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First, what’s a Power of Attorney? It’s a document by which you appoint someone as your “Agent” to act on your behalf. If that Agent is unwilling or unable to act, the document can appoint one or more successor Agents. In other words, you give someone else (the Agent) powers you inherently already have yourself. With a Financial Power of Attorney, otherwise known as a General Durable Power of Attorney, you appoint your Agent to make financial decisions for you. The Power could be drafted to be “immediate.” In other words, the Agent would have the power to make decisions regarding your financial assets right away and without regard to your ability to make those decisions for yourself. In most states, you could make the Power “springing,” in other words it would only become effective upon your not being able to act for yourself because of incapacity. A Power of Attorney is “durable” if it continues notwithstanding you having incapacity. A Power of Attorney which is not durable would not allow your Agent to act during your incapacity.

The most useful and most common Financial Power of Attorney is one that is “general.” In other words, it is effective as to all your property. You could have a Power of Attorney that is “specific,” in other words it only applies to a particular property or for a particular purpose.

Let’s look at an example:

Mary is going to Europe for a semester abroad. She has a car which she wants her father, Harry, to sell for her. She signs a Financial Power of Attorney in which she appoints Harry as her Agent. The Power would need to be immediately effective as Mary is not expecting to have a period of incapacity. She could have the Power prepared so that it is specific to the sale of her car. Or, Mary could have the Power prepared as a general power.

Let’s look at another example:

Harry has a Power of Attorney prepared and wants his wife, Betty, to act for him in the event he becomes incapacitated. He has a Power of Attorney prepared to appoint his wife, Betty, as his Agent. His daughter, Mary, is his successor Agent. If Harry’s Power of Attorney is springing, Mary could act only upon Harry’s incapacity. Harry’s incapacity is defined in the Power, such as a certification of incapacity by two physicians. Harry has a Power of Attorney which is a “hybrid” in which it is immediately effective when his spouse is acting as his Agent, yet it is “springing” when anyone else (such as Mary) is acting as his Agent.

With these Powers of Attorney in place, Mary can travel to Europe and rest easy that Harry will be able to sell her car for her while she’s hiking in the Alps. Meanwhile, Harry can rest assured that his Power of Attorney will enable Betty and Mary to act for him if needed.

Powers of Attorney add great flexibility to an estate plan. However, sometimes an Agent under a Financial Power of Attorney could encounter resistance to its use from financial institutions which have been defrauded through the use of Powers of Attorney. For this reason, trusts may offer better incapacity protection than Financial Powers of Attorney, though Financial Powers of Attorney are a good idea even with a trust-based estate plan.

Medicaid is a partnership between the state and federal governments to provide medical benefit assistance to people, including those over age 65, who have financial need.

In order to be considered to have financial need, when you go into a nursing home and go on Medicaid, you cannot have more than $2,000 (in most states) in “available” resources. Some resources don’t count, such as the car used for your medical transportation. Also, assets that cannot be used for your benefit, such as in an irrevocable trust, typically don’t count either.

A prior post set forth the reasons giving assets to an irrevocable trust is a better strategy than giving outright. But, it’s important to keep in mind that uncompensated transfers, whether outright or to an irrevocable trust, can generate a penalty period. This article will examine when there’s a penalty and how it works.

If you give away assets during the “lookback period” there’s a penalty period. The lookback period typically is five years (60 months) from the date on which you apply for Medicaid and are “otherwise eligible.” Otherwise eligible means that you have a medical need and are financially eligible. So, let’s look at an example: Mary is medically in need of going into a nursing home. She only has $2,000 in available resources, such as her checking account. In other words, she’s “otherwise eligible” and is applying for Medicaid. When Mary applies for Medicaid, they’re going to ask her about any uncompensated transfers she made within the “lookback period,” which in almost every state is 5 years. If Mary didn’t have any uncompensated transfers to report, she’d be good to go.

But, what if Mary had made an uncompensated transfer during the lookback period? In that case, Medicaid wouldn’t kick in until the penalty period passes. The penalty period is the amount of the uncompensated transfers in the lookback period, divided by the Average Private Pay Rate (“APPR”) for her area (typically the state but sometimes the county or local area). Mary had made $150,000 in uncompensated transfers in the lookback period. The APPR in her area is $10,000. So, she has a 15-month penalty period.

