Estate Planning and the Value Proposition

About once a week I’ll receive a call that goes something like this:  “Hello Mr. Shapiro, my name is Mary Jones.  I need to update my will -- it’s really simple. I know exactly what I want to do, so can I just give you the information on the phone and then come in to sign?”

Such a request underscores a serious misconception about what constitutes an effective estate plan, as well as the appropriate role of an estate planning attorney.  Some people expect their attorney to serve merely as a “scrivener” who records the client’s dispositive wishes and transforms that information into a legally effective will.  The result of that scenario will be a “word processed” will that, while satisfying the legal requirements for creation of a valid will, in substance is no different than what the client could have done for themselves using a do-it-yourself online website.  

But doing such a “fill in the blanks” estate plan provides the client with a false expectation that the “estate plan” (I use that term loosely) in fact assures the client that their goals will be addressed. Almost inevitably the client’s true objectives will be frustrated, although the client will never know it since the ultimate success or failure of the plan will not be known until after their death – and sometimes not for many years after their death.

For example, married couples routinely own assets as joint tenants with rights of survivorship.  It is simple to set up, it gives each spouse comfort that they have “skin in the game,” and title automatically passes to the surviving owner upon the first death without the need to go through probate.  

But joint ownership is fraught with pitfalls.  The assets are only truly owned by the surviving joint tenant, who is free to dispose of the assets as he or she desires after the first owner’s death.  Perhaps the surviving spouse remarries and then dies before the new spouse.  Even if the deceased spouse has a will or trust leaving assets solely to the children of the first marriage, in the absence of a prenuptial agreement, the second spouse can assert spousal rights to at least one-third of the assets of the deceased spouse.  Even if there is no remarriage, the jointly owned assets may be exposed to estate taxes upon the second spouse’s death, will likely be subject to probate, will not be Medicaid protected, and will likely be exposed to the surviving spouse’s creditors.

Proper estate planning requires that an attorney well-versed in current estate planning and elder law information and techniques gather a significant amount of financial and personal information about the client, their family, and other “key people” in the client’s life. Only after the attorney has learned about the family, their assets, and their planning objectives can the attorney work with the family to craft a customized estate plan that will address all of the client’s planning goals.

A significant part of the attorney’s role is to educate the client about the myriad planning possibilities, and to challenge the client’s assumptions.  For example, most people intuitively assume that the “appropriate” way to leave an inheritance to an adult child is to simply leave it to them as an outright distribution, rather, than in a trust for the child.  People are wary of “controlling from the grave,” and they incorrectly believe that leaving a child’s inheritance in trust necessarily means that the child will not have any control of, or access to, their inheritance.  But after they have been informed that they can establish a trust for a child’s inheritance that will allow the adult child to have access to the trust assets as trustee while the same time shielding the assets from the child’s creditors, a divorcing spouse, or the dissipation of assets as a result of a catastrophic illness or injury, clients almost always choose to leave the children’s inheritance in some form of a trust.

It is important to keep in mind that hiring an estate planning attorney should not be treated in the same manner as if you are purchasing, say, an appliance.  Seeking the "cheapest" professional without focusing on the value you will (or won't) receive for your money is likely to lead to disappointment - if not for you, then certainly for your heirs when they need to settle your estate and are left with chaos and the resulting additional costs resulting from a "word processing" based estate plan that provides no correlation between the planning documents and title to the client's assets.

Proposed Bill in Congress Would Permit Disabled Individuals to Create Their Own Special Needs Trusts

Special Needs Trusts are often vitally important lifelines providing the means of financial security for persons with disabilities.  One flaw in the current system is that "self-settled" special needs trusts  that are to be funded with the disabled person's own assets and/or income can only be created by a parent, grandparent or legal guardian for the disabled person, or by a court.

This statutory restriction effectively requires mentally competent but disabled individuals to find a permitted third party to "create" the trust.  If there is no available parent or grandparent, then the disabled person must file a time consuming and often expensive court petition to have the special needs trust put into effect.

