Letting Software or Online Service Plan Your Estate: Is It Worth the Risk?

There are several websites that offer customized, do-it-yourself wills and other estate planning documents. These computer-based services appear to offer the consumer a cost-effective and convenient alternative to visiting an Estate
Planning or Elder Law attorney. Or do they? Is online estate planning worth the convenience and initial savings? How do the documents created compare to those that a qualified attorney would produce?

To answer these questions, ElderLawAnswers asked two experienced Estate Planning and Elder Law attorneys to evaluate three leading online will preparation and estate planning programs: Nolo’s Online Will, BuildaWill, and LegalZoom. Their findings and ElderLawAnswers’ conclusions are presented in a five-page whitepaper that is available for free on ElderLawAnswers website.

The conclusion: “We conclude that while online estate planning could possibly work for people who have little or no property, small savings or investments, and a traditional family tree, the significant remainder of the population should not rest easy using one of these programs and should instead consult with a qualified Estate Planning attorney. In other words, in all but the most commonplace Estate Planning situations (and only an attorney can determine what is “commonplace”), do-it-yourself estate planning programs can be a risky, and often quite costly, substitute for in-person planning with an experienced estate planning attorney.”

I encourage you to read the whitepaper and see for yourself. Common issues with these type of estate plans include oversimplification. For example they do not explain the complexities of naming too many decision makers to serve at the same time, nor do they explain why a minor child or an elder parent may not be a good choice to name as an agent. They often overlook tax laws. Its important to remember that each State’s probate laws and tax laws vary. Further, mixed marriage situations are never a good fit for these programs. Additionally, users may miss powerful opportunities to sheild a child’s inheritance or plan for a special needs child. Finally, there is the issue of liability. Who do you hold accountable if a mistake was made?

In my office alone, I have several consultations per month where I assist clients in backing out of poorly drafted, do-it-yourself estate plans, and into something that makes sense for them and their families. Its very important to remember that there are no one-size-fits-all when it comes to planning one’s estate but that the utmost care should be placed in choosing the right person (Estate Planning or Elder Law Attorney) to help you, and not the right computer program.

Rodrigues Case and Pending Massachusetts Legislation make Homestead Protection for Trusts a Reality (Finally!)

On February 23, 2010, the US Bankruptcy Court in Massachusetts finally did what the Massachusetts state legislature has been unable to do for years: the court ruled that the Massachusetts Homestead Exemption is applicable to an owner whose property is in a revocable trust. Since this decision, In re Rodrigues, Bankr. D. Mass. Case No. 09-11960-JNF, the legislature has been working to pass a new statute that will replace Massachusetts General Laws, chapter 188, the statute concerning homesteads. The legislature is very close to passing a new law. Today we will review the Rodrigues decision, the pending Massachusetts legislation, and how it may be beneficial to you.

Olga M. Rodrigues and her now deceased husband purchased a home in September 1979. Mr. Rodrigues died in 1994, and Mrs. Rodrigues became the sole owner of the home. Shortly thereafter, she transferred the home into a revocable trust where she was the trustee and her children were the beneficiaries of the trust upon her death. Once the home was transferred into the trust, Mrs. Rodrigues no longer owned the legal title to the home; at the point, she only owned equitable title. In April 2008, less than a year before bankruptcy proceedings were filed against her, Mrs. Rodrigues executed a Declaration of Homestead and recorded the declaration in the Bristol County Registry of Deeds. The declaration stated that she owned, possessed, and occupied the home as her residence and homestead under the Massachusetts General Laws, chapter 188. This declaration was only partially correct because she did not actually own the home, but she did possess it and she was occupying it.

