Monthly Archives: March 2023

In an effort to make things easier for their loved ones, people sometimes enter into prepaid funeral contracts. The idea is that you pay for all of your own funeral and burial or cremation expenses in advance. When you pass away, your family notifies the service and the service handles everything.

When you enter into the contract you will have the opportunity to make specific choices with regard to the details of your funeral and burial or cremation. The service is legally compelled to deliver in accordance with the terms of the contract.

A Closer Look
This may sound like a simple solution on the surface. However, there are significant problems with these prepaid funeral contracts. For one thing, there are companies with unscrupulous intentions. These services are required by law to place payments into trusts or insurance policies. This doesn’t always happen. When the assets remain in hand, the people behind the service can abscond when the time is right.

Short of flat-out robbery, prepaid funeral services can take advantage of clients in other ways. Shortchanging would be one of them. For example, you could pay for a casket of a certain quality in advance. A far inferior product could ultimately be delivered. Or, you may pay for a certain number of limousines of a particular size. An entirely different assemblage of vehicles may arrive. Floral arrangements may come up short of the mark, and other shortcuts may be taken.

If you were to enter into a prepaid funeral contract in one area of the country and die elsewhere, you may ultimately receive nothing for your money. The contract could be tied to services provided by specific local entities.

Avoid the Middle Man
When you enter into a prepaid funeral contract you are paying someone to make arrangements that could be made directly. As a result, you are paying more for the actual products and services because the intermediary must make a profit. This is why prepaid funeral services exist. Because of the middle man you are overpaying from the start. You are also surrendering the opportunity to earn interest on the money that you have set aside for your final arrangements.

Viable Alternative
Instead of entering into a prepaid funeral contract, you could place adequate resources into a payable-on-death account. You name a trusted heir as the beneficiary. All of your heirs should be aware of this arrangement. After you pass away, the beneficiary assumes ownership of the resources in the account. Probate is not a factor, so the assets are immediately available to cover your final expenses. If you discuss your preferences with your beneficiary in advance, he or she will carry out your specific wishes when the time comes.

If you go this route there will be no surprises. Everything will go according to plan as you leave behind a turnkey, risk-free postmortem situation.

The Biden Administration recently released its budget proposals for 2024. Of the fourteen proposals listed, two could impact estate planning, if signed into law. This article will focus on the first such proposal which relates to distributions from an Individual Retirement Account (“IRA”). The Internal Revenue Code (“Code”) allows taxpayers under the age of 50 to contribute up to $6,500 to their IRAs in 2023. Taxpayers over the age of 50 may contribute an additional $1,000. The numbers adjust for inflation each year. If the taxpayer contributes excess funds to their IRA and does not withdraw the excess amount along with any income attributable thereto prior to the tax filing deadline, then such taxpayer would be subject to an annual excise tax. If the taxpayer contributes to a traditional IRA, then the taxpayer may contribute pre-tax dollars and would include distributions from the IRA in income when received. Taxpayers contributing to Roth IRAs do not report the distributions as income because contributions consist of post-tax dollars.

Under current law, distributions from traditional IRAs begin April 1 in the year after the taxpayer has attained age 73. At that time, the taxpayer needs to withdraw a Required Minimum Distribution (“RMD”) amount annually. Taxpayers and their advisors calculate RMDs based upon tables promulgated by the Internal Revenue Service that use life expectancy to determine the distribution factor. That factor is applied to the account balance as of December 31 of the prior year to produce the RMD for that year. When the taxpayer takes their RMD or otherwise withdraws funds from their IRA, they include those amounts in their income. For that reason, many taxpayers wait until they have reached age 73 to begin withdrawing funds from their IRAs thereby deferring income as long as possible and allowing the funds in the IRA to grow without generating income tax. Taxpayers with Roth IRAs may begin withdrawing penalty-free once they have attained age 59 ½ and have held the account for at least five years but Roth IRAs have no RMDs.