Hopefully this unnecessarily burdensome restriction will be a thing of the past.  On May 23rd, Reps. Glenn Thompson of Pennsylvania and Frank Pallone of New Jersey introduced the Special Needs Trust Fairness Act of 2013. If enacted, this bill will permit competent adult disabled beneficiaries to create their own self-settled special needs trusts.

More information about this exciting development can be found here.

Life Insurance with Long-Term Care Access: Covering all the Bases

Most people begin thinking about long-term care insurance – if they think about it at all – once they reach their 60’s or beyond.  Unfortunately by that age the cost may seem to be prohibitive to many of those interested in purchasing the product, or health conditions may render an applicant uninsurable.  And frankly, most people believe the need for long-term care will only apply “to the other guy.”  So, the reasoning goes, “if I don’t use the insurance, then all of my premium payments will be ‘wasted.’”

But the fact is that approximately 50% of all seniors will need at least some form of long-term care.  With the costs for care increasing by leaps and bounds – in the Hudson Valley, the cost for in-home care will run approximately $250 per day, and nursing home care is at least $350 per day -- very few people have sufficient resources to cover the costs for any extended period.  And, with governmental budgets shrinking, it is unlikely that Medicaid will continue to be available to cover a large chunk of long-term care costs for the ever-growing baby boomer population.

A possible solution for those reluctant to buy long-term care insurance is the availability of a growing number of “hybrid” life insurance policies that provides lifetime access to the death benefit to cover long-term health care costs.  These hybrid policies have been gaining in popularity, with sales increasing by 19% in 2012 over the previous year.

The hybrid policy generally works as follows: the policy provides a fixed death benefit and includes a chronic illness rider. Should the insured become disabled – typically defined as suffering from cognitive impairment or needing assistance with two or more “activities of daily living” such as dressing, bathing, toileting, transferring or eating -- then the death benefit can be “accelerated” with payments typically of 2% of the death benefit per month to cover long-term care costs. A hybrid policy with a $500,000 death benefit, for example, would provide up to $10,000 per month for 50 months for long-term care needs.  To the extent that long-term care is not needed, the remaining death benefit would be paid to the surviving spouse or other heirs. 

A potential downside is that ownership of a life insurance policy in your individual name would cause the death benefit to be includable in your taxable estate, which could result in estate taxes being owed on the death benefit.  For example, if an unmarried person added a $500,000 hybrid life insurance policy to an existing $1 million estate, the resulting $1.5 million taxable estate would require payment of a New York estate tax of approximately $65,000.

One strategy to minimize the likelihood that the life insurance will result in an increase in estate tax liability is to utilize a "Special Needs Irrevocable Life Insurance Trust" established by the insured's children to own the policy.  The parent would make cash gifts to the children, who would use the cash to pay the premiums for the life insurance policy owned by the trust.  Should the insured require financial assistance to pay for long-term care, the accelerated death benefit can be triggered, with the trustee (usually the children) having discretion to use the benefits to contribute towards the parent's long-term care needs.  If the parent is Medicaid-eligible, the children would not be forced to distribute money from the insurance policy to cover the parent's long-term care costs, and the death benefit can remain intact.  Adding icing to the cake, since the parent has no retained ownership interest in the policy, the death benefit would not be included as part of the parent's taxable estate.
 

Powers of Appointment – An Essential Tool For Building Flexibility Into Your Estate Plan

The ideal estate plan is one that not only satisfies all of a person’s current goals and objectives, but also provides flexibility to allow for changes both during the person’s life, as well as changing circumstances affecting the lives of their children and other loved-ones.  People typically recognize that they can modify wills and revocable trusts at any time.  But they are often surprised to learn that even an irrevocable trust – such as the Medicaid Asset Protection Trust that is commonly used as a Medicaid planning device – can be drafted to allow for changes not only in the choice of beneficiaries, but also the manner in which a beneficiary will receive an inheritance.

