Monthly Archives: July 2011

Retirement Assets May Be Unpleasant Surprise for Heirs

You’ll often read news articles or blog posts about saving for retirement—when to start, how much to save, what savings or investment plan is best—but there’s an important retirement topic which often goes underreported: How these retirement accounts impact your heirs.

As noted by this article in the Wall Street Journal, “The new, higher threshold for the federal estate tax has many heirs happily thinking they won’t have to surrender a big piece of their inheritance.” But these heirs “may need to think again if they’re in line to receive a lot of money from tax-protected retirement accounts like 401(k)s and IRAs.”

Many (if not most) retirement assets these days are IRD assets, this is “income in respect of a decedent,” and it means that the assets are income earned by a person, but not taxed or received before that person passed away. These IRD assets can be wonderfully beneficial to the investor… but they can be an unpleasant surprise for heirs, who will end up paying the taxes on these assets.

“Heirs who receive retirement accounts often pay far more tax on IRD than they have to, collecting payments from the plan but failing to take an annual deduction that is available to beneficiaries. Sometimes that’s because the tax attorney who planned the estate knew about the deduction, but the accountant who prepares the heir’s taxes doesn’t.”

Some of the solutions suggested in the article are to take advantage of a recent rule change which allows many IRD savings accounts to be converted to Roth 401(k)s. Taking advantage of this and converting the money to a Roth allows the owner to pay any applicable taxes now, so that heirs won’t be liable. Another option is to move money from the IRD retirement account into an irrevocable life insurance trust, thus removing it from the taxable estate.

“People need to refocus their thinking on what heirs are truly inheriting.” Our office can help you do just that. A little bit of thought and action now can save your heirs a lot of taxes and confusion down the line, and this is especially true if you are lucky enough to have a significant amount of savings that you anticipate passing on to your children or grandchildren.

After A Tempestuous Life Amy Winehouse Leaves Clear and Certain Will

Following the death of British singer Amy Winehouse there have been a number of news stories and blog posts about her turbulent career and the last few years of her life. In the midst of all this scrutiny, perhaps the most surprising discovery is the fact that Winehouse’s affairs were in incredibly good order, with a carefully crafted will leaving all of her sizeable estate to her parents and brother instead of to her incarcerated ex-husband.

This timely article in U.S. News and World Report remarks that “celebrities and non-celebrities alike often leave their estates in disarray when they die. That lack of awareness and planning can make death more stressful and more costly for family members as they struggle to quickly plan a funeral and think about dividing up family property while grieving.”

All too often our office is contacted by family members who are overwhelmed with the task of probating or administering a poorly planned estate. Sometimes these bereaved relatives are dealing with overwhelming and confusing debt, or terrible family infighting, but more often than not they are simply trying to make their way through the long and arduous process of probating an estate without the benefit of a will or trust.

One of the many things we can learn from the life and death of Amy Winehouse is that even in the midst of troubled times it is possible to think clearly about the future. If you’d like to start planning for your family’s future, please contact our office today.

Charitable Lead Trusts Can Benefit Your Heirs AND Your Favorite Charity

2011 and 2012 are good years not only for heirs but also for charities; high estate- and gift-tax exemption amounts (as much as $5 million per person) have many wealthy families exploring their options for gift-giving, and record-low interest rates are prompting many financial advisors to recommend that their clients set up charitable lead trusts to leave money to both their favorite charity and their heirs with little or no tax hit.

When setting up a charitable lead trust the grantor puts the desired assets into a trust for a specified number of years, naming a charitable foundation as the first beneficiary, and a non-charity (children or grandchildren) as the remainder beneficiary. Each year during the specified time period payments are made from the trust to the grantor’s designated charity, once the trust’s term expires, what is left goes to the grantor’s heirs.

Charitable lead trusts have fallen in and out of favor with financial advisors over the years, and were most recently popular after Ms. Jacqueline Kennedy Onassis used one to great effect. This recent article in the New York Times describes the pros and cons of the charitable lead trust:

“Over the years, charitable lead trusts have been a way to give money to charity with the possible benefit of passing what was left to children without paying estate taxes.” Although the payout (to both beneficiaries) of a charitable lead trust is highly dependent on the starting interest rate, “the likelihood today that one of these trusts would have money left for heirs [is] 95 percent. The trusts are written so that the assets appreciate substantially over time, but even if they do not, the designated charity — often a family foundation — will still get the money.”