These rules do not consider the value of the IRA and depend solely upon the age of the participant as the trigger for distributions. One aspect of President Biden’s revenue proposals aims to change that. The proposal titled “Modify Rules Relating to Retirement Plans” will require any high-income taxpayer with an aggregate vested account balance under tax-favored retirement arrangements that exceeds $10 million as of the last day of the preceding calendar year to distribute a minimum of 50% of the excess amount. If the aggregate value exceeds $20 million, then the taxpayer needs to withdraw the lesser of the excess amount or the portion of the taxpayer’s aggregate vested account balance that is held in Roth IRA or designated Roth account. Thus, if a taxpayer had $15 million in their tax-favored accounts, then this proposal would require distribution of $2.5 million in addition to any RMD otherwise required.

Tax-favored arrangements include defined contribution plans, annuity contracts under Code Section 403(b), eligible deferred compensation plans under Code Section 457(b) maintained by a state, political subdivision thereof, or an agency or instrumentality of a state or political subdivision thereof, and IRAs. The proposal defines high income as modified adjusted gross income of $450,000 for married filing jointly, $425,000 for head of household, and $400,000 in all other cases, all adjusted for inflation. The taxpayer may choose which tax-favored retirement arrangement from which to withdraw the funds; however, if the taxpayer has funds in a Roth vehicle, those funds need to be distributed first. Distributions resulting from this proposal are in addition to amounts withdrawn as RMDs for any particular year but applies even if the taxpayer is not otherwise required to be taking RMDs. Failure to take this distribution subjects the taxpayer to the 25% excise tax on the portion not taken. Thankfully, the penalty on early distributions does not apply to these excess amounts. The taxpayers cannot use the funds for a rollover. The proposal requires plan administrators to report the vested account balance for all tax-favored retirement arrangements for high income taxpayers that exceeds $2.5 million, as adjusted for inflation. This proposal is for tax years beginning after December 31, 2023.

As mentioned above, the Biden Administration released another revenue proposal of interest to Estate Planning attorneys called “Improve Tax Administration for Trust and Decedents’ Estates.” While it’s interesting to review these proposals, it’s important to remember that they are just that:  proposals and have not yet become the law. It appears unlikely that Congress would enact these proposals given the current Republican majority in the House of Representatives. Of course, even if you aren’t concerned with application of these revenue proposals, it’s always a good time to talk me about your Estate Plan.

When you are thinking about your estate planning process, you will want to establish an estate plan that not only meets your needs but also makes the most sense for you based on your current stage of life. As you think about what you want your estate to entail, it’s likely that you have heard about both wills and trusts.

Wills and trusts are distinctly different legal documents, but if you think that wills and trusts have a lot in common, you are correct! There is a lot of overlap between the two. For instance, they both identify the people who will receive your assets in your absence, but the documents do so in their own ways.

As an example, one main difference between wills and trusts is when they take effect. Wills are not implemented until after you die, whereas a trust goes into effect immediately upon being signed and funded.

If you were to become incapacitated to the point that you are unable to make your own decisions, a will cannot step in to provide any recourse or plan in response to your new circumstances.

Even so, wills can allow you to do the following:

• Name guardians for your children and your pets.
• Designate where your assets will go once you are gone.
• Specify the details of your final arrangements.

Wills offer a beautiful simplicity to the estate planning process, but wait — there are drawbacks as well.

Keep these details in mind:

• Wills offer limited control over the distribution of your assets.
• In most cases, wills require some sort of probate process.
• Wills are public documents, so if there is any information you would prefer to keep private, consider opting for a trust instead.
• Trusts are more complicated than wills, but how do they differ? Trusts, in particular:

• Provide control regarding not only how your assets will be distributed but when they will be distributed as well.
• Are available in more than one form.
• Help you minimize the chances of going to probate if not evading it altogether.
• Come with private distribution of assets.

So you could say that trusts are more complicated to set up than wills are, but if avoiding probate is your goal, setting up a trust is wise.

Having it both ways

Is it possible to have it both ways? Can you draw up both a will and a trust? The answer is yes. While trusts are designed to establish what will happen to your assets, wills give you the opportunity to denote people to serve as guardians for your children, appoint a trustworthy executor for the management of your estate and define your final wishes.

