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Wednesday, March 11, 2015

Planning for Minor Children

Do you have minor children? Planning for the children involves multiple considerations.

1. Who do you want to raise your children if you are gone?

You need to name a “guardian” who will take care of your children in the event of your demise. You should name an alternate guardian, in case your first choice (usually your spouse) is unable to become one. This designation can only be done through a will.

You don’t want your children or your family to go through a custody battle. Stating your wishes clearly in a Will eliminates the courtroom drama.

2. Who do you want to manage the children’s assets while they are minor?

You need to name someone who will take care of the child’s assets while they are minor and potentially afterwards. It can be the same person as the “guardian” but it can also be a different person.  It will be either a “custodian” or a “trustee”, depending on the method used to leave the money.

You can decide whether or not there will be only one custodian or several (depending on how much control you want one person to have). You should not name your spouse as the sole custodian of the minor children’s money.

3. How do you want to split the money between your spouse and your children?

A very common misconception is that when a spouse dies, 100% of his money goes to the surviving spouse. In New York State, this is simply not correct, if there are children involved. Without a will expressing wishes to the contrary, the first $50,000 belong to the surviving spouse, and the remaining assets are split 50 /50 between the spouse and the children.

Do you like this default distribution? If you do not, then you need to write a will, expressing your desires about the percentage of your assets going to the spouse and the percentage going to your children.

4. When do you want your children to receive the money?

Without a will expressing wishes to the contrary, the children will receive all of their money at the time they turn 18 years old. Do you like this default distribution? Some people think that 18 is too young to receive a large inheritance. If you agree, then you need to decide when they children should receive the money and who will manage their assets in the meantime.

You can create a trust for the benefit of your children. The trust will specify at what age and under what circumstances the money will be distributed. You can decide who will manage the money and determine the distribution. You can decide in what proportion the money will be distributed. This trust can be created either during your life or written into a Will, to come into effect only after your demise.

Do not think that you need to have to be rich to have a trust. A $100,000 inheritance placed into the hands of an 18 year old without any limitations or control may spell disaster. With proper estate planning, the same money managed by a responsible friend or a relative can be used to pay for college education or vocational training, establishing a child’s future.  

5. Will the children have sufficient money to live on if something happens to you?

Even if you establish a guardian for your children, consider whether or not that guardian will have sufficient funds to raise your family. Will there be sufficient money for college, summer camps, and extracurricular activities?

If you are unsure of the answer, consider buying life insurance. The proceeds will ensure that your children are provided for until they are old enough to support themselves.

6. Do you have a child with Special Needs? There are many steps you should take when planning for this child’s future.

  • If the child has capacity to execute legal documents, then as soon as he turns 18, he should execute advance directives.  
  • If the child does not have capacity, then prior to the child turning 18, you will need to initiate a guardianship proceeding.
  • Depending on the disability, either an Article 17A or an Article 81 guardianship may be appropriate.
  • Prior to the child turning 18, you need to register with OPWDD (New York State Office for People with Developmental Disabilities), in order to obtain continuing services, assistance with living and additional education after high school.
  • You should consider establishing either a First Party Special Needs Trust or a Third Party Special Needs Trust, depending on your individual situation, in order not to jeopardize the child’s ability to receive government programs.


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, March 9, 2015

Facebook now permits a "legacy contact".

Facebook now allows you to designate a "legacy contact". This is a person who will be able to take over the account in a limited capacity if the user dies.

  • If you do not designate a legacy contact, but name a digital heir in a legal will, Facebook will honor your wish.
  • If you do not do anything, your Facebook account will simply freeze.

Friday, March 6, 2015

Role of Insurance in Estate Planning

Failure to plan can mean unnecessary hardship for loved ones. The hardship can be financial (not having sufficient money to live on) or emotional (a feeling that the parent treated the children unequally).

Life Insurance

Reasons to have one:

  • For heirs: Immediate cash for payment of debts and burial. Elimination of the possibility of a forced sale of assets that would be needed to generate cash to live on.

  • For businesses: Funds for surviving partners to buy the partnership interest of the deceased partner from heirs.

  • For fairness: if a parent wants to pass on a business (or a real estate investment) intact to one child, the other child may feel left out. In order to prevent one heir from having to buy out interests of the other heirs, a life insurance policy left to the other children may equalize the inheritance.

  • For creation of a larger estate: if there are few assets to leave to heirs, or if the parent wants to increase the money she leaves, a life insurance policy is an easy method of doing so.

