Posted by David E. Peterson, Esq. on April 30, 2013 under Estate Planning | 
By its very nature, much of the administration of an estate plan takes place upon the creator’s death or incapacity. For that reason, selecting the proper persons to serve as fiduciaries is arguably the most important decision that one can make. To clarify, a fiduciary is a person with a very close legal relationship to another person or entity, who is subject to a field of jurisprudence designed to ensure the utmost level of care and loyalty. In the estate planning realm, common types of fiduciaries are Executors of wills, Trustees of trusts, Attorneys-in-Fact acting under a durable power of attorney, Health Car Proxies, and Guardians and Conservators of minor children or disabled adults.
When selecting a fiduciary, it’s important to consider the scope of the fiduciary role. For example, an attorney-in-fact is tasked with managing finances, so it makes sense to select someone with financial skills. Similarly, your health care proxy should share your views on extraordinary medical care, and your children’s guardian should share your views on parenting.
Although it’s easy to define the ideal candidate to serve as fiduciary, it is often much harder to find them in real life. Many clients struggle to find someone that they truly trust when their life and livelihood are on the line. Others seem to have too many close relatives and friends, and they don’t want to pick one at the risk of offending another. In the end, making the right choice is up to that person; their attorney can talk them through it, but the decision is theirs to make.
I often explain to clients that there are two schools of thought. First, if there are relatively few trusted candidates, it can make sense to have the same person fulfill several or all fiduciary roles. This allows a high level of convenience and effectiveness, because there is only one point of contact for all of the client’s affairs. It also avoids the challenge of finding multiple trusted candidates. However, this solution requires a tremendous amount of trust, because the one fiduciary has a tremendous amount of power.
The second school of thought is that it is better to nominate different people to serve in different fiduciary roles. This avoids the problem of “having all of your eggs in one basket.” The separate fiduciaries can provide oversight and be a system of checks and balances to each other. It also reduces the burden placed on any individual person, as each fiduciary’s role is limited in scope. However, this approach will only work if there are several trusted candidates waiting in the wings. It can also be difficult for such people to coordinate with each other, adding a layer of administrative tedium.
Like anything else, it ultimately comes down to the individual circumstances of the client and their family, and their comfort level. Nevertheless, conversations like this often help to grease the gears and guide the client to their ultimate decision.
Posted by David E. Peterson, Esq. on February 5, 2013 under Estate Planning |
If you listen to talk radio, then there’s a good chance that you’ve heard an advertisement from a law firm preaching the benefits of Medicaid Trusts. They are a great option for many families, especially for the late-middle-aged, moderate to high income demographic that listens to talk radio. If I’m describing you, please read on.
Simply speaking, a Medicaid Trust is a mechanism that allows you to keep your home (or other assets) in your family, even if you need the government to step in and pay for your nursing home expenses. Considering the housing prices in eastern Massachusetts, the benefits can be truly tremendous.
To better understand how a Medicaid Trust works, let’s first take a look at what happens without one. If an individual becomes unable to care for themselves and requires long-term care, either in a nursing home or at home, then they must pay for it. The average cost of a nursing home in Massachusetts is around $11,000 per month. At this rate, it doesn’t take long for someone to run out of money. Once the person has less then $2,000 left, they can qualify for Medicaid (called MassHealth in Massachusetts), which will cover their long-term care expenses moving forward.
If the person receiving long-term care owns a home, then MassHealth will put a lien on the home for the amount spent on long-term care costs. If the home is sold during the individual’s lifetime, then the proceeds will pay the lien. If the remainder of the proceeds bring the person over the $2,000 asset limit, then they will have to spend down the excess or lose MassHealth coverage. If the person retains their home until their death, then MassHealth can seek repayment from their estate through a process called MassHealth Estate Recovery.
Please note, if the person requiring long-term care is married, there are some other protections in place, which I will cover in future posts.
The best protection against losing your home to long-term care expenses is the Medicaid Trust. Here’s how it works.