Trusts also differ from wills because while trusts are primarily crafted for the sake of taking care of your estate after you have died, they can also be influential when you are still alive. Alternatively, wills are only put into effect posthumously. But what about how these documents can be contested?

For starters, wills are more likely to be challenged because they can become outdated. They can also be combatted with the claim that the will was made at a point in time when you were not fully of sound mind.

Another possibility is that wills could be contested under the assumption that they were created while you were under the influence of someone else. On the other hand, trusts are far less likely to be contested due to their lack of an expiration date.

Another detail that differentiates wills and trusts is that wills do not offer anyone protections from creditors nor do they come with tax benefits. Dissimilarly, an irrevocable trust is a type of trust that cannot be changed, and it serves the purpose of removing assets from your estate, meaning irrevocable trusts offer both protection from creditors and benefits in a financial sense.

Despite their numerous discrepancies, wills and trusts are both legal instruments that focus on making sure that your assets are allocated to your heirs and according to your wishes. Trusts require more paperwork to establish than wills do, and trusts are typically more expensive to prepare than wills.

Where should you go from here?

Establishing clear expectations and documenting them in written form will significantly benefit your loved ones in your absence. Both trusts and wills are avenues that you can make use of when outlining what you would like to have happen regarding your end-of-life wishes.

Ultimately, the main difference between wills and trusts has to do with the work involved with establishing them. For instance, wills are regarded as lower maintenance than trusts, as they are usually in need of updates every three to five years. On the other hand, trusts must be updated every time a major life event takes place, such as marriage or the birth of a child.

So what’s the takeaway here? As always, talk to me and to financial advisers who can assist you as you figure out which instruments are best for you and your situation. That way, with a personalized approach to your estate planning process, you can ensure that your long-term goals are met.

I remember the shock I felt in 2008 when I learned that my bank, Washington Mutual, collapsed after a 9-day bank run. Thankfully, J.P. Morgan Chase bought the banking subsidiaries and most depositors continued with the new bank as though nothing had happened. Fifteen years later, not one, but three, banks have failed in one week’s time. Leaders are working hard to differentiate the events of the last week from those in 2008, but similarities exist.

Trouble started when Silvergate, a California-based bank that loaned funds to cryptocurrency companies, announced that it would liquidate its assets and cease operations. Concern grew when a few days later the Federal Deposit Insurance Company (“FDIC”) took over Silicon Valley Bank, taking almost $175 billion in customer deposits under its control. A large number of uninsured deposits, many held by small businesses, only exacerbated that concern sending shockwaves through the banking industry over the weekend when banks are typically closed. That fear lead to a Sunday night announcement that yet another bank, Signature Bank, shuttered its doors. The Federal Reserve, Treasury, and FDIC gave a joint statement that “depositors will have access to all of their money starting Monday, March 13” to calm investors and prevent panic from reverberating throughout the banking industry. If investors feared for the safety of their deposits in other banks and began to withdraw their money that could prompt a system-wide failure. The aggressive move of covering all deposits, even those that exceed the FDIC insured amount, means that the regulators have decided the risk to the banking system merits invoking an exception to the rule that the FDIC covers the failure by the least expensive means. The Deposit Insurance Fund will cover the funds not covered by the FDIC through the fees it collects from the banking industry.

Interesting, no doubt, but what does all of this have to do with Estate Planning? A great deal, it turns out. I have fielded many a question from a client regarding how much of their funds will be insured by the FDIC, especially when the plan involves one or more trusts. Last year, the FDIC issued updated rules regarding insured accounts designed to simplify the system.

Under the current rules, which remain in place until April 1, 2024, the FDIC insures deposits up to $250,000 per depositor, per ownership category, per institution. Assume that Johnny has $250,000 in BigBank and no other accounts anywhere. Should BigBank fail, the FDIC covers the entire amount. The same holds true if instead, Johnny titled his account in his revocable trust. Things change a bit if Johnny dies. Upon Johnny’s death, the assets in trust will pass to his daughter, Lyla. In that situation, the FDIC would insure up to $250,000 per institution, per trust beneficiary, up to a maximum of 5 beneficiaries for a total of $1,250,000. The rules look to the primary beneficiaries of the trust, which the FDIC defines as those individuals who would take upon the death of the grantor of the trust. The rules do not count contingent beneficiaries and more remote beneficiaries. In the above example, one beneficiary means that the FDIC protects the entire $250,000.

