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Davidow, Davidow, Siegel & Stern, LLP
Long Island's Elder Law, Special Needs & Estate Planning Firm

Friday, December 24, 2004

Beware of Living Trust Scams

Unfortunately, it is becoming more and more common to hear about unscrupulous companies stepping up their efforts to market costly living trusts to older Americans, resulting in the jeopardizing of the buyer's economic security. According to the AARP, the Federal Trade Commission (FTC), and a number of state attorneys general, these high-pressure con artists have built an entire industry around older people's fears that their estates could be eaten up by probate costs or taxes, or that the distrubtion of their assets could be delayed for years. The solution, they claim, is a living trust. There is nothing wrong with the proper use of a living trust. Attorneys may recommend a living trust as an estate planning device for appropriate clients. However, salespeople masquerading as professional estate planners are working hard to try to convince older Americans that such trusts are for everyone. The problem is that many people don't need a living trust, a trust from a "kit" may not meet a particular client's needs and often these companies charge more than the service is worth. In addition, according to the FTC, some companies are using the living trust concept merely as a way to gain access to consumers' financial information and sell them other financial products, such as insurance annuities. Among the various dangers of "one-size-fits-all" living trusts, say AARP officials, is that in many cases they won't make the grantor and spouse eligible for Medicaid reimbursement of nursing home costs. In addition, some trusts improperly instruct the trustee to distribute property to beneficiaries immediately upon the death of the grantor. If creditors make a claim against the trust after asset distribution, the trustee becomes personally liable for any valid claims against the trust. According to an AARP study published in 2000, about four million people older than 50 with less than $25,000 in annual income may have purchased costly, unnecessary and potentially dangerous living trusts as a result of high-pressure sales tactics. The Federal Trade Commission has a checklist for consumers to go through before they sign any papers to create a will, a living trust or any other kind of trust. The Healthcare and Elder Law Programs Corp. (H.E.L.P.) has also created a website, annuitytruth.org to help make better decisions about annuities. Better yet, seek the advice of a qualified elder law attorney.

Thursday, December 9, 2004

Why You Need a Health Care Proxy and a Living Will

A recent Nassau County Supreme Court case highlights the importance of having a Health Care Proxy and a Living Will. A Health Care Proxy is the approved document in New York which appoints an agent to carry out your wishes for health care in the event you are not able to communicate your wishes to your doctor. It usually states that your agent knows your wishes but may or may not state those wishes in detail. Without such a document, you may be kept alive no matter what, even if it involves extraordinary measures including surgery, blood transfusions, etc. A Living Will is a document which articulates your wishes specifically and can be used as a backup to the Health Care Proxy in the event of a dispute.

In the instant case, Roger Russell brought an action to resume artificial nutrition for his aunt, margaret Russell, after her court appointed guardian authorized the withdrawal of her feeding tubes. Mrs. Russell was residing in a nursing home suffering from advanced Alzheimer's disease, breast cancer and the effects of a prior stroke. She was unable to express her wishes about her healthcare.

In 1999, Mrs. Russell executed a Health Care Proxy appointing her nephew to act as her agent to make health care decisions. In 1991, a previous proxy stated that she did not want "heroic measures" taken to save her life and did not wish to "receive artificially administered feeding or fluids". In 1995, Mrs. Russell expanded on the 1991 proxy by executing a Living Will stating she did not want cardiac resuscitation, tube feeding or antibiotics and wanted maximum pain relief. In January of 2000, appointment of Mr. Russell as Mrs. Russell's agent under her Health Care Proxy was revoked when the judge issued a restraining order against him for "financial and personal" abuse of Mrs. Russell.

Thereafter, authority to discontinue the feeding tube was given to Mrs. Russell's court appointed guardian. Mr. Russell brought an action to challenge the court's decision. Justice Frank S. Rossetti denied Mr. Russell's aaction and allowed the feeding tube to be discontinued based on a review of her wishes stated in both of her health care proxies and her living will.

This case highlightsthe interaction of Health Care Proxies and Living Wills and the importance of having both documents. It should be noted that states such as Florida honor Living Wills rather than Health Care Proxies. If you travel, copies of both should be taken with you. A knowledgeable Elder Law attorney can prepare these documents for you to ensure they will contain all appropriate language to effectuate your health care decisions.

Wednesday, December 8, 2004

Why You Need a Will

If you think wills are only for the rich, you're wrong. A will is an essential part of any estate plan. It is the primary document for transferring your wealth upon your death. If you die without a will, (intestate) state law controls the disposition of your property. Without a will, settling most estates is more troublesome and more costly. And, if you already have a will, you may need to make some changes to it. People's lives are rarely static and changes should be reflected in your will. There are many critical elements of an effective will, but here are three major provisions that your will should include: Guardian for your children - this deserves a lot of thought; name someone whose ideas on raising children are similar to yours. Also, be sure the person is willing to accept the responsibility. Creation of Trusts - All a will can do is direct the disposition of your estate. To accomplish longer term goals, such as funding a child's education or providing for a disabled relative, you must include instructions for the creation of trusts. Naming an executor - your executor is your personal representative after your death and has several major responsibilities, including administering and distributing assets to your beneficiaries, making tax decisions, paying any debts or expenses, ensuring life insurance benefits are received and filing the necessary tax returns and paying the federal and state taxes.

Tuesday, November 30, 2004

Use of a Life Estate Should be Rare - Part 1

Saving the family home from the high cost of nursing homes and other long term care expenses is high on the set of priorities of most middle-class seniors. Elder law attorneys have educated clients on the various solutions to this problem over the years. Perhaps the most popular legal solution to this problem is the creation of a life estate. It is also the most overused and usually inappropriate tool we have at our disposal. Its use should be rare.

