Inportant Estate Planning Tools

November 2005

DISCLAIMER: The information herein is current through November 1, 2005. This handout is intended as an overview of planning options and not as legal advice for a particular matter. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

Both federal and state laws protect the rights of each individual to self determine what happens to his or her person and property. However, these rights are waived when a person fails to put into place a written plan that will survive incompetency and death. As described below, without written documents (the minimum of which are: health care directives, durable power of attorney, and last will and testament), the state’s default law of Guardianship and estate intestacy laws control the treatment of the person and disposition of the person’s property during life and upon death. The state’s plan ends up being much more costly in legal and accounting fees, than the cost of putting an individual testamentary plan with contingencies in the event of catastrophic illness.

When putting together an individual plan, the appropriate legal documents fall into two major categories: documents to manage the person and property during life (inter vivos) and documents to distribute property upon death (testamentary). All testamentary plans become irrevocable upon death while inter vivos plans can be either revocable or irrevocable depending upon the desired purpose of the document.

I. PLANNING DURING LIFE - INTER VIVOS DOCUMENTS

1. Revocable Planning Tools - The documents can be revoked upon written notice of revocation to the third parties who have relied on the documents. However the individual or his agent must be legally competent to give written notice of revocation.

   1. Representative Payee. The Social Security Administration does not honor powers of attorney. For an agent to manage social security benefits, a third party can apply to the SSA for appointment as “representative payee.” The SSA has a duty by law to investigate every applicant to determine that he/she does not have a criminal record and has no history of defrauding the SSA.

   2. “In Trust For” Bank Accounts. This bank account is owned by the individual and has a designated beneficiary. The result is that upon death the funds pass directly to the beneficiary thus avoiding probate. However, the funds are not protected for Medicaid eligibility as they are available to the individual during life. The funds are part of the individual’s taxable estate fully subject to estate tax laws.
      

   3. Revocable Living Trust. This trust is useful when the individual owns property out of state, because holding the property in trust avoids probate in the both the home state and ancillary probate in the foreign state where the property is located. It is also useful to manage large or complicated estates, because the trustee has an affirmative duty to prudently invest, manage, and protect the trust assets. The revocable trust does not protect assets for Medicaid eligibility purposes. A “pour over” will is still necessary as it is unlikely to have all one’s property in a trust. The trust must be properly funded in order to be beneficial as described above.

   4. Reverse Mortgage. This is a federal loan program for individuals, age 62 or older, who are house rich and cash poor. All other mortgages on the property must be paid off as closing, and the property must be maintained. The mortgage is paid off upon the earlier of the individual not residing in the property or the property being sold or transferred. The reverse mortgage is paid in a lump sum, in monthly payments, or in an equity line of credit. The mortgage funds are not counted for Medicaid eligibility purposes because it is a liability which eventually must be repaid to the Federal government.

   5. Long Term Care Insurance Partnership Plans. These plans provide for three years of long term care insurance. Upon exhaustion of the third year coverage, all the individual’s assets are exempt; only his income must be spent on his/her care.

   6. Third Party Special Needs Trust for the Disabled Person Receiving Public Benefits. Disabled relatives who reach the federal financial eligibility levels to receive public assistance can be financially provided for by relatives or friends who have no legal duty of support of the disabled beneficiary by establishing a specially drafted trust which provides for the needs of the disabled not covered by Medicaid, Medicare, Supplemental Security Income, or other public benefits. Upon the death of the disabled beneficiary the trust funds can be distributed to other beneficiaries named in the trust.

2. Irrevocable Planning Tools. These documents must waive all right of revocation in order to be legally effective in preserving assets

   1. Joint Bank Accounts - A joint account gives all parties named on the account the right to complete withdrawal of all funds. An individual’s name cannot be removed from a joint account. The account has to be closed and a new account opened in order to return full control to the original owner. Joint bank accounts avoid the probate estate. All of the funds are part of the decedent’s taxable estate unless the funds are jointly owned by the spouse in which case half of the account value belongs to the taxable estate. All joint account funds are not protected for Medicaid eligibility purposes. By placing assets in joint accounts one waives the need for a Guardian/Conservator of the property of the incapacitated individual.

   2. Life Estate Deed in Personal Residence - This deed gives the individual full possession of his home, but upon his death the property goes immediately to the person(s) named as “remainder men” in the deed. The life estate avoids probate of the property; gives the property a stepped up basis upon the death of the individual. However, if the house is sold while the individual is living his/her capital gains exclusion applies only to the value of his/her life estate. Also in order to sell or transfer the property, all persons on the life estate deed must sign the deed of transfer. The life estate deed avoids Medicaid recovery of the personal residence upon death of the Medicaid applicant or his/her spouse.