If Johnny had $500,000 in the account with BigBank, the FDIC would protect only $250,000. He could, however, transfer $250,000 to HugeBank thereby doubling the protected amount because it’s at a different institution. If Johnny had 5 children, all of whom were the beneficiaries of his revocable trust upon his death, then the FCID would insure $1,250,000 (5 x $250,000). If he had funds in excess of that $1,250,000, then he should transfer the overage to a new bank, keeping in mind that the FDIC insures no more than $250,000, per institution, per beneficiary, up to a maximum of $1,250,000 regardless of additional beneficiaries or funds. If Johnny were married and had a joint revocable trust, assuming that five beneficiaries took upon the death of both grantors, then the FDIC would cover up to $2,500,000 at any one institution.

Now assume that Johnny created an irrevocable trust. FDIC insurance works the same for all identified non-contingent beneficiaries as it does for a revocable trust covering up to $250,000 per institution, per trust beneficiary, up to a maximum of 5 beneficiaries for a total of $1,250,000. If the trust names contingent beneficiaries, however, then the rules add those contingent interests together and insure up to a maximum of $250,000, regardless of the number of beneficiaries or the allocation of the funds among the beneficiaries. To demonstrate, let’s assume that Johnny has 5 children, 4 of whom hold contingent interests in the trust making Lyla’s interest the only non-contingent interest. If Johnny has $600,000 in BigBank, the FDIC will cover only $500,000, $250,000 for Lyla, and $250,000 for the collective contingent interests, even though there are 4 beneficiaries.

Note that if the funds in an account represent both contingent and non-contingent interests, then the FDIC would separate those interests and apply the rules as described above. It’s easy to see how multiple trusts complicate these rules. Interestingly, according to the FDIC, it receives more inquiries related to insurance coverage for trusts than all other types of deposits combined. As noted earlier, to simplify the rules, the FDIC issued new rules on January 21, 2022, with a delayed effective date of April 1, 2024.

The new rules merge the categories for revocable and irrevocable trusts and use a simpler, more consistent approach to determine coverage. Now, each grantor’s trust deposits will be insured up to the standard maximum amount of $250,000, multiplied by the number of beneficiaries of the trust, not to exceed five. It no longer matters whether the trust is revocable or irrevocable or whether the interests are contingent or fixed. These rules effectively limit coverage for a grantor’s deposits at each institution to $1,250,000 for a single grantor trust and $2,500,000 for a joint trust, assuming that there are five beneficiaries of such trusts. The streamlined rules provide depositors and bankers guidance that’s easy to understand and will facilitate the prompt payment of deposit insurance, when necessary.

While depositors in Silicon Valley Bank were covered in excess of FDIC coverage, there’s no guarantee the FDIC will cover depositors in excess of the insurance coverage next time. If you are concerned about FDIC coverage for trust accounts, or in general, let me know. I can help you understand current coverage levels and advise you regarding any moves that you should make now or in the future to receive maximum FDIC insurance coverage.

A recent National Public Radio (“NPR”) article discussed one family’s experience with the Medicaid estate recovery program, something many elderly Americans and their families face. When the matriarch of the family received a diagnosis of Lewy body dementia, a case manager from the Area Agency on Aging suggested that the family explore the state’s “Elderly Waiver” program to help pay expenses not otherwise covered by Medicare or the family’s health insurance. The family completed the necessary paperwork without understanding that the program was a branch of Medicaid because the forms indicated that the program was designed to help “keep people at home and not in a nursing home.” Imagine the family’s shock when they received a letter shortly after the matriarch’s death that the state would seek reimbursement for the funds spent on her care. At first, the family thought it was fake, but they soon found out that it was real and that the agency was seeking reimbursement as required by federal law. Some of the funds that the family received were paid to the daughter as income for her mother’s care. She paid income taxes on those funds and now needs to help her dad figure out how to pay them back. Their biggest asset, the family home, is worth approximately one-third of the total amount sought for recovery. Of course, the agency can only recover half the total value of the home because the decedent owned it jointly with her surviving spouse. Further, the agency cannot seek reimbursement for any of the funds it expended until after the surviving spouse’s death. This scenario resonates deeply with many families.