A life estate is created by preparing a new deed. The deed conveys the property, in the usual manner, from the party of the first part to the party of the second part. For example, Mom transfers her property to the names of her children. The only addition to this is that in the body of the deed, perhaps after the description of the property, the following language is inserted (or words to this effect): THE PARTY OF THE FIRST PART HEREBY RETAINS A LIFE ESTATE.

As is evident, the creation of a life estate is simple. It is a concept that all lawyers and clients can understand with ease. My contention, however, is that its simplicity breeds a climate for its inappropriate and over use.

Next week we'll explain the benefits of the life estate.

Tuesday, November 23, 2004

Use of a Life Estate Should be Rare - Part 2

Life Estate Benefits A transfer of real property by deed with a retained life estate can protect the property from having to be consiered an available asset when seeking Medicaid coverage of long term care expenses. Subject to the look-back and transfer penalty rules, at a certain time in the future, the property will be protected.

A transfer of any non-exempt asset causes a Medicaid penalty, that is an amount of months in which the Medicaid applicant will not be eligible for Medicaid. Currently the formula to determine this, on Long Island, is, subject to a three year look-back (five years if the transfer is to an irrevocable trust) that the applicant will not be elgible for Medicaid for one month for each $8,272 transferred.

One benefit of a life estate is that the value of the retained life estate itself is not considered for such transfer penalty purposes, thereby reducing the penalty period from the longer period based on the full value of the property.

The value of the retained life estate remains an asset of the Medicaid applicant, but it is at best an illiquid asset which Medicaid practically ignores. Medicaid will place a lien on this life estate value, but the lien is extinguished with the life estate itself upon the death of the life tenant.

Lawyers and their clients also love life estates because they keep seniors in control of their homes and allows them to retain all property tax exemptions.

Furthermore, upon the death of the life tenant, the reamindermen children now own the entire property, without probate, and they receive a step-up in tax basis, thereby eliminating all captial gains when the property is sold after their parents' death.

Life estates sound great. Our senior clients are in control, they have protected their homes from long term care, they have avoided probate and have preserved all tax benefits. So what could possibly be wron with the life estate technique in this context? Tune in for the answer in an upcoming newsletter.

Sunday, November 14, 2004

Use of a Life Estate Should be Rare - Part 3

SELLING THE HOUSE The problem with a life estate is that it can lead to disastrous consequences when the house is sold during the life of the life tenant.

Assuming that there is no concern with the need to obtain the consent of the remaindermen children to sell the property, there still exists tax and Medicaid problems with a sale of the senior's principal residence.

When a home is sold in a life estate situation, the sales proceeds are split between the life tenant and the remaindermen. The Federal government laid the ground work for the proper percentages to apply in this context when it published Health Care Financing Administration (HCFA) transmittal #64. To give an example of the breakdown, if the life tenant were 76 years old at the time of the sale, 50 percent of the sales proceeds would inure to the benefit of the life tenant and 50 percent to the benefit of the remaindermen. Carrying this example further, what then are the tax and Medicaid ramifications of this sale?

Let's first discuss the tax ramifications, that being whether or to what extent the principal residence capital gain exclusion (IRS 121) can be applied to this transaction. The law permits a homeowner to exclude from capital gains $250,000, provided the homeowner owned and resided in the home for at least two out of the last five years. As applied in this case, a 76-year-old life tenant would have only owned 50 percent of the property and thus would only be allowed to apply her $250,000 capital gains exclusion to the gains realized on such half. (As an aside, the IRS does not use the HCFA tables to determine the proper allocation between the life tenant and the remaindermen).

The remaindermen children, on the other hand, would not be allowed to apply any exclusion to the gain on their half, assuming they do not live with their parent(s). Therefore, a sale of a home in a life estate situation would cause capital gains to be paid on the remaindermen children's portion.

More sophisticated solutions involving irrevocable trusts solve this problem and should be offered to the clients as an alternative plan. The house can be transferred to an irrevocable grantor trust (pursuant to IRS code 674 and/or 675) and when sold during the senior's life, the full $250,000 captial gain exclusion could be applied to the entire property.

Next we'll discuss the Medicaid ramifications that must be considered with a life estate.

Next week we'll explain the benefits of the life estate.

Sunday, November 7, 2004

Use of a Life Estate Should be Rare - Part 4

The Medicaid ramifications must also be considered when using a Life Estate. If the life tenant is not on Medicaid, then in the case we have been discussing in previous newsfaxes, 50 percent of the sales proceeds will be returned to the life tenant in an unprotected manner, necessitating a transfer (subject to look backs and penalties) all over again. Now that the client is older and perhaps less healthy, we are jeopardizing the assets, albeit half, all over again.

If the life tenant is on Medicaid, then Medicaid will have placed a lien on the life tenant's portion of the property which then must be satisfied at the closing. Here, we would simply lose 50% of the property.

In either case, if the property had been transferred originally to an irrevocable grantor trust, then the sales proceeds wold have been payable to the trust, not returned to the senior. The trustee can then, if appropriate, purchase another home or otherwise invest the sales proceeds, without any further concern for the Medicaid system.

The bottom line is that a life estate poses tax and Medicaid problems during a sale of the property during the life of the life tenant. An irrevocable grantor trust will also keep the senior in control, protect their homes from long term care, avoid probate and preserve all tax benefits, but allows the senior (or her trustee) to sell the house at any time during their life without tax and Medicaid issues. The use of a life estate ties the hands of a senior because of the practical inability to sell the house during life.

When a lawyer approaches a client about this issue, the first question that should be asked is whether they are prepared to give up the right to sell their house during life. In those rare cases where the client is willing to give up all desires adn rights to sell the house during life, the life estat is the appropriate tool to use.

Monday, October 25, 2004

Frequently Asked Questions

What is Elder Law? Elder Law is an area of the law that deals primarily with planning for incapacity. Many documents used in Estate Planning overlap with Elder Law planning such as Powers of Attorney, Health Care Proxies and Living wills.