Legally speaking, a Medicaid Trust is also known as an Income Only Irrevocable Trust. The assets of the trust are divided into two categories, principal and income. The person who establishes and funds the trust is called the Grantor. The terms of the trust require that the Grantor receive all income generate by the trust. Income includes interest on bank accounts, dividends from stock, rent from investment real estate, etc. If the trust owns the Grantor’s primary residence, then income includes the right to use and occupancy of the premises. This means that you can keep your home.
The terms of the trust also dictate that the Grantor has no access to the principal of the trust. The principal is the equity of the trust property itself, as distinct from the income that it generates. To better understand the concept, think of it this way: If you could sell the assets of the trust, the sale price would be the principal (and if you could rent the assets of the trust, the rental price would be the income).
Forgoing access to the principal is a significant limitation on the Grantor, but the practical impact of a Medicaid Trust on the Grantor’s lifestyle is actually quite small. This is because the main asset of the trust is the Grantor’s primary residence, and the Grantor retains the right to use and occupancy as part of his income interest.
So how does MassHealth treat Medicaid Trusts? Strictly speaking, if the trust is a true Income Only Irrevocable Trust, MassHealth doesn’t count the trusts assets against the $2,000 asset limit. However, the transfer of property to the trust is heavily scrutinized by MassHealth. If an individual applies for MassHealth within five years of transferring property to an irrevocable trust, then MassHealth will impose a period of ineligibility do to the disqualifying transfer. The specific ineligibility period depends on the size of transfer, and transfers of real estate tend to be quite large. Fortunately, if you make the transfer more than five years before you need MassHealth to cover long-term care, then you have successfully protected your largest asset, and can pass it on to your next of kin.
So that is how Medicaid Trusts work in a nutshell. Of course each aspect of this description has its own nuances and quirks, and I could write volumes on any of them. I’ll leave you with this forest-level view for now, and take a closer look at some of the trees in later posts.
If you’re interested in learning more about Medicaid Trusts, or other estate planning topics, please continue reading my blog. If you’d like to know how these techniques could benefit you specifically, feel free to contact me for a consultation. My Massachusetts Estate Planning Law Office is in Danvers, and I represent families on the North Shore, in the Merrimack Valley, and throughout Greater Boston.
Posted by David E. Peterson, Esq. on January 28, 2013 under Estate Planning |
Everyone has an opinion (usually negative) about the Income Tax. It’s a topic of water cooler conversation, and we see it on our pay stubs each pay period. But this is where most people’s knowledge of the tax code ends. For those without direct experience, the Estate Tax is a mythical beast. But for the unwary, the Estate Tax can become very real indeed… Especially in Massachusetts.
At the Federal level, the Estate Tax is a political bargaining chip that presently affects only the very wealthy (at least $5 million of net worth). However, the Massachusetts Estate Tax kicks in on estates valued at over $1 million. It’s important to note that the term “estate” in a Tax context is different than in a Probate context. All of your assets are included in your estate for tax purposes, regardless of whether they go through Probate.
So the question is: Will I have over $1 million in my taxable estate?
Consider the following:
- Financial advisors often use $1 million as the goal for a family’s retirement savings.
- The median home price in Metro Boston is around $370,000, and significantly higher in several North Shore and suburban communities in Essex and Middlesex Counties.
- Life insurance death benefits count, even for term policies. And each parent of minor children should have at least $500,000 of term-life. That is the absolute minimum, and most parents should have around $1 million. That’s what it takes to replace the income of a deceased spouse.
So if you are only halfway to your retirement goal ($500,000), have half of your house paid off ($185,000), and have half of the life insurance that you need ($500,000), then you have a taxable estate of $1,185,000. Guess what? You owe a Massachusetts estate tax of around $44,000. That is $44,000 that would otherwise go to your children, or your church, or where ever else you decide.
So what should you do? You should talk to an experienced estate planning attorney.