Currently, the law dealing with the Massachusetts Homestead Exemption states that a homestead interest “may be acquired … by an owner or owners of a home or by one or all who rightfully possess the premise by lease or otherwise.” M.G.L., c. 188, §1 (2007). Although Mrs. Rodrigues was no longer a legal owner of the home, when she recorded her Declaration of Homestead, she rightfully held possession of the home and evidenced her intent to occupy the premises as her principal residence. Judge Feeney, the bankruptcy court judge in this case, held that Mrs. Rodrigues’ actions satisfied the Massachusetts law concerning homestead and that she had validly exercised her homestead exemption. The result of this case has encouraged the Massachusetts state legislature to rewrite M.G.L., c. 188, to make it clearer and include language about trusts and the homestead exemption.

Going forward, the proposed law moving through the state legislature specifically uses language allowing a trustee of a trust containing real estate to make a declaration of homestead for the person or persons occupying the premise. The law states that the person claiming the homestead exemption must prove that he or she is using or intends to use the home as his or her principal residence. If this law passes, holding your home in a trust may be a safe way to protect it from unsecure creditors. Please visit the current text of Senate Bill 2401, An Act Relative to the Estate of Homestead.

No, You Can’t Just Give It Away! The Dangers of “Gifting” when Considering Long Term Care

Hardly a day goes by when I don’t have a client who tells me that they can give away a certain amount of money free and clear, avoiding look-back periods for long-term care planning. They inform me that their neighbor, friend, or cousin told them that this is allowable. I then have the unfortunate task of telling them that they are wrong and that most states that have enacted the Deficit Reduction Act. After February 8, 2006, the rules relative to gifts changed.

Regardless of the amount, any gift that is made is a transfer and is subject to a look-back period of five-years for MassHealth (Medicaid) purposes. This doesn’t mean that the State will take that money, but rather, that the State will not pay for the donor’s long-term care costs until the five-year look-back is exhausted, or in the alternative, until all the gifts that have been transferred are used to pay for the institutionalized person’s care.

The sum that most clients feel that can be gifted (erroneously) without a look-back is $10,000. This amount actually relates to a past year’s annual amount that could have been gifted on an annual basis to as many individuals as the donor wishes without the need to file a GIFT TAX return. This has NOTHING to do with the look-back period when applying for MassHealth (Medicaid) coverage of a nursing home. However, the exemption in 2010 for gift giving on an annual basis is $13,000 per donee per year. Again, this is only a tax amount gift, and is not a Medicaid or asset protection plan exempt amount. A gift of $13,000 from a parent to a child will constitute a non-taxable gift, but this gift will carry with it a waiting period of five-years relative to MassHealth (Medicaid) qualification.

Far too often, family, friends, and other non-professional advisors provide well-intended but erroneous advice that can lead to significant adverse consequences if relied upon. If in doubt, it is always appropriate to contact a professional accountant, geriatric care manager, attorney, or other financial advisor for the appropriate and up to date laws relative to gifts, Medicaid planning, taxes, etc.

If you are unsure about how to find a qualified elder law attorney contact the National Academy of Elder Law Attorneys.

I drafted a follow-up to this blog, dealing with the exceptions to the gifting rule. It can be found here.

This blog was modified from one originally posted by Attorney Hy Darling from Bacon Wilson, Attorneys at Law in Springfield, MA. Its original version can be found here.

Proposed Massachusetts Legislation Could Change the Way Assets are Counted for MassHealth

How often do you feel like you know what your state legislators are doing? The whole process can be mysterious and confusing. This week I would like to shed some light on the subject and tell you about a potentially helpful piece of legislation currently pending in the Massachusetts state legislature.

The proposed law would change the way assets are counted when determining whether a spouse in a nursing home, or certain other institutions and community based programs, is eligible for medical assistance through MassHealth (Medicaid). For MassHealth purposes, the spouse in the nursing home is called the “institutionalized spouse” and the spouse still living at home is referred to as the “community spouse.” Currently, under Massachusetts General Laws, chapter 118E, subsection 21A, many different types of income and asset types of both spouses are considered countable for purposes of determining eligibility. The total amount of countable income and assets are major factors the Division of Medical Assistance takes into account when determining if the institutionalized spouse is eligible for medical assistance from the Commonwealth (MassHealth/Medicaid).