The magical planning tool that allows for such flexibility is known as a “power of appointment.”  A power of appointment may be either “general” or “limited” (which is also sometimes referred to as a “special” power of appointment).  A general power of appointment authorizes the power holder to direct the property over which the power is granted to any person or entity.  A limited power of appointment grants the power holder authority to direct the designated property to a more limited class of persons or entities, often limited to the descendants of the person granting the power.

Powers of appointment are typically included in wills and trusts, but can also be incorporated in other legal instruments such as deeds.  Why would someone consider incorporate a power of appointment as part of their estate plan?  Because life happens!  As but one example, one spouse will sometimes outlive the other spouse by many years, and changing circumstances may render the original planning unsatisfactory to the surviving spouse. 

Assume, for example, that in 2007 Sam and Mary met with their attorney to work on their estate planning.  The couple agreed that upon the first spouse’s death the deceased spouse’s assets would be left in a protective trust for the surviving spouse, and after both of their deaths, their combined assets would be divided equally between their two children, Paul and Jennie.  After learning the many benefits of leaving assets in protective trusts for their children, Sam and Mary executed revocable trusts providing that after both of their deaths the couple’s assets were to pass equally into protective trust shares for their children.

Relying on their attorney’s sage advice, Sam and Mary’s revocable trusts included limited powers of appointment authorizing the surviving spouse to leave the deceased spouse’s trust assets among any of their descendants in any manner.  Each trust further provided that the power of appointment would be deemed exercised if the surviving spouse were to include a provision in their will or revocable trust specifically exercising the power.  In essence, each spouse afforded the surviving spouse – whoever that would be – with the “last look” at the family’s circumstances to determine if the equal asset distribution included in the original plan remained desirable.  

Fast forward to 2009 when Sam passed away.  Soon thereafter Paul, who had a seemingly stable life, saw his world fall apart.  He was laid off from his job as an executive at a large company, and at age 53 found himself unemployed for the first time in his adult life.  Six months later, as the tension in his home continued to build, Paul’s wife Sally moved out with their three children and filed for divorce. 

Mary, being distraught over her son’s changing circumstances, called her attorney for advice. While she was helping out Paul with periodic cash gifts to help keep him going, she wondered if she should change the children’s inheritances in light of the changing circumstances. She spoke to Jennie, who told her mother that Mary should feel free to leave a larger inheritance for Paul.   Mary’s attorney told her that not only could she leave more of her own trust assets to Paul’s trust share, but that she could also exercise the power of appointment provided to her under Sam’s trust to make a similar allocation of Sam’s trust assets to Paul’s trust after Mary’s death.  Accordingly, Mary decided to amend her revocable trust to leave 75% of her own trust assets to Paul, and exercised the limited power of appointment granted to her by Sam to leave the same percentage of Sam’s trust assets to Paul.

Another common use of a power of appointment is for a person executing an irrevocable trust to retain for himself the power to modify the beneficiaries under the trust without having to formally amend the trust.  Even if the retained power is never exercised, the mere inclusion of the power in the trust instrument will cause the trust assets to be includable in the trustmaker’s estate, thereby insuring that the trust assets will receive a “step-up” in cost basis for capital gains tax purposes.

In my experience powers of appointment are woefully underutilized, presumably because of a lack of understanding of the many benefits that this legal tool provides.  But any serious estate planning discussion must include a conversation about how powers of appointment may be incorporated into one's estate plan to ensure that the desired objectives can be realized.

Pennsylvania Court Ruling Allowing Support Action Against Adult Children For Parents' Nursing Home Costs Allowed to Stand

The Pennsylvania Supreme Court recently declined to hear a Pennsylvania man's appeal of a lower court ruling that held that the man was responsible for payment of his mother's $93,000 nursing home bill under Pennsylvania's "filial responsibility law."