If you’re in the Metro Boston, North Shore or Merrimack Valley areas, I have an office in Danvers. I have developed a system for calculating Estate Tax liability. Contact me for your Estate Tax estimate.
Posted by David E. Peterson, Esq. on December 5, 2012 under Estate Planning |
As a Massachusetts estate planning attorney, I am well versed in the laws and procedures governing wills, trusts, taxes, and probate. But with elderly clients, their legal issues often overlap with their medical issues. While discussing estate planning with a client, I’m often asked whether an elder can remain in their home, or whether an elder can move in with a child instead of a nursing home. It is with great humility that I answer: “I don’t know.”
Although I am qualified to advise on how to protect assets from the costs of nursing home care, or how to nominate a child to make medical decisions, I am not a doctor, or a nurse, or a clinical social worker. I simply couldn’t know what they know, and still have room in my brain to know what I know. Neither could most lawyers.
So when faced with these questions, and admitting my lack of knowledge, how do I help my clients? Often times I refer them to a Geriatric Care Manager. Geriatric care managers are private consultants that help the elderly and disabled to achieve the highest level of care that they need, in the best possible way.
The scope of the GCM’s duties are set by the client, or the client’s family, and may evolve over time. A geriatric care manager typically begins by doing an assessment of the elder, and writing a report about their medical condition, social condition, support network, and necessary level of care. If the elder is able to live at home, then the care manager can advise the family as to any modifications needed to make the home accessible, or equipment needed to care for the elder at home. If the elder is not able to live at home, then the GCM can help the family locate the optimal assisted living or nursing home facility.
Not only can geriatric care managers locate a great long-term care facility, but they know how to get your relative a bed there.
Nursing home residents invariably end up on Medicaid (MassHealth), and Medicaid reimburses the nursing home at a much lower rate than private-paying residents. Therefore, the best nursing homes tend to avoid Medicaid patients in favor of private paying patients. But there are unwritten rules of thumb at work here, and geriatric care managers know them. For example, if a resident can afford to privately pay for six months,then a GCM may be able to leverage that ability in order to obtain a bed that would otherwise be unavailable. They also know which facilities are poor in quality, and which are high. They can recommend the best facility for an individual’s circumstances, and find a way to get them in there.
Geriatric care managers often have long careers in the nursing home industry, so they know all of the rules and tricks.
And that is why geriatric care managers are a great resource for estate planning attorneys.
Posted by David E. Peterson, Esq. on November 26, 2012 under Estate Planning |
When I counsel new estate planning clients in my law office on the North Shore of Massachusetts, I tell them to consider their Revocable Trusts as “Will Substitutes,” because they determine the ultimate disposition of their property. While this is a general rule, it is not always true. Often times clients have assets that pass outside of their Wills or Revocable Trusts.
The best examples of this are Retirement Accounts (IRAs and 401(k)s). These Retirement Accounts allow the owner to dictate who will inherit them, by using a special beneficiary designation forms. When completing these forms, clients have two options: to name their Trust, or to name a person.
Naming a Trust
If you’ve carefully set forth your wishes in your Revocable Trust, then you can be sure that your Retirement Accounts will benefit the right persons in the right ways. However, the Tax Code and Treasury Regulations require the Trustee of a standard Revocable Trust to withdraw the entire balance of the Retirement Account within five years of the owner’s death. Unfortunately, taking this money out of these accounts results in a realization of income for tax purposes. So, if you name the Trust as beneficiary, you can provide an inheritance in a thoughtful and protective way, but you may pay more in taxes than if you had named an individual.
Naming an Individual
If you name an individual as the beneficiary of your Retirement Accounts, then that person can withdraw money from the account over their lifetime, according to their life expectancy. By spreading out the distributions, they can minimize their income taxes. However, an individual may not choose to spread out their distributions, and may take the account as a lump sum, resulting in a tremendous tax bill. Furthermore, an individual beneficiary of a Retirement Account could lose the assets to lawsuits, creditors, divorces, addiction, or any other expensive event that life throws their way. If the Retirement account had gone into a Trust, then it could’ve been protected for the ultimate beneficiary.