The proposed legislation, sponsored in the State House by Representative Alice Peisch, and sponsored in the State Senate by Senator James Eldridge, would alter the language in the statute to make some assets that are currently countable, no longer countable. The proposals in both houses are identical. The proposed legislation would make any money held by the community spouse in an IRA, Keogh plan, or other pension fund non-countable assets as long as regular income distributions are made from the fund OR the community spouse is employed. This means that those assets would not affect the institutionalized spouse’s eligibility for medical assistance. This would come in handy in lots of potential situations, but especially in situations like a spouse in their 50’s suffering from early onset dementia, where the community spouse is still working. Many spouses in their 50’s, 60’s, and even early 70’s still work and more importantly have to work to make ends meet.

This change in the law would also be hugely beneficial to aging couples who have worked hard and diligently saved their money. If one spouse is institutionalized, the community spouse still needs to have the means for adequate support. No one should be penalized for following their financial planner’s advice and putting money away for retirement. In this system, frivolity and impoverishment would no longer be the only path to assistance from MassHealth.

The proposed legislation has been referred to the Joint Committee on Health Care Financing, and a public hearing is scheduled for June 3, 2010, at 1:00, in Hearing Room B1. If you are interested in learning more, contact State Senator James Eldridge. He represents parts of Middlesex and Worcester county. Most importantly, if you would like to see this legislation passed, contact your own local representative and express your support.

What about Fluffy? Pet Trusts: Another Important Estate Planning Tool

It’s estimated that two-thirds of American households currently have at least one pet, a number that has steadily increased in the last 60 years. With more pets comes a growing industry devoted to helping Americans better care for, and even indulge, their pets, has developed. Businesses that provide pet day care, pet sitters, grooming, spa services, and even pet cemeteries have become common.

Many even consider pets part of their family, a sort of child, brother, sister, or at the very least, friend. Since so much love and attention is given to these fury and feathery companions, many wish to provide for their animals in the event that they become incapacitated or die before their pet. With family greed, skepticism, and fraud on the rise, many seek a better solution than hoping Junior will “do the right thing.” As a matter of fact, owner death and/or disability is one of the top reasons that animals end up in Shelters across the country.

Several states have made changes to their laws to help people provide for the care of their pets after the owner’s death, thereby statutorily allowing for “Pet Trusts.” Pet trusts can be useful in a number of situations. Should the owner of a pet die, a pet trust can ensure that the pet continues to be taken care of, provided a home, food, and veterinary care. A properly-funded pet trust can give an owner peace of mind that should something happen to them, their pet will continue to be cared for, and not end up in an animal shelter or otherwise abandoned.

Forty states currently have pet trust laws on the books. Sadly though, Massachusetts is not one of them (Start writing those letters to your Representative). However, that doesn’t mean that you can’t provide for “Mr. Droolsalot” and “Fluffy Von Furball” when you pass in Massachusetts.

Should you choose an intervivos trust, one that exists outside of your Will, you’ll need to be very specific as to what your money can and can’t be spent on for your pet’s care. In states with pet trust legislation, you are able to leave many of the details to the statute. Depending on how you fund your trust, it can be effective on your disability, incapacity, or death.

You also have the option of choosing a testamentary trust, one that exists within your Will itself. This option is often less expensive than an intervivos trust, however the trust is not in existence until after your passing and therefore does not protect the pet if you were to enter a nursing home or were otherwise incapacitated. Both of these options can be accomplished by adding an extra clause or two to your existing documents.

It is important to remember to have an attorney experienced in estate planning for pets prepare or update your documents. If your current attorney doesn’t take you seriously when you indicate your desire to care for you animals, they may not have YOUR best interests in mind. Estate planning is intimately personal and cookie-cutter plans should not be accepted.

Top photo courtesty of Maggie Smith. Bottom photo courtesy of my cat, Mr. Griffin.

