Category Archives: Estate Planning

Living trust funding: Whose job is it?

Estate Planning, Living Trusts

At home, I received a newsletter from a northwest suburban lawyer who prepares a lot of living trusts. This attorney does a lot of seminars and I must be in his direct mail target market now that I am old enough to be in the AARP army. I scanned the newsletter expecting the usual boilerplate, but one story left me amazed.

It was about how the attorney was experiencing a rash of probate estates that had to be opened for clients with living trusts. (Spoiler alert: You’re not supposed to have a probate with a living trust.)

The story pointed out that the clients simply were not “funding” their trusts correctly, which is the process of changing beneficiaries and the titles of accounts to the living trust. A trust has to be properly funded to avoid probate. If any asset valued at more than $100,000.00 is left in the client’s own name (not jointly or in the trust) a probate will be necessary. Avoiding probate is one of the reasons to use a living trust over a will, so the newsletter story pointed out that this was huge failure. Rather than blaming himself for this, the attorney laid responsibility for this problem squarely where it belonged —on all of his misguided, wayward clients.

After all, he gave the client a letter telling them exactly how to fund their living trust. Why couldn’t the client simply follow his instructions? This attorney is part of the “go in peace my son and fund the trust yourself” school of attorneys.  Oddly, when attorneys refuse to participate in funding of trusts, the cost of the trust is usually pretty high. But many attorneys consider trust funding to be beneath them.

I believe that attorneys who draft living trusts have an obligation to help the client fund the trust. I have drafted thousands of living trusts for clients and my clients are intelligent people. They are also very busy and have a million demands and obligations. They do not have the time or the interest to learn how to fund their living trust. Nor should they have to.

I have tried every imaginable combination of methods for funding trusts and after 20 plus years, I’m convinced that, for me, there is only one way to handle trust funding that works. Both the attorney and client have to be involved:

1. It is too much to sign the trust and other documents AND fund the trust in one meeting, unless the trust funding is really simple. I usually sign the trust in one meeting and fund the trust in a second meeting.

2. At the trust signing I set up an appointment for two weeks down the line with the client for a trust funding meeting. If I don’t schedule an appointment at the trust signing, there is about a 60% chance the client will never get back to me and the trust will be left unfunded.

3. At the trust signing, I make a list of the forms that the client must obtain. The client calls for the forms and the forms are mailed or faxed to the client. Many institutions will not send the forms to me, so the client has to undertake this step. I have many of the common forms on file for Fidelity, Vanguard,  Schwab and some of the more common companies.

4. From trial and error I have developed one unwavering rule: All beneficiaries must be changed on life insurance and IRA accounts. Many clients say “Oh don’t worry I know my spouse is primary and kids are secondary.” I always change the beneficiary designation for all IRAs and life insurance, even if the trust is not the beneficiary and no matter what the client says. I would estimate that about 75% of the current beneficiary designations are screwed up, missing or wrong.

5. Once all of the forms are obtained by the client, we have the trust funding meeting with the client in my office. I tell the client it will be the most boring 30 minutes of his or her life. I sort through the forms and fill them out for the client. The client signs them. I scan the forms into pdfs and we mail in the originals.

6. The trust funding meeting is essential. Sometimes the client will say “I’ll just drop off the forms and you can fill them in when you have time.” This does not work. First, the client will usually forget to drop off the forms. Second, I will never have the time to complete them. The trust funding meeting forces the client and me to finish the job.

How do I get a free nursing home?

Estate Planning, Medicaid

“How do I protect my assets so that the state doesn’t get everything if I have to go into a nursing home?” This is, by far, the most common question that I answer.

I prepare many living trusts for clients, so this question comes up almost every time I meet with a client. It’s really hard to answer, and every time I hear it, I kind of cringe. The answer will not be what people want to hear. As I explain, clients stare at me with a glazed over look like, does this guy know what he’s talking about?

Here is what people are afraid of: The average cost of a nursing home is $219.00/day and rising. That’s almost $80,000.00 per year. The average nursing home stay is 2.5 years.

No one’s fondest dream is to see their assets depleted by a nursing home. But, in this Tea Party age with constant calls for limited government spending, I am always surprised that so many people think that long-term nursing home care is something that they should not have to pay for, or that they can easily qualify for by a simple legal maneuver.  I think a person’s money should be used to make them comfortable in the best environment that is affordable. In reality, medicaid is a safety net program for the truly indigent.

On the other hand, health insurance covers you when you are sick… why should long-term nursing care be any different from  having your gall bladder removed or any other illness? I don’t know the answer to these tricky questions.

But here are some of the answers to why it is now hard to qualify for medicaid:

Does my living trust “protect” my assets so that I can get medicaid if I need it?

No, a living trust will not help qualify you for medicaid.

Is there a type of trust that I can use to qualify for medicaid?