So What Should I Do?
Well, your specific course of action should be based on your unique circumstances, and should be discussed with an experienced estate planning attorney. But in general, here is what I advise for many of my clients. If you are married, then each spouse should designate the other as beneficiary. I recommend this because spouses have the ability to “roll over” their deceased spouse’s Retirement Accounts into their own. Therefore, they can achieve the ultimate tax deferral during their remaining lifetime. Then, I recommend that the surviving spouse carefully weigh the financial savvy and risky behavior of their next of kin. If they have substantial concerns, then they should lean towards the trust. If they are worry free, then they should lean towards individual beneficiaries.
Fortunately, they can also have it both ways (guaranteed tax deferral and asset protection), but that’s covered more in another post.
Posted by David E. Peterson, Esq. on November 12, 2012 under Estate Planning |
Trusts are an advantageous mechanism for structuring the legacy that people leave to their next of kin, but not all trusts are the same. This post discusses two different methods for providing for children in Trust: the Pooled Trust versus Separate Trusts.
The Pooled Trust
A Pooled Trust is a trust that “pools” assets for several beneficiaries. For example, a pooled trust might dictate: “My Trustee shall distribute the principal and income of the trust for the benefit of any of my children and grandchildren as the Trustee determines in his discretion. The Trustee is not required to treat such issue equally.”
Separate Trusts
Instead of pooling assets for multiple beneficiaries, a trust could divide into Separate Trusts for each beneficiary. For example: “My Trustee shall divide the Trust into as many equal shares as there are children of the Grantor.”
So Which Is Better?
Deciding whether to use a pooled trust or separate trusts depends on your individual circumstances. That being said, here are some common considerations that help to make the decision.
The Size of the Trust
There is a cost associated with administering a trust. Therefore, for smaller trusts, the time and expense of administering separate trusts may outweigh the benefits. Conversely, a larger trust could split into several separate trusts, each large enough to support their own expenses and accomplish their own objectives.
The Needs of the Beneficiaries
If the beneficiaries of a trust are all professional adults with no major financial concerns, then parents may decide that providing equally-sized, separate trusts is the fairest way to provide an inheritance. If, however, one of the children has a special need, or other concern, then the parents may want to leave more money to that particular child, or provide for them in a different way. In some situations, especially with younger children, parents may not know whether one child will have greater financial needs than the other children. In this case, a pooled trust gives the Trustee flexibility to provide more for a child with greater needs, or to provide equally if the children have equal needs.
The Number of Beneficiaries
Dividing a trust into separate trusts for two children is relatively easy. But what if you want to provide for your four children, ten grandchildren, and two great-grandchildren? If you use separate trusts, it could get tricky. But pooled trusts can also be cumbersome when there are many beneficiaries. I often advise clients to use separate trusts for their children, but to use pooled trusts for their grandchildren or later descendants. This is especially helpful when you want to provide for grandchildren born after your death.
Of course the ultimate decision involves a careful weighing of these and other factors. In order to create the best plan for your family, you should discuss these matters with an estate planning attorney. If you happen to live in Massachusetts, especially in the North Shore, Merrimack Valley, or Greater Boston areas, I would love to help.
PS. Here is another post on structuring Trusts for Children
Posted by David E. Peterson, Esq. on November 6, 2012 under Estate Planning |
In honor of election day, I thought I’d write a quick post about the impact of politics on estate planning.
One consideration in crafting estate plans for clients is how the federal and Massachusetts estate taxes will impact the legacies that they leave to their families. Currently, a federal estate tax is levied on decedents with taxable estates in excess of $5.12 million. Here in Massachusetts, there is a state estate tax levied on decedents with over $1 million. While the Massachusetts amount has been steady for over a decade, the federal exemption amount changes frequently.