One of the downfalls of a charitable lead trust is that rules and regulations can be confusing, “they are hard for someone who is not a tax lawyer to understand.” Furthermore, some families have “used these trusts to give money to their family foundation. This runs the risk of being deemed self-dealing if the person who set up the trust names his foundation as the recipient and then parcels out the money himself.”

The bottom line is that while a charitable lead trust can be an incredible useful tool benefitting both your heirs and your favorite charity (especially if set up during the next year and a half), it is not something to be done lightly, without the advice and help of an experienced attorney or financial planner.

War Veterans May Be Unaware They Qualify For VA Aid and Attendance Benefits

One of the services Elder Law and Estate Planning attorneys often provide is helping clients navigate the application procedures and bureaucratic systems for the various state and federal medical insurance programs; and one thing that remains a surprise throughout the years is how many people forget about the VA Aid and Attendance Program for war veterans.

According to the Department of Veterans Affairs website, VA Aid and Attendance is “a benefit paid to wartime veterans [or their spouses] who have limited or no income, and who are age 65 or older, or, if under 65, who are permanently and totally disabled.” Unfortunately, too many veterans and their spouses are unaware that they qualify for this benefit, or even worse, have never been informed that the program exists.

An informative article in the Washington Post quotes the VA’s deputy undersecretary for disability assistance as saying that he believes they are only reaching “about one in four eligible veterans.” Part of the reason for this is that “there are a lot of veterans where it’s been 40 years or more since they’ve been on active duty. It just doesn’t occur to them there may be a benefit from the VA.”

If you are a war veteran over the age of 65 it is very likely that you and/or your spouse qualify for Aid and Attendance Benefits. Eligibility requirements include:

* You served at least 90 days of active military service 1 day of which was during a war time period. (If you entered active duty after September 7, 1980, generally you must have served at least 24 months, or the full period for which called or ordered to active duty.)

* You were discharged from service under conditions other than dishonorable.

* Your countable family income is below a yearly limit set by law (The yearly limit on income is set by Congress.)

* You must need help with at least one activity of daily living: dressing, eating, walking, bathing, adjusting prosthetic devices or using the toilet. Those who are blind, living in nursing homes or require in-home care may also be eligible.

For many veterans and their families the financial assistance they receive from their VA Aid and Attendance benefits can be an incredible help. Unfortunately, the application process required to receive the benefits can be daunting. “It’s not a simple process. A&A applicants must mail the forms, copies of service records, marriage certificates, proof of insurance and medical records to the regional VA office. If a third party is making the application, an additional form, 21-22-a or 21-0845, must be completed.”

This is why many veterans ask a knowledgeable Elder Law or Estate Planning attorney to help with the application process. The right attorney can help you find and fill out the correct forms, gather the necessary records and materials, and keep track of progress throughout the entire process. If you think you may be eligible for VA Aid & Attendance Benefits please don’t hesitate to contact our office.

How Should A Caregiving Relative Be Compensated?

It is common knowledge in our society of aging Baby Boomers that many adult children end up taking months or even years off from their lives and careers to provide care for their elderly parents. Most children do this out of love and a sense of duty, but even in the closest of parent-child relationships there may be an unspoken expectation that appreciation for the caregiving child’s time and effort may be reflected in the parent’s will or trust. After all, professional caregivers demand a salary, is it too much to expect that a relative serving as caregiver should be compensated as well?

Take as an example the case of Anthony Olivo, who this article in Forbes describes as “a tax lawyer who ended up providing nearly full-time care for his mother and father.” Anthony “worked in law firms from 1976 to 1988 and then opened his own practice. Yet by 1994, given all the time he was devoting to his parents and their health problems, he found it hard to maintain his practice. He lived with his parents and gave them round-the-clock care from 1994 through 2003, during which he earned no significant income from his law practice.”

Now Mr. Olivo is asking that the U.S. Tax Court deduct $1.24 million from the estate of his parents for fees it paid to Anthony while he was serving as caregiver. Mr. Olivo is not challenging his parents’ wishes, he is not asking for more of the estate than his parents bequeathed to him; rather, he is asking that a “salary” for caregiving be deducted from the taxable portion of his inheritance.

Unfortunately, in the absence of a legal agreement, the tax court is unable to rule in Mr. Olivo’s favor: “The court was careful to note that Anthony rendered extraordinary care and that his efforts were commendable. However, the court ruled that his mother’s estate did not establish that Anthony was entitled to that pay. There were no written agreements and scant evidence the family agreed to pay him.” Furthermore, “There was no contract and no firm evidence of how much Anthony’s services were worth.”