Yes, there is an irrevocable, medicaid income-only trust. You cannot be trustee. You can’t change the trust. You can only get the income from your assets. I rarely use these because they are very restrictive.

What assets can I keep and still qualify for medicaid?

You can keep $2000.00 in assets and a prepaid funeral. A house is exempt too, but only temporarily. After 6 months in a nursing home, it is presumed you will not return to the home and then a lien can be placed on the house. (There are other rules for married couples.)

Can I give away my assets and qualify for medicaid?

If  you have ESP and know when you will need medicaid and don’t mind parting with all of your assets then, yes, if you gift away all of your funds 5 years or more before you need a nursing home, you will get the free medicaid nursing care. Other than that, it is very hard to protect your assets in such a way that you will qualify for medicaid.

Does medicaid keep my pensions and social security if I qualify?

Medicaid will take all social security income, pensions and other income except for $30.00/per month.

Why is it harder now to gift assets and qualify for medicaid?

This has to do with the so called “penalty period.”  When someone applied for medicaid under the old law, your checking accounts and other bank statements were checked for the last 36 months for gifts or transfers to family members or others. This is called the “look back” period. Medicaid did not care about gifts made more than 36 months prior to the medicaid application. So if a gift of $50,000 was made more than 36 months before the medicaid application, the applicant would qualify for medicaid. If they found gifts within the 36 months then there was a “penalty period.” Under the old law, the penalty period started when the gift was made. In Illinois, the penalty amount was about $5000.00 per month, so if you gifted $50,000.00 within the 36 month look back period, you were penalized for 10 months from the date that you made the gift and after that you would qualify for medicaid. Confused yet? If not, you are a savant…It was easy under the old law to made gifts over time and still qualify for medicaid.

Now, the look-back period is 60 months. Worse yet, when a gift is made, the penalty period now starts when the client enters the nursing home. So, if a client gifts $50,000.00, the penalty period of $5000.00 per month will make the client ineligible for medicaid for 10 months from the date they enter the nursing home. This makes gifting away assets an almost unusable strategy.  The current laws encourage people to buy long-term care insurance and make it hard for those with substantial assets to gift the assets and still qualify for medicaid.

So how am I supposed to pay for a nursing home if I need it?

There are only three ways to pay for long-term nursing care:

1. Use your own funds to pay for care, or self-insure.

2. Buy long-term care insurance to cover some, or all, of the charges. Some clients buy long term care insurance to cover their expense for 3 to 5 years, which carries lower premiums than a lifetime benefit.

3. Have medicaid pay for your care.

Should I buy long-term care insurance?

If you can self-insure, then you won’t need long-term care insurance.

Anyone with assets of $1 million or more can probably safely self-insure.

Those with assets of $1 million or less, should consider some sort of long-term care insurance.

The cost of probate

Probate, Wills

I am a fan of living trusts. Trusts avoid probate. Probate is not the chamber of horrors that it is sometimes made out to be. But, all things being the same, you are better off side-stepping it  if possible.

In Illinois, probate is not terribly expensive since we do not have a fee schedule that sets mandatory executor’s and attorney’s fees.  Our  probate statute allows ”reasonable” attorney’s fees. Generally, a probate case involves a minimum of two court appearances by the attorney.  Attorney’s fees in a standard probate range from a low of $1500.00 to a high of $3500.00. In addition to the attorney’s fees there are filing fees and costs. Here are the current costs in Cook County for a testate (with a will) probate:

$314.00 Filing fee to Clerk of Court

$180.00 Claims Notice in Newspaper

$20.00 Copies of letters of office

$514.00 Total Costs

Generally, the total cost of a probate (including costs and attorney’s fees) will be as low as $2000.00 or as high as $4000.00. This  would not include any tax advice, adminstration of the assets after the probate is opened or asset transfers. This is just to open and close the estate.

With a living trust, these costs are avoided and the client can go straight to collecting and distributing the assets without the added cost of the probate.  Often, the cost of setting up a living trust is just a little more than the cost of the probate filing fees alone, so it makes sense to skip the probate by using a trust.

Estate tax vanishes Jan 1: But watch out for capital gains tax

Carry-over basis, Inheritance tax

If you thought inheritance taxes were complicated before, just wait for January 1.

The inheritance tax is abolished starting January 1. But it only stays abolished until December 31, 2010. On January 1, 2011, the old inheritance tax system returns, except that the amount that is free of inheritance tax changes to $1 million per person. Make sense? Of course not.

There is a new wrinkle that makes it all even more confusing. It’s this: Under the “old” system that expires December 31, 2009 and the new system that starts January 1, 2011, assets that the deceased owned received a “stepped-up basis.” This  means that the value of an asset is reset to its value on the deceased’s date of death. For example, if a client bought a house in 1980 for $100,000 then died in 2009 when the house was worth $300,000, and the house was sold after the deceased’s death, so no capital gains tax was due when the asset was sold because the “basis” or cost of the house was increased to $300,000. This applied to all property owned by the deceased.

