A colleague and I have recently devoted some time to developing a new facet of estate planning that we call “Zero Tax Planning.” The idea is simple. First, we use traditional estate planning techniques to reduce estate taxes as much as possible, while keeping assets within the family. Then, once traditional methods are exhausted, we make charitable gifts of any remaining taxable estate. Because there is an unlimited estate and gift tax deduction for charitable gifts, this method will work for any estate, no matter how large or small.
Of course, eliminating estate taxes is only one goal of estate planning. Clients often have many competing needs and goals that we must address. Fortunately, the non-profit and financial industries have developed several sophisticated charitable giving methods, that allow clients to achieve their family, financial, tax, and philanthropic goals simultaneously.
So without further ado, here are the Top Five Methods of Charitable Giving, ranked from simplest to most sophisticated:
1) Outright Gifts (Lifetime, Bequests, Devises, and Legacies)
The simplest way of giving to charity is to just do it. You can make an outright gift by handing over cash or writing a check. You can donate a car, a house, stocks, bonds, mutual funds… you name it. You can gift during your lifetime, or upon your death.
(aside: the term bequest and legacy traditionally referred to a gift of personal property in a will; devise to real estate. Today they commonly used interchangeably, and can be made via will or trust.)
When making outright gifts, make sure to keep records so that you can authenticate the transaction to the taxing authorities.
2) Charitable Gift Annuities
For donors looking to retain an income stream, while removing property from their taxable estates, a charitable gift annuity is a worthwhile option. With a gift annuity, the donor transfers property to a charitable organization, and the charity makes periodic payments back to the annuitant. Then, when the annuitant dies, the remainder of the property vests in the charity. The property transferred to the annuity is immediately removed from the donor’s taxable estate, reducing his or her estate tax. Further, the donor receives an immediate partial income tax deduction for the present value of the annuity’s remainder interest. The annuity payments to the grantor are partially taxable income, and partially non-taxable return of principal.
3) Pooled Income Funds
A pooled income fund is similar to a gift annuity, in that the donor receives an income stream, and the charity receives a remainder interest. However, with a pooled income fund the donation is invested into a professionally managed fund, and the donor receives periodic payments of the income generated by the investments. Because the income generated by the fund varies with the market, the periodic payments will vary. Conversely, with a charitable gift annuity, the annuity payments would be predetermined based on actuarial rates.
Tax-wise, the donor receives an immediate partial income tax deduction. However, because payments to the donor consist solely of fund income, they will be taxable on the donor’s 1040 in their entirety. Fortunately, the entirety of the gift will be removed from the donor’s taxable estate.
Because they are so similar, it can be difficult to determine whether a charitable gift annuity or pooled income fund is the right solution for a family. Although individual circumstances vary, typically, a pooled income fund is typically more appropriate for larger gifts, especially when the immediate income tax deduction is desirable.
4) Charitable Remainder Trusts
A charitable remainder trust is essentially a do-it-yourself version of a charitable gift annuity. With a CRT, the donor establishes a trust, and funds it with money or other assets. The trustee then invests the trust’s property, and makes periodic payments to the donor, or other income beneficiary. Finally, when the income beneficiaries pass away, the remainder passes to one or more charitable organizations.
So what is the benefit of a CRT? Flexibility. The donor of a CRT can name multiple charitable beneficiaries, while gift annuities and pooled income funds are specific to each charity. The CRT can have multiple income beneficiaries. The donor can reserve the right to change the charitable remainder beneficiaries. The income stream to the donor can be structured in a variety of ways (percentage of trust assets, set dollar amount, limited to net trust income, etc.). Each allowable arrangement has its requisite legal acronym, so we have CRATs, CRUTs, NICRUTs, NIMCRUTs, and FLIPCRUTs. Confused yet? That’s okay. If you’re considering this type of planning, you need to speak with an attorney who can walk you through it.
Finally, charitable remainder trusts allow the donor, if they are also the trustee, to handle all of the investment decisions for the trust. This control is forfeited with a gift annuity or pooled income fund, and is attractive for many donors.
5) Establishing a Private Foundation
For donors who want to take complete control of their philanthropic endeavors, establishing a private foundation may be the answer. A private foundation essentially operates on an ongoing basis towards the furtherance of a stated charitable purpose. Typically, the private foundation is endowed by one or more wealthy individuals, or a wealthy family, or corporation. The foundation then invests and manages its endowment, and makes disbursements to other organizations with direct charitable or educational operations. These disbursements are often determined through a grant-making process.
