Asset Protection

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.

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?

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.

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.

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

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

Self-Settled Trusts:

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

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

Main features:

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

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

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

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

Benefits:

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

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

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

 Drawbacks:

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

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

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

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

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

Domestic Trusts:

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

Main features:

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

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

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

Benefits:

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

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

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

Drawback:

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

    

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

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

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.

Some people think that asset protection is only relevant when you have a bankruptcy looming in the near future. Nothing could be further from the truth. Attempting to hide your assets when there are known creditors may be classified as ‘fraudulent conveyance’ and may not be effective.

Instead, asset protection is a legal method of arranging your assets in such a way as to make them impervious to a future creditor attack. It is most effective when done ahead of time, with the benefit of thought and planning. Below are 5 scenarios where asset protection would be appropriate:

1. Protecting Money from Irresponsible Young Children. If a parent dies without a will, or leaves everything in his will directly to the children, then under the New York law, children will receive the money (including life insurance proceeds) at the age of 18. Some may think that this is too early, because lots of children are still irresponsible at that age. Wills and trusts can be written in such a way as to delay the receipt of money until either a specified age, or a specified time in a child's life (marriage, college graduation, etc).

2. Medicaid Planning. An elderly person may need to receive long term care in the future (such as home care or nursing home care). In New York City, full time home care and nursing home care costs approximately $13,000 a month. Very few people have sufficient savings to be able to afford this cost for the needed time. As a result, asset transfers either to trusts or directly to children achieve the result of preserving the assets for the family, while making the parents eligible for long term care assistance from the government. To be most effective, these transfers should be done before the care becomes needed.

3. Special Needs Planning. A child or a relative with special needs may require government assistance for the rest of his life. Yet government programs cover only the most basic needs and parents and relatives may want to enhance the life of the child. There are ways of providing money for a special needs relative in a way that preserves his eligibility for government programs.

4. Protecting Money from Irresponsible Adults. Some families have members with problems – drug, alcohol, gambling, creditors, etc. Leaving money directly to that person is almost like throwing the money away. Trusts can be written in such a way as to control the distribution of money to a profligate family member, with the result that the money will be protected – both from the person and from his creditors.

5. Protecting Money from Your Own Future Creditors and Financial Loss. If you are engaged in a business where there is a possibility of you getting sued, then you may want to shield as many of your assets as possible. Moving your assets after the creditor has already materialized may be considered fraudulent and will not be effective. There are many ways to shield your assets: irrevocable trusts, LLCs, corporations, family limited partnerships, trusts in other jurisdictions, etc. The key to protecting your assets is to do so before asset protection becomes a necessity.