So, once Mary is otherwise eligible and applies for Medicaid, she’ll have a 15-month period during which Medicaid won’t pay for her care. She’d have to pay for her own care during that period. But how can she do that if she only has $2,000 in available resources? Typically, she’d use exempt resources such as her home equity or she’d have her family pay for her care during that time. If she didn’t have family willing to pay or any exempt resources, she could find herself in a real bind.

That is the reason it’s important to do gifting early so that you maximize the chances of having it done outside of the lookback period. None of us know when we might need medical assistance. Therefore, it’s best to start your Medicaid planning as early as possible.

Gifting, including to a Medicaid trust, can be a great tool to allow you to protect some assets and still qualify for Medicaid. 

Medicaid is a partnership between the state and federal governments to provide medical benefit assistance to people, including those over age 65, who have financial need.

In order to be considered to have financial need, when you go into a nursing home and go on Medicaid, you cannot have more than $2,000 (in most states) in “available” resources. Some resources don’t count, such as the car used for your medical transportation. Also, assets that cannot be used for your benefit, such as in an irrevocable trust, don’t count either.

If you give assets away, this may generate a penalty period which I will explain in the next post, but is generally five (5) years. As long as these assets are no longer available for your use, they aren’t considered your resources. So, you could give your assets to your adult children. However, there may be many reasons not to do that. Your child could:

• Be a minor or otherwise lack capacity,
• Get divorced and lose the assets in the divorce settlement,
• Get sued due to a car accident or other event,
• Lose the assets through poor investments, gambling, etc.

But, there is a better way. You could give the assets to an irrevocable trust. The trust principal would not be for your benefit, otherwise, it would be an available resource. The trustee of this trust would invest those assets. You could retain a right to the income from the trust (in the vast majority of states). The trustee could distribute to someone else, like one of your children, in the trustee’s discretion. After your death, the assets would be divided as you had outlined in the trust.

Let’s look at an example: Mary had $400,000 over the asset limit in her state. She transferred it to an Irrevocable Medicaid Trust. John was her trustee. Mary retained the right to the income of the assets during her lifetime. John, as trustee, could make distributions to Mary’s daughter, Betty, during Mary’s life. At Mary’s death, the assets in the trust would be split between Mary’s daughter, Betty, and Mary’s son, Alex. If Mary needs some of the principal, John could make a distribution to Betty. Betty could use the money distributed to her for Mary’s benefit if Betty wanted to do so but would be under no obligation to do so.

If you wanted to provide the most protection, the trustee shouldn’t be Mary or Betty. If Mary were the trustee, some states would consider the trust assets to be “available” to her. Therefore, unless you’ve checked with your state’s Medicaid-administering agency and they have determined it’s ok for the Trustor to be the trustee of the Medicaid trust, it’s best not to do so. In Illinois, a beneficiary can be the trustee.  If Betty were the trustee and could distribute to herself, it would allow Betty to take all the assets out of the trust for her own benefit and thus, would allow her creditors to do the same thing.

A Medicaid trust can be a great tool to allow you to protect some assets and still qualify for Medicaid. But, each state is different, so call me to discuss.

Bob

The novel “coronavirus” (also called “SARS-CoV-2”) causes the disease “COVID-19.” It first appeared in late 2019 and was reported to the World Health Organization (WHO) on December 31, 2019.  COVID-19 has impacted the lives of millions of people and countless events around the world.

The coronavirus has caused an unprecedentedly steep increase in unemployment and has roiled stock markets around the world. The resulting low-interest rates open the door to unique estate planning opportunities.

The IRS sets the “Applicable Federal Rate” or “AFR,” which is the rate the Service determines is the going interest rate. As long as you charge at least that rate, you will not be deemed to have made a gift in charging the interest rate. The AFR is set in the middle of the month for the next month. The AFR for May 2020 is historically low. Those rates are .25% for a loan of up to 3 years, .58% for a loan term of 3 to 9 years, and 1.15% for a loan over 9 years duration. The rate for certain estate planning transactions, such as life estate and remainder interests, is .8%.

