The Durable Power of Attorney – Part 1 (May 2012)

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Sanford Okura
on May 3, 2012
in Estate Planning and Powers of Attorney and Health Care Directives
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Every adult should have a Durable Power of Attorney.  A “Power of Attorney” is a legal document in which one person gives another person the power to act for him, including the power to sign papers for him.  The person who is giving the power is called the “principal.”  The person who is getting the power is called the “Attorney-in-Fact” or “agent.”  “Attorney-in-Fact” doesn’t mean the person who is getting the power has to be a lawyer.  Any adult such as your husband, wife, son or daughter, brother or sister, or friend can be your Attorney-in-Fact.  A “General Power of Attorney” gives broad powers to the Attorney-in-Fact, such as the power to buy and sell real estate, open and close bank accounts, sign checks, sign contracts, and in general, do anything the principal can do.  A “Special Power of Attorney” gives the power to do only one or more specific things, such as the power to buy or sell a certain piece of real estate for the principal.

A “Durable” Power of Attorney is one which will continue to work even if the principal becomes disabled or incapacitated (unable to handle his own financial affairs).  To be “durable,” a Power of Attorney must contain these words: “This power of attorney shall not be affected by the disability of the principal.”  A “Springing” Power of Attorney is one which will start to work only when the principal becomes incapacitated.

Most Powers of Attorney which people have are Durable General Powers of Attorney.  That is, they give broad powers to do anything, they can be used while the principal is still healthy, and they can be used even if the principal becomes disabled or incapacitated.  However, you cannot tell by the title.  Some Durable General Powers of Attorney are called “Durable Power of Attorney.”  Others are called “General Power of Attorney.”  Still others are called “Power of Attorney.”  You have to read the actual words of the document to find out whether a Power of Attorney is “general” or “special”, “durable” or not, and “springing” or not.

A Durable Power of Attorney is an important part of every estate plan.  If a person becomes incapacitated, the Attorney-in-Fact can withdraw money from accounts to pay bills for the principal, open and close bank accounts, sell stocks or mutual fund shares, sell or rent out real estate, and do whatever else is necessary to handle the financial affairs of the principal.  If a person has any assets in his or her own name and does not have a Durable Power of Attorney, there will be a problem if that person becomes incapacitated.  The family members will not be able to withdraw money or pay bills for the incapacitated person.  One of the family members will have to hire an attorney, go to court, and ask the court to appoint a “conservator” of the property of the incapacitated person.  (The conservator used to be called a “guardian.”)  After the court officially appoints someone to be the conservator, the appointed conservator will be able to withdraw money, pay bills, and handle other financial matters for the incapacitated person.  However, the court will order the conservator to keep careful records of every penny that comes to the incapacitated person and every penny that is spent for the incapacitated person.  The conservator will have to go back to court every year, or as often as the court orders.  Each time the conservator goes back to court, the conservator will have to provide an accounting of all the money that came in and went out since the last accounting.  There will be more attorneys fees and costs each time the conservator goes back to court.  The conservatorship hassle and expense can easily be avoided by having a good Durable Power of Attorney, which will allow the Attorney-in-Fact to handle finances for the principal without an exact accounting and without court supervision or attorneys fees.



Understanding Revocable Living Trusts (April 2012)

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Sanford Okura
on April 20, 2012
in Estate Planning and Trusts and Wills
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UNDERSTANDING REVOCABLE LIVING TRUSTS

 

Trusts began in England in the Middle Ages. The Statute of Uses is a law enacted in 1536 under King Henry VIII. The Statute of Uses is the basis of trust law in England.  From England, the concept of trusts came to America with the colonists.  Thus, even though most of us have been hearing about trusts for only the last 10 or 20 years, trust law has been established for centuries.

A trust is created by a legal document which is usually called a “trust agreement.”  Many trust agreements are 20 to 40 pages long.  They can be shorter or longer.

There are 3 main roles that people play in a trust.  The person who puts his property into the trust is called the “Settlor,” because he is settling his affairs in regard to that property. In some trust documents, the Settlor is called the “Grantor” or “Trustor.”  The Settlor puts his property into the trust by giving it to a person who is called the “Trustee,” because he is being trusted by the Settlor.  The Trustee holds the legal title to the property and can sell the property, manage it and invest it.  However, the Trustee cannot take the property for himself or use it for himself.  The Trustee has a strict duty to take care of the property and to give it to or use it for a person who is called the “Beneficiary” because he benefits from the trust.

