Who needs an estate plan? Everyone over the age of 18.
Older Individuals: This is more obvious and more individuals over the age of 55 will actually engage in estate planning. They feel that they now have the assets accumulated that need direction after their death. Also, as they are older, they believe that the chances of death are greater.
They are right on both counts. It is important as we age to look at what we have accumulated in the areas of real estate, cash assets and personal property. Then it is important to plan for the ultimate distribution of these assets upon our death. For couples, it is important to plan for the comfortable continuation of life for the survivor.
Individuals with minor children: This group often does not engage in estate planning because they may have more debt than assets. Since they feel they do not have an “estate” they believe that there is no need to plan.
The only place to designate a guardian for their children if they should pass is a Last Will and Testament. This is more important that who gets grandma’s hutch.
When an individual has a child, one of the first considerations should be for that child’s future. Part of the unknown future is what happens if the parents die. While it is less likely that both parents will die prior to the child(ren) attaining the age of 18, it happens. Accidents happen – suddenly.
Who would care for your children? You must name these individuals.
How would they care for your children? If you do not have sufficient assets to raise your children, you should consider the purchase of sufficient life insurance to provide for care of your children until they are 18 or 21.
Individuals over 18: This is a group that understandably do not even think about the estate planning process. However, there are two vitally important documents that each of them need – Durable Power of Attorney and Durable Power for Health Care or Patient Advocate Designation.
The minute a child turns 18, he or she is considered to be an adult. While still living at home, on his/her parents’ medical insurance, if he/she were injured in an accident or became acutely ill, the parents would be unable to direct any of their child’s medical care. They would not be permitted to discuss their child’s medical condition with the medical staff at the hospital and would not be permitted to have any access to the medical records or information.
It is for this reason that every child turning 18 should execute these documents naming his/her parents as the agents and advocates. This is not taking adult power away from the child, but providing for his/her care and safety.
So the answer to the question, “Who needs an estate plan?” is everyone. It will take a different form with different documents, be all need a plan.
Needs based government programs, Supplemental Security Income (SSI) and Medicaid, are important programs for people with disabilities. Because of their needs based requirements, recipients of these benefits cannot have more than $2,000 in assets. If such a person were to receive more than $2,000, he or she could lose SSI and Medicaid.
These programs, however, provide only for the bare necessities: food, clothing and shelter, and then on a very modest basis.
If you have a family member that you would be leaving a portion of your estate to upon your death, you need to investigate the manner in which you can leave money to the individual without jeopardizing his or her benefits. If you were to leave a gift of as little as $10,000, he or she could lose these important benefits and actually be worse off after the gift. Not the intended consequence.
The Special Needs Trust or Supplemental Needs Trust is a vehicle which allows the individual to maintain his or her government eligibility while making assets available for other needs of the person.
First, the money in such a trust can never be given directly to the individual. It is instead distributed on his or her behalf for good or services that benefit him or her.
Common uses of assets in a Special Needs Trust can include transportation (automobile, insurance, repairs), appliances (TV, VCR, stereo, microwave, stove, refrigerator, washer/dryer), computers (hardware, software, programs, internet service) funeral expenses, furniture, home furnishings, pet and pet’s supplies, telephone or cell phone service and equipment, vacations.
How should such a trust be set up? It can be a part of a parent or grandparent’s estate plan if the parent is providing for the disabled child. It is important that the attorney drafting the estate plan is familiar with such trusts and the requirements.
If the individual is setting up the trust due to money he or she may already have received, a “self-settled” trust, then the trust must be unchangeable, only for the benefit of the disabled individual, and any assets left at the death of the disabled individual must be payable to the government for repayment of government benefits.
A Special Needs Trust is an important tool for improving the life of a disable individual by continuing to provide those extras that he or she received while his or her parents or grandparents were alive.
Revocable Trusts provide a host of benefits to the beneficiaries of a deceased loved one. Probate is avoided and administration is less cumbersome. These are nice benefits of a revocable trust; however, some clients feel that these benefits do not outweigh the cost of setting up an estate plan with a revocable trust.
A circumstance that make a revocable trust really needed is when you have a beneficiary that is disabled or is “special needs”.
Needs based government programs such as Medicaid and SSI, provide for an individual’s food and shelter at a very modest level. The recipient of these benefits may not, with some exceptions, have assets greater than $2,000.
If you leave such an individual a gift through your Will or Trust exceeding this limit, he or she may be disqualified from his or her benefits. This unintended consequence would create more harm than the potential good of receiving the bequest.
It is important to leave monies to such an individual through a Special Needs Trust which restricts the distribution of funds to third parties for amenities such as transportation, furnishing, and travel for the disabled individual’s benefit. In this way, you are able to provide for the individual over his or her lifetime, giving an enhanced lifestyle, while not jeopardizing the governmental benefits.