One common way to help loved ones without using any lifetime exclusion is by lending money at a very low-interest rate. If you charge no interest, then (with an exception for small loans between individuals), the Service will deem that the borrower paid interest to the lender and the lender gave it back to the borrower. This would cause taxable income to the lender and a taxable gift by the lender. (In a future article I’ll examine these so-called “gift loans” under Section 7872.) A loan at the AFR faces no such imputation of income or a gift.

Let’s look at an example: John lost his job due to the coronavirus pandemic. He had a good job at a major retailer that had to close due to stay-at-home restrictions. As a result, John is considering moving his family closer to his mother, Mary, as she’s getting older and needs more help as she ages. Mary has excess funds and decides she wants to benefit John. She wants him to have a good start and wants to make it easier for him and his family to move closer to her. She doesn’t want to use any of her gift tax exclusion as she has other uses for it. She lends John the money for his house, charging interest at the AFR, 1.15% for a 30-year loan (in the month she lends the money). She also lends John money to start a new business. This helps John immensely. He doesn’t have a job and will be moving to a new city. He would have had difficulty qualifying for a loan. Even if he could have gotten a loan, it would have been at a much higher interest rate.

Mary was able to provide a real benefit to John. This helped make it possible for John (and her grandchildren) to move closer to her. It allowed John to save money on his mortgage and business loan. It allowed Mary to help John without using any of her exclusion. It also allowed her to slow the increase in the size of her taxable estate.

This transaction worked to benefit both Mary and John. It allowed John and his family to move closer to Mary and for them to become even closer, both geographically and personally.

Bob

It’s common for IRA owners to leave their assets to multiple beneficiaries – for example, their children. Before the SECURE Act, it usually made sense to split the IRA into separate accounts either before or after death. That’s because beneficiaries could stretch payment of their shares over their life expectancy. But, if there were multiple beneficiaries and the account was not split, each beneficiary was required to use the life expectancy of the oldest beneficiary – the one with the shortest life expectancy. Splitting accounts allowed each beneficiary to use her own life expectancy.

Under the SECURE Act, most non-spouse beneficiaries must use the 10-year payout rule, which requires the entire IRA to be emptied by December 31 of the tenth year following the owner’s death. No annual distributions are required. Life expectancy is no longer used to calculate payouts for beneficiaries subject to the 10-year rule.

So, does this mean that splitting IRAs is no longer a worthwhile strategy? Not at all. Here are several good reasons why it still makes sense to create separate accounts:

When a spouse is co-beneficiary. Surviving spouses can take advantage of special IRA distribution rules that no other beneficiaries can use. For example, a surviving spouse can roll over inherited IRAs to her own IRA. However, those special rules are available only if the spouse is a sole IRA beneficiary. So, if a spouse is an IRA co-beneficiary, look to create a separate account for her to make sure she can use the special payout rules.

When an eligible designated beneficiary is co-beneficiary. Under the SECURE Act, certain individuals, called eligible designated beneficiaries (“EDBs”), can still use the stretch. These are: surviving spouses; minor children of the account owner; disabled individuals; chronically ill individuals; and individuals no more than 10 years younger than the owner. But, if one beneficiary is an EDB and the others are not (for example, one beneficiary is a minor child and one is an adult child), the EDB can only use the stretch if a separate account has been established for the EDB.

When a co-beneficiary is a non-living beneficiary. Sometimes, an IRA owner will leave part of the IRA to a charity (or another non-living beneficiary) and the remainder to one or more individuals. Non-living beneficiaries must use the least favorable IRA distribution rules (which could result in a payout period of less than 10 years). So, unless the IRA is timely split, the individual co-beneficiaries will also be stuck with those restrictive payout rules.

Practical reasons. There are also practical reasons why splitting IRAs while still alive is wise. It allows the owner to invest each account in a way that is best suited for each beneficiary. And, following the owner’s death, each beneficiary is guaranteed to have the freedom to decide whether to accelerate IRA payouts during the 10-year period or wait until the end.

Remember that if the IRA owner doesn’t split the account during his lifetime, the beneficiaries can still do it after his death. But there is a deadline for splitting: December 31 of the year after the year of the original owner’s death.