We sympathize with Mr. Olivo, and hope that our firm can help save our clients from ending up in a similar situation. Simply leaving the caregiving relative “a little extra” in a will or trust is not enough, we cannot stress enough the importance of a legal caregiver agreement if a family member is providing caregiver services—especially if that family member is giving up time from his or her own career to do so.

QPRTs Offer A Chance to Have Your Cake and Eat It Too

Since the burst of the housing bubble a few years ago and the subsequent crash of real property value, many of the clients who have come into our office have bemoaned the lowered value of their homes, but we have good news for these clients: You do have options.

One of those options is a QPRT (Qualified Personal Residence Trust) a specific kind of trust which allows you to continue living in your home, while at the same time removing it from your taxable estate. Sound too good to be true? It almost is. In fact, this article in Reuters calls it “a chance for clients to have their proverbial cake — a sweet vacation home in Florida, for example — and eat it, too.”

Here is how it works: “In a QPRT, the grantor transfers up to two residences into an irrevocable trust and retains the right to use the home for a pre-determined period, or trust term. Terms can vary widely — 10 years is typical, but can run for 40 — and the idea is to make sure grantors outlive the term… Once the term concludes, the grantor then pays rent to the trust. The beneficiaries become landlords, and open a brokerage-type vehicle to receive payments titled to the trust. There’s no income tax on those payments, a big plus for beneficiaries.”

The reason the QPRT is such a boon right now, while property values are low, is that grantors are able to “gift” the residence into the trust while the value is low and still under the gift tax exemption amount. If the value of the property increases over the term of the trust (which it almost certainly will) the grantor does not have to pay gift tax on that increase, but the recipients of the trust will still benefit from the increased value.

The QPRT appears to be a perfect tool for gifting property to children, but you do want to be careful about how you structure the trust, and consider carefully your relationship with your children. Once the trust term is over the property belongs to the beneficiaries (your children.) Many families arrange to have the grantor continue to live in the home, but begin paying rent to the beneficiaries once the trust term is up; however, the beneficiaries have no obligation to allow the grantor to continue living in the property.

And if you think you can escape the eviction concern by simply making the term of the trust so long you’re likely to pass away before the term is up, think again. “Die before the term’s up and your property reverts to the estate and takes an estate tax hit. That’s why planners stress picking a term you and your spouse expect to outlive.”

If you feel a QPRT may be a good planning tool for your family, give us a call. We can answer any questions you have and help you determine whether a QPRT could benefit you.

The Best Laid (Estate) Plans…

A recent story in the Chicago Tribune will be of interest to anybody who has created, or is considering creating, an estate plan—regardless of state of residence. The article tells of Heather Rooney, the widow of wealthy businessman Thomas McNamee, and her ongoing fight to get the inheritance she believes her deceased husband wanted her to have.

Approximately six months before his death Thomas McNamee found out he had a deadly form of brain cancer. After learning that his cancer treatments had failed McNamee took steps to get his affairs in order; these steps included marrying Rooney, his girlfriend of 15 years, and setting up a $3.5 million trust fund for the benefit of Rooney and other family members.

It seems like he took care of everything—prenuptial agreement signed before the wedding, trust created before he became too sick to manage his affairs—what could go wrong?

Unfortunately, according to Heather Rooney, the arrangements left after his death were not what her husband actually intended. “According to [Rooney’s] suit, [McNamee] intended to leave Rooney a $500,000 trust fund to maintain her at the 24-acre Dundee-area property where the couple lived. He also intended to leave her two parcels in East Dundee, including one with a beauty salon that Rooney operated.” Rooney also claims that she was coerced mere minutes before their wedding into signing a prenuptial agreement that did not accurately reflect her or Thomas McNamee’s true wishes.

At this point, we can’t know for certain what McNamee’s true wishes were. It certainly seems as if he created a thorough plan which would accurately reflect his wishes not only for his widow but also for other family members. But one would think a person as savvy as McNamee would have informed his spouse of his plans ahead of time, eliciting her grudging agreement, if not her wholehearted approval.

Unfortunately, even the best laid plans can be contested by unhappy relatives. But with the help of an experienced attorney you can make your plan as strong or as flexible as you believe is necessary to ensure that your wishes are followed and your loved ones are provided for.