Now that Congress has acted, we know that each of us has a $5.25 Million exempt amount to transfer during our lifetimes or at death before our estates are hit with the estate tax.
If married, that means that the two individuals together get $10.5 Million to transfer.
So, what is portability? It is a provision in the estate tax law that allows couples to take advantage of each other’s exemption, even if they do not have credit shelter trusts.
An example is this: If husband and wife have $7 Million in assets. The first to die leaves all of the assets to the survivor. At the death of the first to die, there is no estate tax as transfers between spouses are not taxed.
When the survivor dies, there is now $7 Million in assets. Since the exempt amount is $5.25 Million, there would be $1.75 Million that would be taxable. However, if upon the death of the first spouse, the Personal Representative transferred the deceased spouse’s unused $5.25 Million federal estate tax exemption to the surviving spouse, that surviving spouse would now have $10.5 Million in estate tax exemption available. As a result, the estate of $7 Million would pass to the heirs without the imposition of estate tax.
First, remember that this portability of the exempt amount only applies to spouses. Therefore, a single individual ‘s estate cannot transfer the federal estate tax exemption to a child or other family member.
Next, this does not assist when the assets appreciate. If high net worth clients place their assets in a credit shelter trust, the exempt amount for the deceased spouse is held in trust and remains exempt, even if it appreciates. Not so if the individuals are relying on portability.
Finally, timing is everything. To take advantage of this option or to “elect portability” the Personal Representative handling the estate of the spouse who died must file an estate tax return (Internal Revenue Service Form 706), even if no tax is due. This return is due nine months after death with a six‑month extension allowed.
While we were getting dangerously close to flying over the fiscal cliff, those in the estate planning sector were watching closely.
The estate and gift tax, which taxes what you own and pass on to others either during your lifetime as a gift, or at death as a bequest, was in flux. At the end of 2012, the tax which gave every individual a $5 Million exempt amount prior to the imposition of tax, was in danger of reverting to $1 Million per person. Additionally, the tax rate would have gone up to 55%.
Many may think that $1 Million is a sufficiently generous amount. However, it would have had adverse affects upon many family owned businesses and farms. These individuals don’t live like the wealthy, however, the value of their businesses or farms, which include all of their equipment, would have placed their estates over $1 Million. In such an instance, the family would then, upon the death of the owner, have to sell the business or farm because they did not have enough money to pay the estate taxes due.
In the end, lawmakers preserved the $5 Million exempt amount per person but did change the tax rate from a maximum of 35% to 40% on the amounts over the exempt amount.
So, who’s estate is now taxable? For taxpayers dying in 2013, the estate tax exclusion amount as adjusted for inflation is now $5.25 Million per person. For all amounts over that, the estate tax will be levied at a maximum rate of 40%.
If something untimely and unanticipated happens to the parents of minor children, what happens next?
The Probate Court must appoint a Guardian and a Conservator for the children that will serve until the children are 18 years old. This will be done without any guidance from the deceased parents.
A Petition for Appointment of a Guardian will be filed in the Probate Court by an individual wanting to serve in that capacity. If multiple parties think it should be them, then there will be a hearing in front of the Probate Judge who will then make a decision.
This is necessary as children must have care givers and people who will serve in a parental capacity to raise them. It is also unfortunate as the Probate Judge will have little information upon which to make a decision.
The relatives who show up will presumably do so in nice clothes and using nice manners. They will all “look good”. The judge will have no idea as to the feelings of the now deceased parents.
What if she didn’t like the way she was raised? If her parents were too detached? Too strict?
What if he doesn’t like the way his brother lives? Too lazy? Too driven?
In the end, the judge will make the best decision that he or she can make with the information that is presented.
Don’t leave your children’s fate in the hands of a judge who doesn’t know you. Plan. Get a Will done and nominate those individuals that you would want to raise your children.
It comes as a surprise to many couples who are looking at re-marriage later in life. They discuss their finances, make decisions as to estate planning, make decisions concerning the payment of current expenses. They decide to execute a Pre-nuptial Agreement to set forth all of their agreements.
They want to agree that if one becomes ill and requires nursing home or long term skilled nursing care, the other will not be required to pay for it. They want this provision in their Pre-nuptial Agreement.
What affect will such a provision have? Will it be binding? NO
While the individuals can agree in writing that they will not have any responsibility for the other’s long term care costs, Medicaid rules do not see it that way.
When applying for Medicaid for long term care, a snap-shot of the couple’s assets are looked at – his and hers. All assets are counted toward paying for the nursing home resident’s care. Medicaid does not honor Pre-Nuptial Agreements and it is not bound by the provisions in such an agreement.
