Asset Protection

New York has a very strong policy against self-settled trusts. A self-settled trust is one where the Grantor transfers assets to an irrevocable trust but remains one of the Trust’s beneficiaries. While these transfers are legal, New York believes that they are “void as against creditors”. As a result, if the Grantor remains a beneficiary of this type of Trust in New York, his assets are not protected against creditors.

Nevada, however, together with approximately 12 other states, permits these types of trusts and protects the assets against creditors.
Read more . . .

There are many reasons why one would want to withdraw money from an investment real estate. Some of these reasons include: no longer willing to manage the property, no longer needing the income tax benefit, desiring liquidity or desiring diversification in one’s investments.

1. The easiest way of monetizing a real estate property is selling it. However, with a sale come a host of costs. These costs include brokerage fees and income taxes (both federal and state). Depending on the level of appreciation and on prior depreciation deductions, the gain can be quite substantial and may result in a net amount received that is significantly less than the sale price.

2. There are methods of minimizing the income taxes on the sale of the property. These methods include:

           a.    An installment sale. This is a method of sale where at least one payment occurs after the year in which the disposition took place. Under this method, gain is not taxed when the disposition occurs, gain is recognized gradually as the payments are received.

           b. Borrowing against the property. If one wants to create liquidity while retaining ownership of the property, one can borrow against it. There are no tax consequences to this method. Cash can be used for other purposes.

            c. Like-kind exchange under 1031. This method provides a tax-deferral mechanism. No federal gain or loss is recognized where a real estate property held for use in a trade or business or for investment is exchanged for another “like-kind” property. There are several specific steps that must be taken to qualify for the exemption under section 1031. 

            d. Contributing property to a Charitable Remainder Trust (“CRT”). If one is at least somewhat charitably inclined, one can contribute property to this trust, where specified payments are made to a non-charitable beneficiary for a number of years and the remainder goes to charity. There are many tax advantages to this transaction, the main one being that upon a sale of the property by the CRT, no federal income taxes are due.

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. ATTORNEY ADVERTISING

A researcher at Ohio State University found that Americans who receive an inheritance save about half of it and spend, donate or lose the rest. However, almost 30% of Americans who receive the inheritance had negative savings rate within 2 years of receiving the inheritance, meaning that they spent it all.

There are strong similarities in these spending habits with people who receive lottery winnings. Apparently, lottery winners save only 16 cents of every dollar won and have dramatically higher bankruptcy rates within 5 years after winning.

Of course, the inheritance that people receive may not be a large amount of money. The median inheritance for the past 30 years was $11,340. For those people who inherit $100,000 or more, the percentage of people who spent it all within two years dropped to 19%.

If you receive an inheritance (or a lottery winning) – be careful. I’ve seen bad financial advisors who have only their own interests at heart. I’ve also seen bad “friends” who convince unsophisticated people to invest in their ‘brilliant’ business schemes. There is no perfect answer about what to do with the money. But not spending it immediately would probably be the best advice!

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. ATTORNEY ADVERTISING

Many seniors are not aware that Medicare does not pay for custodial long term care. An individual suffering from Alzheimer’s disease or dementia, which requires assistance with feeding, bathing, and taking oral medications will not be covered by Medicare not by a Medigap insurance. The only way of paying for custodial long term care are: private payments, Medicaid, or Long Term Care Insurance.

Long term care: this is care that can be provided in the home, in a nursing home or in an assisted living facility. Eligibility for benefits is based on medical necessity as evidenced by an individual’s inability to perform a specified number of personal functions (activities of daily living): bathing, toileting, dressing, self-feeding, lack of mobility or loss of cognitive capacity.

Home Care: Most long term care insurance policies have a home care component. It is usually beneficial for an elderly person to continue to reside at home: familiar surroundings, familiar people and familiar foods provide comfort and control. The long term care insurance policy can pay for the number of hours required by the patient. This is a large improvement over Medicaid: individuals relying on public programs (Medicaid) frequently find that the number of hours authorized may be significantly less than what is required for the individual’s health and safety.