Irrevocable Trusts & the Current Federal Estate Tax (IRC 1022), Friend or Foe?

The following is a repost of a blog recently written by Attorney Dale Krause of Krause Financial Services. Attorney Krause is also a fellow member of the National Academy of Elder Law Attorneys (NAELA). The original version can be found here.

An Irrevocable Trust can offer a grantor lifetime control over his or her assets of the trust is established with the following provisions:

• All taxable income shall be disbursed to the grantor;
• The grantor shall have the right to direct how the trust assets are held or reinvested; and
• The grantor shall have a limited power of appointment over the final distributions of the trust; this power shall be in favor of a limited class of beneficiaries, consisting of the grantor’s children and grandchildren; the disbursements do not have to be in equal amounts or shares.

After the trust is established, totally funded, and 60 months passes, the grantor can qualify for Medicaid benefits. None of the trust assets will be included in the grantor’s Medicaid application, in that they are outside of the 60 month look-back period for uncompensated transfers. The grantor will qualify for Medicaid benefits with generally his or her personal property, a prepaid funeral plan, and $2,000.00, or less, of cash assets.

Medicaid eligibility will require that the grantor pay substantially all of his or her monthly income to the nursing home, including that received from Social Security, any pension, and the trust. The only monthly income retained by the grantor is a personal needs allowance, which amount is designed to provide him or her with toiletries and other personal items. Nationally, the personal needs allowance ranges between $30.00 to $101.10.

From an income tax viewpoint, in that the grantor retained all the taxable income, and a limited power of appointment over the final distributions of the trust, the trust is deemed a “grantor trust.” See IRC 671-679. Grantor trusts do not pay any income taxes. Instead, the income flows directly out of the trusts to the grantor, to be placed on their personal income tax returns. For many, the end result is a lower total tax, in that the trust tax rates for individuals are much lower than those for non-grantor trusts.

From an income planning standpoint, in that the grantor retained the right to direct the investment of trust assets, the income taxes can be minimized, or totally eliminated, if the trustee is directed to invest the trust assets in tax-deferred annuities. No income is recognized from a tax-deferred annuity until the trustee either elects to take a withdrawal or annuitize the product.

From a gift tax viewpoint, again, since the grantor retained all taxable income, and a limited power of appointment over the final distributions of the trust, these provisions prevent the funding of the trust from being treated as a “completed gift.” See IRC 2036(a)(10). The end result is that without a taxable gift, no gift tax will be due, nor the requirement that a gift tax return be completed and filed.

Finally, from an estate tax viewpoint, in that the transaction is being treated not as a completed gift, the trust assets will be included in the grantor’s gross estate. The end result is that certain trust assets will receive an automatic step-up in basis. See IRC 1014(a). For example, if a grantor paid $50,000.00 for a house, and made lifetime improvements of $25,000.00, his or her cost basis is $75,000.00. At the time of the grantor’s death, assuming it occurred prior to 2010, if the house was worth $250,000.00, the beneficiaries would receive a tax basis of $250,000.00. Thus, if they later sold it for $250,000.00, or less, they would not owe any capital gains tax. The sale would be tax-free. However, as a result of IRC 1014(a) being repealed on December 31, 2009, the aforementioned tax result will not take place. Instead, if the grantor’s death occurs in 2010, the beneficiaries will receive a tax basis of $75,000.00 – which is likely to result in the payment of capital gains tax when the property is later sold. The present law states that each trust asset will receive a basis equal to the adjusted basis of the property in the hands of the grantor/decedent, or its fair market value on the grantor/decedent’s date of death, whichever is lesser. See IRC 1022.

Congress Does Unthinkable by NOT Addressing Estate Tax

Who wants to ring in the New Year with uncertainty? Well, that’s what Congress did by not getting around to extending the estate tax before December 31, 2009. Many experts believed this would NEVER happen. I discussed this in several past blog entries in September and December of last year.

