Katya Sverdlov Blog

Wednesday, February 25, 2015

3 reasons why you might NOT want to plan for Medicaid

You probably see a lot of advertisements trying to convince you to plan for Medicaid in order to obtain long term care coverage. Long term care is home care (for people who live in their homes but need help with daily activities) and nursing home care.

I, on the contrary, will show you that if you are over 60 and fall into a certain category, you might not need to plan for Medicaid.  Below are the 3 reasons you do not need to think about long term care planning.

1. You have over $1MM in savings that you do not mind spending on your own health care.

Approximately 70% of the seniors can expect to need some form of long term care.  Long term care can be in the form of home care services (home attendants) where a hired helper comes for a few hours a day to give assistance in daily living, or in the form of a nursing home.

On average, nursing home costs approximately $14,000 a month in New York City.  The annual amount ranges from $140,000 a year in Queens to $180,000 in Manhattan, and the cost is rising rapidly.  The average stay in a nursing home for a patient is approximately 2 years (which means that some people may stay there for 4 years or longer).

Home care services may range from a home attendant coming for a few hours each day to assist with shopping and cleaning, to 24 hour a day care. Usually, the length of time required for a senior increases as the diseases and the weaknesses progress. A 24 hour a day home attendant that is privately paid can cost up to $500 a day, translating into the same cost as a nursing home - $180,000 a year.

As I wrote earlier, Medicare generally does not pay for long term care. At this point, Medicaid is the only government program that pays for home care and nursing homes.

In general, if one expects to need some form of home care for several years, and then eventually to need nursing home care, the overall cost of this care can be $1MM or more. If you have this money and do not mind spending it on your own long term care, then you do not need to think about Medicaid planning.  

2. You have a crystal ball

A lot of people think that they do not need to plan for long term care, because they will do so only when the need arises. Others believe that they will not need long term care at all, and their family will take care of them. However, there are many situations when planning in an emergency is not an efficient method and can result in a large loss of money.

For example, Medicaid imposes a penalty for all uncompensated transfers made in the 5 years prior to an application for nursing home coverage. If there were any gifts made (this often happens when the family realizes that a loved one’s health is declining rapidly), Medicaid will refuse to cover the nursing home cost for up to 5 years from the date of application. The family will have to pay privately from its own savings.

There are ways to reduce this penalty period, but in general, at least ½ of the assets will have to be used to pay for nursing home cost. Planning ahead of the need is the best method of protecting your assets.

 3. You have long term care insurance

This is one of the best reasons not to plan for Medicaid long term care. A long term care policy may cover home care services and nursing home costs.

However, before you feel completely complacent, you should ask yourself the following questions about your policy:

  • Does it provide enough coverage? You need to review the long term care policy to see the amount of coverage that it provides. Some policies pay only $250 a day. A nursing home private room or a 24 hour home attendant can cost up to $500 a day. The money that is not paid for by the insurance will have to come from your savings.

  • Does it last for a sufficient time? Some policies only provide coverage for a limited number of years. Have you thought about your expenses if the coverage expires?

  • Are you able to pay the premiums for the policy? You need to review if you are able to continue paying for the long term policy. Some policies have recently increased their annual premiums by 20-50% a year, to make up for the unexpected costs that they have to bear. Even if you have long term care policy now, will you still have it when the need arises?

Overall, if you fall into one of the above 3 categories, you may not need to plan for Medicaid. If you do not, however, you should consider talking to a Medicaid planning attorney who will review your individual situation and suggest an optimal course of action.

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.

Saturday, February 21, 2015

Common retirement assumptions people make that could result in an unexpected shortfall.