While a private foundation may come into existence through a wealth person’s estate planning, the foundation could continue long after the founder’s death.
Of course the pathways to establishing and funding a private foundation are numerous, and the tax implications labyrinthine. However, for wealthy individuals that want to leave an ongoing philanthropic legacy, they are a powerful tool.
The largest, and perhaps the most famous, private foundation is the Bill & Melinda Gates Foundation.
So there you have it, my Top Five Methods of Charitable Giving. Of course, these aren’t the only way to give to charity. For those not in a position to make financial gifts, consider making a gift of your time and volunteering for a local charity. If you are interested in learning more about integrating philanthropy with your estate plan, please feel free to contact me.
Does Having A Will Avoid Probate?
There is a common misconception that having a valid will allows a decedent to avoid probate. This is completely false.
When someone dies without a will, they are considered “intestate”. The Massachusetts Uniform Probate Code includes several formulas for determining the division of assets when someone dies intestate. These formulas are based on the assets of the estate, and whether the decedent left a surviving spouse, children, grandchildren, parents, distant relatives, etc.
The primary benefit of a will is that it avoids using these intestacy formulas. Instead of a formula determining who inherits an estate, the will states who will inherit. This is a huge advantage over intestacy, because it allows the decedent to set forth their intended beneficiaries.
However, whether someone dies intestate (without a will) or testate (with a will), their estate still has to go through probate.
What is Probate?
Originally, the term probate referred to the legal process for determining the validity of a will presented to the court. This led to the courts tasked with jurisdiction over the administration of decedents’ estate to be called “probate courts”. In Massachusetts the court probate court also has jurisdiction over domestic relations cases, and is called the Probate and Family Court. Now, the term probate refers to the process of administering an estate in the probate court.
The process for probating an intestate estate and a testate estate are essentially the same. Someone, usually a close family member, must submit a Petition to the Probate and Family Court. The Petition will typically request that the Court determine the proper beneficiaries of the estate (by applying the will, or the intestacy formulas), and officially appoint someone as the Personal Representative (formerly called Executor or Administrator) of the estate. Depending on the complexity of the estate, the remainder of the administration may be relatively simple or complex.
So What’s the Matter with Probate?
If you listen to talk radio, you’ve probably heard advertisements proclaiming the horrors of the probate process. While these commercials are somewhat hyperbolic, probate does exert a cost, in time, energy, and money.
First, probate is slow. Even if a decedent’s family is prompt about administering an estate, it’s probably going to be a few weeks before they can file a probate petition. Then once the petition is filed, it could be a few more weeks before the Probate Court issues a Citation. A citation is the Court’s written instructions for serving notice on interested parties. It involves sending copies of the citation in the mail, and publishing the citation in a local newspaper. The citation typically allows a period of time for interested parties to object to the petition, usually around a month. Then, once the objection period has expired, it could take the Court several more weeks to approve the petition.
As you can see, just getting permission to administer an estate can easily take three months, or more. Then, creditors of an estate have one year from the decedent’s date of death to file claims against the probated estate. That means that the Personal Representative cannot safely make distributions until a year has passed.
And this illustration is for an estate that goes smoothly, which seldom happens. Ensuring a snag free probate will require either a considerable amount of the family’s energy in researching the process, or hiring an estate attorney at considerable expense.
The fees for probating an estate run into the hundreds, even without hiring an attorney. The court fees in Massachusetts are around $400, and the newspaper publication fees are around $200, depending on the specific paper.
The good news is that probate can be avoided with relative ease.
How Can I Avoid Probate?
The best method for avoiding probate is to establish a revocable trust during your lifetime. Think of a revocable trust as a “will substitute”. It essentially allows you to designate the beneficiaries of your estate, but is not subject to the probate process. Instead, your trust will nominate someone to take over as trustee upon your death, so that they can immediately manage and administer your legacy for your loved ones.
In addition to avoiding probate, revocable trusts have a multitude of other estate planning advantages over simple wills. When done correctly, revocable trusts can double the amount of assets that a married couple can pass free of estate taxes, and can protect the beneficiaries’ inheritances from their future lawsuits, creditors, divorces, etc.