Well, the stepped-up basis rules all change on January 1, 2010. Now, “stepped-up basis” is replaced by the term “carry-over basis.” This means that the basis of the deceased property owner carries over to the heirs and is not stepped-up (but of course there are exceptions, naturally).  If the asset is sold, capital gains tax must be paid by the heirs.

The new rules on carry-over basis are:

  1. $1.3 million or less in property still gets a stepped up basis.
  2. Any amount inherited over $1.3 million does not get a stepped-up basis. If this property is sold, capital gains tax will be paid by the heirs on the gain.
  3. An additional $3 million can be left to a surviving spouse and will get a stepped-up basis.

Complicating matters even more, Illinois decoupled from the federal inheritance tax system for a few years. This made is possible for large estates of over $2 million to pay inheritance tax to Illinois, but not to the U.S.  Thankfully,  for 2010, there is no Illinois inheritance tax to worry about.

What to make of all this? It is wise to review your will or trust with your attorney to address these complicated and ridiculous rules to be sure that you don’t call into a carry-over basis trap.

Two steps and your will is done

Wills

will

Clients are short on time. Couples with young children seem the most time-starved.

In the past, it generally took two office visits to have a will done for a client. It was hard to coordinate times to meet and I think multiple office visits discouraged clients from signing wills and trusts.

Now, I’ve simplified will preparation into a two step process:

1. Fill out my online form. I call the client to discuss it by phone.

2. Wills are sent by email in pdf form and a hard copy is mailed to the client’s home with signing instructions.

It works wonderfully for those in time crunch mode. By making it easier to sign a will, maybe more than 31% of couples (the current sad stat) with young children will sign a wills.

Convenience bank accounts may cause probates

Estate Planning

Starting January 1, “convenience accounts” will be able to be set up at your bank. These are alternatives to joint bank accounts. This development is good and bad.

It’s good because we have endless problems with joint bank accounts. Many times, clients add a joint tenant, usually a family member — but sometimes a non-family member, to a bank account. Upon the client’s death, the funds in the joint account snap automatically to the surviving joint tenant. Most clients don’t realize that this will happen. They think that their will or trust will control the bank account, but it doesn’t control it at all. Many times (about 50% of the time) the joint tenant keeps the funds because he thought he was owed something or did more for the deceased than the other heirs. I’ve seen some pretty nasty family rumbles over this issue.

The new convenience accounts will allow the additional party to make deposits and withdrawals on the account. Upon the client’s death, the convenience account will NOT snap to the convenience signer, but will be controlled by the deceased’s client’s will or trust.

The bad part of this: If the convenience account is $100,000.00 or more, it will cause a probate estate to be opened.  I think that there will be quite a few probates down the line from this new law. Many clients are “advised” by the bank representative on how to title accounts and we already have POD, TOD, in trust for, living trust and joint accounts. It is hard to clients to digest all of this and I think that clients will assume, wrongly,  that the convenience account avoids probate.

The other bad part: The convenience account can be cleaned out by the convenience signer, much like a joint account. Many clients do not realize that a joint signer on a bank account can help themselves to the entire account at any time. It’s rare, but occasionally the joint tenant (who didn’t furnish any $ to the account)  can make off with all the cash in the account and they don’t have to repay it. The convenience signer can withdraw some or all of the funds from a convenience account, but there would be a strong presumption that the funds were the account owners since and it might be easier to get the funds back than if a joint account were raided.

Supreme court gives retirement plan to ex-spouse

Estate Planning

Couple is married and Mr. makes Mrs. the primary beneficiary of his retirement account.

Mr. & Mrs. get divorced.

Mr. does not change his beneficiary and then dies.

The U.S. Supreme court recently ruled in Kennedy Estate vs. Plan Administrator for DuPont Savings that the ex-spouse gets 100% of the retirement plan because the beneficiary designation trumps the divorce decree .

Moral of story: Always update your beneficiary designations for retirement plans, especially after a divorce.

Illinois 09 inheritance tax trap may be no more

Estate Planning

The Illinois House passed, and the Senate is reviewing, a bill that would prevent estate tax from being owed on the first to die of a husband and wife with a large estate. It looks like it will pass the Senate easily.

Technically, the bill does this:

“Amends the Illinois Estate and Generation-Skipping Transfer Tax. Provides that the State tax credit for the estates of persons dying after December 31, 2005 and on or before December 31, 2009 includes a reduction for qualified terminal interest property. Effective immediately.”

That’s a mouthful, but it means that there would be no estate tax due on the first death of a married couple. The history of the bill is here. I previously wrote about this problem and advised couples with large estates to amend their trusts to include a state marital trust.

I’m glad to see that they are patching up this mess before tax is paid by too many widows/widowers.