Making incorrect or overly optimistic assumptions about your retirement portfolio and plans can lead to disastrous results. Some of the most common retirement assumptions that may not turn out to be true are:


  1. Assuming that stock market returns will always be high.

    Investing in the market at the wrong time can lead to a ‘lost decade’ or even a longer period of no returns, as people who invested in the stock market in the 1930s and in the late 1990s realized to their great sadness. Solution: To be comfortable, you should assume relative low returns for the long term projections. And save accordingly.
  2. Assuming that inflation will always be low.
    It is hard to imagine now, but in the late 1970s, inflation rate was over 10%. A high inflation rate can erode the purchasing power of your fixed retirement income, such as a pension or an annuity. Solution: You should invest at least a portion of your portfolio in a way that protects against inflation, such as stocks and real estate.
  3. Assuming that you will be able to work past the retirement age.
    Some people never want to quit. They love their job and they want to work for as long as possible. Unfortunately, however, working past a certain age may not be an option for everyone. Some professional fields move so fast that you may not be able to keep up cognitively. You may lose your job and not be able to find another one (age discrimination is a reality that you may not be able to combat). You may not have the health and stamina to continue working. Solution: do not make an assumption that you will be able to make a high income after retirement age. Save more now and view any money earned after retirement as an unexpected bonus.
  4. Assuming that you will get an inheritance.
    Increasing longevity and rising long term care cost mean that many parents may not be in a position to leave any money to their children. In addition, many parents may simply not want to leave any money to their children or to a particular child (no matter how hurtful it will be). Solution: do not count on money from the parents. Count only on yourself and your own saving.
  5. Assuming that the government will help.
    Many people rely on Social Security, Medicare and Medicaid as their sole or primary source of income and health care after retirement. However, all of these programs have significant financial problems and may be insolvent by the time you hit the retirement age or may become insolvent while you are already retired.  Even if these programs are not bankrupt, they usually do not provide sufficient money to live on. Without additional savings, a Social Security check can barely cover the rent. Medicare now demands significant co-payments for doctor visits and medicine. Solution: have a plan B, which involves additional savings and income.

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.

Tuesday, February 17, 2015

Difference between Social Security, Social Security Disability and Supplemental Security Income

There are many acronyms in government benefits. This article explains the difference between most common Social Security benefits.

Social Security benefits are based on the individual’s earnings, averaged over the worker’s life.

Eligibility: To be eligible, an individual must have a minimum of 40 quarters of reported earned income. To receive full credit for the quarter, the amount of earnings is currently $1,200. This amount has been raised incrementally since 1977.

Age of eligibility: for people born after 1959, the age of retirement is currently 67 years. For people born between 1943 to 1954, the full retirement age is 66. Individuals may retire early and collect reduced Social Security benefits as early as age 62. The reduced level of benefits will continue for the rest of the individual’s life.

What income is counted: only earned income is considered when determining eligibility or benefit amounts. Unearned income, such as interests and dividends, is not counted.

Earnings Limitations on Benefits: for individuals between ages 62 and 65 collecting Social Security benefits, earnings above $15,480 will reduce Social Security benefits by $1 for each $2 of earnings in excess of $15,480. For individuals above age 65 collecting Social Security benefits, all earnings limitations have been eliminated.


Social Security Disability (“SSDI”) benefits are based on several criteria, including medical condition, age, prior earnings level, and period between termination of employment and the onset of disability. The case will be periodically reviewed, to ensure that the individual is still disabled.

Definition of disability: inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of no less than 12 months, taking into account the person’s age, education and past work history.

Determination of Eligibility:

  1. To be fully insured and eligible for Social Security Disability payments, an applicant must have 40 quarters of earnings. For workers under the age of 31, there is a special calculation.

  2. To be fully insured and eligible for Social Security Disability payments, an applicant must have reported earnings within 5 years prior to the onset of disability.

If the above 2 criteria are met, then:

  1. There are 5 criteria that Social Security Administration evaluates when determining eligibility, such as (a) substantial gainful employment at the time of the application, (b) severe impairment, (c) listed impairment, (d) past relevant work and (e) residual functioning capacity.

Medicare for Social Security Disability recipients

If an individual receives Social Security disability benefits for a continuous period of 24 months, he becomes eligible for Medicare Part A and B, without regard to age.

Reduction of Social Security Disability benefits

An individual’s benefits are not reduced if he has other sources of income, such as IRA accounts, pensions, insurance, SSI, or Veterans Administration benefits.


Supplemental Security Income (“SSI”) is a federal program that pays a monthly cash stipend to indigent aged, blind or disabled individuals.


1. Categories: There are 3 separate categories of people who are eligible to receive SSI:

a. Aged: people above 65 years of age

b. Blind: either total blindness or minimal vision that is incapable of correction

c. Disabled: people who are unable to perform any gainful employment because of a medical or mental condition that is expected to last for at least a year.