Coverage Provisions: These vary, depending on the need and the willingness to pay. In New York, a policy must offer at least 24 consecutive months of coverage. Each policy generally provides for a specified payment level, based on whether care is received at home, in an assisted living facility or in a nursing home. If the cost of care exceeds the policy benefit, the full benefit will be paid. If the cost of care is lower than policy benefit, the actual cost will be paid. Most policies contain a deductible, usually measured in days. The benefit period can be as short as two years, and as long as the life of the insured, with everything in between.

Exclusions: certain conditions are excluded by long term care insurance policies. These are, among others: alcoholism and drug additions, attempted suicide or intentionally self-inflicted injuries, mental and nervous disorders (except Alzheimer’s disease or demonstrable organic brain disease).

New York State Partnership for Long Term Care

These are specific long term care insurance policies approved by the New York Partnership policy.

Under a Total Asset Protection plan, the insurance policy will pay for the first three years nursing home care or six years of home care or a combination of the above (where two home care days are equal to one nursing home day). Individuals who have received these specified Partnership long term insurance benefits may apply for Medicaid and be eligible without regard to the value of their assets. Individuals may sell, transfer spend or retain assets, before during and after applying for Medicaid nursing home care – the penalty period does not apply. However, the Medicaid income levels will still be applied.

The policy premiums depend on age and coverage chosen. The Partnership policies are generally slightly more expensive than other policies. Annual premiums for a basic policy can range from $2,800 for a 40 year old to $13,000 for an 80 year old. However, the benefit is the ability to apply for Medicaid without transferring assets. All aspects must be considered and analyzed before a decision is made.

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. ATTORNEY ADVERTISING.

Why estate planning: In general, there are many reasons why people engage in estate planning. Those include: death time tax mitigation, avoidance of probate, smooth transition of property at death, and making sure the deceased’s dispositive wishes are followed. Asset protection is an additional aspect of estate planning, which safeguards the assets from the risks they would otherwise be subject to.

What is asset protection: The goal of asset protection is generally to deter litigation. At the same time, the plan must be flexible enough to provide options to the client and to change over time in response to changing laws.  However, asset protection will not aid the client in the avoidance of taxes and it will not aid the client in the fraudulent hiding of assets.

Timing is crucial. There is no one particular planning tool that will aid every client in protecting the assets. Every situation is unique. The main lesson, however, applies to everyone: planning must be done in advance of litigation. Protecting or transferring assets after there are claims, may expose the client and the attorney to criminal and civil liability.

What one can be sued for: In general, one can never be sure what one will be sued for. If a person is a sole proprietor, then he can be sued for his business. If there is a corporation or an LLC, the corporate veil can be pierced. If one is a general partner, the partnership’s debts may cause personal issues. And generally, there is a “deep pocket syndrome” in America, where lawyers often base their analysis on whether the opposing party can pay a judgment.

Tools of asset protection: Gifting, joint ownership, insurance, corporations, family limited partnerships, domestic trusts, foreign trusts.

Result of asset protection: The client will divest himself of assets and still retain a degree of control over the property. As a result, if  / when in the future a cause of action accrues, there will be little incentive for the opposing side to sue, because there will be little or no assets to pursue.

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.

When drafting a testamentary or an estate plan, one always should always consider family dynamics in order to preserve family relationships.

Parents may have several concerns about their children: entitlements, sibling rivalry, children’s spouses, safeguard from malpractice actions, and safeguard from drug abuse.

Entitlements: for parents of younger or minor children, the parents may not know what the children are going to be like when they grow up. It is up to the parents to build in incentives into their estate plan, so that the child graduates college, gets a career, waits until a certain age to get married, etc. One must be careful of entitlements that are against ‘public policy’ as those may be found void by the courts. Explicitly racist bequests (i.e. no money if she marries a Chinese) will not be upheld.

Sibling rivalry: most parents should be concerned about sibling rivalry. Once the parent is gone, the glue that held the family together may be gone as well.  A typical parent usually names the older child as the trustee or an executor of the trust, despite the feeling of ill-will that this nomination may cause. One method to avoid the rivalry may be to name a third party executor or a trustee.  This way the children may actually unite against a common enemy, who is not distributing the assets fast enough (in their opinion).

If the parent has left different provisions to children, it is imperative that the parent have a conversation with the children about his plan prior to his own demise. It is unfair to all siblings involved, if the disinherited child will find out about his disinheritance from the other siblings. In addition to feelings of resentment against the parent, the disinherited child may also suspect the other siblings in coercing the parent into doing what was done, and may start litigating.

