Minnesota Estate Planning Blog
Wednesday, January 4, 2012
Do I Really Need Advance Directives for Health Care?
Many people are confused by advance directives. They are unsure what type of directives are out there, and whether they even need directives at all, especially if they are young. There are several types of advance directives. One is a living will, which communicates what type of life support and medical treatments, such as ventilators or a feeding tube, you wish to receive. Another type is called a health care power of attorney. In a health care power of attorney, you give someone the power to make health care decisions for you in the event are unable to do so for yourself. A third type of advance directive for health care is a do not resuscitate order. A DNR order is a request that you not receive CPR if your heart stops beating or you stop breathing. Depending on the laws in your state, the health care form you execute could include all three types of health care directives, or you may do each individually.
If you are 18 or over, it’s time to establish your health care directives. Although no one thinks they will be in a medical situation requiring a directive at such a young age, it happens every day in the United States. People of all ages are involved in tragic accidents that couldn’t be foreseen and could result in life support being used. If you plan in advance, you can make sure you receive the type of medical care you wish, and you can avoid a lot of heartache to your family, who may be forced to guess what you would want done.
Many people do not want to do health care directives because they may believe some of the common misperceptions that exist about them. People are often frightened to name someone to make health care decisions for them, because they fear they will give up the right to make decisions for themselves. However, an individual always has the right, if he or she is competent, to revoke the directive or make his or her own decisions. Some also fear they will not be treated if they have a health care directive. This is also a common myth – the directive simply informs caregivers of the person you designate to make health care decisions and the type of treatment you’d like to receive in various situations. Planning ahead can ensure that your treatment preferences are carried out while providing some peace of mind to your loved ones who are in a position to direct them.
Friday, May 28, 2010
submitted by Peter G. Lennington, Esq., St. Paul, MN
This post, examines the unique planning requirements of families with children, grandchildren or other family members (such as parents) with special needs. There are many misconceptions in this area that result in costly mistakes in planning for these special needs beneficiaries. It is therefore incumbent upon us - the client's advisors - to ensure that clients understand all of their options.
COSTLY MISTAKE #1: Disinheriting the child.
Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. Your clients may have been advised to disinherit their disabled child - the child who needs their help most - to protect that child's public benefits. But these benefits rarely provide more than basic needs. And this "solution" does not allow your clients to help their child(ren) after the client becomes incapacitated or is gone. When a child requires, or is likely to require, governmental assistance to meet his or her basic needs, parents, grandparents and others who love the child should consider establishing a Special Needs Trust.
Planning Tip: It is unnecessary and in fact poor planning to disinherit a special needs child. Clients with special needs beneficiaries should consider a Special Needs Trust to protect public benefits and care for the child during the client's incapacity or after the client's death.
COSTLY MISTAKE #2: Procrastination.
Because none of us knows when we may die or become incapacitated, it is important that your clients plan for a beneficiary with special needs early, just as they should for other dependents such as minor children. However, unlike most other beneficiaries, a child with special needs may never be able to compensate for a failure to plan. A minor beneficiary without special needs can obtain more resources as he or she reaches adulthood and can work to meet essential needs, but a child with special needs may never have that ability.
Planning Tip: Parents, grandparents, or any other loved ones of a special needs child face unique planning challenges when it comes to that child. This is one area where the client simply cannot afford to wait to plan.
COSTLY MISTAKE #3: Failure to coordinate a planning team effort.
It is critical that the advisor assisting with special needs planning include in the planning team: an attorney who is experienced in this planning area; a life insurance agent who can ensure that there will be enough money to maintain the benefits for the special needs child; a CPA who can advise on the Special Needs Trust's tax return; an investment advisor who can ensure that the trust fund's resources will last for the child's lifetime; and any other key advisors that may support the goals of the trust going forward.
Planning Tip: Special needs planning dictates that the client's advisors work together to ensure that there are sufficient trust assets to care for the child throughout his or her lifetime.
COSTLY MISTAKE #4: Ignoring the special needs when planning for the child's benefit.
Planning that is not designed with the child's special needs in mind will probably render the child ineligible for essential government benefits. A properly designed Special Needs Trust promotes the special needs person's comfort and happiness without sacrificing eligibility.
Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (for example, a specially equipped van), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment & appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses: the sorts of things your clients now provide to their child or other special needs beneficiary.