Do I need a power of attorney and a health care proxy? A durable power of attorney is a document that allows you to appoint one or more persons to make your business and financial decisions. Powers of Attorney drafted by experience Elder Law attorneys generally provide enhanced gift giving provisions to allow your agent to use the Power of Attorney for Medicaid planning to protect your assets if you are unable to do so. A Health Care proxy is a document that allows you to appoint someone to make your health care decisions if you are unable to convey your wishes. The form should cover artificial nutrition and hydration. It is important that you discuss your healthcare wishes. If you have a properly drafted durable Power of Attorney and Health Care Proxy in place, there is generally no need for an expensive guardianship proceeding if you become incapacitated.

What is a Living Will? While a Health Care Proxy is the appropriate document used to make health care decisions in New York, for persons who travel or snowbird, the Living Will is an alternative document used in other states. Essentially, the Living Will provides more detailed information about what procedures you want or do not want if you have a terminal condition where you are expected to pass away shortly. The language in the Living Will can also be used as clear and convincing evidence of your wishes in a new York court in the event your Health Care Proxy agent's decisions are challenged.

Monday, October 4, 2004

Definition of "Homebound" Clarified

Many are covered by Medicare for home health services. To receive such services, each beneficiary must: 1. Require skilled nursing care on a periodic basis, physical or speech therapy or need to maintain occupational services after skilled nursing or therapy has stopped; 2. Be under the care plan of a physician; 3. Receive services from a Medicare certified home health agency; and 4. Be confined to the home("homebound"). 42 U.S.C. Sections 1395f(a) and 1395n(a).

Section 507 of the Medicare, Medicaid and SHIP Benefits Improvement Act of 2000 (BIPA) has recently clarified that certain absences from the home by a beneficiary receiving Medicare home health care benefits are permissible. Moreover, beneficiaries may continue to receive such services when they need to leave the home, specifically for absences associated with the need for "therapeutic, psychosocial, or medical treatment in an adult daycare program that is lecensed and certified by a State, or accredited, to furnish adult day-care services in the State.

BIPA has also allowed for the attendance of religious services without disqualifying the person from Medicare home health care. In fact, BIPA has provided that an absence from home resulting from the attendance of a religious service "shall be deemed to be an absence of infrequent or short duration" thereby classifying the person as homebound to receive continued Medicare home health benefits.

[HCFA has provided "Q & As" to offer guidance to beneficiaries and professionals associated with Medicare home health services. The "Q & As" address the definition of "homebound" and clarify definitions of therpeutic services, psychosocial services, the specifics regarding state licensing and certification.] The Q & A's are available on the websites of HCFA and Medicare at www.hcfa.gov and www.medicare.gov.
Source: The National Senior Citizens Law Center in the Washington Weekly - May 2, 2001. Volume XXVII No. 21.

Thursday, September 30, 2004

Durable Powers of Attorney - Part 1

Let's start with the basics. A durable power of attorney is a document in which you can delegate certain powers over your financial life to another person or persons. While it takes effect immediately upon signing, it is most useful at a time when, for a variety of reasons, you can no longer act on your own behalf. In fact, what makes the power of attorney "durable" is the very fact that your agency can act for you when you, the principal, suffer from some disability. For the power of attorney to actually be "durable", the document must simply state that the agent can act regardless of any subsequent disability of the principal, or words to that effect. Since there is a high probability that an older client may face such a period of disability, a durable power of attorney is one of the essential tools that must be implemented in any estate plan for an older adult.

Most of us may know this already, but what we do not know is the extent of ELDER ABUSE associated with durable powers of attorneys. We do know who the abusers tend to be though: known abusers are family members, professionals, caregivers and scam artists, who use the durable power of attorney for their own benefit and of the benefit of their principal.

Persons who are older and sicker are among the most vulnerable people in our society, especially those who become dependent upon their caregivers. As such, they have a dual problem; they are both a likely target for abuse and may be unable or reluctant to report such abuse. In fact, victims of such abuse may be threatened by their abusers with physical or emotional harm, or withdrawal of care, or may simply be unable to comprehend that they are being abused in the first place.

This problem of elder abuse through the misuse of a power of attorney is expected to grow as the population of frail elderly grows. This is especially true because we also expect the use of durable powers of attorney to grow. Why not, the durable power of attorney is the most simple and cost efficient method of handling a person's finances. Moreover, they are very easy to obtain. Just click on to the internet or walk in any stationary store and you can have one in minutes. But perhaps they are too readily available.

Clearly, those who do not use legal counsel will be unaware of the document's scope, limitations and potential for abuse. We'll go into detail in a future newsletter.

Tuesday, September 21, 2004

Durable Powers of Attorney - Part 2

Although this document starts with a bold faced warning, few read it, and those who do fail to understand its inherent legalese. In fact, it has been reported that many older principals sign their documents based only upon the limited information given to them by their "abuser agent". It's just too easy and perhaps too tempting for those who mean harm!

At present, the execution of a durable power of attorney is accomplished by the principals's notarized signature. Would strengthening the execution requirements make more principals aware of what they are signing and dissuade would be abusers? Certainly the notary process is not taken as seriously as it perhaps should, many times, however, with the best of intentions. Would the process be improved if the notary faced a felony charge for not making the necessary inquiries as to the capacity of the principal to sign? What if the notary were personally liable for any financial loss incurred as a consequence of the misuse of a durable power of attorney, at least under circumstances where the documetn was notarized without the presence of the principal or signed by a clearly incompetent principal.

Would it be better if we required a durable power of attorney signing using the same formalities of a Will signing? Perhaps, but forging signatures and finding co-conspirators to witness the documents seems like an easy way to circumvent the good intention of increased formalities. If this latter point is true, increased execution requirements will likely not have an appreciable effect on such elder abuse.

What if all durable powers of attorney had to be prepared by attorneys? Certainly we would think that if a lawyer is involved in the process, such elder abuse would be caught in its tracks. But this is probably not the case in practice because of our zeal to help and our naive under-appreciation for the potential for abuse.