   3. Grantor Retained Income Trust of “GRIT” - The GRIT places the property in an irrevocable trust so that it is out of control of the individual funding the trust while the income generated by the trust property if paid to the individual and taxed at the individual’s income tax rate instead of the trust’s income tax rate. This is a good asset protection trust because only the trust income can be reached by the individual’s creditors including medical providers. The GRIT avoids the need for a Guardian/Conservator of the trust property, probate, and ancillary probate. The trust principal although excluded from the individual’s probate estate is pulled upon death into the decedent’s taxable estate where the property receives a stepped up basis, avoiding capital gains tax upon the sale of the property.
      
      For Title XIX-Medicaid eligibility and recovery purposes in Connecticut the trust must fall outside of Connecticut’s “Trust Busting” statute in that it must be funded more than five years before the date of the Medicaid application or the trust must have a charitable purpose.

   4. Life Insurance Trust - Life insurance placed into a correctly drafted irrevocable trust removes the life insurance proceeds from the decedents taxable estate, thus reducing estate tax liability. Upon the death of the insured, the proceeds are paid out to the beneficiaries tax free. The insurance policy value and death proceeds are protected for Medicaid eligibility purposes and Medicaid recovery.

   5. Self funded Special Needs Trust - The assets of a Medicaid applicant under age 65 may be placed in a trust similar to the trust described in #6 above with the major exceptions that the trust must be for the sole benefit of the disabled beneficiary during his/her life and upon his/her death the trust proceeds are recovered by the state for any Medicaid paid on behalf of the disabled beneficiary.

   6. Charitable Remainder Trust - The grantor receives income for his (or hisand his spouse’s) life, the remainder is given to a charity of the grantor’s choice. If the trust is funded with highly appreciated assets, there are no capital gains taxes when the trust sells the assets. The assets are removed from the grantor’s taxable estate and the grantor receives an income tax deduction in the year funded.

II. PLANNING FOR DISPOSITION OF PROPERTY AT DEATH

1. Six Reasons to Execute a Will

   1. To avoid State Intestacy Rules

   2. To appoint a guardian of Minor Children

   3. To provide adequately for children of a first marriage and “after-born” children

   4. To provide adequately for disabled beneficiaries who receive public benefits

   5. To reduce the costs of estate administration

   6. To reduce estate taxes

2. Testamentary Trusts Which Can be Drafted within the Individual’s Will

   1. Minor’s Trust - This trust manages property left to a minor. The trustee can be directed by the trust to hold the assets until the minor reaches a certain age which can be well over age 18.

   2. Disclaimer Trust - This trust is useful if the individual and his/her spouse are unsure whether or not the first spouse’s death will create a taxable estate upon the second spouse’s death. The surviving spouse can disclaim his/her inheritance from his/her spouse within nine months of his/her death if he/she wants to avoid estate tax exposure upon death. The disclaimed property is placed in an irrevocable credit shelter trust.

   3. Credit Shelter Trust. This year each individual can pass $1,500,000.00 free of federal estate tax. If a married couple has a $3,000,000.00 estate and it all passes to the surviving spouse only $1,000,000.00 will pass tax free upon the second spouse’s death. However, if the first $1,000,000.00 is placed in a credit shelter of “By-Pass” trust for the benefit of the decedent’s spouse and family, $3,000,000.00 will pass tax free. When the second spouse dies, only $1,500,000.00 (plus any growth if the spouse does not make annual gifts) will be in the spouse’s estate.

   4. Marital Trust - For large estates, after the By Pass/Credit Shelter Trust is funded with the federal estate tax exempt amount, the balance of the decedent spouse’s estate can be placed in a Marital Trust for the benefit of the surviving spouse. The Marital Trust property is not taxable until the second spouse dies due to the marital election rules. Further, the surviving spouse’s credit shelter amount of $1,500,000.00 can be applied to the Marital Trust property at spouse’s death.

   5. Special Needs Trust for the Disabled Beneficiary - See above for description.

III. TAX QUALIFIED ACCOUNTS

Tax qualified accounts such as pensions, IRA accounts, etc. should not pass by will. These accounts should have “designated beneficiaries” and contingent designated beneficiaries which are persons, not entities. If the estate is named a beneficiary, the funds still have to be distributed at death. In New York, tax qualified accounts are sheltered from the Medicaid spend down rules if the owner is drawing regular income from the tax qualified account(s) rather than continuing to grow tax free during the life of the designated beneficiary. In Connecticut tax qualified accounts must be spent down for Medicaid eligibility.