The Settlor and the Trustee both sign the Trust Agreement.  The trust becomes active or “funded” when the Settlor puts property into the name of the Trustee.  The property can be anything of value:  land, house, bank accounts, stocks and bonds, mutual funds, jewelry, etc.

The Trust Agreement usually gives the Trustee broad powers, so that the Trustee can do almost anything with the trust property.  The Trust Agreement also names the Beneficiaries and says how and when the Trustee is to give or “distribute” the property to the Beneficiaries.  Many trusts say that when the Settlor dies, the Trustee will distribute the trust property to the Settlor’s spouse or children.  Some trusts require the Trustee to give to the Beneficiaries whatever amount of money he decides is needed by the beneficiaries for their health, education, maintenance or support.  This kind of trust can be very useful when the beneficiaries are young children or for other reasons are not able to handle their own finances well.

Most of the trusts people have are “self-trusteed revocable living trusts.”  In this kind of trust, the Settlor gives property to himself as Trustee, to hold for the benefit of himself, the Beneficiary.  The same person is in all 3 roles.  As Trustee, he has full control of the trust property and can invest it and manage it himself.  He can also distribute to himself as Beneficiary any amount or all of the trust property at any time.  He has full control of the trust, has full use of the trust property and yet, technically, he doesn’t own the property – the trust does.  Therefore, if he dies, the property does not have to go to court for probate.  The Trust Agreement says who the next Trustee or “Successor Trustee” will be when the Settlor-Trustee-Beneficiary dies, and also says who the next Beneficiaries will be.  When the Settlor dies, the Successor Trustee gives the property to the Beneficiaries, without having to go to court for probate.

This kind of trust is called a Revocable Living Trust.  It is “Revocable” because the Settlor can “revoke” or cancel the trust at any time and take his property back; “Living” because it is created while the Settlor is living, as opposed to a “testamentary trust” which is created by a will when a person dies; “Trust” because the Trustee is being trusted to hold property for the Settlor.  In the future I will explain other kinds of trusts.

© OKURA & ASSOCIATES, 2012



Making It Easier For Your Loved Ones (March 2012)

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Sanford Okura
on March 29, 2012
in Estate Planning
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MAKING IT EASIER FOR YOUR LOVED ONES

From time to time, our law firm has a client who passes away with a situation similar to the following actual experience.  The wife died. She handled all of the family finances.  She was the family record keeper.  When she died, her poor husband was at a loss.  He did not know where all their money was invested.  He became very frustrated.

In many families, either the husband or wife is the financial expert and record keeper.  Often, the other spouse does not like paperwork.  When death strikes, the problem of not knowing the financial situation adds to the stress of losing a husband or wife.  A similar problem arises for the children when the parents pass away.  When a person dies without children, the same problem is faced by the brother, sister, niece or nephew who is chosen to handle the finances.

Here is what you can do to make things easier for your loved ones: make a list of all important financial information.  Write down the following: 1) The account number and financial institution (name, address and phone number) for every investment you have.  (This would include savings accounts, checking accounts, C.D.s, stock brokerage accounts, mutual fund accounts, annuities, IRAs, 401(k)s, 403(b)s, etc.)  2) A description, including tax map key number, of all real estate you own.  3) The kind of insurance, policy number, and insurance company (name, address and phone number) for every insurance policy you own.  Include life insurance, long term care insurance, health insurance, auto insurance, homeowners insurance, etc.  4)   The name and contact information of the company, state of registration, and number of shares you own in any corporation, LLC or partnership that is not traded on any stock exchange.  5) Any other asset you own, such as money owed to you by someone else.  6) The amounts and sources of your income (social security, pension, rental income, etc.).  7)  The account number and financial institution (name, address and phone number) for every mortgage, loan, credit card or other debt you owe.  Include the monthly payment amount and the day of the month on which payment is due.  8 ) The name, company name, address and phone number of your stock broker or financial planner, insurance agent, estate planning attorney, and tax return preparer.  9) The company (name, address, and phone number) from which you bought your funeral plan and burial plot or niche.  10) The financial institution (name, address and phone number) where you have a safe deposit box, and a list of what is in it.  11) The location of the paper work for all of the above, and the location of the safe deposit key.  12) (optional) A list of jewelry and other valuable personal property.