Next time we will illustrate this by looking at a common example in an Elder Law attorneys's office.

Sunday, September 5, 2004

Durable Powers of Attorney - Part 3

A common example in an Elder Law attorney's office might go something like this...A son may come into the office and say that his Mom is bedridden and has been diagnosed with the beginnings of Alzheimer's disease. Immediately we are concerned with the capacity of the client, at least down the road. As lawyers we know that an expensive guardianship adventure awaits the client unless a durable power of attorney is quickly executed. Moreover, if we prepare a Durable Power of Attorney, it would usually contain very liberal powers, such as the power to make gifts and self-deal to enable effective Medicaid and tax planning. This in turn makes it easier for a would-be abuser to abuse.

So, should we do the easy thing? Should we prepare the durable power of attorney and hand it to the son. this would be the easiest and in many cases the best solution. The son is usually looking for a quick and inexpensive solution to his problem and we are usually trying to provide such a solution. This may in fact be what the elderly person wants as well.

But shouldn't we insist on going to Mom's house and talking to her? Clearly this strategy would provide the best protection for Mom. But is it overkill to go this far in every case? Who is the client in this situation anyway? The Mom or the son? Does it matter if we get the feeling that the son is on the up and up? Wouldn't this be a waste of time and money in most cases, as most children are not out to financially abuse their parents? This is an ethical siutation that Elder Law attorneys face everyday. Do we need a hard and fast rule for these situations or as true advocates for the elderly, can we satisfy our ethics and our natural inclination to serve the elderly by using our judgment on a case by case basis? Besides, are clients willing to pay for the conservative service? At least for the clients who seek our advice, I believe the case by case approach is the most practical approach, in spite of the fact that some will fall through the cracks.

The bottom line is that durable powers of attorney are being abused. Legislation should be enacted to balance the need for a simple and convenient solution with enough safeguards to prevent abuse. Involving attorneys in the process may help. Perhaps requiring the formalities of a Will signing will force more seniors to seek legal counsel before signing such a powerful document. Lawyers are involved often in this process anyway and they can at least exercise their independent judgment as to whether a particular elderly person needs further protection. Many may still fall through the cracks, but a balanced solution is what is called for under these circumstances. A power of attorney should be easy to obtain in most cases, but the individuals need to appreciate that the person they choose as their agent may have a different agenda. We and our clients need to proceed with caution. In the end, perhaps our greatest goal is to continue to educate the public on the durable power of attorney's scope, limitations and potential for abuse.

Monday, August 30, 2004

Advance Planning in Second Marriages

Second marriages, particularly those later in life, can pose issues and challenges which require careful consideration. Prenuptial Agreement - a written agreement or contract drafted by lawyers and signed by the prospective husband and wife before the marriage - are designed to cover each spouse's rights in the event of divorce and upon death. Typically, the Prenuptial Agreement will cover a couple's individual property brought to the marriage, what is to be done with future-acquired property, and support of a surviving spouse. Prenuptial Agreements have expanded to cover the rights and obligations of the husband and wife during the marriage, as well. Even with these agreements, under New York law each spouse has a duty to support the other during marriage and possibly after divorce.

The importance of property rights notwithstanding illness and incapacity, although not just the province of second marriages, pose difficult issues for second marriage couples and their families. Who will care for the sick spouse? Who will be responsible for arranging for care and making decisions about that care? Who will pay for the care - whether at home or in a nursing home? And, if necessary, will Medicaid be available to pay for care?

Prenuptial Agreements can and should address many of these issues. If either spouse could remain at home with home care services, the agreements should have payment plans for care and other possible extraordinary medical expenses. Medicaid planning with respt to resources should also have been considered. Will one spouse be allowed to "gift" assets to adult children leaving the other spouse's assets exposed to Medicaid recovery or subject to spend down if either should require long term care? Has the prenuptial agreement provided for payment for supplemental Medicare policies and/or long term care insurance?

The issue of who will make actual health care decisions for an ill spouse must be addressed outside the prenuptial agreement in a Health Care Proxy and Living Will. Careful consideration in selecting the agent and alternate agent is essential. should the spouse be the agent or adult children from the prior marriage? If adult children, will the agent be accessible in the event of a medical emergency?

The facts of each case will differ as will the needs of the couple entering into a second marriage. Management of and payment for health care in a second marriage should not be overlooked in Prenuptial Agreements.

Sunday, August 15, 2004

Per Stirpes

An essential part of drafting a will or a living trust involves collecting information about personal and financial objectives of a client. Most clients are very clear as to whom they wish to leave their personal and financial property - a surviving spouse, children, and grandchildren are the most common beneficiaries.

It is also our job to make sure that those intended beneficiaries receive their inheritance. What happens if the intended beneficiary of a specific or residuary bequest under a will or trust dies before the client? Who will inherit?

There are three designations commonly seen in estate planning documents such as wills and trusts - Per Stirpes, Per Capita and By Representation. Each will be discussed over the next few weeks. We will also be discussing the importance of these designations in 'will substitute' instruments such as IRA and 401K plans, life insurance, etc.

The most common phrase used in estate planning documents is "per stirpes". Essentially, "per stirpes" means that a distribution will be made to the surviving family members in the family tree when an individual dies before the testator or settlor of a trust. This means that surviving "issue" will inherit equal portions of the share their deceased ancestor would have taken if living. "Issue" are persons descended from a common ancestor.

For example, assume that Mr. Client leaves his estate to three Children, A, B, and C, each of whom has three children. At the time of Mr. Client's death, one of his children, A, has predeceased. Mr. Client's Will says, "I leave all of my property, real and personal, to my three children, per stirpes." Who will inherit and in what proportions? The answer is that Mr. Client's two living children (B & C) will each inherit a 1/3 share of his estate. The remaining 1/3 share which would have been inherited by the predeceased child, A, will now be divided equally between the three surviving children, or issue, of A.