Most folks understand that Medicaid is a partnership between the federal government and each individual state designed to provide medical benefit assistance to those over the age of 65 who have a financial need. The program defines financial need as income and assets below a certain amount. Most states require the Medicaid applicant to have an income of no more than $2,742/month. Thankfully, states impose no such limitation on the spouse of the applicant, thus the non-applicant spouse could have $15,000 in income without disqualifying their applicant spouse. Further, if the well or “community” spouse does not have enough in their own income, then a portion of the applicant spouse’s income may be allocated to the community spouse. This protection, called the Minimum Monthly Maintenance Needs Allowance (“MMMNA”), helps shield the well spouse from impoverishment. In most states, the maximum amount of income that can be allocated from the Medicaid applicant spouse to the well spouse is $3,715.50/month. Note that the income of the non-applicant spouse when combined with the spousal income allowance cannot exceed that amount.

Determining whether an applicant meets the asset test requires more analysis. First, states divide assets into countable assets and exempt assets. Exempt assets usually include things like the home, household furnishings, retirement accounts, life insurance, and the car used for medical transport. Available resources mean everything else. Second, if the applicant is married, then all assets, regardless of whose name the assets are held, count for purposes of determining eligibility for Medicaid. Generally, an individual needs to have less than $2,000 in “available” resources. Like under the income requirements, the non-applicant spouse has additional protection called the Community Spouse Resource Allowance (“CSRA”). Each state determines which assets will count as “available” within federal guidelines and which assets to exclude as well as the amount of the CSRA. The federal government sets the minimum ($29,724) and maximum ($148,620) amount and states (Illinois is $123,600.00 for a married couple) decide which number in that range they want to use. If the assets cannot be used for an applicant’s benefit, such as assets in an irrevocable trust, then those assets generally don’t count as an available resource.

There are several ways that an individual may lower their countable assets. Many people seeking to avail themselves of Medicaid assistance establish irrevocable trusts to hold their assets to keep those assets from being counted. The trust principal cannot benefit the Grantor, if it does, then it’s considered an available resource. The trustee of the trust invests the principal. Sometimes the Grantor retains the right to income generated from the trust, but the Trustee has discretion to distribute the principal to other individuals, such as the Grantor’s children. Upon the Grantor’s death, the trust agreement dictates the division and distribution of the assets in the trust. A Medicaid trust is by no means the answer to every problem, but it’s a great solution for many families. Some families fail to consider undertaking this planning until it’s too late. If they create a trust too close in time to when they apply for Medicaid, then they will be subject to a “penalty period” during which time they will need to cover their medical expenses.

Qualifying for Medicaid alone does not end a family’s concerns. Once they have an individual qualified, they need to worry about repayment. The federal government requires each state to seek recovery of funds spent through the Medicaid Estate Recovery Program (“MERP” or “MER”). Each state must seek repayment from the decedent’s probate estate, but the state has the option to attempt recovery from assets outside the probate estate as well. As part of the recovery process, Medicaid can place a lien on the Medicaid recipient’s home in some states and some circumstances. A qualified Estate Planning attorney can help a family work through what assets will be subject to reimbursement and how to plan for it.

Medicaid planning requires an understanding of the concepts explained above as well as Estate Planning generally. Due to a five-year lookback on uncompensated transfers, setting up a Medicaid trust far in advance of needing the care is a great way to give you and your family peace of mind.

America’s favorite tough guy, Bruce Willis, recently received a diagnosis of Frontotemporal Dementia or FTD which destroys the brain’s frontal or temporal lobes. The condition strikes individuals between ages 45 and 64 and is the most common form of dementia for those under 60. His diagnosis brings into sharp focus the importance of planning for incapacity. Unfortunately, incapacity planning often takes a backseat to planning for what happens upon death because death is certain, but incapacity is not. Its uncertain nature, however, makes planning for that possibility all the more important.