Planning Tip: When planning for a child with special needs, it is critical that the client utilize a Special Needs Trust as the vehicle to pass assets to that child. Otherwise, those assets may disqualify the child from public benefits and may be available to repay the state for the assistance provided.
COSTLY MISTAKE #5: Creating a "generic" special needs trust that doesn't fit.
Even some "special needs trusts" are unnecessarily inflexible and generic. Although an attorney with some knowledge of the area can protect almost any trust from invalidating the child's public benefits, many trusts are not customized to the particular child's needs. Thus the child fails to receive the benefits that the parent provided when they were alive.
Another frequent mistake occurs when the Special Needs Trust includes a "pay-back" provision rather than allowing the remainder of the trust to go to others upon the death of the special needs child. While these "pay-back" provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your clients hundreds of thousand of dollars, or more.
Planning Tip: A Special Needs Trust should be customized to meet the unique circumstances of the child and should be drafted by a lawyer familiar with this area of the law.
COSTLY MISTAKE #6: Failure to properly "fund" and maintain the plan.
When planning for children with special needs, it is absolutely critical that there are sufficient assets available for the special needs beneficiary throughout his or her lifetime. In many instances, this requires utilization of a funding vehicle that can ensure liquidity when necessary. Oftentimes permanent life insurance is the perfect vehicle for this purpose, particularly if the clients are young and healthy such that insurance rates are low.
Also, because this is an ever-changing area, it is also imperative that the clients revisit their plan frequently to ensure that it continues to meet the needs of the special needs beneficiary.
Planning Tip: Clients should consider permanent life insurance as the funding vehicle for special needs beneficiaries, particularly when the beneficiary is young given the often staggering costs anticipated over that beneficiary's lifetime.
If the client may be subject to estate tax, consider having an Irrevocable Life Insurance Trust own and be the beneficiary of the policy, naming the Special Needs Trust as a beneficiary. Alternatively, in a non-taxable situation, consider naming the client's revocable trust as the beneficiary to help equalize inheritances if that is the client's objective.
COSTLY MISTAKE #7: Choosing the wrong trustee.
During your client's life, he or she can manage the trust. When the client is no longer able to serve as trustee, they can choose who will serve according to the instructions that they have provided. They may choose a team of advisors and/or a professional trustee. Whomever they choose, it is crucial that the trustee is financially savvy, well-organized, and, of course, ethical.
Planning Tip: The trustee of a Special Needs Trust should understand the client's objectives and be qualified to invest the assets in a manner most likely to meet those objectives.
COSTLY MISTAKE #8: Failing to invite contributions from others to the trust.
A key benefit of creating a Special Needs Trust now is that the beneficiary's extended family and friends can make gifts to the trust or remember the trust as they plan their own estates. For example, these family members and friends can name the Special Needs Trust as the beneficiary of their own assets in their revocable trust or will, and they can also name the Special Needs Trust as a beneficiary of life insurance or retirement benefits.
Planning Tip: Creating a Special Needs Trust now allows others, such as grandparents and other family members, to name the trust as the beneficiary of their own estate planning.
COSTLY MISTAKE #9: Relying on siblings to use their money for the child with special needs' benefit.
Your client may be relying on their other children to provide for their child with special needs from their own inheritances. This can be a temporary solution for a brief time, such as during a brief incapacity if their other children are financially secure and have money to spare. However, it is not a solution that will protect the child with special needs after your client has died or when siblings have their own expenses and financial priorities.
What if the inheriting sibling divorces or loses a lawsuit? His or her spouse (or a judgment creditor) may be entitled to half of it and will likely not care for the child with special needs. What if the sibling dies or becomes incapacitated while the child with special needs is still living? Will his or her heirs care for the child with special needs as thoughtfully and completely as the sibling did?
Siblings of a child with special needs often feel a great responsibility for that child and have felt so all of their lives. When your clients provide clear instructions and a helpful structure, they lessen the burden on all their children and support a loving and involved relationship among them.
Planning Tip: Relying on siblings to care for a special needs beneficiary is a short-term solution at best. A Special Needs Trust ensures that the assets are available for the special needs beneficiary (and not the former spouse or judgment creditor of the sibling) in a manner intended by the client.
COSTLY MISTAKE #10: Failing to protect the child with special needs from predators.
An inheritance from parents who fund their child's special needs trust by will rather than by revocable living trust is in the public record. Predators are particularly attracted to vulnerable beneficiaries, such as the young and those with limited self-protective capacities. When you plan with trusts rather than a will, your client decides who has access to the information about their children's inheritance. This protects their special needs child and other family members, who may be serving as trustees, from predators.