Flashback to 2001: At that time, a largely Republican coalition in Congress tried to repeal the estate tax completely, but they were unable to get past a filibuster. So, instead, the changes were put into the tax code when then-President George W. Bush signed a bill that was designed to phase out the estate tax so that by January 1, 2010, the estate tax would no longer exist. However, since this was done through the tax code, Congress would have to revisit the changes within ten years, or the estate tax would come back into effect on January 1, 2011, at a higher rate. Generally all experts in the field believed that Congress would act and not allow the estate tax to disappear completely in 2010. But, Congress was so busy debating health care reform this fall that we have entered 2010, and the estate tax is temporarily gone.

So what will happen now? As of right now, if someone dies in 2010, his or her heirs will not owe any taxes on the estate. Sounds pretty good right? Well don’t go “pulling the plug” on Great Uncle Henry just yet. One also has to consider changes to the capital gains tax. Attorney Deirdre Wheatly-Liss wrote a fantastic blog on this topic.  If that same person dies after December 31, 2010, however, with an estate of 1 million dollars or larger, those same heirs will pay a 55% tax. This means that in 2011, a one million dollar estate will be reduced to $450,000, after taxes are paid. Considerinig your life insurance policies are countable in your overall estate, many more middle-class americans will be subject to estate taxes in 2011 if Congress continues to fail to act.

This uncertainty continues when Congress resumes session this year because our representatives may decide to draft a retroactive law reinstating an estate tax that would extend back to January 1, of this year! (Don’t go spending that windfall inheritance quite yet). No one knows howlong it will take Congress to act or what Congress will do. If Congress does act, then the question will be whether a retroactive law would be upheld in court. Unfortunately, it could be a long time, filled with much speculation, before Congress acts and whether that action is deemed constitutional.

While this uncertainty may exist for quite a while, some steps can be taken to protect your family. Please check in with your elder law attorney to learn about potential planning opportunities and to stay up to date on what Congress is doing with regard to the estate tax.

Ring in the New Year with an Estate Plan!

Resolutions abound as the New Year quickly approaches. Each year we make a pact with ourselves to make lifestyle changes for the better. Whether it is to exercise more, skip the daily fast-food lunch breaks, or give up bad reality television, the intentions are always good, though often we do not follow through. How many times have we seen the new year rush at the local gym, but notice the crowds slowly dwindle come the beginning of February?

One resolution that you should make every effort to keep is to meet with an experienced estate planning attorney and develop or update your plan. The New Year is the perfect time to consider your assets, beneficiaries, retirement goals, and your health. And don’t be fooled, estate planning is not just for Grandma and Grandpa. All adults age 18 and older should be thinking about their health care wishes and how to dispose of their assets. No financial sum is too small to consider, and no one is invincible against a tragic accident. Consider the following:

• Do you have minor children?
• Do you have any children or grandchildren with special needs?
• Are your insurance beneficiaries up to date?
• Have you thought about who will receive your precious wedding china, or your antique cuckoo clock after you are deceased? Often the sentimental value placed on personal items can far outweigh financial gain, and arguments over such matters can cause rifts between family members. Now is the time to determine where these treasures will end up.
• Do you have an existing will or trust but have recently married? Divorced? Had a child?
• Have you thought about life-saving measures that you would want performed in the event of serious illness or accident? Have you shared your wishes with family members?
• Have you thought about whom you would want to make health care decisions for you if you were to become incapacitated?

If you answered ‘yes’ to any of the above, then make your 2010 New Year’s resolution one that will give you peace of mind. Many options are available depending on the size of your estate and your desired wishes, but at the very least, consider a simple will, sign a durable power of attorney and appoint a health care proxy. Have a safe and happy holiday!

Congress is Down to the Last Hour When it Comes to the Estate Tax Sunset Rules

Tick, tick, tick… The clock is ticking for Congress to act to extend/amend the current estate tax laws. They have about three weeks to prevent the federal estate tax to disappear all together in 2010. Experts agree that it is unlikely for Congress not to act.