Reproductive technology has advanced so rapidly that legal answers are being demanded for questions that we wouldn’t have conceived of asking a generation ago. Questions like, Who gets to decide what happens to a woman’s frozen eggs after her death? Should a wife be able to harvest sperm from her dead husband’s body in order to create a posthumously born child? What about couples who are divorcing – who gets to control what happens to frozen embryos they created and stored during their marriage? 

When it comes to these issues, the law has not quite caught up with technology. The approaches taken vary from state to state, with some jurisdictions at the progressive forefront, and others lagging behind. But, there is a distinction drawn between control over gametes (eggs and sperm) and embryos or pre-embryos.

Gametes

When it comes to gametes, contract rights prevail, and the owner of the genetic material generally gets to dictate, by way of contract, what should happen to it. So, for example, a woman can use her estate plan to control what happens to her frozen eggs after she passes away. What if there’s no will, but there’s a surviving husband? Then the default rule appears to be that the surviving spouse gets to control what happens to the frozen eggs.

Embryos

Embryos are a slightly different story. Florida and Louisiana are among the few states which have enacted statutes to provide for what happens to frozen embryos. The results are in stark contrast to each other. 

Florida:  Under Florida law, a couple using advanced reproductive technology is required, along with their doctor, to enter into a written agreement that spells out what is to happen to gametes or pre-embryos in the event of a future divorce, death, or other unanticipated circumstance. If there is no contract in place, then the control of gametes belongs to the person who provided the genetic material, while the couple jointly decides what happens to pre-embryos. However, if one member of the couple passes away, control goes to the surviving partner. 

Louisiana:  Louisiana takes an entirely different approach. Fertilized eggs are not considered property, and they are not controlled by contract. Instead, a fertilized egg is considered a legal person. It is illegal to destroy a fertilized egg, and any dispute concerning the fate of the fertilized egg is to be resolved using the “best interest of the fertilized ovum” standard. Note the similarity to Family Law, in which the best interest of the child is the overriding concern. 

The consensus among the remaining states seems to be that if a contract exists, the terms of that contract will dictate what happens to the embryo, both during divorce and after death. If there’s no contract, then the courts tend to side with the individual asserting the right not to procreate.

It’s important to counsel clients on the need to address these issues, in writing, before a dispute arises. 

What do you think? What should the law be in this new area? 

Now that: i) a majority of states allow same-sex marriage, and ii) a majority of people live in a state which allows same-sex marriage, I thought it would be interesting to take a step back and look at some of the lesser-known financial aspects of marriage for both same-sex and traditional couples.

• Marriage Bonus/Penalty. Typically, a couple will benefit on their income taxes from getting married, this is the “marriage bonus.” However, if the spouses’ incomes are nearly the same, there may be a “marriage penalty,” rather than the typical marriage bonus.

• Related-Party Rules. A couple who is married cannot harvest a loss by having one spouse sell the asset to the other spouse. The related-party rules will deny the loss. However, if the couple is unmarried, then a transaction will be respected. This may be useful to harvest losses and yet keep the assets in the economic unit of the couple.

• GRIT. An unmarried couple cannot utilize the marital gift tax deduction, but they may utilize a non-QPRT GRIT. A GRIT is a Grantor Retained Income Trust and may be useful to pass assets from one partner to another.

• Medicaid. When qualifying for Medicaid, the assets of both the applicant and the spouse are considered. An unmarried applicant would not have their unmarried partner’s assets considered. This could be a distinct advantage.

Of course, the financial aspects of marriage are only a minor part of the couple’s decision. They must consider the legal ease of marriage as well as the social, societal, and religious benefits which may accrue. Finally, the couple must weigh the impact the marriage might have on their relationship itself.

Outside of the probate process, is there a way to seek redress in a situation where an intended beneficiary loses an inheritance because of the acts of a third party? For instance, what happens when a relative induces Dad to revoke his Will, leaving his son with only an intestate share of Dad’s estate, rather than the much larger inheritance he would have enjoyed had the Will remained in effect?

There’s a trend toward recognizing a claim for tortious interference with inheritance in situations like this, but the requirements for making a valid claim are pretty restrictive.