Planning Tip: A Special Needs Trust created outside of a will ensures that information about the inheritance is not in the public record, protecting the special needs beneficiary from predators.
Planning for special needs beneficiaries requires particular care and the participation of all of the client's wealth planning advisors. A properly drafted and funded Special Needs Trust can ensure that the beneficiary has sufficient assets to care for him or her, in a manner intended by the client, throughout the beneficiary's lifetime.
(Peter G. Lennington, Esq., is a wealth preservation and estate planning member attorney with offices in St. Paul, MN, Bloomington/Edina, MN, and Minnetonka, MN. The Lennington Law Firm, PLLC website is located at www.lennington.com. You can contact Peter G. Lennington via e-mail at firstname.lastname@example.org)
Tuesday, October 27, 2009
If you’re over the age of 70½ — or if you reach that age this year — you may be planning to take required minimum distributions (RMDs) from your IRA, 401(k) plan or other retirement accounts later this year. But you may be better off taking advantage of a tax law change that lets you skip RMDs this year.
Leaving funds in your tax-deferred accounts as long as possible often can make sense from an estate planning perspective. The longer you allow your retirement funds to grow on a tax-deferred basis, potentially the more there will be for your heirs.
Normally you must take your first distribution by April 1 following the year you turn 70½. After that, annual distributions are required no later than Dec. 31. Many people take their first RMD during the year they turn 70½ to avoid taking two distributions the following year.
In the economic downturn, the value of many investments has declined, so it’s not the best time to make withdrawals from tax-deferred accounts. Lawmakers recognized this when they enacted the Worker, Retiree and Employer Recovery Act of 2008 late last year. The act suspended RMDs for 2009.
If you reached age 70½ before this year, you can skip the distribution that would have been required by Dec. 31, 2009. And if you turn 70½ during 2009, you can skip your first RMD — which would have been due by April 1, 2010 — so you won’t have to take an RMD until the end of 2010.
The act also provides relief for people with inherited retirement accounts. The rules are a bit complicated, though, so if you’re in that situation, consult your estate tax advisor to find out whether you’re entitled to skip this year’s RMD.
Tuesday, October 20, 2009
To transfer your wealth in the most cost-effective manner, it’s important to understand how an asset’s income tax basis affects your estate planning strategies. The basis that your beneficiary receives in an asset depends on how you transfer it, and this can have a large impact on the recipient’s income tax bill.
What is basis?
Essentially, basis is the cost associated with an asset. It’s used to measure your gain or loss when you dispose of the asset and, if the asset is used in your business, it’s used to determine the amount of depreciation, depletion or amortization deductions.
When you sell an asset, your gain or loss is determined by taking the sale proceeds and subtracting your adjusted basis. So, for example, if you purchase stock for $100,000 and sell it for $150,000, you’ll recognize a $50,000 gain. On the other hand, if you sell the stock for $75,000, you’ll have a $25,000 loss.
The starting point for calculating an asset’s basis is the price you pay for it (including the amount of any existing debt you agree to assume in connection with the purchase). But depending on the nature of the asset, your basis may be adjusted to reflect changes that increase or decrease your investment in the asset.
Suppose, for example, that you purchase stock in an S corporation. Your initial basis is the price of the stock plus the adjusted basis of any property you contribute to the corporation.
Over time, your basis is increased by your taxable share of the corporation’s income, as well as by additional capital contributions or loans you make to the corporation. (Be aware that your basis isn’t increased by the fact that you guarantee a loan made by the corporation.) Your basis is decreased by items such as your share of distributions and any tax losses that are passed through to you.
Your basis in an asset has significant tax implications, so it’s important to track basis carefully and to document any events that increase or decrease it.
Why does basis matter?
From an estate planning perspective, basis is important because it affects the amount of taxable gain your beneficiary will recognize should he or she sell the asset. And your beneficiary’s basis in an asset depends on the manner in which you transfer it.
The general rule is that, when you transfer an asset at death, your beneficiary receives a “stepped-up” basis equal to the asset’s fair market value on that date. If you transfer an asset by gift, however, your adjusted basis in the asset “carries over” to your beneficiary.
At first glance, it would seem that transfers at death are preferable because a stepped-up basis minimizes the gain on a sale of the asset. But it’s not that simple. To determine the best strategy for transferring assets you need to look at the big picture.