Incapacity, much like death, doesn’t care about your age, your health, or your family. It strikes without rhyme or reason and often, without warning. When incapacity occurs unexpectedly, it leaves loved ones scrambling for solutions. If the incapacitated individual failed to plan properly for incapacity, the family may be forced to undertake a guardianship proceeding to have the individual declared incompetent and a guardian appointed. Guardianship proceedings are sometimes referred to as “living probate” because the proceeding involves many of the same issues of probate only with incapacity the loved one is alive, not dead.

Let’s look at an example. John decided that he wanted to move closer to his elderly parents. He listed his home for sale and on his way back from a meeting with the realtor, was involved in an automobile accident and rendered unable to manage his affairs. One of John’s neighbors knew of John’s desire to sell his home and thought it would be a perfect place for his sister who was looking to relocate. The neighbor’s sister made an offer over asking price; however, because John was incapacitated and had not created a plan to deal with incapacity, no one had the legal authority to accept the offer. His family petitioned the court to have him declared incapacitated and someone appointed as his legal guardian. The process was difficult because John’s family disagreed about who should be appointed guardian. The disagreement played out in the courtroom and unflattering information about John and his family emerged. Unfortunately, by the time a guardian was appointed, the neighbor’s sister withdrew her offer. Shortly thereafter, home values began falling and John’s family waited several months before another buyer made an offer for significantly less than the previous offer and even less than the asking price.

While the example above seems extreme, it isn’t. Situations like this occur every day. What are some of the things that John should have done to prevent this result?

First, John should have created a Property Power of Attorney. A Property Power of Attorney allows the principal (John) to designate an “Agent” and one or more successors to make decisions inherent to the Principal on their behalf during life. The Property Power of Attorney may give the Agent immediate power to make these decisions, even if the Principal is not incapacitated when the Agent is making the decision. Most states also give the Principal the option to make the Property Power of Attorney “springing,” meaning that the Agent’s powers “spring” into action only upon incapacity of the Principal. If anyone refers to the Property Power of Attorney as “durable” that means the Property Power of Attorney continues to be effective notwithstanding the Principal’s incapacity. Any Property Power of Attorney that is not durable prohibits the Agent from acting during the Principal’s incapacity.

In addition to the Property Power of Attorney, John should have prepared a Healthcare Power of Attorney. The Healthcare Power of Attorney allows the Principal to appoint an Agent to make medical decisions if the Principal is unable to make those decisions; however, the Agent cannot veto any medical decision of the Principal. In conjunction with the Healthcare Power of Attorney, John should have signed a HIPAA Authorization which allows one or more designated individuals to receive information that the Health Insurance Portability and Accountability Act of 1996 mandates be kept confidential. While it’s important to keep healthcare information confidential, people acting on behalf of others need access to this information and the HIPAA Authorization provides that.

Finally, John should have created a Revocable Trust. A Revocable Trust serves as a Will substitute, maintains the Trustor’s privacy, requires little or no court oversight, and provides significant flexibility. If John had transferred his home to a Revocable Trust, then upon his incapacity, the successor Trustee would have stepped into John’s shoes to manage the property. The successor Trustee would have had the legal authority to accept the offer on John’s home, conclude the sale, and then use the proceeds for John’s continued care. This would have added a layer of protection and smoothed the way for a sale of John’s home. Often, financial institutions hesitate to rely upon a Property Power of Attorney for real estate due to fraud, especially if the Property Power of Attorney was executed more than 2 years prior. The Revocable Trust sidesteps the issue altogether.

Regardless of the duration of incapacity, it’s important to include incapacity planning as part of a comprehensive Estate Plan. Statistics estimate that over 7 million people aged 65 and older have dementia. This statistic alone should scare all of us into undertaking incapacity planning. While planning for disposition of your estate upon your death is important, planning for the management of your assets and health during periods of incapacity is even more critical. As our life expectancies increase, so do the chances that we or someone we love will experience incapacity. Incapacity takes an emotional and physical toll both on the incapacitated individual and their loved ones. A seamless Estate Plan eases those burdens and the resulting emotional strain and allows everyone involved to focus on recovery and the next steps.