.86 million in estate tax exemption.  Without portability, the husband’s remaining exemption might have been forfeited if the couple had not implemented special tax planning techniques as part of their estate plans.

How Do You Claim the Portability?

This is where married couples and estate executors can get into trouble.  The estate tax portability rule is not automatic.  In order to claim the remainder of the first-to-die spouse’s estate tax exemption, the surviving spouse or the deceased spouse’s estate executor must file an estate tax return soon after the death, usually within nine months.

If this filing deadline is missed, then the couple will not get the benefit of estate tax portability.  Missing the estate tax filing deadline can result in hundreds of thousands of unnecessary and avoidable estate taxes.

In a recent report in The Wall Street Journal, estate planning experts expressed concern that executors of small estates may be unaware of the estate tax return filing requirement and may believe that an estate tax return is unnecessary if the deceased spouse’s assets fall under the $5.43 million exemption amount. To preserve portability, however, the estate tax return must be filed after the first spouse’s death.  Alternatively, married couples can utilize a special trust, referred to as a “credit shelter trust” or “bypass trust” to prevent forfeiture of their individual exemptions.  This planning technique must be undertaken when both spouses are still alive.

The Consequences of Failing to File an Estate Tax Return

As a simple example, consider a husband and wife who have a total of $7.5 million in assets, $6 million in a business the husband owns and the remaining $1.5 million owned by the wife.  Upon the wife’s death, the estate’s executor files a timely estate tax return and the wife’s remaining $3.93 million in estate tax exemptions passes to the husband.  When the husband dies, his entire $6 million business passes to his heirs tax free, even though his personal estate tax exemption is only $5.43 million.  If portability is not claimed, then approximately $500,000 of the husband’s business will be taxed (the current rate is 40 percent).  The husband’s heirs would be required to pay approximately $200,000 in estate taxes which could have been avoided if the wife’s estate executor had filed an estate tax return within the time limit.

Even if both spouses together have assets under the current $5.43 million exemption, it is still a good idea to file an estate tax return after the death of the first spouse.  Filing the estate tax return and preserving the portability benefit protects the surviving spouse’s heirs in the event the surviving spouse receives a windfall during his or her lifetime that raises his or her assets above the $5.43 million exemption level.

If you are a parent and you are considering estate planning, one of the most difficult decisions you will have to make is choosing a guardian for your minor children.  It is not easy to think of anyone else, no matter how loving, raising your child. Yet, you can make a tremendous difference in your child’s life by planning ahead. 

The younger your child, the more crucial this choice is, because very young children cannot form or express their own preferences about caregivers. Yet young children are not the only ones who benefit from careful parental attention to guardianship. Children close to 18 years old will be legal adults soon, but, as you well know, may still need assistance of a parental figure after the fact.

By naming and talking about your choice of guardian, you can encourage a lifelong bond with a caring family. The nomination of guardians is a straightforward aspect of any family’s estate plan. It can be as basic or detailed as you want. You can simply name the guardian who would act if both you and your spouse were unable to or you can provide detailed guidance about your children and the sort of experiences and family environment you would like for them. Your state court, then, can give strong weight to your expressed wishes.

There are essentially four steps to this process. First, make a list of anyone you know that might be a candidate for guardian of your children.  It is important to think beyond your sisters and brothers and consider cousins, aunts and uncles, grandparents, child-care providers and business partners. You might also want to consider long-time friends and those you’ve gotten to know at parenting groups as they may share similar philosophies about child-rearing. Second, make a list of factors that are most important to you. Here are some to consider:

• Maturity
• Patience
• Stamina
• Age
• Child-rearing philosophy
• Presence of children in the home already
• Interest in and relationship with your children
• Integrity
• Stability
• Ability to meet the physical demands of child care
• Presence of enough “free” time to raise children
• Religion or spirituality
• Marital or family status
• Potential conflicts of interest with your children
• Willingness to serve
• Social and moral habits and values
• Willingness to adopt your children

You might find that all or none of these factors are important to you or that there are others that make more sense in your particular situation.  The third step is to, match people with priorities. Use the factors you chose in step two to narrow your list of candidates to a handful.

For many families, it is as easy as it looks. For others, however, these three steps are fraught with conflict. One common source of difficulty is disagreement between spouses. But, consensus is important. Explore the disagreements to see what information about values and people is important to one another and use all of your strongest communications skills to understand each other’s position before you try to find a solution that you can both feel good about. Step four is to make it positive. For some parents, getting past this decision quickly is the best way to achieve peace of mind and happiness. For others, choosing a guardian can be the start of an intensive relationship-building process. An attorney who understands where you and your spouse fall on that spectrum can counsel you appropriately. 

An executor's fee is the amount charged by the person who has been appointed as the executor of the probate estate for handling all of the necessary steps in the probate administration. Therefore, if you have been appointed an executor of someone’s estate, you might be entitled to a fee for your services.  This fee could be based upon a variety of factors and some of those factors may be dependent upon state, or even local, law.

General Duties of an Executor

1. Securing the decedent's home (changing locks, etc.)
2. Identifying and collecting all bank accounts, investment accounts, stocks, bonds and mutual funds
3. Having all real estate appraised; having all tangible personal property appraised
4. Paying all of the decedent’s debts and final expenses
5. Making sure all income and estate tax returns are prepared, filed and any taxes paid
6. Collecting all life insurance proceeds and retirement account assets
7. Accounting for all actions; and making distributions of the estate to the beneficiaries or heirs.

This list is not all-inclusive and depending upon the particular estate more, or less, steps may be needed.

As you can see, there is a lot of work (and legal liability) involved in being the executor of an estate.  Typically the executor would keep track of his or her time and a reasonable hourly rate would be used. Other times, an executor could charge based upon some percent of the value of the estate assets. What an executor may charge, and how an executor can charge, may be governed by state law or even a local court's rules. You also asked whether the deceased can make you agree not to take a fee. The decedent can put in his or her will that the executor should serve without compensation but the named executor is not obligated to take the job. He or she could simply decline to serve. If no one will serve without taking a fee, and if the decedents will states the executor must serve without a fee, a petition could be filed with the court asking them to approve a fee even if the will says otherwise. Notice should be given to all interested parties such as all beneficiaries.

If you have been appointed an executor or have any other probate or estate planning issues, contact us for a consultation today.

If your estate plan and related documents are properly and carefully drafted, it is highly unlikely that the court will disregard your wishes and award the excluded child an inheritance.  As unlikely as it may be, there are certain situations where this child could end up receiving an inheritance depending upon a variety of factors.

To understand how a disinherited child could benefit, you must understand how assets pass after death.  How a particular asset passes at death depends upon the type of asset and how it is titled. For example, a jointly titled asset will pass to the surviving joint owner regardless of what a will or a trust says. So, in the unlikely event that the disinherited child was a joint owner, that child would still inherit the asset because of how it was titled.

Similarly, if you left that disinherited child as a named beneficiary on a life insurance policy or retirement plan asset, such as an IRA or 401k, that child would still receive some of the benefits as the named beneficiary even if your will stated they were to take nothing. Another way such a "disinherited" child might receive a benefit is if all other named beneficiaries died before you.

So, assume you have three children and you wish to disinherit one of them and you state you want all of your assets to go to the other two, and if they are not alive, then to their descendants.  If those other two children die before you and do not have any descendants, there may be a provision that in such a case your "heirs at law" are to take your entire estate and that would include the child you intended to disinherit.

If you wish to disinherit a child, all of these issues can be addressed with proper and careful drafting by a qualified estate planning lawyer.