If you are interested in revocable trusts, avoiding probate, or estate planning in general, please contact an specialized estate planning attorney. A bit of planning now will safe a lot of money and frustration in the future.
If you are a resident of Massachusetts, and you die with more than $1 million in your “taxable estate,” then you owe a Massachusetts estate tax. The tax rate is based on a sliding scale from 0% to 16%. When you add up real estate, retirement accounts, and life insurance death benefits, many Massachusetts residents end up over the $1 million threshold.
Fortunately, there are a variety of estate planning mechanisms that can reduce and often eliminate the estate tax. Here are the top three.
Method One: Marital Deduction and Credit Shelter Planning (sounds complicated, but it isn’t really)
Every person can pass $1 million free of estate taxes. Therefore, a married couple should be able to pass $2 million free of tax. However, achieving this result requires a bit of planning.
Here’s what happens without planning: Husband and Wife have $1.5 million. Husband dies, leaving everything to wife. Wife dies with $1.5 million in her taxable estate (because she got everything when Husband died). Wife is now over the threshold by $500,000, and owes a Massachusetts estate tax of around $64,000.
Here’s what happens with planning: Husband and Wife have $1.5 million. They split their assets evenly, and hold them in revocable trusts with estate tax planning provisions. Husband dies, and leaves his half in a credit shelter trust. His half is under the threshold, so no estate tax is due. Husband’s credit shelter trust is now available for Wife’s benefit, but is not part of her taxable estate when she dies. Wife dies, and her taxable estate consists of the $750,000 in her revocable trust, which is under the threshold. Voila, no estate tax!
Here’s how it works with a larger estate.
Without Planning: Husband and Wife have $3 million. Husband dies, leaving everything to wife. Wife dies with $3 million in her taxable estate. Wife is now over the threshold by $2 million, and owes a Massachusetts estate tax of around $182,000.
With Planning: Husband and Wife have $3 million. They split their assets evenly, and hold them in revocable trusts with estate tax planning provisions. Husband dies, and leaves $1 million in a credit shelter trust, and $500,000 in a marital deduction trust. Because the marital trust is deductible, his taxable estate is only $1 million, and not over the threshold. Both trusts are available for Wife’s benefit. Wife dies. Her estate consists of the $1.5 million in her own trust, and the $500,000 in the marital trust, for a total estate of $2 million. She is $1 million over the threshold, and owes a Massachusetts estate tax of around $100,000. That’s an estate tax savings of $82,000!
This type of planning is the most common method of reducing or eliminating estate taxes. The only prerequisite is that you are married.
Method Two: Annual Exclusion Gifting
If the estate tax is based on your net worth when you die, then why not just give your money away while you’re still alive? Well, the smart folks at the federal IRS and Massachusetts Department of Revenue have already thought of that. Therefore, there are rules in place that cause large gifts to count as part of your taxable estate, even though you no longer have the money/property. Fortunately, there is an exclusion from these rules for gifts of up to $14,000 per person per year. That means if you give me $14,000 today, you will lower your future estate taxes. Even better, married couples can give $28,000 per year.
Here’s how this plays out:
Husband and Wife have over $2 million, so they’ll owe an estate tax even with the marital planning discussed above. They also have three children, who are all married. Therefore, Husband and Wife can give each of their children, and each of their children’s spouses, $28,000 per year. That equals out to $168,000 per year ($28,000 x 6). Husband and Wife decided that they would like to keep their money within the family, and reduce their eventual estate tax, so they make these gifts every year for six years. This reduces their taxable estate by over $1 million, and saves them around $100,000 in estate taxes. Imagine how much they could save by gifting to their grandchildren too!
Method Three: Charitable Giving
When you give money (or property) to charity, you reduce your taxable estate. And for charitable gifts, there is no $14,000 limit. You could theoretically eliminate your estate tax by giving everything to charity. It is more common, however, for people to pass their wealth to their families, while making some charitable gifts for tax planning purposes.
Like other types of estate planning, there are many ways to make charitable gifts. You can gift outright, by writing a check. You can leave gifts when you die, by putting them in your will, or in a trust. You can set up a Charitable Remainder Trust, which preserves a stream of income while you are alive, but goes to charity when you die. You can even set up a Private Foundation that serves an ongoing charitable purpose long after your death.