EXAMPLE ONE: Uncle Donald has an IRA of $60,000 with no named beneficiary. Upon his death the $60,000.00 is taxed as income with respect to a decedent (I.R.D.), taxed as part of Uncle Donald’s taxable estate, and must be distributed over the remaining life expectancy of Uncle Donald.

EXAMPLE TWO: Uncle Donald names his three nephews, Huey (age 40), Dewey (age 25) and Louie (age 10) as designated beneficiaries of his $60,000 IRA. Result: after estate taxes the $60,000 which are distributed according to Huey’s life expectancy, can remain an IRA longer, growing tax free.

EXAMPLE THREE: Uncle Donald divides his $60,000 IRA into three IRA’s, each with $20,000. Huey, Dewey and Louie are each a single beneficiary of a $20,000 IRA. Upon Uncle Donald’s death, the three IRAs, after estate taxes, are paid out over Huey, Dewey and Louie’s life expectancies. Result: the separate IRA’s grow tax free for a longer period of time, especially for Louie since he is 30 years younger than Huey.

IV. PLANNING FOR INCAPACITY

1. NEW YORK

   1. Durable Power of Attorney. This document appoints an agent called an“attorney in fact” who can be given broad powers to manage the individual’s affairs. These powers include taking legal action and managing the individuals’s finances. The agent cannot make any health care decisions under a New York power of attorney. Upon mental incapacity or catastrophic illness of the individual who does not have a power of attorney, the only alternative to manage a person’s finances and legal affairs is the appointment of a legal Guardian (Article 81 Proceeding under the New York Mental Hygiene Law).

   2. Appointment of Health Care Agent. In 1991 New York passed its Health Care Proxy Law, which permits an individual to appoint any adult to serve as his health care agent.

   3. Living Will. The federal Patient Self Determination Act of 1991 permits the individual to state in writing what type of treatment he/she consents to or refuses should he/she be in a comatose state with no expectations of consciousness or be expected to die shortly with no expectation of recovery. These conditions are determined by the treating physician. Without such determination, the living will directives will not be activated.

   4. Voluntary Guardianship. When an individual is mentally competent, but physically frail, he/she may petition the court to appoint a Guardian of his/her choosing to manage his/her property and person. New York Case law permits the Guardian to submit to the court an asset protection plan permitting gifts to relatives in order to qualify the ward for earlier Medicaid financial eligibility. At any time while he/she is competent, he/she may request removal of the Guardian.

2. CONNECTICUT

   1. Durable Power of Attorney. This document appoints an agent called an “attorney in fact” who can be given broad powers to manage the individual’s affairs. These powers include taking legal action, managing the individual’s finances and making health care decisions on behalf of the individual with two exceptions. The agent cannot make any decisions regarding removal of life support, because that decision is governed by Connecticut’s living will statute. Further, the agent cannot revoke the individual’s living will. Upon mental incapacity or catastrophic illness of the individual who does not have a power of attorney, the only alternative to manage a person’s finances and legal affairs is the appointment of a conservator. Conservatorship is often a drawn out costly process which sometimes results in outcomes in opposition of the individual’s wishes or those of his family.

   2. Living Will. Connecticut’s living will statute is in conformity with the federal Patient Self Determination Act of 1991. This document permits the individual to state in writing what type of treatment he/she wants or refuses should he/she be in a comatose state with no expectations of consciousness or be expected to die shortly with no expectation of recovery. These conditions are determined by the treating physician. Without such determination, the living will directives will not be activated.

   3. Appointment of Health Care Agent. Any person over eighteen who is not the individual’s treating physician, an employee or administrator in a facility in which the individual resides, or a governmental agency representative responsible for the individual’s medical care serve as health care agent. The agent by law must make decisions according to the individual’s known wishes.

   4. Voluntary Conservatorship. When an individual is mentally competent, but physically frail, he/she may petition the probate court to appoint a conservator of his/her choosing. At any time while he/she is competent, he/she may request removal of the conservator.

We have helped many people in your situation, and we can help you.

Please contact Connecticut living will and estate planning lawyer Linnea Levine today. For immediate assistance call us at 203-557-0850 or 914-481-5555.

We welcome clients in Fairfield County, CT and Westchester County, NY, including Stamford, Harrison, White Plains, Greenwich, New Canaan, Darien, Westport, Bedford, Katonah, New Rochelle and Scarsdale.