Show the list to the person who will handle your affairs when you are gone (your “personal representative”).  Let him or her read it and ask you any questions.  If you prefer to keep the list confidential until your death, tell your personal representative where the list will be kept.  Ideally, the list should be in your safe deposit box, and your personal representative should have access to it.  Update your list when changes occur.

If you make investments over the internet, make a separate list of your user names and passwords.  This list should be kept in your safe deposit box or by using a “password management tool.”  Your personal representative should know how to access it.

It is also a good idea to keep your important papers in one place.  For example, you could have one drawer in a file cabinet or bureau which contains your checkbook and check registers,  account statements for investments, deeds, insurance policies, stock certificates, incorporation or LLC papers, account statements for mortgages, loans and credit cards; tax returns for past years, funeral plan and burial plot certificates.  Some of these important papers could be kept in the safe deposit box.

If you follow the suggestions above, when you are gone, your loved ones will be very grateful that you were so organized.



Who Inherits When Someone Dies? (February 2012)

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Sanford Okura
on February 22, 2012
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WHO INHERITS WHEN SOMEONE DIES?

When someone dies without a will, we say that the person died “intestate.”  The law of intestacy explains who will inherit the property of a person who dies without a will.  Each state has its own law of intestacy.  I will explain the law in Hawaii.  It is quite complicated.

Neither a will nor the intestacy law affects property that is held jointly or in tenancy by the entirety, that has a beneficiary named, or that is in a trust.  For example, if a savings account or real estate is held by two or more people as joint tenants, and one of them dies, it goes equally to the surviving joint tenants.  If a husband and wife own property as tenants by the entirety and one of them dies, it goes to the survivor.  Life insurance death benefits, IRAs, 401(k)s, 403(b)s, annuities and “pay on death” accounts go to the beneficiary named.  Assets in a trust go to the trust beneficiaries.

Assets which are owned by only one individual without a beneficiary named and assets which are owned by a person as a “tenant in common” go according to the person’s will.  If the person dies without a will, these assets will go according to the law of intestacy.

If the person who died without a will was survived by a spouse, but had no living descendant and no living parent, then everything goes to the surviving spouse.  (A registered “reciprocal beneficiary” or civil union partner has the same rights as a spouse.)  If the person had one or more living descendants, but all descendants are also descendants of the surviving spouse, and if the surviving spouse has no other descendant, then everything goes to the surviving spouse.

If the person was survived by a spouse and one or both parents, but had no living descendant, then the surviving spouse gets $200,000 plus three-fourths of the balance of the estate.  The other one-fourth goes to the surviving parents equally, or to the surviving parent if only one is living.

If the person was survived by a spouse and by one or more living descendants who are also descended from the surviving spouse, but the surviving spouse also has one or more other descendants, then the surviving spouse gets $150,000 plus one-half of the balance of the estate.  The other one-half goes to the person’s descendants, by representation.  “By representation” means to children equally, with the shares of deceased children combined and then divided equally among the children of the deceased children.

If the person was survived by a spouse and by one or more descendants who are not descended from the surviving spouse, then the surviving spouse gets $100,000 plus one-half of the balance of the estate.  The other half goes to the person’s descendants, by representation.

If the person died with no spouse, then everything goes to the person’s descendants, by representation.  If the person had no descendants, then everything goes to the person’s parents equally, or to the surviving parent, if the other has died.  However, if the person who died without a will was a minor, then a parent cannot inherit if the parent deserted the child for at least 90 days.  Also, if the minor child was in the custody of another, a parent cannot inherit if the parent failed, for a period of one year or more, to communicate with the child or to pay court-ordered child support when able to do so.

If the person dies with no spouse, no descendant and no parent, then everything goes to the descendants, by representation, of the parent of the person.  If the person dies with no spouse, no descendant, no parent and no descendant of parents, then one-half goes to the paternal grandparents or to the survivor of them, or if none, to their descendants, by representation, and one-half to the maternal grandparents or to the survivor of them, or if none, to their descendants, by representation.

With a will or trust, you get to choose who inherits from you.

© OKURA & ASSOCIATES, 2012



2012 Estate Planning Update (January 2012)

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Sanford Okura
on January 20, 2012
in Estate Planning, Estate Taxes and Gift Taxes and Medicaid and Nursing Home Costs
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Here is a 2012 update on important numbers used in Estate Planning and Medicaid Planning in Hawaii.

How much money and property can a person have at death without paying estate taxes?