In 2002 the federal estate tax exemption amount was $1 million, then it rose every two years, until it reached $3.5 million in 2009. In 2010 there was no federal estate tax, and now in 2012 it is $5.12 million. However, unless Congress takes action, the exemption amount is set dwindle back to $1 million in 2013. At the same time that the exemption amount changes, the percentage of the tax levied changes as well.
So why isn’t there a permanent solution to the estate tax issue?
My personal opinion is that the estate tax is a political fundraising tool. Republicans claim that they want to eliminate the estate tax, but that isn’t their only motivation. Wealthy individuals, who pay the vast majority of estate taxes, are likely to donate to politicians that advocate eliminating this tax. But what would happen if the tax were eliminated? Those same politicians would no longer have the estate tax issue as a mouthpiece to solicit campaign donations. The same factors prevent Democrats from seeking to raise the estate tax to uncharted levels, lest they forgo their own donations from wealthy patrons.
Beyond campaign fundraising, the estate tax is also a political bargaining chip. For example, the exemption amount was set to revert to $1 million in 2011, but Congress raised is to $5 million. Why? Because in the same bill Congress also agreed to extend unemployment benefits at the request of the President; a political quid pro quo. And you can bet that the politics will not end anytime soon, regardless of who wins today’s election.
Of course, there are methods to reduce or eliminate estate taxes that don’t rely on waiting for Congress and the President. A healthy dose of cynicism and a discussion with a Massachusetts estate planning attorney could get you there.
Posted by David E. Peterson, Esq. on June 27, 2012 under Estate Planning |
Please check out my article on Caregiver Contracts in the Local Voices section of the Danvers Patch.com website.
For children who care for elderly parents, establishing a Caregiver Contract could ensure that the elder’s life savings remain in the family, instead of disappearing to the nursing home.
Posted by David E. Peterson, Esq. on September 20, 2011 under Corporate and Business Planning, Estate Planning |
After years of toil and sweat, your small business is a thriving part of the local economy. But what will happen when you retire? What if you run into financial trouble, or become disabled, or pass away at a young age? Who will take over the business? How will the business take care of your family?
These are important questions, and the only way to provide answers is to create a succession plan for your business. A comprehensive succession plan will address both the management and ownership of the business. One common feature of a succession plan is a Buy-Sell Agreement.
A Buy-Sell Agreement (a.k.a. Shareholder Agreement) is a contract between business owners, or between a business and its owners, that governs the sale of business interests in certain circumstances.
The most common Buy-Sell Agreement is the Cross Purchase Agreement. A Cross Purchase Agreement is a contract between two owners of the same business. Typically, when one of the owners dies, the contract provides that the other owner must purchase the deceased owner’s share of the business. This ensures continuous ownership of the business, which allows operations to continue without much of a transition. It also ensures that the deceased owner’s family receives the cash proceeds of the sale, instead of an interest in the business, which is great if the surviving family members were not involved in the business operations.
The alternative to a Cross Purchase Agreement is a Redemption Agreement. A Redemption Agreement is a contract between a business and its owners. The contract most often provides that the business will redeem the interest of a deceased business owner. Just like with a Cross Purchase Agreement, the business owner’s family receives the cash proceeds of the sale. However, instead of the other owners purchasing the interest directly, the company purchases it. This results in a proportional increase in the percentage ownership of the remaining owners. Because it is difficult to setup a Cross Purchase Agreement with more than two parties, a Redemption Agreement may be preferable for businesses with three or more owners.
To make matters more interesting, Buy-Sell Agreements can address more scenarios than just the death of a business owner. A Buy-Sell Agreement can trigger the sale of a business interest upon a variety of voluntary and involuntary circumstances. For example, a career change, retirement, disability, or bankruptcy could all provide for the sale of an owner’s stake in the business.