As Priorities Change, So Does Your Estate Plan

Estate plans have been changing quite a bit over the past few years, not only because of changing laws and new tools for protecting your assets and your heirs, but also because our priorities as a society are changing and growing. A recent article in the Wall Street Journal sums up the situation well:

“Even the simple question of who your heirs will be is getting more complicated. Nowadays more people are considering pets and even children posthumously conceived from genetic material in their estate-planning mix, say financial advisers. That often means setting up trusts that just a few years ago would have been unthinkable.”

Some of these “new” trust arrangements include:

Pet trusts: Money set aside in trust to be distributed to your pet’s caretaker as per your instructions. Some people choose to make the caretaker the trustee of the trust as well, others choose to have a separate trustee who can ensure the caretaker is caring for your pet according to the guidelines in the trust.

Trusts for posthumously conceived children: As fertility treatments get more and more advanced, “a growing number of states are passing laws defining the inheritance and Social Security rights of posthumously conceived children. Earlier this month, legislation took effect in Iowa granting posthumously conceived children the right to participate in trusts. Texas, Washington, Colorado and North Dakota confer similar rights.”

As technology advances, and as the legal system works to keep up with it, you have more and more options when it comes to protecting your family and passing on your estate as you choose. If you have questions about unique estate planning choices please don’t hesitate to contact our office.

Joint Ownership A Dangerous Way to Avoid Probate

When asking about how to avoid probate, many clients have asked about the wisdom of adding family members as joint owners to bank accounts. While joint ownership will achieve the goal of avoiding probate, there are many dangers and drawbacks to adding family members—even trusted family members—as joint owners on bank accounts:

Vulnerability to creditors: Your only goal in adding a family member as a joint owner may be to avoid probate, but in the eyes of creditors that bank account is suddenly fair game, and may be used to pay off the debts of your co-owner.

Vulnerability to lawsuits: In the same way that joint accounts are vulnerable to the creditors of both owners, they are also vulnerable to potential lawsuits against both owners.

Gift tax assessment: If a new owner is added to an account as a joint owner, but doesn’t contribute any funds to the account, the IRS may see the move as a monetary gift. If the “gift” exceeds the annual gift tax exclusion amount the IRS will require it be reported on a gift tax return.

Joint ownership can adversely affect Medicaid planning: Even if an account is jointly owned by two people, the state considers ALL the funds in the account to be at the disposal of the owner applying for Medicaid. Furthermore, if your co-owner chooses to remove assets from the account Medicaid could consider this an improper transfer of assets and you could be rendered ineligible for Medicaid for a certain period of time.

And of course, the number one danger of joint ownership for probate avoidance purposes is that your co-owner may act unethically or irresponsibly.

For more reliable—and more effective—estate planning strategies to protect your assets and avoid probate, please contact our office.

Estate Planning Challenges (and Benefits) for Same-Sex Couples

There are many changes going on nation-wide for same-sex couples as more and more states legalize gay marriage. But there are still a few areas of the law—estate planning being one of them—which present challenges no matter what your state of residence. This article in the Wall Street Journal points out just a few of the challenges same-sex couples still face, and one of the highest on their list is death and inheritance.

“The biggest problems [for same-sex couples] may not come until death do you part. Although same-sex spouses are legally entitled to inherit assets from each other whether there’s a will or not, since inheritance is governed through state law, they don’t have federal rights.”

In states which have legalized gay marriage (including Massachusetts, Vermont, New Hampshire, Connecticut, Iowa, and now New York) same-sex couples are still inhibited by federal law in the following ways:

  • Same-sex partners aren’t able to inherit retirement plans with the same ease that opposite-sex partners have. “Unlike opposite-sex spouses, same-sex spouses would have to transfer [401(k) and other] accounts to inherited IRAs and start taking distributions each year, rather than allowing the tax-deferred assets to continue to potentially accumulate tax-free earnings.”
  • Same-sex partners still won’t get the federal marital deduction—the ability to “leave each other unlimited assets without owing any estate tax”—regardless of their state of residence. These assets may be considered joint by the couple and by the state, but not by the federal government. This means assets will be taxed once upon the death of the first partner, and may be taxed again upon the death of the second partner.

But there may be one opportunity not available to traditional married couples which same-sex couples can take advantage of: gay couples are legally entitled to “set up a ‘grantor-retained income trust,’ a type of trust that family members aren’t allowed to create for one another. You put an asset into a trust and retain the right to income from it.”

No matter where they live, same-sex couples are simply going to have more challenges creating estate plans that will hold water on both a state and federal level. The good news is that in spite of these challenges it is possible, with the right help, to plan to protect yourself, your partner, and your family now, and in the future.