Some clients favor a Zero-Tax Planning approach. This consists of utilizing all three methods with the ultimate goal of paying no estate tax. First, we set up the credit shelter/marital deduction trusts to double the amount that will pass tax free. If they’re still over the threshold, we incorporate annual gifts to family members to gradually reduce their estates. And if they’re still over the threshold at death, we make a charitable gift to reduce their taxable estate to the threshold, ensuring no estate tax is due.
So there you have it, three three easiest and most effective ways to reduce or eliminate estate taxes in Massachusetts. Of course there are plenty of more sophisticated methods as well, but for most of us, these three are the ones to discuss with your Massachusetts estate planning attorney.
For many people, the prospect of discussing their sensitive family and financial scenarios, in the context of their eventual death, is intimidating. Even so, estate planning is an important undertaking that responsible people should not ignore. The best way to improve the process is to find an estate planning attorney with whom you are comfortable.
So how do you find the right estate planning attorney for you? Let me break it down into three simple steps.
Step One: Identify some attorneys that practice in the estate planning field.
The first step is to identify attorneys that include estate planning in their law practice. Here are some tips.
Ask your professional advisors: Financial advisors and accountants tend to run in the same circles as estate planning attorneys. Ask your other advisors for an introduction.
Ask your current lawyer: If you’ve engaged a lawyer in the past for other issues, he or she may know an estate planning specialist.
Ask your family and friends: Perhaps someone in your family or social circle has done some estate planning. If so, they may be able to recommend someone to you.
Search the internet: If you’re interested in getting the most information in the shortest amount of time from the comfort of your home or office, just hop on Google. Search for estate planning attorneys in your area. Try using a few different search terms (estate, trust, probate, lawyer, attorney, etc.). Unless you truly live in the middle of nowhere, you’ll find many attorneys, mostly located in the commercial areas closest to your home. Pay special attention to the Google Local results (the ones that show up on a map) to see where they are located.
Step Two: Review each attorney’s website for key information and red flags.
The best way to evaluate a potential estate planning attorney early in the process is to check out their website. When reviewing a website, try to answer these questions.
Is this lawyer knowledgable about estate planning?
Estate planning is a multi-disciplinary practice that involves taxes, health care, finance, and business. Because of this complexity, estate planning has become a specialty practice. As such, you should make sure that your lawyer is an estate planning specialist. Check to see that their website discusses estate planning in a thorough and comprehensive manner.
Is this lawyer out of touch, or set in their ways?
Estate planning is a constantly changing area of law. For example, in the last few years, Massachusetts has completely overhauled their probate, estate administration, and guardianship/conservatorship laws, with the adoption of the Massachusetts Uniform Probate Code. Massachusetts has also implemented new changes by adopting a modified version of the Uniform Trust Code. On the federal level, the estate tax laws have changed every few years for more than a decade.
As a result of these constant changes, the best estate planning lawyers tend to be younger, energetic, and enterprising. Just having a website is a good indicator that you’ve found such an attorney. On the other hand, if an attorney has been doing things the same way for the last forty years, they may be slow to adapt to the current state of the industry.
Is this lawyer a general practitioner?
Unfortunately, because of the downturn in the economy and real estate markets over the last five years, many business and real estate lawyers now hold themselves out as estate planners. This makes it more difficult to find a genuine estate planning specialist. When reviewing an attorney’s website, take a close look at their “practice areas.” If they say that they specialize in personal injury, divorce, criminal defense, real estate, business, bankruptcy, and estate planning… that means that they don’t specialize in anything. The “Jack-of-all-Trades, Master-of-None” is not someone to whom you should entrust your family’s legacy.
Please be aware that there are some complementary practice areas to estate planning. For example, genuine estate planners often have subspecialties in probate and guardianship law.
If the attorney seems like a true specialist, with the energy and passion to stay current with the industry, then it’s time to move on to the next step.
Step Three: Schedule a consultation to see if it’s a good fit.
There is no substitute for an actual, sit-down, face-to-face, conversation. Most estate planners offer free consultations to prospective clients. The purpose for this consultation is two-fold. First, it allows the attorney to convey their approach to estate planning in the context of your family’s unique situation. Second, it gives you the opportunity to evaluate your comfort level with the attorney. Did the attorney listen to and understand my goals? Did he or she appear well informed? Most importantly: Would I feel comfortable working with them?
