Estate Planning

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.

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.

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.

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.

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.

Wednesday, January 14, 2015

Celebrity Estates – the smart and the not-so-smart ways to leave the money.

Three beloved celebrities died in 2014 – Robin Williams, Phillip Seymour Hoffman and Joan Rivers. Both their deaths and their estate planning could not have been more different.

Robin Williams left behind 3 children from 2 separate marriages. During his life, Mr. Williams set up trusts for his children. The trusts are structured in such a way as to provide 3 separate payouts to the children – when they reach 21, 25, and 30.

This was a smart way to leave the money. Unlike a will, whose details are public, these trusts are private instruments, so the amount of money in the trusts and conditions of the payouts remain private.  Furthermore, the money is protected from the children’s mothers – whatever their eccentricities may be, and whoever their new spouses may be. The money is also protected from the children’s own immaturity – at least the hope is that a child at 30 is more mature than a child at 18. Finally, by taking the money out of his estate during his life, Mr. Williams may have avoided having his heirs pay an estate tax on their inheritance.

After his death, it was disclosed that Mr. Williams was diagnosed with Parksinson’s disease and Lewy Body Dementia. Had those trusts been established after his diagnoses, they would have been subject to potentially long and costly court battle. By establishing these trusts before he became ill, Mr. Williams saved his family a lot of money and pain.

Phillip Seymour Hoffman, on the other hand, left his entire estate of $35MM to his partner, the mother of his 3 children. He left nothing to his children directly.

This was not the smartest way of leaving the money. First, all the details of his estate are public, since everything passed through a will. This result could have been avoided by the use of a revocable trust. Second, Mr. Hoffman’s partner had to pay a $15MM tax on the inheritance: since they were not legally married, she could not take advantage of unlimited marriage deduction. This high amount could have been avoided by a marriage, or at least reduced by through the use of lifetime gifts. Third, this plan places a lot of trust into one person – the partner. She is now free to squander the money, leave it all to charity, or leave it to one of the children to the detriment of the others. She could also be sued (i.e. by an angry driver) and lose the money in a lawsuit. Overall, not a fair result to the children.

It is understood that Mr. Hoffman did not want his children to become ‘trust fund babies’. However, his desire could have been achieved by having a trust whose payout is contingent upon his children achieving certain results in life (graduating college, keeping a job, remaining drug free).

Joan Rivers’ estate was worth approximately $150 million. She wrote a will, where everything that she owned was left to a Trust (this is called a simple ‘pour over’ will). Reportedly, the trust language provides that she left her fortune to a combination of her daughter, grandson, friends and charity.  The executor and trustee is Ms. Rivers’ daughter. The charities that were important to Ms. Rivers were listed in the trust. The friends whom Ms. Rivers wanted to benefit were named in the trust. At the same time, the actual amounts given to each beneficiary remain private (because, unlike a will, the trust document does not need to be made public). Furthermore, there is a provision in the will that anyone who challenges either the trust or the will is going to be completely disinherited.

This was a clearly well thought out plan, put together while Ms. Rivers was in full command of her facilities.  Regardless of whether or not Ms. Rivers’ estate taxes were minimized, her wishes were fulfilled and the people and causes that she wanted to benefit will receive her money.

Sunday, January 11, 2015

Power of Attorney – an important document that every adult should have.

What is it? A Power of Attorney is a document that gives another person (your agent) the authority to make legal decisions and transactions on your behalf. 

Why do you need it? If an individual loses the capacity to act on his own behalf, then the agent can act for him. If there is no Power of Attorney signed, a Guardianship proceeding will need to be commenced with a Surrogate Court to have a legal guardian appointed – an extremely intrusive, time consuming, and expensive procedure. Every adult above 18 years of age should have this document signed.

Who should be named as my agent? Often, spouses name each other as their primary agents. If you have adult children, then one or more of the children can be named as successor agents. If there are no adult children, then a competent parent, relative or a friend can be named as the agent. You can name more than 1 person to be your simultaneous agents, and specify whether or not you want them to act together or separate. The most important consideration is to name someone that you can trust.

When does it become effective? A durable Power of Attorney becomes effective immediate upon signing. Often, since the document is done as part of the overall planning, the document is signed but retained by the principal. together with other estate planning document.  This way, only if the principal loses capacity, will his agent get the document and use it.

What kind of powers does my agent have over my affairs? You have the ability to control that issue. The statutory form has a list of powers that you may grant to your agent. A competent attorney will have a form that will have additional powers. The most effective Power of Attorney is the one that grants the broadest powers, because one cannot anticipate the future. However, if you are uncomfortable with granting your agent all of the powers, you can specify which ones you want to give (i.e. banking and real estate, but not trusts).  The Power of Attorney is a very important document, one that gives someone else the potential control over your financial life, that is why it is very important to sign it in front of a competent attorney who can explain the implications of various provisions.

What can the Power of Attorney NOT be used for? The Power of Attorney cannot be used to make health care Decisions on your behalf. In order to designate a health care agent, you need to sign a Health Care Proxy.

When does the Power of Attorney expire? There are 2 ways for the document to expire. First, you can revoke your Power of Attorney at any point in your life, as long as you have the mental capacity to do so. Second, the Power of Attorney expires immediately upon your death. Just like one cannot make legal transactions after death, your agent loses his capacity to act on your behalf as well.  

Is the document subject to abuse? Absolutely. By signing the document, you are giving someone else the access to your financial accounts and real estate. That is why your agent should be someone that you trust to act in your best interests.  

Disclaimer: 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, December 16, 2014

Why Single People Need Estate Planning

Generally, most estate planning literature focuses on married individuals. However, according to the Census Bureau, in 2013 almost half of Americans age 15 and older were single. If you are single and die intestate (without a will) your money will be distributed in ways you may not like.

Read more . . .

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