Sometimes, instead of using the phrase, per stirpes, estate planners will use another format. For example, Mr. Client's trust says, "The Settlor directs that the trustee shall distribute all of the then remaining property, both real and personal, of this trust to Settlor's Children A, B, and C, except that, should any of them not be living at such time, but leave issue surviving, the issue of such predeceased child shall take the share, per stirpes, which their parent would have taken, had he or she survived." The result is the same if A should predecease Mr. Client and leave three surviving children.

What happens if there is no per stirpes designation in a will or trust? The answer will be discussed next week.

Thursday, August 5, 2004

What Happens When "Per Stirpes" is not used?

We began our discussion last week on the importance of proper designation of beneficiaries in estate planning documents, such as Wills and Living Trusts, and on beneficiary designation forms for life insurance, IRA's, 401K's and certain bank accounts.

The most common planning phrase used is per stirpes. Here, the issue (children or grandchildren) of a predeceased child will take their ancestor's share. What happens if no designation is made? That is, what happens if the phrase per stirpes is not used?

Under wills executed before September 1, 1992, if per stirpes is not specified, the distribution will be per capita if all beneficiaries are equally related to the testator, and per stirpes if not equally related.

A per capita distribution means that each person who is entitled to inherit receives an equal share. Assume Mr. Client has four children - A has two children, B has 1 child, C has 1 child and D has three children. A and C die before Mr. Client. Mr. Client's will does not specify per stirpes. All 5 beneficiaries - A's two children, B, C's child and D - will divide the estate equally.

Under wills executed after September 1, 1992, if a disposition of property is made to "issue" without the phrase per stirpes or per capita, then the issue take by representation. Again, assume Mr. Client has four children - A has two children, B has 1 child, C has 1 child and D has three children. A and C die before Mr. Client. Now, B and D will each receive their 25% share of Mr. Client's estate; A's two children and C's one child (three in total) will share the balance of the estate (about 16.5% each).

In calculating a share by representation, the intital division of shares is made at the first generation level (here, the children of Mr. Client) in which a member is living. Members of the nearest generation to the testator will each receive one share and the remaining shares are combined and equally divided among the heirs in the next generation.

Monday, August 2, 2004

The Use of a GRAT (Grantor Retained Annuity Trust)

A GRAT (grantor retained annuity trust) is a technique for transferring property to members of the grantor's family at a reduced transfer tax cost. A grantor creates a GRAT by transferring property to a trust and retaining a "qualified annuity interest" in the property. The trust lasts for a specified period of time that the grantor is expected to outlive(the trust "term"). At the end of the specified term, the trust property passes to the trust's remainder beneficiaries (members of the grantor's family).

GRATs take advantage of special IRS valuation rules which make tax savings possible. The grantor is treated as having made a gift of a remainder interest in the property, the value of which is determined under these special IRS valuation tables. For tax purposes the value of the interest passing to the grantor's family (the gift) is less than the total value of the property at the time the trust is created because the value of the gift is deemed to be (1) the value of the property (2) as reduced by the value of the interest retained by the grantor. The grantor's Applicable Credit against gift and estate taxes (currently $675,000, and increasing in phases to $1,000,000 in the year 2006) can be applied to the reduced gift to avoid or minimize the payment of gift tax on the transfer to the trust. If the trust does not qualify as a GRAT, the special valuation rules would not apply and,as a result, the value of the retained interest would be deemed to be zero, meaning that the grantor would have to pay gift tax (or apply his Applicable Credit) the entire value of the trust property at the time he created the trust.

When the grantor's retained interest terminates, the property remaining in the trust passes to the grantor's beneficiaries free of a gift tax, even if it has appreciated in value since the trust was created. If the grantor survives the trust term, the trust property won't be includable in his estate for estate tax purposes when he dies because he will no longer have any interest in the property. If the grantor dies during the term, part or all of the trust property will be includable in his gross estate. But, he won't be any worse off than he would have been if he hadn't created the trust in the first place.

Friday, July 30, 2004

The Elder Suite

The vast majority of caregiving for the senior population is not provided in nursing homes or assisted living facilities. Most seniors are able to receive care at home with the help of their family. In some cases, this is an alternative. However, in many cases this is simply not an option. Location issues, careers, money and raising families of their own prevent many adult children from caring for elderly parents. However, children do not want their senior parent's safety or comfort to be at risk and many want to participate in caring for their elderly parent. This is a common issue for many families with elderly relatives today.

Balancing the needs of the elderly parent and caregiver child can be difficult. However, one solution can be the addition of an "elder suite" to the caregiver's residence. Basically, an elder suite is approximately 300 square feet of living space that is custom tailored to the special needs of senios and is installed on the caregiver's residence. The elder suite has an open layout for easy accessibility and also has the safety features such as shower seating, oversized doors, non-slip flooring, grab bars and panic buttons.

Paying for the elder suite is often less expensive and more time efficient than the costs and time involved in building an addition to the caregiver's residence. The elder suite provides both the senior and the caregiver's family with the privacy and independence each needs. In addition, the elder suite can be removed and the caregiver's residence can be returned to its original condition when the circumstances of the family change.

There is a cost to install the elder suite and you can either rent or buy the elder suite, depending on your situation. Compared to the rising costs of assisted living facilities and nursing homes, this is an ideal option for many families. It allows the parent to remain at "home" and maintain a sense of independence while allowing the caregiver child to have peace of mind that his or her parent is comfortable and safe.

Thursday, July 15, 2004

Divorce and Beneficiary Designations

Generally, we look to state inheritance law (i.e., NYS Estates Powers and Trust Law) to know who are the "distributees" of an estate. Distributees are those individuals who are entitled to inherit estate assets which do not contain beneficiary designations or are not disposed by will.