Spouses of the Children:  parents usually want to leave bequests to their children and grandchildren, but not necessarily to the spouses of their children. Bequests to spouses may either be specifically avoided, or restricted, such that if the spouse divorces the child, the bequest will terminate.

Protection from malpractice action: A lot of the trusts that are now set up are done to protect the beneficiaries from creditor actions. The trust can be structured in a way that permits the beneficiary to enjoy the assets but not to technically own them.

Protection from drug abuse: if the parent is concerned about a child who has a drug, alcohol or gambling problem, naming a third party trustee is almost a necessity. The trust may also permit a trustee to engage in periodic testing of the child, and to stop making any payments to the child, in full discretion of the trustee. The goal is to provide for the child’s basic needs (shelter, food, clothing), and potential rehabilitation, without supporting the problem.

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.

Medicaid Eligibility:

What is homestead: A “homestead” is the primary residence occupied by the Medicaid recipient or his spouse, minor or disabled child. A homestead is an exempt resource for the purpose of Medicaid eligibility.

Penalty Period: All transfers, including the transfer of your home, are subject to a ‘look back period’ from the time of the application for Medicaid nursing home benefits. Currently the ‘look back period” is 5 years. The period of ineligibility for nursing home services is calculated by dividing (i) the uncompensated value of the transferred resource by (ii) the average regional monthly cost of a nursing home to a private pay patient. The period of ineligibility begins only when the Medicaid recipient is in a nursing home and “otherwise eligible”. The maximum penalty period is 60 months.

There is currently no look back period and no penalty for uncompensated transfers for Medicaid home care benefits.

Exempt transfers: Some transfers are exempt and do not incur a penalty period. Those are transfers to a spouse, transfers to a minor or disabled child, transfers to an adult child who has resided with the parent for at least 2 years prior to the transfer and became a primary caregiver, and transfers to a brother or sister of the owner who has lived with the owner for at least one year prior to the transfer and who already owns an ‘equity interest’ in the home.

Why should the home be transferred if it is an exempt resource? Even though it is an exempt resource, Medicaid has a right to put a lien on the home for the services provided to the Medicaid recipient. Therefore, even though one will have a right to receive Medicaid and a right to live in one’s home, after the Medicaid recipient’s death, the heirs will likely have to sell the home to pay off the Medicaid lien.

Furthermore, if the Medicaid recipient has to go into a nursing home and there is no spouse or minor / disabled child living in the home, the homestead becomes an available resource. At that point, it will likely have to be sold and the proceeds will be used to pay for nursing home.

Various Types of Transfers That Need to be Considered When Protecting the Home

1. Outright transfer to a spouse

2. Outright transfer to children / relatives

3. Outright transfer with a retained life estate

4. Transfer to a revocable trust

5. Transfer to an irrevocable trust with a retained life estate

6. Transfer to an irrevocable trust

Each type of a transfer has its own Medicaid, legal, asset protection and tax implications. The effect on the Medicaid recipient during his lifetime, the effect on the beneficiaries during the Medicaid recipient’s lifetime, and the effect on the beneficiaries after the Medicaid recipient’s lifetime should be considered.

There is no one correct solution that applies to everyone. Each situation is unique, and the client’s health, family status, resources and goals must be considered. It helps to talk to an elder law attorney, to evaluate the different options, and to understand the implications of your actions.

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.

Another warning for anyone thinking of using self-settled trusts. A Utah court recently decided that Utah state law should apply to an asset protection trust, even though the stated choice of law in the trust was Nevada.

If the same logic will apply in New York, any local creators of self-settled trusts will be doomed, because New York has a strong policy against self-settled trusts. As a result, any transfer to such a trust my be considered void, and the money may be available for creditors!    As I wrote earlier, there are multiple considerations when choosing a type of asset protection trust to use. Talk to an experienced attorney if you are thinking about asset protection.

http://law.justia.com/cases/utah/supreme-court/2015/20100683.html

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.

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.

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.

http://www.forbes.com/sites/janetnovack/2015/01/20/obama-attack-on-trust-fund-loophole-could-increase-tax-advantage-of-trusts/

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.