In the case, Health Care & Retirement Corporation of America v. Pittas, John Pittas's mother entered a Pennsylvania nursing home car after being in an auto accident. She subsequently left the nursing home and moved to Greece, leaving an unpaid bill of approximately $93,000.  Relying on Pennsylvania's filial support law, which requires adult children to provide support for indigent parents, the nursing home sued Mr. Pitta for payment of his mother's bill.  The nursing home prevailed at trial, with the verdict upheld by an appellate court and now by the Pennsylvania Supreme Court.

Pennsylvania is one of 29 states that presently has filial support laws on the books. As shown by this map, New York is not one of them. However, while these laws have been rarely enforced to date, the result in the Pittas case may well lead to an explosion in filial support claims as cash-strapped nursing homes seek to recover for patients' unpaid bills, and states such as New York that presently do not have filial support laws on the books may consider such legislation as a means to reduce reliance on Medicaid expenditures for nursing home care.

Federal Court Approves use of Promissory Note in Crisis Medicaid Planning

The Federal District Court for the Western District of Oklahoma recently struck down Oklahoma's assertion that a Medicaid applicant's sale of assets in exchange for a non-negotiable promissory note rendered the applicant ineligible for Medicaid benefits.

In Lemmons v. Lake (U.S. Dist. Ct., W.D. Okla., No. CIV-12-1075-C, March 21, 2013), Juanita Lemmons sold a farm and investment assets to her son, Gary Lemmons, in exchange for a promissory note.  The note included an anti-assignment clause, which prohibited Mrs. Lemmons from selling the note to a third party.  Soon thereafter, Mrs. Lemmons applied for Medicaid benefits.

Notwithstanding that the note met the requirements set forth by Congress as part of the 2006 Deficit Reduction Act, Oklahoma's Department of Human Services denied Mrs. Lemmons' Medicaid application on two bases:  (1) the transaction constituted a transfer of assets without receipt of adequate value, or (2) the note constituted an impermissible "trust like" device.

Mrs. Lemmons sued in Federal Court, claiming that the promissory note was not a resource. The District Court sided with Mrs. Lemmons, granting her summary judgment. The court held that the note was not a resource, as the anti-assignment clause rendered the note non-negotiable and thus it could not be sold to a third party.  The court further refuted the state's claim that the note was a trust-like device, holding that Gary Lemmons held the farm for his rather than his mother's benefit.

In reaching its decision in favor of Mrs. Lemmons, the court specifically recognized that use of a promissory note "is a valid form of Medicaid planning," and that the State of Oklahoma "may not use [the statute] to penalize Plaintiff for taking advantage of a loophole that Congress has not foreclosed."

Although this decision does not constitute legal precedent in New York, the court's reasoning in Lemmon provides comfort that the common use of promissory notes in "crisis" Medicaid planning cases should withstand any similar challenge that might be brought by any Department of Social Services in New York State.

Transferring Assets to Children For Medicaid Protection? Beware of Your Children's Creditors!

It is commonplace for senior citizens looking to preserve their assets to make gifts of the assets to their adult children.  These transfers are typically made to "start the clock" running on the five-year "look back" period applicable to nursing home Medicaid eligibility.  That is, if the parent does not need nursing home care for at least five years after the transfer of assets, all the transferred assets are deemed "exempt" if the parent subsequently applies for nursing home Medicaid coverage.

But as demonstrated by a just-issued United States Bankruptcy Court decision, parents engaging in asset transfers to their adult children have more than just Medicaid risks to consider.  The case, In Re Woodworth (Bankr. E.D. Va., No. 11-11-51-BFK, Feb. 6, 2013), presents a straightforward set of facts.  In 2002, Dorothy Stutesman transferred assets in an investment account valued at $142,742  to her daughter, Holly Woodworth.  Mrs. Stutesman testified before the Bankruptcy Court that she was unsophisticated about finances, and that she transferred the assets to her daughter to both protect the assets from potential "scammers," and to enable her "to be eligible for Medicaid and other public benefits, should there come a time when she needed such benefits."  Mrs. Stutesman testified that at all times she considered the funds to be her own assets and not her daughter's, notwithstanding that they were titled in her daughter's name.  Holly similarly testified that she always considered the assets as her mother's assets.