A recent case* addressed the issue of whether state law controls where a decedent died before changing his beneficiary designation on his 401(k) plan and life insurance policy (Both named his ex-wife.) The U.S. Supreme Court held that federal law controlled this situation. According to federal law, qualified retirement plans are required to pay the benefits to the designated beneficiaries.

The outcome of this case teaches us the importance of reminding our clients who are going through a divorce to change beneficiary designations on all assets, including retirement plans, IRAs, bank accounts and life insurance policies. Accordingly, these clients should also revise their estate planning documents, such as the Last Will and Testament, Health Care Proxy and Power of Attorney.

*Egelhoff S. Ct., March 21, 2001.

Friday, June 25, 2004

Gift Splitting

It is a common practice for financial advisors, accountants and attorneys to recommend that their clients gift the "annual exemption" each year as part of the clients' estate, gift and income tax planning. The following is a summary of the rules regarding "gift-splitting" which is an important part of utilizing the annual exemptions.

Generally, each individual is permitted to gift $10,000.00 to any number of donees during a tax year without the requirement of filing a gift tax return and, at the same time, without utilizing the applicable exclusion amount. If a gift from a married individual exceeds $10,000.00 to any one donee, you may consider gift-splitting with their spouse. That is, if the nondonor spouse agrees, the gift can be deemed to have been made from both husband and wife; thereby utilizing the $10,000.00 exemption per spouse, for a combined $20,000.00 gift per donee.

The following are the requirements for gift splitting: Gift-splitting can only be elected between spouses. Gift-splitting is not permitted if the couple is divorced and either of them remarries during the year; the spouses must both be U.S. citizens or residents; and the nondonor spouse must consent to the gift-splitting.

A split gift is recorded on the donor's gift tax return. If only one of the spouses makes gifts during the calendar year, then the nondonor spouse simply consents by signing the donor spouse's gift tax return and will not need to file their own gift tax return (unless the total gifts to the donee exceeds $20,000.00 for the year or any gift constitutes a future interest).

Note that a nondonor spouse may revoke the splitting of gifts on or before the April 15th following the year of the gift. In addition, the gift-splitting election applies to all of the gifts made during the year. As a result, the nondonor spouse cannot elect to split some gifts but not other gifts.

As the end of the year approaches, it is important to advise clients on the basic rules of gift-splitting and the gift tax return requirements so that the gift tax exemptions are not jeopardized.

Friday, June 11, 2004

Proper Beneficiary Designations

We have been discussing the importance of proper beneficiary designations in wills and living trusts. Generally, the most frequent type of designation seen is, assuming no surviving spouse, "to my children, in equal shares, per stirpes." This means that a distribution will be made to the surviving family members when a beneficiary dies before the testator or settlor of a trust. But what about beneficiary designations for non-probate assets such as life insurance, annuities, 401K's and IRA's? The answer is that equal attention must be paid to the beneficiary selection for these types of assets as with wills and trusts. The per stirpes designation on a financial institution's or insurance company's beneficiary designation form is acceptable. Some issues to be aware of include: per stirpes (for example, "to my son, A, per stirpes") may not avoid the appointment of a guardian by a court if a minor does inherit as a contingent or designated beneficiary of a non-probate asset. A simple solution: "To my son, A, per stirpes, but in the event such issue who inherit shall be minor (s) then said minor's beneficiary share shall be paid to a custodian under the Uniform Transfers to Minors Act until the maximum age permitted by law and thereafter directly to the beneficiary. The custodian, if none, shall be designated by the executor or administrator of my estate." If there is no per stirpes or per capita designation on a beneficiary designation form, the proceeds of the policy or retirement account will be payable to the testator's estate, and be distributed according to the terms of his or her will, or by intestacy, if no will exists. This may create unintended results and unintended beneficiaries. If a trust is named the beneficiary of a IRA, and the testator later revokes the trust, care must be taken to change the beneficiary designation form, as well. It is also recommended that a beneficiary designation form be completed in duplicate, with one copy returned to the owner of the account or policy. This avoids the potential problem of a misplaced or lost designation form by a financial institution.

Saturday, May 15, 2004

Reviewing the Tax Relief Act of 2001

On May 26th Congress approved The Economic Growth and Tax Relief Reconciliation Act of 2001, the biggest tax cut in a generation. The bill, which provides for a tax cut of $1.35 trillion in the next decade, passed the House by a vote of 240 to 154, and passed the Senate by a vote of 58 to 33.

The new legislation makes 441 tax-law changes, according to the Wall Street Journaland will require CCH Inc. (a leading publisher of tax information) "to update more than 14,368 pages in its 23 core federal tax...looseleaf materials." This issue of THE ADVANTAGE and succeeding issues will focus on and highlight some of the changes in the Estate and Gift Tax Laws and the Generation Skipping Transfer (GST) Tax Law.

Beginning in 2002 and through 2009, the Estate and Gift Tax rates will be reduced. At the same time, the Unified Credit Exemption amount for Estate Tax purposes and the GST Tax Exemption amount will be significantly increased. In 2002, the Unified Credit Exemption amount for lifetime gifts will be increased to $1 million and will remain at that level. The Estate Tax and GST Tax are repealed in 2010, but only for one year. In that same year, assets would begin to be inherited at their purchase price rather than market value (carryover basis), so heirs could inherit old capital gains-tax liabilities - making bookkeeping potentially burdensome.

Commentators have noted some curiosities in this legislation. For instance, according to an Op-Ed piece humorously entitled Bad Heir Day in The New York Times (May 30th), the postponing of the repeal of the Estate Tax until 2010 left the "books insufficiently cooked," so Congress- added a 'sunset' clause, officially causing the whole bill to expire, and tax rates to bounce back to 2000 levels, at the beginning of 2011. So in the law as now written, heirs to great wealth face the following situation: If your ailing mother passes away on Dec. 30, 2010, you inherit her estate tax-free. But if she makes it to Jan. 1, 2011, half the estate will be taxed away. That creates some interesting incentives. Maybe they should have called it the Throw Momma From the Train Act of 2001.