• The plaintiff must show that an actual expectancy of an inheritance existed sufficient to warrant the court’s protection.
• The expectancy may be impeded by conduct altering the execution, alteration or revocation of a Will.
• The plaintiff must prove that the defendant’s interference with the expectancy was intentional and tortious.
• If the interference was only negligent and not intentional, the plaintiff does not have a valid claim.
• The plaintiff is required to show by a “high degree of probability” that, but for the defendant’s intentional act, the plaintiff would have received the expected inheritance.
• The plaintiff has to show that the defendant’s tortious conduct caused injury. Ordinarily, the measure of damages in a tortious interference claim is the value of the property that plaintiff would have inherited absent the tort.

What about the timing of a claim? In some states, a plaintiff is permitted under certain circumstances to make a claim during the testator’s lifetime, while in others, the plaintiff must not only wait until after the testator’s death, but also exhaust any remedies available through the probate process before making a tort claim. Nationwide, there’s a growing trend toward recognizing the tort, but a number of states, including Arkansas and Tennessee, have declined to do so.

What do you think? Should states recognize tortious interference with an inheritance?

The answer to that big question is a composite of your responses to a range of smaller questions. Mull over the following questions, and if the answers or implications are not clear, or if they trouble you, make a note of it – a real note, not just a mental one. You will then have a list of issues on which to focus, and the simple act of writing things down is invaluable in clarifying the thought process. Many people, who have been uneasy for years thinking about this, find it improves their peace of mind just to make themselves spell out exactly what bothers them.

Look over this list. Of course, not all questions will be pertinent to everyone.

Would there be mistrust, uncertainty, and bickering among your survivors in deciding how to handle your property and wrap up your affairs? Is there anybody who, if not prevented, might actually take your property or funds without authority?

Do you have a will that reflects your current wishes? If so, is all your property actually subject to probate court and the terms of the will – or is it instead set up to pass another way at death – e.g., through a beneficiary designation form, as with a 401(k) account, or to a co-owner, as with a joint bank account?

If you do have property subject to probate (e.g., furniture; a house, or an account in your name alone), but do not have a will, what does your state’s law of intestacy say about who takes property after a person’s death?

What are the needs, abilities, and weaknesses of your survivors, especially your spouse and children, if any?

Are your survivors responsible individuals, capable of managing and using an inheritance wisely if they receive it outright? Or will they need protection from their own youth, financial inexperience, or bad habits? What about the influence of others? Would your bequest to a child need protection from his or her spouse?

If your current spouse is not the parent of your children, how – and when – would your estate be divided among them?

What kinds of property do you own, e.g., real estate, mutual funds, a family business, etc.? Can your property get along without your active management, at least for a while? How much of it could easily and quickly be converted to cash, if necessary, at reasonably good prices?

Is the net worth of all your property more than the amount at which the federal estate tax begins to bite, and tax planning is called for? 

What are your responsibilities to your survivors? Would you be leaving young children and the surviving parent, for example, with sufficient assets to maintain the family’s standard of living? Or, in contrast, do you have grown children, with good jobs, and a spouse with his or her own adequate retirement plan account?

If your children are under age eighteen, have you found a suitable guardian for them in case their other parent also dies?

Do you have a disabled child or family member who must be provided for separately, for life?

If you have an IRA or retirement plan account, have you selected the appropriate beneficiary and distribution options?

What Would You Want To Happen, If You Died Tomorrow?

If you have made a troubling realization or two after considering the above questions, the more immediate issue might be what you do not want to happen. The top priority is probably the potential situation you have identified, and how to correct it. Frequently, an easy solution will suggest itself, simply as a result of thinking through the problem. (If not, be smart and see an attorney experienced in estate planning. He or she has most likely dealt with many situations much like yours.)

Some peoples’ values, wishes and survivors’ needs, however, really are very simple. So, too, should be their estate plans – perhaps just a two page will saying, for example, “Everything to my three children, in equal shares.” Other people have various contingencies to plan for. Some form of charitable contribution – during life or at death – might be part of their plans. There might be a need for life insurance. Many want to keep one or more “strings attached” to payments made to their chosen beneficiaries. These “strings” come in infinite varieties, but almost always, keeping strings attached requires a trust. (Trusts are examined in detail in other tutorials.)