2. Resource test: an individual is entitled to have no more than $2,000 in resources (a married couple is entitled to no more than $3,000)

a. Certain assets are exempt from calculation, such as a primary residence, a car, and household goods

b. Assets held for the benefit of an individual in a Special Needs Trust, if structured properly, are also not considered resources

3. Income test: an individual’s income from all sources is considered when determining eligibility  

a. Certain income is exempt, such as food stamp benefits, German reparation payments, reverse mortgages, etc.

b. Other income is disregarded, such as the first $65 of earned income and the first $20 of unearned income.

Transfer of Assets

At the time of application, Social Security Administration will conduct an investigation into any transfers that were done by the applicant or his spouse in the past three years. A penalty will be calculated for all transfers that were made for less than a full market value. The penalty is calculated by dividing the amount gratuitously transferred by the maximum monthly benefit. The maximum penalty period is 3 years.  

Medicaid for SSI recipients

Any New York State resident who is eligible for SSI is automatically enrolled into the Medicaid program.

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.

Thursday, February 12, 2015

What gifts can you make without informing the IRS? Why would you want to give large gifts during your lifetime?

Every person has a lifetime gift and estate tax exemption of $5.43MM (this number rises with inflation). Generally, most gifts made during a lifetime are counted towards this lifetime exemption.  If lifetime gifs exceed $5.43MM, a gift tax is due. If the sum of lifetime gifts and the money remaining in the estate exceeds $5.43MM, an estate tax is due. There are some gifts, however, that are not counted towards this exemption, and can be made without filing a gift tax return.  

Annual Exclusion:

A person is permitted to give annually up to $14,000 of assets per donee without this money being counted toward his indexed lifetime gift tax exemption.  A couple is allowed to give up to $28,000 per year per donee. For example, if you are married and you have 3 children, you and your spouse are allowed to give them 3 * 28,000 = $84,000 per year without filing a gift tax return.

A gift amount greater than $28,000 will not necessarily incur a tax liability, but it is required to be reported on a gift tax return and it will be counted toward a lifetime gift tax exemption. For example, if you gave $1MM in 2014 to your son, $986,000 will be reported on your gift tax return filed in 2014. No taxes will be due that year, but your lifetime gift tax exemption will be reduced to $4,356,000.

Whether or not you or your estate will actually owe any taxes on the gifts made over the annual exclusion will depend on your lifetime gift amounts. Currently, the lifetime gift tax exemption is $5.43 million per person. If the sum of your gifts made over the annual exclusion amount and the amount remaining in your estate at the time of death is over $5.43MM, then federal estate taxes will be due.

What can you give as a gift: The gift does not necessarily have to be in cash and does not have to equal the total value of the asset. For example, people gift fractional interest in businesses (LLCs, corporations), stocks, real estate, art work, etc. A fractional gift may be quite useful in terms of valuation because discounts for the lack of control and lack of marketability may also be applied.

Currently, there is no limit to the number of recipients. Therefore, if you have 20 children and grandchildren, you may gift up to $280,000 per year to them. However, the current proposal from the Obama administration would limit this amount to $50,000 a year. It is unclear whether this proposal would pass.

Medical and Educational Expenses

One can also give unlimited payments directly to qualified medical and education providers. Therefore, a grandfather can pay for his grandson’s college education, without having to file a gift tax return. The only stipulation is that the donor must give the money directly to a medical provider or school.

Gifts to Spouse

All gifts made to a spouse, both during the life and from your estate after the death, are federally tax free. However, the spouse must be a US citizen in order to take advantage of this law. Gifts to a spouse who is a non-US citizen are also possible, but with limited exemptions.  

Gifts to Charitable Organizations

Gifts to qualified charitable organizations are exempt from the Gift Tax.

Why would you want to make gifts during your lifetime?

1. The main reason is to reduce the size of your estate. Currently, the lifetime exemption is $5.43MM, a number which most people feel comfortable that they will never reach. However, this number may decrease (as it has in the past). Currently, the Obama administration proposes to reduce the lifetime exemption amount to $3.5MM. The number may be decreased even further. All gifts made as part of the annual exclusion amount are not counted in the estate, and will not incur the estate taxes (currently 40%).