Furthermore, Shareholder Agreements do not have to force a sale, but could instead provide the business or other owners with an option to purchase the shares at stake. Often times the agreement will grant an option to purchase the shares of an owner who retires from the company, but require a mandatory purchase upon the death of the same owner.
But what if the owners or the business don’t have the liquidity to purchase the interest of another owner? Well, there are a few methods for funding a Buy-Sell Agreement.
Often times, parties to a Cross-Purchase Agreement will purchase life insurance policies on the life of the other owner. This guarantees that they will have the cash in hand to purchase the shares upon the other’s death. Similarly, a business could purchase life insurance on its owners in order to fund a Redemption Agreement. Sometimes, the life insurance will be purchased by an Irrevocable Life Insurance Trust (ILIT), which could remove the value of the business from the remaining owner’s taxable estate.
Other times, a Buy-Sell Agreement will provide that the purchasing party may pay for the shares with an installment note, which provides an income stream to the family of the deceased owner, and allows the remaining owner(s) to generate the liquidity over time. Sometimes the agreement will utilize both insurance and an installment note. The possibilities are vast.
Buy-Sell Agreements can be very simple, or they can be extremely sophisticated. This type of business succession planning is at the crossroads of corporate law and estate planning. Be sure to discuss your options with an attorney that is well versed in both areas.
Posted by David E. Peterson, Esq. on August 17, 2011 under Estate Planning |
If you are like many mid-career professionals, then your retirement accounts may comprise an enormous portion of your net worth. To the delight of estate planners and clients, qualified retirement accounts (401(k)s and IRAs) receive favorable treatment upon the owner’s death in a few areas. First, retirement accounts are non-probate assets. They have their own beneficiary designations, which determine to whom they pass, rather then going through the Probate Court process. Second, the designated beneficiaries of a retirement account can elect to stretch the Required Minimum Distributions (RMDs) over their own lifetimes, thereby realizing huge tax deferral savings.
However, probate and tax avoidance are not the only aspirational goals of estate planners. They also strive to protect clients’ assets from their children’s financial woes, usually through the use of a trust. But there are stringent rules regarding the use of trusts for retirement accounts.
When an improperly drafted trust is named as the beneficiary of a retirement account, it could accidentally trigger an IRS requirement that the account be distributed within five years of the decedent’s death. Furthermore, even if the trust is correctly drafted, it will normally require that the retirement account be distributed over the life expectancy of the oldest potential beneficiary, even when some beneficiaries are much younger. In both these scenarios, the tax deferral benefit is greatly reduced.
In order to defer distributions (and thereby taxes) over each beneficiary’s own life expectancy, each beneficiary must have a separate trust designated as the beneficiary of their share of the retirement account. Even still, these separate trusts will only achieve the maximum stretch in certain circumstances. First, the trust will receive the maximum stretch if all RMDs received by the trust are immediately distributed to the trust beneficiary. This conduit trust guarantees tax deferral, but it does nothing to protect the distributions from the beneficiary’s creditors. Alternately, if the trust accumulates the RMDs, then it can protect them from the beneficiary’s creditors. However, the tax treatment of this accumulation trust is uncertain. It may still receive the maximum tax deferral, if there are no potential beneficiaries with a life expectancy longer then the primary beneficiary of the trust. Unfortunately, this result can be difficult to obtain, and may thwart the client’s other estate planning goals.
One novel solution is to designate separate conduit trusts as the beneficiaries of a retirement account, but also give a Trust Protector the power to change them into accumulation trusts in the event that a beneficiary encounters financial trouble. This structure guarantees the maximum tax deferral so long as the beneficiary has no asset protection concerns. Then, if/when such concerns arise, the Trust Protector can toggle the provisions of the trust so that its assets are beyond the reach of creditors.
Confused? You should be. This is very complicated stuff, and should only be done by an experienced estate planning attorney. If it is done properly, then even a modest retirement account can be worth millions when deferred over the life expectancies of children or grandchildren.