  • For funding of a Supplemental Needs Trust. Many parents are worried about what will happen to their special needs children after the parent passes. While the parent is alive, he is caring for and supporting the child. But after the parent's passing, life insurance proceeds placed into a Supplemental Needs Trust for the benefit of a special needs child can assist the child for the rest of his life. The money in this trust can help pay for the child's needs beyond those provided by government programs, including a private care giver, better medication, better living facility, etc.

  • For avoidance of estate tax: COMPLEX STRATEGY: an individual can pay high premiums for a large life insurance policy on his own life. The policy should be owned by an irrevocable trust, preferably with a lot of beneficiaries (to take advantage of the annual gift tax exclusion). By paying high premiums and utilizing the annual gift tax exclusion, an individual gets money out of his estate without having to pay gift taxes. Once the individual dies, the life insurance policy proceeds are out of his estate, no estate taxes are due, and the heirs receive a large inheritance.

Types of Life Insurance:

  • Term Insurance provides financial protection for a limited specified period of time. The policy provides a constant amount of insurance, the annual premiums are fixed, the term of the agreement is predetermined (usually 10 or 20 years). If the premium is not paid, the policy usually lapses. This is the cheapest type of life insurance.

  • Whole Life policy provides a death benefit for the entire life of the insured. There is also a tax-deferred build up of cash values. Premiums can be paid either for a specific period of time or for the life of the insured. You can borrow an amount from the insurance company up to the current cash value of the insured.

  • Universal Life offer flexible premium payments, an adjustable death benefit and cash values that are often tied to current interest rates. There may be beneficial tax treatments.

  • Variable Life builds cash value that can be invested in a variety of separate accounts. Policyholders assume the risk of negative investment performance.

  • Survivorship Life policy insures two lives simultaneously. Policy provides benefits to heirs only after the last surviving spouse dies.


There are other common types of insurance that you should consider as part of your comprehensive plan.

  1. Disability insurance. For people between the ages of 25 and 65, the chances of becoming permanently disabled may be higher than chances of dying. If you live in a one income household, you may not want to rely on the employer’s policy, since it may be inadequate or may only apply if you are still working there.

  2. Long Term Care Insurance. This type of policy is expensive. However, given that over 70% of seniors can expect to need long term care (home care or nursing home care) at some point in their life, a long term care insurance policy may be a basic necessity. Without one, the alternative options are Medicaid Planning or using all of your savings to pay for your care.  A long term care rider may now be attached to a whole life policy.

A team of an estate planning lawyer and a financial advisor can give you comprehensive advice for a plan and a policy that is appropriate for you.

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, March 2, 2015

What happens with government benefits if one gets an unexpected windfall?

There are many government programs: SSI, Medicaid, food stamps, etc. Most of these programs have thresholds for recipient’s income and assets. What happens when recipients receive an unexpected windfall – inheritance, personal injury award, etc? Can one retain both the money and the benefits? Can one decline the award? The answer depends on the type of benefit in question: 


Qualification: In order to qualify for SSI, one’s assets cannot exceed $2,000 (if single) and $3,000 (if married). Any uncompensated transfers of assets done within 3 years of SSI receipt will incur a penalty.

Effect of a windfall: if the SSI recipient receives a windfall, it is considered income in the month of receipt, and asset if retained until the next month. Any transfer of the asset will incur a penalty and a disqualification from the benefit. The only exception to this rule is for people who are below 65 and disabled; they are permitted to transfer the windfall to a Special Needs Trust for the benefit of themselves without losing their SSI benefit.

What to do: consider the amount of money received. If the amount is small, you may consider spending the money on yourself in the month of receipt. There are many things that one can do – house improvements, payment of debts, food, clothing, vacation, etc. As long as the money is spent within 1 month, the recipient will retain his eligibility for future months. 

If, on the other hand, the amount is large, you may consider transferring the money to a trust / relatives and then losing the benefit for the next 3 years. The maximum amount of SSI benefit in New York for 3 years is approximately $29,000. If the personal injury is $500,000, the loss of $29,000 is not that significant.



Qualification: depends on the age of the recipient and the type of Medicaid care that one is receiving.

If below age 65, not an SSI recipient and no disabilities, Medicaid considers only one’s income. Assets are not considered. Income thresholds depend on the number of people in the family and whether or not there are children.

If after age 65, Medicaid considers both income and assets. An individual’s assets cannot exceed $14,750 and income cannot exceed $825 per month.