2. Another reason to gift an asset is to shift the income to a person with a lower tax bracket. If the gift is of a property which generates income, the income tax will have to be  paid by a donee.

3. Another reason is to plan for the property that has the potential of high appreciation. If one owns stock of a closely held corporation that is currently worth $1MM but may be worth $10MM in the near future, it may be quite advantageous to transfer the stock (either to a child or to a trust) before the appreciation occurs. This way, only the $1MM of the lifetime gift exemption will be used, and no federal estate taxes will be due on the higher amount.

What are the disadvantages of making lifetime gifts?  

The main disadvantage is the lack of control. After all, you are giving up the assets. Your donees are free to sell, spend or transfer these assets, and you are not entitled to the income.  

Another disadvantage is the loss of the step up in basis. All completed gifts retain the basis of the donor. Therefore, if you gift a real estate with a basis of $100,000 that later appreciates to $1MM, the donee will retain the basis of $100,000 and may have to pay high capital gains taxes at the time of the sale.

A significant disadvantage for making lifetime gifts is Medicaid planning. If there is a potential that one may have to go into a nursing home in the next 5 years, then very careful planning must be done, because Medicaid may impose a long penalty.

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.

Monday, February 9, 2015

Social Security “Spousal Benefits” – the money you never knew you had!

Spousal benefits are available to spouses, divorced spouses and widows / widowers. Married individuals can choose which Social Security benefit they will receive – their own or a percentage of their spouse’s, whichever is greater. The benefit of receiving the ‘spousal benefit’ is to delay the collecting spouse’s retirement age, and as a result, receive a larger Social Security Payment from her own earnings in the future.

When Should One Apply for Spousal Benefits:

Only after the both spouses reach the full retirement age (FRA). If you apply before the FRA, you may be permanently penalized and will not receive the full benefit of the program.

How Does It Work?

For example, Mary is 66 (her FRA), and her husband Jake is 67 (past his FRA). Jake is entitled to collect $2,000 from Social Security. Mary, if she were to start collecting her own social security benefit, would receive $800. Mary can either begin collecting her own benefit, or collect the $1,000 of the “spousal benefit” for the next 4 years (50% of Jake’s full benefit). As a result, she will delay collecting her own benefits until the age of 70. At the age of 70, she can begin collecting her own benefits, but at that point they will be 132% of the original amount - $1,056.

What If The Higher Earning Spouse Does Not Want to Collect His Own Benefit Yet?

In order for Mary to collect the “spousal benefit”, Jake needs to apply for his own benefit first. If he is not ready to start collecting yet, Jake can apply for benefits and then ‘suspend’ them. As a result, Mary will collect her spousal benefit based on Jake’s retirement benefit at the FRA. Simultaneously, by suspending the receipt of his own retirement benefits, Jake will be taking advantage of the increased benefits that he will receive after he turns 70. There is absolutely no downside to collecting ‘spousal benefits’.

Are These Benefits Available for Divorced Spouses?

Yes.  As long as you have been divorced for at least 2 years, the marriage lasted 10 years or longer, both you and your former spouse are aged 62 or older, and the former spouse is entitled to Social Security Benefits, you are entitled to ‘spousal benefits’.

Two additional benefits for divorced spouses:

  1. the former spouse does not need to know that the spouse has applied for ‘spousal benefit’

  2. the former spouse need not have filed (or filed and suspended) his own Social Security benefit in order for you to receive it.

Are These Benefits Available for Widows / Widowers?

At the death of one spouse, the surviving spouse will receive the larger of her own benefit or her husband's benefit, but not both. Therefore, it is beneficial for both spouses not to take their retirement benefits too early. The delay in collecting Social Security and maximizing  both spouse's benefits can act as another form of life insurance.

See more at:

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.

Thursday, February 5, 2015

Trusts will be the only solution if the “Step Up” in basis is eliminated

Earlier I wrote a post about what is the step up that President Obama wants to eliminate. Currently, the step up in basis is the favorable tax treatment that heirs get if the assets were held until death by the parent. If the mother buys stock at $20 a share, holds on to it until the share price rose to $100, and then dies, the heirs will not need to pay any capital gains on the appreciation. Obama wants to eliminate this ‘loophole’, treat death as a taxable event, and make $80 appreciation taxable immediately at death.