Contrary to the somewhat cynical views espoused by some of these critics, it will not be necessary for our clients or their heirs to resort to criminal activity in order to benefit greatly from the new tax laws. With proper estate planning, the reduction in Estate and Gift Tax rates and the dramatic increases in the Unified Credit Exemption will allow much greater wealth to pass from one generation to the next, with far less tax erosion than was the case under prior law. More detials of the tax legislation, and some resulting planning opportunities, will be the subjects of ensuing articles.

Monday, May 3, 2004

Reviewing the Tax Relief Act of 2001 - Part 2

As we have noted in the previous newsletter, under the 2001 Tax Act (that President Bush has now signed into law), the amount exempt from estate taxes and the rate of tax on larger sums are slowly reduced beginning next year until 2010. At that time the estate tax (but not the gift tax) is repealed for one year. The new law then "sunsets", meaning the law existing prior to the 2001 Act will be reinstated effective January 1, 2011. Thus, (a) in 2009 only estates in excess of $3.5 million will be subject to estate tax, at a top federal rate of 45%; (b) in 2010 there will be no estate tax: and (c) in 2011 we revert to estate tax on estates exceeding $1 million, at a top rate of 55%.

According to an article in The New York Times (June 14, 2001), these: roller-coaster changes can turn an estate plan drafted under the old law to eliminate estate taxes into a financial disaster. ...Six prominent estate tax lawyers agreed in interviews [June 13th] that the repeal would probably not take place, but they all said individuals must have wills that take into account a range of possibilities, including all of the changes planned over the next 10 years, the possibility of permanent repeal and the prospect that repeal will never take place. ...Those who...have a will and estate plan drafted under the old laws need to ...have it reviewed and in many cases rewritten. ...Without revisions, these experts said yesterday, widows may be left with far less than they expected, children and grandchildren may be stuck with huge tax bills that could have been avoided and litigation over who receives tax-favored assets may erupt, even in families whose members have worked together to build and preserve their wealth.

The above-quoted article may be somewhat alarmist, particularly in light of some interesting statistics the same newspaper published in a different article on April 8th this year: while 17% of Americans in a recent Gallup survey think they will owe estate taxes, only a much smaller perentage in fact do. "And nearly half the estate tax is paid by the 3000 or so people who each year leave taxable estates of moer than $5 million." While The New York Times doesn't specifically say so, the negative implication of this latter statistic is that somewhat more than half the estate tax is paid by people who leave less than $5 million (though we don't have statistics to verify that inference).

We believe that clients are advised to continue to make "annual exclusion" gifts and take other steps to reduce estate tax where there is risk that they may die before repeal with an estate larger than $1 million. We also agree with the experts quoted by The Times above that it is sensible for clients to have their wills and other estate planning documents reviewed. Many clients may benefit from having their "optimum marital deduction" will updated to avoid the anomaly of having all or most of their estate diverted to the "Bypass" trust (a/k/a "Credit Shelter" trust). Further, since the gift tax exemption increases to $1 million per person in 2002, leveraged gifts via GRATs and Family Limited Partnerships will take on added importance in the "reform" period.

Thursday, April 22, 2004

Reviewing the Tax Relief Act of 2001 - Conclusion

In the previous issues of this newsletter we have taken a detailed look at some of the changes to the estate and gift tax laws made by the Tax Act of 2001. We have also taken note of the Tax Act's "sunset" rule, under which the new laws expire and the pre-2001 Act laws return. And, we observed that estate planning has been made more difficult due to (a) the uncertainty of whether the sunset rule will ever come into play, and (b) the uncertainty of whether an individual will die during aperiod of increasing Exemption Equivalents. The focus in this issue is on a topic that has been only touched upon in prior articles, namely: the 2001 Tax Act's switch from the "stepped-up" basis rule to the "carryover" basis rule.

"Stepped-up" Basis vs. "Carryover" Basis. When a person makes a gift, the donee generally gets the donor's basis (usually cost). That is, the donor's basis "carries over" to the donee. As a result, if there is a gift of appreciated stock, for example, the donee will have a taxable gain if he sells at the gift value. By contrast, under pre-2001 Act law, property acquired from a decedent generally got a basis equal to its value at his death - the heir's basis of the property was "stepped-up" to the date of death value. This meant that, on a later sale by the heir, he or she wouldn't have to pay capital gains tax on the appreciation in the property that occurred while it was owned by the decedent.

Changes to the Basis Rules. When the estate tax is repealed in 2010, the basis rules applicable to property acquired from a decedent will be changed to be similar to the gift tax rules noted above, subject to some exceptions. In other words, the heir will no longer receive a setpped-up basis; instead, the decedent's basis will carry over to the heir.

Certain exceptions to Carryover Basis. One important exception to the new carryover basis rule is that each estate will receive $1.3 million of basis to be added to the carryover basis of any one or more of the assets held at death. For example, if an individual dies owning stock worth $5 million for which he paid $3.7 million, the basis of the stock can be increased to $5 million under the Act. Another exception is that estates will be allowed an additional $3 million of basis, to be allocated among the assets passing to a surviving spouse. Under the "sunset" rule, the step-up in basis rules return for 2011.

Record Retention. With the change to carryover basis in 2010, clients must retain all records of cost or other basis. For purchases, this means receipts and statements showing the amounts paid for the items. For items inherited before 2010, basis ordinarily is the date of death value of the item. For property acquired by gift, the donee's basis usually is the same as the donor's.

What to do now. While the 2001 Act may well save estate tax, it has also added new planning complications. Clients should continue to have wills and estate plans prepared to ensure that their assets will pass as they desire, taking into account the spec ial needs of particular heirs. This is so even if there is a good chance of survival until a yar when estate tax won't be owed due to the increasing exemption or repeal. Clients who may have an estate larger than the increasing exemption amount will want to take steps to reduce estate tax, including setting up life insurance trusts, grantor retained annuity trusts, qualified personal residence trusts, and family limited partnerships. Many existing estate plans should be re-examined to keep estate taxes and income taxes to a minimum.