Asset transfers: If one receives only home care or medical care, then Medicaid does not impose a penalty on asset transfers. On the other hand, if one is in a nursing home or will apply for nursing home care in the next 5 years, Medicaid imposes a penalty of up to 5 years. 

Effect of a windfall: If a Medicaid recipient receives a windfall, it is considered income in the month of receipt, and asset if retained until the next month. If one is below 65, one may either retain the asset or transfer it, and retain his eligibility for the future months.

What to do: If a Medicaid recipient is above 65, consider the amount of money and the type of care that is needed. Generally, seniors depend on Medicaid as their medical insurance, therefore retaining the assets and losing the benefit may not be an optimal solution. Consider first spending the money on your immediate needs (paying down debt, house repairs, etc). Then consider transferring the remaining money. Remember that if nursing home is needed in the 5 years after the transfer, Medicaid may impose a penalty and deny the benefits.

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 28, 2015

Poder notarial - un documento importante que cada adulto debe firmar

 ¿Qué es? Un poder notarial es un documento que da a otra persona ( su agente ) la autoridad para tomar decisiones legales y transacciones en su nombre.

¿Por qué es necesario? Si una persona pierde la capacidad de actuar en su propio nombre, a continuación, el agente puede actuar en su nombre . Si no hay un poder firmado, tendrá que ser iniciado por un Tribunal Testamentario para obtener un tutor legal designado a un procedimiento de tutela - algo que consume mucho tiempo, es muy intrusivo, y también un procedimiento costoso.

¿Quién debe ser nombrado como mi agente ? A menudo, los cónyuges se nombran como sus principales agentes . Si usted tiene hijos mayores de edad , uno de ellos puede ser nombrado como agentes sucesores. Si no hay hijos mayores de edad , un padre competente , un pariente o un amigo puede ser nombrado como el agente . Usted puede nombrar a más de una persona para actuar como agentes simultáneos , y especificar si desea que actúen juntos o separados . Lo más importante es nombrar a alguien a quien usted pueda confiar.

¿Cuándo se hace efectivo? Un poder notarial duradero se hace efectivo de inmediato al firmar el documento . A menudo , ya que el documento se hace como parte de la planificación general, el documento firmado se mantiene en posesión del autor , junto con otro documento de planificación de sucesión . De esta forma , sólo si el autor pierde capacidad, su agente podrá obtener el documento y utilizarlo.

¿Qué tipo de poderes tiene mi agente sobre mis asuntos ? Usted tiene la capacidad de controlar la situación. La forma legal tiene una lista de los poderes que un agente pueda tener. Un abogado competente tendrá una forma que tendrá poderes adicionales que se pueden conceder . El poder más eficaz del abogado es el que otorga las más amplias facultades , porque no se puede anticipar el futuro. Sin embargo, si usted se siente incómodo con la concesión de su agente de todos los poderes , puede especificar cuáles desea ceder. Este es un documento muy importante , uno que le da a otra persona el control sobre su vida financiera , y es por eso que es muy importante que lo firme delante de un abogado competente que pueda explicar las implicaciones de las diversas disposiciones .

¿Qué puede el poder no se utiliza? El poder no se puede utilizar para tomar decisiones de atención médica en su nombre . Con el fin de designar a un representante de atención médica , debe firmar un Poder para la Atención de la Salud, un documento completamente separado.

¿Cuándo se vence el Poder? Hay 2 maneras en que el documento se expira . Primero, usted puede revocar su poder de abogado en cualquier momento de su vida , con tal que usted tenga la capacidad mental para hacerlo. Segundo , el poder legal se expira inmediatamente después de que uno muere. Al igual que uno no puede hacer negocios jurídicos después de la muerte , su agente también pierde toda su autoridad para actuar en su nombre después de que usted muera.

Es el documento objeto de abusos ? Absolutamente . Con la firma del documento , le está dando a otra persona el acceso a sus cuentas financieras y de sus propiedades . Es por eso que su agente debe ser alguien de confianza para actuar en su mejor interés.

Este artículo sólo se ofrece información general. Cada situación es única . Siempre es útil hablar con un abogado especializado, para averiguar sus diferentes opciones y consecuencias de las acciones . Como cada caso tiene diferencias sutiles , por favor no utilice este artículo para obtener asesoría legal. Sólo una carta de compromiso firmada creará una relación de abogado-cliente.

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.

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