The unintended consequence of this proposal would likely be an increased use of trusts. If the mother holds the stock that she bought at $20, and thinks that the stock is likely to appreciate significantly (such as, for example, shares of a closely held corporation), she would be better off transferring the stock into a trust. For example, if she transfers the stock when it is worth $30, under the new proposal only $10 would be immediately taxable. Any further appreciation (such as when the stock reaches $100) would take place inside the trust. As a result, it would be outside the estate of the mother, and the mother’s death would not trigger a taxable event.

There are multiple assets who would benefit from being transferred to a trust if this proposal goes through. Art work, income producing real estate, stock of a closely held corporation – basically all the assets that heirs might want to hold on to after the parents’ death, yet whose value is high enough that heirs might not have sufficient cash to pay the death taxes.

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.

Sunday, February 1, 2015

Differences between Medicare and Medicaid

The cost of nursing home care or 24 hour home care averages over $140,000 per year in New York City. At this rate, only the very wealthy can pay indefinitely for this care, without depleting their lifetime savings. Since most people do not have private long term care insurance to pay for this cost, seniors look to government programs to pay for the cost of long term health care. The following explains some of the differences between Medicaid and Medicare, the programs that people rely on to pay for this cost.

Difference Between Eligibility for Medicaid and Medicare

Medicare is available for those above 65 years of age and those with disabilities under the age of 65 who have received Social Security Disability benefits for 2 years. Medicare is based on one’s payments into the Social Security system, therefore eligibility is not based upon the income or assets of a beneficiary.

Medicaid is means tested, i.e. the recipient must qualify financially, both based on income and assets. In 2015, for people older than 65, the annual income threshold for a single individual is $9,900 ($14,500 for a married couple) and the asset threshold for a single individual is $14,850  ($21,750  for a married couple).

What Does Medicare Cover and What Does Medicaid Cover?

Medicare Part A covers in-patient medically necessary hospital care, skilled nursing facility care, skilled home health services and hospice care.  The requirement for “skilled” is very specific, Medicare Part A will not cover nursing home care or home care if it is simple "personal care services" (feeding, dressing, etc).  The fact that Medicare does not cover regular long term care comes as a surprise to many.  

Medicare Part B covers physician’s payments.

Medicare Part C provides beneficiaries with alternatives to the traditional fee for service. The services are provided by various health care providers, such as Health Maintenance Organizations ("HMOs").

Medicare Part D covers prescription drugs.

Medicaid covers chronic care in hospitals, skilled nursing facilities, participating physicians’ fees and home care services. Since Medicaid covers home care and nursing home care, something that Medicare and most private insurance plans do not, Medicaid coverage becomes almost a necessity for people who are expecting to need long term home care.

What Are Countable Assets (from Medicaid’s Perspective)?

All financial accounts in one’s name are countable. Retirement plans that are in pay status do not count as assets, however the monthly distributions are counted as income. The individual’s primary residence does not count as an asset (unless the Medicaid recipient is in a nursing home, the equity in the house exceeds $828,000, and there is no spouse or disabled child living in the home).

Can One Transfer The Assets and Qualify for Medicaid?

The answer is – it depends. All transfers between spouses are exempt, therefore there is no penalty period after those transfers. Similarly, if one is applying for Medicaid while living in his home, then he can transfer the assets to his children or to a trust in one month, and become eligible for Medicaid during the following month.
However, if one is applying for nursing home Medicaid, then Medicaid looks at all transfers made within the last 5 years of the application, and determines an ineligibility period based on the amount of assets transferred. Therefore, crisis planning is usually not very effective when it comes to nursing home Medicaid planning.


Can One Transfer All Assets to a Spouse and Qualify for Medicaid Immediately?

Yes, however, there is a maximum resource and income allowance for the “community spouse” – the spouse who remains in the community while the institutionalized spouse is in the nursing home. The community spouse may retain the home, may retain between $74,820 and $1192,20 in assets, and may retain the maximum annual income of $119,220. However, the community spouse has a  legal duty to support the institutionalized spouse. Therefore, if the community spouse has the assets and the income above these thresholds, Medicaid is likely to institute a collection action, to compel the community spouse’s support.