A trust document can be drafted to set forth a personalized combination of specific instructions, with or without discretionary judgments allowed to your trustee, so that money is given to whom you want, when, and for the purposes you specify. This cannot be done with a will alone. A practical example of this point is the use of a trust by parents, in case they both die prematurely, to avoid the immediate distribution of assets to their kids, upon turning eighteen.

Choosing The Right Executor and Trustee

Choosing a personal representative may be the most important estate planning decision of all to maximize the likelihood that your wishes are followed.

Personal representative is a generic term, referring to an executor or a trustee, who is named in a trust to carry out its terms.

An administrator is also a personal representative, and is court-appointed to perform the executor’s duties, when a decedent has no will. Unfortunately, the person appointed might be a family member whom the decedent would not have wanted. Alternatively, the court might find it appropriate to choose a neutral third party – usually a lawyer – to serve as administrator. In the latter case, the estate is responsible for paying the administrator an hourly fee for all services performed.

Any of these personal representative roles can be filled by an institution, such as a bank, as well as by an individual. Obviously, however, whoever serves should be capable of doing the job, and this is a matter that often deserves much more thought than it is given. In many cases, relations among the surviving family are harmonious, there is little to be done, and everything works smoothly – no matter who is running the show.

When disputes arise or there is bickering, however, family diplomacy might be called for. Remember that some of us are better at this than others. Occasionally, on the other hand, someone must be ready, willing – and authorized – to “lay down the law,” and get things done. The selection of this person (or institution) should not be left to chance; he or she should be named by the decedent in a will or trust.

Your personal representative, in most cases, is going to have – by necessity -extensive, if not total, access to your property. Very bluntly, a trustee, executor, or administrator is in a position to rob you (or your heirs) blind, or to ruin your plan through inaction, if somebody else acts improperly. Indeed, misconduct is probably the most common factor in estate and probate horror stories.

Of course, objections or complaints can be filed in court. But these can be difficult moves, and they are made after the damage is at least partially done. There is no close court supervision to prevent the misconduct. Therefore, you should not move forward with any plan, unless you feel comfortable with the person or institution you have chosen.

What’s the true value of an estate planning attorney? I’ve been reading about the latest lawsuit against LegalZoom. This one is a class action filed in California by a woman who is the niece and executor of the estate of LegalZoom client Anthony J. Ferrantino. Mr. Ferrantino, in the last months of his life, used LegalZoom to draw up a will and a living trust. It turns out that the trust couldn’t be funded because Mr. Ferrantino’s financial institutions would not accept the LegalZoom documents.

Naturally, upon finding this out, Mr. Ferrantino and his niece, Katherine Webster, asked LegalZoom for help – to no avail. After Mr. Ferrantino passed away with his trust still unfunded, it turned out that his will was also invalid because it had not been properly executed. Ms. Webster’s lawsuit is based on LegalZoom’s alleged deceptive business practices and unlicensed practice of law.

So, the trust documents were flawed. Giving LegalZoom the benefit of the doubt, you could make the valid argument that even attorneys have been known to make mistakes in the drafting of estate planning documents. It’s less likely that a lawyer would let a will go out the door improperly executed. In my mind, though, these aren’t the real issues.

The problem is that when consumers use “services” like LegalZoom, they’re on their own. Even after fatal flaws were found in the trust documents, LegalZoom did nothing to remedy the situation. Would this have happened if someone had been unable to fund a trust that I had created? Nope.

The value that I as an estate planning attorneys offer to clients is not just the documents… although well-drafted and effective documents are intrinsically valuable. Instead, the value I offer is my role as knowledgeable and trusted counselors… my relationship with my clients. When clients come to me for an estate plan, I’m not just filling in the blanks on their behalf. I’m listening intently to their stories and their questions, and often reading between the lines, to help them discern their true needs. And I’m there for my clients as issues emerge and their needs evolve.

So, in the end, I’m not competing in the same market as LegalZoom and other companies of its ilk. I’m not providing a simple commodity – and my clients and prospective clients deserve to know this.

So, call me to discuss your estate planning.

Bob