This is a significant issue for couples. While they can specify who pays for what while they are married and can agree upon an inheritance for one another and for their children, they are unable to control the cost of long term care for themselves or one another.
For couples concerned with this issue, I recommend seeing a long term care insurance specialist to determine if the parties are eligible for insurance (given their age and medical condition) and whether the insurance coverage is affordable.
In some cases, when unable to obtain insurance, some couples have decided against getting married in order to shelter their own assets from the possibility of paying for the other’s health care needs.
If you are about to be a parent, it is time to get serious about planning for your child. Lots of plans will get made about baby clothes, strollers, and the color of the nursery. Often left out is planning for the future – is something unexpected should happen.
First, you need to sign a Will. This is where you name a Guardian to raise your child if you are unable to be there to do so. If you don’t, a Court will decide the child’s fate.
While Probate Court Judges take this very seriously and want to make the “right” decision, they will never have enough information available. They don’t know your family and friends the way you do. Imagine the dilemma for a judge when a bunch of seemingly nice relatives all come rushing into court to be the Guardian of your child. Who to choose? His sister? Her mother?
This is often a difficult decision for the parents themselves to make and is frequently the reason that this does not get done. Mom thinks her family should raise the child and Dad thinks his should. As difficult as it is, you need to decide and put it in your Will. In the event that both parents will to die in an automobile accident, someone needs to raise the child or children.
Next, unless your prospective guardian is wealthy, you will need life insurance to cover the cost of raising your child. When you are young, this is relatively inexpensive. You should purchase enough coverage to make sure that your child or children can be raised appropriately and have a little extra for college.
What if only one of you dies? You still need that life insurance. If the primary earner dies, the money will be required to continue the family in the home and at the same level of living. If the parent who is primarily handling the child rearing tasks dies, it will cost a bundle to replace all of the services that he or she provided.
Two important steps to take before the new baby arrives – every bit as important as deciding on furniture for the nursery.
It is always highly recommended that a couple getting married for a second (or third) time enter into a Pre-nuptial Agreement.
First, if you are seriously contemplating marriage, you need to be able to discuss the financial and legal issues that arise. These issues affect your present, your future and your family when you are no longer here.
The issues break down into three primary categories:
1. Financial issues concerning day to day living. This may seem nit picky, however, if not addressed up front, it can be the root of many problems down the road.
Whose house are you going to live in? Will the owner pay the taxes? The maintenance? The repairs? If these are going to be jointly paid, will the non-owner acquire an ownership interest in the home?
How will food, vacations, transportation and vacations be paid for? Will there be a joint account into which you place money for the payment of these joint bills? or will each party bear the responsibility for his/her own expense?
What about the house you will live in? What will happen to the house when the owner dies? If, for example, you both decide to live in one party’s home, but he/she wants his or her children to inherit the home upon the owner’s death, putting the house in joint names is not an option. However, how long should the survivor be permitted to live in the home prior to being forced to move? Should the survivor have a life estate? Could that tie up the home too long?
2. Death of One Party. This is addressed in a Pre-nuptial Agreement for several reasons. While the parties can agree that they will not be providing for one another at death, and then prepare Wills that give their assets all to their respective families, the law does not presume that an individual can disinherit a spouse.
Therefore, if there were no Pre-nuptial Agreement and the decedent’s Will totally disinherited the survivor, that survivor could then go in and challenge the Will and insist on getting the survivor benefits available to a spouse without a Will.
If on the other hand, there is a Pre-nuptial Agreement, this statutory benefit can effectively be waived by the parties.
3. Divorce. No one gets married with the anticipation of getting divorced. It does happen. Best to address this issue in a Pre-nuptial Agreement.
A usual arrangement for a second (especially later in life) marriage is to state that each takes away what they came in with. Anything acquired jointly is to be split.
While the discussion may initially be uncomfortable, a Pre-nuptial Agreement is a very necessary component of a second marriage.
Young and Poor
The simple answer: Your kids do. If they are over 18, you will be unable to help them make health care decisions or manage their money once they turn 18. This is true even if they are still in high school.
They are on your health insurance plan but you cannot challenge the insurance company or even question the disallowance of a cost for them. They are adults. They may not have any idea of what question to ask or how to go toe to toe with the claims representatives – but that is the law.
You may be paying for their tuition at college but the college won’t talk to you about their bill because the student is an adult.
If your 18 year old child is in an accident, you will not be able to assist in determining their health care needs. You will have to go to Probate Court to be appointed as the child’s guardian if he or she is not able to speak for him or herself.
Can this really happen? Yes. It happens every day. Accidents are the leading cause of death for young adults.
So on the 18 year old’s birthday, in addition to a cake and candles, you should give them a Durable Power of Attorney and a Patient Advocate Designation to sign.