In general, Medicaid seeks contribution of 25% of the excess income, but may seek up to all excess assets. It is generally advisable to convert the excess assets into an income stream.  However, as there may be a dispute about how much of an income is “excess”, unintended consequences may result, with nursing homes filing guardianship actions to compel additional payments.

One should also think about the future of the second spouse. Generally, spouses are close in age. If one of the spouses currently needs home care or nursing home care, it is likely that the second spouse may need similar type of care in a few years. Therefore, planning for the second spouse is also advisable. Transferring all assets to a ‘community spouse’ may solve the immediate crisis and is not a good long term solution.  

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.

Friday, January 30, 2015

Top Ten Reasons Why You Might Want a Trust

The federal estate tax threshold for an individual is currently $5.43MM (and double that for most married couples). The New York State estate tax threshold is currently $2.06MM (and set to rise to the federal level by 2019). That all means that for the vast majority of New York residents, estate taxes are no longer an important reason to consider creating a trust.

Does that mean that no one needs a trust anymore? Not exactly. Below are the top 10 reasons why you might still want to create a trust:

  1. You want to avoid probate. If the assets are owned outright at the time of death and there is a will, then the family must go through probate. If the assets are owned outright at the time of death and there is no will, then the family must go through administration. Both probate and administration are costly, long-lasting, and often frustrating court processes. Placing assets in a trust avoids this hassle for your family.

  2. You favor privacy. The text of your will and the names and addresses of the people to whom you left money and property become part of the public record. A trust document, on the other hand, is completely private. If you have unusual family dynamics or a publicly recognized name you might want to keep the distribution of your assets private.

  3. You want to make it easier for your family to get control of your assets. If you place assets in a revocable trust, you can name yourself as a trustee while you are capable of acting. You name a successor trustee (a family member or an institution) to take over in case of you lose capacity or death. The transition is orderly.

  4. You have real estate in more than 1 state. If you have real estate property in more than one state, the family will have to go through the probate process in each state. Each state has its own rules and complications, and attorneys will have to be hired in each of these states.

  5. You have children who are professionals (doctors, lawyers, accountants, real estate owners). By placing assets in a trust, you can protect your children’s inheritance from creditors and malpractice claims. You can also protect your children’s inheritance from divorce proceedings.

  6. You have children or grandchildren who are minor. In a trust, you can specify when and under what circumstances your beneficiaries will receive the money. However, you will still need a will in order to specify who will be the guardian of your minor children.

  7. You have a family member who is not good with money or who has a drug / alcohol / gambling problem. You might want some kind of outside management for that beneficiary’s share of your estate.

  8. You have a child, a grandchild or a relative with a disability. If they are receiving public benefits like Supplemental Security Income (SSI) or Medicaid, you will want to create a special needs trust for any share of the inheritance that they will receive.

  9. You may want to change your mind. A trust often has the language that permits the Grantor to change the disposition of the assets amongst the various beneficiaries of the trust. Thus, if for now your trust beneficiaries are your son and your daughter equally, and later you want to give only 25% to your son, you do not need to create a new trust in order to accomplish that. You can simply write a letter stating your new preferences, and sign it in front of a notary.

  10. It is harder to challenge a trust. To submit the probate or administration petition to court, an agreement from all your potential distributees is required. If one of the children wants to cause problems, the probate process and litigation may take years and cost thousands. A trust, on the other hand, does not require a sign off from the beneficiaries in order for the assets to be distributed.

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.

Tuesday, January 27, 2015

Asset Protection: Self-Settled Trusts vs. New York Based Trusts

The goal of asset protection planning is to insulate assets from claims of creditors without concealment or tax evasion. Many people get sued. Some are in professions that almost seem to invite litigation (doctors, lawyers, business owners, home owners). Others simply get unlucky (i.e. car accident). If one is already getting sued, then it’s too late to protect the assets. Any transfers that get made after a creditor is known may be considered fraudulent conveyance and may be invalidated. The time to plan and protect the assets is before the debt or the creditor exists.