First, consider your basis in an asset. If the asset’s value hasn’t appreciated significantly — so that its fair market value isn’t substantially higher than your basis — then the manner in which you transfer the asset won’t have a big tax impact on your beneficiary. Also, if your beneficiary plans to hold onto the asset rather than sell it, the income tax implications may not be a significant factor.
Case in point …
It’s important to balance any negative income tax consequences against potential transfer tax savings. For example, Todd, whose net worth is well above the $3.5 million estate tax exemption, wants to transfer $1 million in publicly traded stock to his daughter, Rebecca. Todd’s adjusted basis in the stock is $200,000, and he’s already used up his $1 million lifetime gift tax exemption.
If Todd gives the stock to Rebecca, he’ll owe $450,000 in gift tax (assuming a 45% rate). His basis carries over to Rebecca, and she also gets to increase her basis by virtue of the fact that he paid gift tax.
The increase is determined by a formula of the gift tax paid and the appreciation gifted. In this instance, she increases the basis by 80% of the $450,000 gift tax paid. Thus, her adjusted basis is $560,000. So if she sells the stock she’ll recognize a $440,000 gain, resulting in a $66,000 federal capital gains tax liability (at the current rate of 15%). (For illustrative purposes, it’s presumed that Rebecca lives in a state that has no income tax.) The combined tax on the transfer (assuming Rebecca sells the stock immediately) would be $516,000.
It seems that a transfer of the stock at Todd’s death is preferable because Rebecca would receive a stepped-up basis and avoid the $440,000 gain. That would be true if Todd were to die tomorrow. But what if he dies 10 years later and the stock’s value grows to $2 million? Rebecca wouldn’t inherit any built-in capital gains, but Todd’s estate would owe $900,000 in estate tax (assuming no change in the estate tax rate).
As you can see, determining the best strategy can be a challenge. Are Todd and his family better off paying $516,000 in taxes now or $900,000 in 10 years? Will the stock’s value actually double in 10 years? The answers depend on the time value of money and Todd’s best guess of the stock’s performance and value in the future.
Bear in mind that, if Todd had not previously used his lifetime gift exemption, there would be no gift tax paid on the gift and, consequently, no adjusted basis for Rebecca. If she were to sell the asset immediately, her gain would be $800,000, and she’d owe a capital gains tax of $120,000.
What does the future hold?
Complicating matters further, as of this writing current law calls for the estate tax to be repealed in 2010 and to be reinstated in 2011. During 2010 only, assets transferred at death won’t be entitled to a stepped-up basis, except for a limited amount of property.
It’s likely that Congress will pass legislation this year that preserves the estate tax, but it’s not yet clear whether such legislation will modify the basis rules. So it’s important to keep track of your income tax basis in various assets and to evaluate its potential impact on your estate plan.
Thursday, August 20, 2009
Estate planning pitfall:
You don’t have a succession plan for your estate plan
Some of the most important estate planning decisions involve naming people to act on your behalf after you die or, in the event you become incapacitated, during your life.
You’ll want to select people you trust and who possess the skills, experience and temperament necessary to carry out your wishes. You should also choose at least one, and preferably two, successors for each of these representatives. If you don’t, and one of them dies or is otherwise unable to serve, a court will make the decision for you (usually with some input from your family).
Common estate planning documents that should include successor designations include your:
To avoid having a court make these decisions for you, review your executor, trustee, agent and proxy designations periodically to be sure you have replacements who are ready, willing and able to step in should the need arise.
- Will. Your will should designate a successor executor, especially if you’ve named your spouse as the executor, because he or she might decline the burden of administering your estate while grieving your death. Further, if you have children who are minors, the will is the place for you to designate guardians for those children.
- Trusts. Trustees often have considerable discretion to distribute funds and make decisions in accordance with your wishes, so selecting their successors is just as important as selecting the original trustees. Another option is to create a mechanism for the current trustee or beneficiaries to name successor trustees.
- Health care documents. A health care power of attorney authorizes another person to make medical decisions for you, including decisions on life-sustaining treatment, when you’re unable to make them yourself. Your spouse will probably be your first choice, but it’s critical to choose one or more successors in the event he or she is unavailable or otherwise unable to make the decision.
- Power of attorney. This document authorizes your spouse or another representative to manage your financial affairs. If he or she is unable to act, you need to have a successor ready to take over at a moment’s notice.