After experiencing losses in the financial markets, in 2010 -- eight years after the assets were put in Woodworth's name -- Mrs. Stutesman  and her daughter agreed to move the funds to a new financial adviser.  The new advisers convinced the women to put the assets into a trust "designed to reduce creditor risk, eliminate probate and eliminate estate tax." Holly was the creator (grantor) of the trust.

Unfortunately for Mrs. Stutesman and her daughter, Holly owned an investment property that lost value in the real estate crash, and was ultimately worth less than the mortgage balance. In February 2011 Ms. Woodworth filed a Chapter 7 petition for bankruptcy.

During the course of the bankruptcy proceeding, the bankruptcy Trustee correctly identified the  $142,742 of trust assets as a fraudulent transfer under the Federal Bankruptcy Code.  However, Mrs. Stutesman and her daughter argued that the trust assets were never actually Holly's property, but were simply being held in trust for Mrs. Stutesman, and therefore should not have been included as part of the bankruptcy estate. In legal parlance, the women argued that Ms. Stutesman retained "equitable title" rather than "legal title."

The Bankruptcy Court did not buy the women's argument.  The Court stated that after the assets were transferred in 2002 to Ms. Wooworth's personal investment account, she had full control to do with those assets as she wished.  In citing Mrs. Stuteman's own testimony, the Court stated,

Ms. Stutesman can't have it both ways--she can't part with title for purposes of Medicaid eligibility, and at the same time claim that she retained an equitable title to the asset.  To allow this kind of secret reservation of equitable title would be to sanction Medicaid fraud.

As a result of the Court's complete rejection of Mrs. Stuteman's and Ms. Woodworth's arguments, the entire $142,742 in the investment trust was ordered payable to the Bankruptcy Trustee to be distributed to Ms. Woodworth's creditors.

This case highlights one of the dangers of parents making outright transfers of their assets to their children, and why we almost always recommend against that strategy.  However, there is a technique by which Mrs. Stutesman could have appropriately protected her assets from a potential Medicaid spend down without exposing those assets to her daughter's creditors.  Specifically, in 2002 Mrs. Stutesman could have created and funded her approximately $142,000 of assets into an irrevocable income-only trust, with her daughter designated as the Trustee.  Funding that trust in 2002 would have started the five year Medicaid look back period, which would have then run its course by 2007. Mrs. Stutesman could have retained access to the income derived from the trust assets, with the principal remaining protected.  It is noteworthy that there is nothing in the decision indicating that Holly at any time gave any of the gifted assets back to her mother, which implies that Mrs. Stutesman was able to live comfortably on her income; this is typical of the vast majority of our clients seeking to preserve their assets from a Medicaid spend down.

Fast-forward to 2011, when Holly filed bankruptcy.  Had she merely served as Trustee of her mother's trust, rather than as the owner of the gifted assets, the assets in the income only trust would have been completely excluded from Holly's bankruptcy proceeding, and the assets would have been preserved during her mother's lifetime.  Just as powerful, such a trust could have been structured to provide that, upon Mrs. Stutesman's death, the assets could have remained in a trust for Holly's benefit, with those assets to be further protected from Holly's current and future creditors!

Unfortunately, it appears from a reading of the Court's decision that at no time did Mrs. Stutesman or her daughter seek the counsel of an elder law attorney to help them through the complex issues that surrounding estate and asset preservation issues.  Had they done so, the story would almost surely have resulted in a much happier ending for them; instead, the only ones left smiling in this case were the Bankruptcy Trustee -- and Holly's creditors!