When it comes to asset protection from future creditors, there are 2 broad categories of trust options available: self-settled trust (based outside of New York State) and New York-based trusts.

Self-Settled Trusts:

What is it:  An irrevocable trust formed under the law of one of the 14 states in the United States that permit these types of Trusts. The Grantor is a beneficiary of the Trust.

  • The States that permit the self-settled trusts are: Alaska, Colorado, Delaware, Hawaii, Missouri, New Hampshire, Nevada, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, Wyoming.

Main features:

  1. The grantor of a self-settled asset protection trust irrevocably transfers assets to a trust under which he or she is a beneficiary.  The trust must also contain contingent beneficiaries of trust income and principal.

  2. An independent trustee controls all trust distributions. The Trustee must be based in the state under which the Trust is formed.

  3. The trust must contain a spendthrift provision, prohibiting the grantor and his creditors from accessing the trust’s assets.

  4. The grantor cannot have the ability to amend or revoke the trust. Often, however, the grantor retains a limited power to appoint the trust assets to persons and / or charities of grantor’s choosing at death.


  1. The Grantor can receive money from the Trust. This is one of the key features that make these trusts so desirable to individuals who are reluctant to part with their assets. Even though the Trust is irrevocable, the assets that are placed into it can ultimately be given back to the Grantor.

  2. Asset protection. Various states have different time periods during which the creditors can act after the asset transfer. For example, a Nevada trust has a 2 year statute of limitations – if the creditor pursues a claim 2 years after the debtor transferred his property into the trust, the assets cannot be recouped.

  3. Note, however, that if the debtor declares bankruptcy, the bankruptcy court has a 10 year statute of limitations for asset claw back.


  1.  The Trustee must be based in the jurisdiction under which the Trust is formed. This may be a significant problem for individuals who have no relationship to the state, and who have will have a complete stranger (or a corporate entity) control the distributions to them.

  2. Some creditors still have priority. Depending on the state, there are certain categories of creditors that are exempt from the asset protection features of these trusts (child support claims, claims from divorcing spouses and / or alimony, torts, etc.)

  3. The asset protection from general creditors may also be limited. There are very few court cases that test the validity of these trusts. Lately, however, there have been several bankruptcy cases that invalidated the asset protection features of self-settled trusts.

  4. New York has a policy against self-settled trusts and does not permit their creation in New York. However, New York must respect the laws of another state, therefore there are many of these trusts done by New York residents, in the hopes that their assets will be protected.  Yet it is unclear whether, when the creditor sues, New York courts will apply the law of the New York State (and invalidate the trust) or the law of the jurisdiction where the trust is formed.

  5. Cost. It is much more expansive to create and run a ‘foreign-based’ trust than a domestic trust.

Domestic Trusts:

What is it: An irrevocable trust that is formed in the New York State and governed by the New York State laws. The Grantor cannot be a beneficiary of the Trust.

Main features:

  1. The Trustee can be anyone, including the Grantor’s family member (although the spouse of the Grantor should not be the Trustee if asset protection is the reason for the creation of the Trust).

  2. The beneficiaries are usually the Grantor’s spouse and children. But the Trust can be for the benefit of anyone that the Grantor desires, including other family members, friends and charities.

  3. Can contain a spendthrift provision, but since the beneficiaries are people other than the Grantor, this provision will apply to them alone.


  1. These trusts have been tested multiple times in New York courts and are valid as an asset protection tool.

  2. The Trustee can be a local individual with whom the Grantor can have a relationship (a sibling, an uncle, a grandparent).

  3. Cost. It is much cheaper to create and to administer a domestic trust.


  1. The Grantor cannot be the beneficiary of the trust. This is a very hard decision to make for a lot of individuals. Once the transfer of an asset to the trust is made, it is an irrevocable decision and the asset cannot be given back to the Grantor.


Common feature: For both domestic and foreign trusts, the transfers cannot be fraudulent, meant to hinder or delay a creditor. Therefore, if there are known creditors and the transfer to the trust would make the Grantor insolvent, the assets are likely to be clawed back.

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.

Thursday, January 22, 2015

Planning for digital assets is just as important as planning for other assets.