Tuesday, August 18, 2009
For many, an important estate planning goal is to encourage their children or other heirs to lead responsible, productive lives. A popular tool for achieving this goal is the incentive trust, which conditions distributions on certain “acceptable” behaviors. But is this your best option?
Rigid distribution rules problematic
An incentive trust attempts to shape your beneficiaries’ behavior by conditioning distributions on specific benchmarks that are readily understandable and achievable. Examples include obtaining a college degree, maintaining gainful employment, or refraining from unacceptable behaviors such as drug or alcohol abuse or gambling.
In an effort to quantify acceptable behavior, some incentive trusts provide for matching distributions based on a beneficiary’s salary or charitable donations. Unfortunately, this approach can lead to unintended consequences.
For example, if your trust conditions distributions on gainful employment or matches a beneficiary’s salary dollar-for-dollar, it may discourage heirs from becoming stay-at-home parents, doing volunteer work or pursuing less lucrative but worthwhile careers, such as teaching or social work. If the benchmark is graduating from college or obtaining a graduate degree, the trust may unfairly penalize family members with disabilities or who simply lack the temperament or capacity for higher education.
One potential solution is to design a detailed trust document that attempts to cover every possible contingency or exception. Not only is this time-consuming and expensive, but, even with the most carefully drafted trust, there’s a risk that you’ll inadvertently disinherit a beneficiary who’s leading a life that you’d be proud of. Or, the trust may reward a beneficiary who meets the conditions set forth in the trust but otherwise leads a life that’s inconsistent with the principles and values you wish to promote.
Principles trump incentives
If you’re comfortable giving your trustee broader discretion, consider using a principle trust, instead. By providing the trustee with guiding values and principles rather than rigid rules, a principle trust may be a more effective way to accomplish your objectives.
A principle trust guides the trustee’s decisions by setting forth the principles and values you hope to instill in your beneficiaries. These principles and values may include virtually anything, from education and gainful employment to charitable endeavors and other “socially valuable” activities.
By providing the trustee with the discretion and flexibility to deal with each beneficiary and each situation on a case-by-case basis, it’s more likely that the trust will reward behaviors that are consistent with your principles and discourage those that are not.
Suppose, for example, that you value a healthy lifestyle free of drug and alcohol abuse. An incentive trust might withhold distributions (beyond the bare necessities) from a beneficiary with a drug or alcohol problem, but this may do very little to change the beneficiary’s behavior. The trustee of a principle trust, on the other hand, is free to distribute funds to pay for a rehabilitation program or medical care.
At the same time, the trustee of a principle trust has the flexibility to withhold funds from a beneficiary who appears to meet your requirements “on paper,” but otherwise engages in behavior that violates your principles. Another advantage of a principle trust is that it gives the trustee the ability to withhold distributions from beneficiaries who neither need nor want the money, allowing the funds to continue growing and benefit future generations.
Not for everyone
Not everyone is comfortable providing a trustee with the broad discretion a principle trust requires. If it’s important for you to prescribe the specific conditions under which trust distributions will be made or withheld, an incentive trust may be appropriate. But keep in mind that even the most carefully drafted incentive trust can sometimes lead to unintended results, and the slightest ambiguity can invite disputes.
On the other hand, if you’re comfortable conferring greater power on your trustee, a principle trust can be one way to ensure that your wishes are carried out regardless of how your beneficiaries’ circumstances change in the future.
Friday, September 26, 2008
Estate Planning Pitfall: Not using a trust when you should
Determining if a trust is appropriate for you depends on your objectives and your needs. Suppose, for instance, you have adult children in whose ability to handle the financial responsibility of inheriting your estate you have complete confidence. You’re unsure whether the idea of keeping assets in trust for them after your death is appropriate.
It would still make sense to use a trust during your life, as doing so will allow for the seamless transition of control of the assets at your death. And assets held in your trust prior to your death will pass to the beneficiaries without being subject to probate, which can be expensive and always is a public process.
In deciding whether to keep assets in trust after your death, though, you need to weigh the disadvantage of burdens — and, more important, the idea of having the assets “tied up” rather than going outright to your children — against the potential estate tax benefits down the road.
Your circumstances will help to determine whether the assets should remain in trust. For instance, depending on the size of your estate, the trust can provide a means of keeping assets outside of the estate tax system forever or, at a minimum, for at least a generation.