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.

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.