What would happen to your Facebook account in case of your untimely death? Your email? Your online bank account? Your computer that is protected by a password? Your small business payroll system? Once you stop to think about the issue, you realize that without proper planning, finding and accessing your online accounts may be incredibly difficult, if not outright impossible, for the survivors.

What are digital assets? These can be digital accounts (such as Facebook, LinkedIn, Paypal, Amazon, etc), or digital assets (such as music files, photographs, Dropbox documents, Bitcoins, etc).

Why plan for these assets?

  • To ease the burden on the surviving relatives. Without a comprehensive list of accounts with passwords, survivors may never get the necessary information that you had wanted to share.

  • To prevent identity theft. There are multiple ways for thieves to obtain people’s information. With no one monitoring the accounts that relatives may not even be aware of, identity theft is rampant.

  • To preserve the digital legacy. Facebook refuses to provide information about the account to survivors once it is aware that the account holder has passed away. Other internet companies have similar provisions.  Your entire digital life may be erased.

  • To determine privacy issues. With advance planning, you have the ability to determine which accounts are acceptable to share with your relatives and the rest of the world, and which should remain private forever.

What happens if the survivors are not aware of accounts or passwords? Potentially, a crime! Federal laws criminalize the unauthorized access of computers and digital accounts and prohibit most service providers from disclosing account information to anyone without the account holder's consent.  By law, if an executor hires a computer specialist to find out the password on an account, under both federal and state laws, the executor is guilty either of a crime or a misdemeanor. You do not want to put the survivors in the position where their only option would be to commit a crime.

How to plan for digital assets?

  • You can create an inventory of all your accounts, together with passwords and security questions.

  • Include appropriate provisions in the will, giving your executor authority to access the digital assets.

  • Include appropriate language in the Power of Attorney ,  giving your your agent authority to access your digital accounts.

  • Consider digital estate planning services

  • Back up regularly

This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney client relationship.

Wednesday, January 21, 2015

What is the Step Up Basis that Obama Wants to Eliminate?

This is an extremely valuable tool in the long term tax planning that saves middle class thousands of dollars in taxes every year. It also enables families to pass on their most valuable possessions at death without the need for beneficiaries to immediately sell it.

What is it? Under the federal tax code, if a tax payer holds an asset until his death, the owner’s cost basis for such asset rises to the full market value at the time of death. That means that the starting point for measuring a tax gain rises to the value of the asset at the time of death. This has huge tax saving implications for the people inheriting the asset.

How does it work? For example, your grandmother bought some stock 50 years ago for $50,000. Now that same stock is worth $1,000,000. If your grandmother holds the stock until her death and you inherit it, your cost basis in the stock becomes $1,000,000. If you sell the stock a week after her death, you will not have to pay any capital gains taxes.

On the other hand, if your grandmother gifts you the stock during her life time, then you will “inherit her basis,” and your cost basis of the stock remains $50,000. If you sell the stock for $1,000,000, you will need to pay capital gains taxes on $950,000. The same result is achieved if your grandmother sells the stock during her lifetime. She will have to pay capital gains taxes on $950,000.

Why the step up in basis was fair: some people think that by having a step up in basis, families are unfairly avoiding the taxes. But the estate tax catches an inheritance at the other hand. If the grandmother was holding the stock at her death, that stock was included in her estate. As a result, depending on the state in which you live in, both federal and state estate taxes may be due. New Jersey taxes estates that are greater than $675,000. New York State taxes estates that are greater than $2MM (set to rise to $3.1MM on April 1st). The federal government taxes estates that are greater than $5.43MM.

President’s Proposal: Under the President’s proposal, the step up in basis would be eliminated. Any time an asset would be inherited or gifted, it would be treated as a sale, and taxes on capital gains would be due.

Exemptions from the President’s proposal: There are some notable exemptions from the proposal, made in order to ease the burden on middle-class Americans.

  • Capital gains of up to $100,000 per individual can be bequeathed free of tax for any type of asset.
  • Capital gains of up to $250,000 per individual can be bequeathed free of tax for a personal residence.
  • No tax would be due on inherited small business – until such business gets sold.

Implications for estate planning: If the proposals pass the Congress, most of the existing estate plans will need to be re-evaluated and likely modified. At this point, given a Republican-controlled Congress, it is unclear whether any of these proposals will actually become law.

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