If you’ve made it this far in the article, I invite you to use my website as a starting point.
I hope that my website (www.deplawfirm.com), and this blog, portray me as an energetic and knowledgable estate planning specialist. But that’s for you to decide. If so, I would love to hear from you. My office is in Danvers, on the North Shore of Massachusetts.
We live in an economically volatile and litigious society. An unexpected lawsuit, or decline in business, can put people’s life savings at risk. Therefore, asset protection planning is of the utmost importance.
According to Massachusetts estate planning attorneys, two of the most common and effective asset protection mechanisms are the Limited Liability Company (LLC) and the Irrevocable Trust. But which one is right for you? Let’s take a look.
Limited Liability Company
Limited Liability Companies are creatures of statutory law. Think of them as Frankenstein’s Monster, patched together with elements of corporate, partnership, and tax law. Only Frankenstein is not a mad scientist, he’s your state’s legislature.
An LLC is an entity that is specifically authorized to provide a liability shield to its owners. So long as the event creating the liability occurs within the LLC, a judgment creditor will be unable to reach the personal (non-LLC) assets of the owner. For example, if you own a vacation home in an LLC, and someone is injured on the premises, then their recovery on the lawsuit would be limited to the assets of the LLC. They couldn’t recover against your bank account, or primary residence, because they’re outside of the LLC.
Furthermore, if the LLC owner is sued due to an event occurring outside of the LLC, then the judgment creditor cannot seize the LLC. For example, if you own a small business inside of an LLC, and you hit someone with your car, they can sue you, but they won’t be able to take your business away if they win.
Because of this protection against inside and outside liability, LLCs are best suited to protect assets that could potential be the source of a lawsuit. Specifically, they are great for holding investment real estate and operating businesses.
Until recently LLCs have been creatures of common law. That means that they’ve evolved through the decisions of courts in England and the United States over several hundred years. Now however, states often supplement trust law with statutory schemes. For example, the Massachusetts Uniform Trust Code creates a framework for trust law in the Bay State. But to the extent that it is not all encompassing, the common law remains.
When a Grantor puts assets into a trust, they are no longer the owner. Instead, the Trustee becomes the legal owner, and he or she must manage the assets according to the terms of the trust. The terms of the trust typically designate beneficiaries, who are the beneficial owners of the trust.
The asset protection mechanism of an irrevocable trust is a function of control. It works like this: if the Grantor cannot take complete control of the assets in trust, then neither can their creditors. Revocable trusts provide no asset protection to the Grantor, because the Grantor can revoke the trust and take back the assets. However, the Grantor cannot take back the assets in an irrevocable trust, because it is irrevocable, so they are protected.
But what if the Grantor wants to control the trust assets?
The terms of the trust can reserve certain rights to the Grantor. Sometimes the Grantor can also serve as the Trustee. There are many types of irrevocable trusts, but it is usually possible for the Grantor to retain a moderate to high degree of control.
But what if the Grantor wants to benefit from the assets in the trust?
This depends on the distinction between principal and income. The primary assets owned by the trust are the principal, but the income that they generate is the income. For example, a bank account is principal, but the interest that it generates is income. Shares of stock are principal, but dividends are income. Real estate is principal, but the rent paid by tenants is income.
The golden rule of asset protection is that if you can get it, your creditors can too. Therefore, irrevocable asset protection trusts prohibit the Grantor from accessing the trust’s principal. Fortunately, a Grantor can retain the right to income, and creditors will still be unable to reach the underlying assets. In this scenario, the Trustee could reallocate the principal into assets designed to appreciate in value, rather than generate income. Then they could reallocate into income generating property once the asset protection threat has passed.
For these reasons, irrevocable trusts work well for income generating property, or primary residences for older clients.
Why not use both?
A sophisticated estate planner may recommend using both LLCs and irrevocable trusts. You could have an LLC for your business, and a trust for your investments; or an LLC for your vacation home, and a trust for your primary residence. Or, if you want to get really savvy, you could have a trust own an LLC, or an LLC serve as trustee of a trust, or both!
Whether your looking for some simple protection, or you want to create a veritable lasagna (multiple layers, get it?) of LLCs and trusts, the first step is to seek the advice of an attorney that specializes in this type of 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.
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.
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.
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.
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.