Monday, April 12, 2004

New York State Disability Law Passed

Recently, a law (Executive Law, Article 25) was passed in New York State which requires that persons with disabilities reside in the most integrated setting possible regardless of their age.

New York State must now develop and put into place a plan which allows persons of all ages to be appropriately placed in the most integrated setting possible and avoid institutionalization.

The term "most integrated setting" means a setting that is appropriate to the needs of the individual with the disability and enables that individual to interact with persons without disabilities to the fullest extent possible.

The "Most Integrated Setting Coordinating Council" has been created to develop and oversee the implementation of a statewide plan to provide services to disabled individuals of all ages in the most integrated setting. The plan is slated to be completed in the Spring of 2003. It will include the creation of a toll free hotline with information on community-based services for persons with disabilities of all ages.

Tuesday, March 30, 2004

Updating the Health Care Proxy

Last year legislation was enacted to allow for organ donation provisions to be included on Health Care Proxies. The Department of Health has now revised the standard Health Care Proxy form in order to accommodate for organ donation provisions. Furthermore, the standard form itself has been altered to allow for the primary agent to be selected and the alternate agent to be selected immediately thereafter (which is more logical).

The organ and/or tissue donation provision specifically states: "I hereby make an anatomical gift, to be effective upon my death, of: (check any that apply) Any needed organs and/or tissues _______ Limitations _________.

If you do not state your wishes or instructions about organ and/or tissue donations on this form, it will not be taken to mean that you do not wish to make a donation or prevent a person, who is otherwise authorized by law, to consent to a donation on your behalf."

The Health Care Proxy must now be signed twice. The second signature is required immediately after the organ donation provision. The Health Care Proxy must still be signed in front of two disinterested witnesses over the age of eighteen (18) and cannot be one of the selected agents.

Even if a Health Care Proxy is completed and a person has selected to donate his or her organs and/or tissues, it is still recommended that a person complete the back of his or her New York State Driver's License to accommodate for the same permission of organ and/or tissue donation.

For more information or for a copy of the Department of Health form, please contact Davidow, Davidow, Siegel & Stern or you can access this directly on the Department of Health website.

Friday, March 5, 2004

Medicaid and Joint Accounts

Often seniors who may be potential Medicaid applicants are under the mistaken impression that if they add their children's names on the title to their financial accounts (banking or brokerage) that this is considered giving up control of some or all of their money and that at some point, it would be protected if they needed Medicaid. This is not necessarily so. If the money in the account actually belongs to the client, making that account joint with a child or even adding that child as the primary account holder joint with the client using the child's social security number will still not be considered a relinquishment of control by the client for Medicaid purposes. There are certain ways to effectively move these assets out of the senior's name: 1. If, by chance, some or all the money in the joint account actually does belong to the child instead of the seniors and proof of this is available for offer to the Dept. of Social Services, and the senior's name is removed from the account prior to the month the senior needs Medicaid, the portion belonging to the child will not be counted as a resource belonging to the senior. This involves careful record keeping over the years. 2. If all of the money belongs to the senior, to remove the account from the senior's name, the account should be retitled in the children's name only with their social security numbers. The senior's name should not appear on th title of the account, and the account should not be held in trust for the senior or be payable on death to the senior. This is considered an uncompensated transfer and will incur a period of Medicaid eligibility for the senior based on the size of the account starting the month following the date of the transfer. 3. Where the senior has ccreated a joint account with a child already, a transfer to that child occurs when the senior removes his or her name from the account. Again, a period of Medicaid ineligibility will start running in the month following the date the senior's name is fully removed from such account. 4. If the senior has a disabled child who is not on SSI, all of the senior's resources can be transferred to that child alone without incurring a period of Medicaid ineligibility for the senior and without jeopardizing the child's SSI. It is highly recommended that any of the above transfers be made under the supervision and upon the recommendation of an Elder Law attorney as part of an overall estate plan, especially if any of the financial accounts contain highly appreciated assets.

Wednesday, February 25, 2004

"After-Born" Children and their Parents' Estate

A recent case, Estate of Magrow, NYLJ, May 16, 2001 at 20, Col. 4 (Surr. Ct. Kings Co.), addressed the question of whether "after-born children" have a right to a portion of their parent's estate.

"After-born children" are children born after the creation of their parent's Will. New York Law allows after-born children the right to share in their parent's estate if the parent did not provide for them in the Will and the child is not otherwise provided for by the parent's assets. In this NY case, a parent created a Will providing for his 3 children. Later, he had 2 additional chidren. He designated all 5 children beneficiaries of a life insurance policy purchased after the Will execution (and after the birth of all of his children). The court held that the beneficiary designation of the insurance shows that the parent sufficiently provided for the after born children. As a result, the court did not permit the children's claim to a portion of the parent's estate.

It is important to realize that the value of the insurance in relation to the parent's entire estate is irrelevant. The court did not determine whether the insurance policy is equitable or just. The court looks to determine whether the parent made financial provisions for the after-born children which would show the parent intended to provide for the after-born children.

In arriving at a decision, the court looks to the facts and circumstances of each case. As a suggestion, in order to avoid litigation in this area, the attorney should draft documents which provide for all of the client's children as a class, (without naming them) or to have the Will read: 'to all of my children born to my marriage to 'X' ". As estate planning attorneys, our firm advises our clients to review their estate planning documents such as their Will, Trusts, Health Care Proxies, Living Wills and Powers of Attorney, after changes in the client's family situation (i.e., births, deaths, separation, divorce and adoption) and, at least every 3 years. This recent court decision dealing with after-born children is a good example of how estate plans may not fulfill the client's actual expectation and intention if the estate planning document doesn't provide for after-born children and/or the client does not review their estate planning on a regular basis.