The question is, however, will they act in time?

The House approved a bill last week to create an entirely new, permanent, estate tax. According to this bill, estates would have an exclusion for taxes of $3.5 million ($7 million for couples). Under this measure the top tax rate for larger estates would be 45 percent. Another key provision of note is that for tax purposes, assets within an estate’s value is set when the estate holder dies, not when he or she originally acquired the assets. This spares heirs from hefty capital gains taxes on inheritances.

A million isn’t what it used to be

Without new legislation, the sunset provisions of current estate tax rules would erase the tax entirely in 2010. Why would anyone WANT Congress to pass a new Estate Tax then? Hold on to your hats because under the current legislation in 2011 the estate tax will be restored with a 55 percent tax rate and an exclusion of only $1 million. This means that anyone with an estate over $1 million will be subject to a 55 percent estate tax when they die.

Million-dollar estates aren’t as impressive as they once were. As the years pass, many everyday families are millionaires and don’t even know it. When calculating your estate you must include not only the value of what you think of being your assets, but also the value of your home, any vacation properties, and life insurance. Life insurance payouts plus the value of your home can easily put one above this $1 million threshold.

A middle class nightmare?

And while Congress could always take steps in 2010 to change that 2011 scenario, it must act this year to avoid triggering the 2010 estate rules. Losing the estate tax all together in 2010 might seem like a good deal for estate beneficiaries. But an even larger pool of taxpayers might get an unpleasant surprise. That’s because the value of assets in 2010 estates would be set, for tax purposes, at their level when they were originally acquired. In addition to being a bookkeeping nightmare, this provision would trigger capital gains taxes for any estate larger than $1.3 million. It would affect a much higher percentage of middle-class estates than the rules that currently exist.

Have you checked with your Elder Law Attorney?

Very few people have estates large enough to be affected by the newly proposed rules. Those fortunate enough to be among them should stay in touch with their estate planning attorney for further estate-tax developments and planning opportunities.
Check out my previous comments on this topic.

Astor Matter Reminds Us that Trustworthiness is Essential When Nominating Substitute Decision Makers

Lately, the matter of Brooke Astor’s estate has been covered in the media. Like many people she had an estate plan in place which included a Durable Power of Attorney and Health Care Proxy, which nominated subsituted decision makers in the event she would lose the capacity to make important financial and/or medical decisions at some point during her elder years. She did not want to burden her family with obtaining a Guardianship and/or Conservatorship through the courts. She did end up suffering from Alzheimer’s disease and her son took over her financial powers. He just didn’t do a very good job…

The following is an exerpt from this week’s AZCentral.

Anyone who has signed a financial document has to be squirming a bit over Brooke Astor’s estate case.

Her son, Anthony Marshall, recently was convicted of stealing millions of dollars from Astor while she suffered from Alzheimer’s disease before her death. Although the case largely centered on a contested will purportedly signed by Astor, other estate-planning issues also came into play.

One was a financial power of attorney signed by Astor that gave Marshall authority to direct her affairs if she became incapacitated – and the means to steal from her.

The episode provides a wake-up call for people who use financial powers of attorney. These legal documents can be highly effective in ensuring that someone else will be around to handle financial matters for you if you’re alive but unable to do so – as in the case of mental incapacity.

A power of attorney can be as short as a page or much longer, depending on the detail desired. They’re often included with a trust, will, health power of attorney (addressing medical issues) and other estate-planning documents.

For all the benefits of using a power of attorney to avoid a potential court-supervised conservator situation, there are pitfalls, too.

In particular, you need to trust the person whom you designate to act on your behalf. And you should make sure he or she is responsible, diligent and reasonably astute.

“They really are documents that people should pay attention to,” said Denise McClain, a financial principal and attorney at wealth-management firm Lowry Hill in Scottsdale. “You’re potentially passing along a lot of power.”