Under a temporary federal law, $5,000,000 is tax free this year. From January 1, 2013, only $1,000,000 will be tax free.  There is a bill in Congress, introduced on November 17, 2011, called the “Sensible Estate Tax Act of 2011,” which proposes to reduce the exemption to $1,000,000 immediately. You can track this bill at http://www.govtrack.us/congress/bill.xpd?bill=h112-3467. There is also a Hawaii Estate Tax.  The State Tax Department is saying that $3,500,000 is tax-free.  The law is ambiguous.  It could be argued that the state exemption is meant to be the same as the federal exemption – $5,000,000.

How much can a person give away without paying a gift tax? You can give $13,000 each year to each person without having to report it to the IRS.  You can give any amount to a husband or wife who is a U.S. citizen without reporting to the IRS.  If you give more than $13,000 to any person in one year, then the amount over $13,000 is a “taxable gift.”  You have to file a gift tax return to report the gift, but for 2012, you can give up to $5,000,000 of taxable gifts in your lifetime without paying a gift tax.  This amount goes down to $1,000,000 in 2013. For the wealthy, now is the time to give.  If you give assets away, there will probably be a Medicaid penalty if you need nursing home care.  Do not give away assets (not even your home) without expert advice about the effect of both gift tax laws and Medicaid laws.

How much in assets can a husband and wife have and still qualify for Medicaid to pay nursing home costs for one of them? A husband and wife together can have $115,640 in assets and still have Medicaid pay for the nursing home costs for one of them. (The amount was $111,560 last year.) This $115,640 is in addition to the following exempt assets, which the government will not count: necessities such as clothing, furniture and appliances; motor vehicles; funeral or burial plans; one burial plot for each family member; one wedding ring and one engagement ring, and up to $786,000 of equity in a home. (The equity limit was $750,000 last year.)

If a person is not married, or if both husband and wife need nursing home help, how much in assets can each have and still qualify for Medicaid for nursing home costs? A single person can have $2,000; a married couple can have $4,000.

If you give away assets to your children, how long do you have to wait before you can qualify for Medicaid for nursing home costs without a penalty? The answer is 5 years.    However, this does not mean that you have to wait 5 years before getting Medicaid help.  There are ways to reduce or eliminate the penalty period.

If a person qualifies for Medicaid for nursing home costs, how much of the family income can the spouse keep? The spouse who is not in the nursing home (“community spouse”) can keep all of his or her own income (social security checks, pension checks, etc.).  If the income of the community spouse is less than $2,841 per month, the community spouse can also be given some of the income of the one in the nursing home to bring the community spouse’s income up to $2,841.  The one who is in the nursing home has to use the rest of his or her income towards nursing home costs, except for $50 a month, which can be kept.

When is a probate necessary? Probate is necessary in Hawaii if a person dies with real estate of any value, or other assets worth over $100,000, which are not in a revocable living trust, not in joint names with right of survivorship, and do not name a beneficiary.

© OKURA & ASSOCIATES, 2012



Reverse Mortgage (December 2011)

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Sanford Okura
on December 19, 2011
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REVERSE MORTGAGE

People often ask me for advice about reverse mortgages.  They hear that with a reverse mortgage the bank pays you instead of your paying the bank, and that sounds good to them.  Here is the advice I give them:  if you want your children or other loved ones to inherit your home, do not get a reverse mortgage.  If you don’t mind having your home go to the bank rather than to your children when you die, then it might be ok to get a reverse mortgage.

The name “reverse mortgage” is not accurate. A more accurate name would be “anaconda mortgage,” because like the anaconda snake, a reverse mortgage will usually swallow up your home, so that it cannot be left to your children as an inheritance.

A reverse mortgage requires that all the owners of the home be at least 62 years old. You can choose to receive a lump sum loan, a loan that comes to you in monthly installments, a line of credit, or a combination of the three.  The bank does not “pay” you. You are borrowing money, the same as with any other mortgage. The difference is that you do not have to make any payments to the bank until you are no longer living in the home. The bank charges large fees when you first get the reverse mortgage, and charges you interest and fees every month. Since you are not making payments, the bank is earning compound interest. The interest and fees you are not paying are added to your loan every month, the interest amount increases every month, and you owe the bank more and more every month.  It is amazing how quickly the balance owing grows to a large amount.

If you die or move out of your home, the entire loan balance must be paid.  If a husband and wife have a reverse mortgage together, when both of them die or move out of the house, the entire balance must be paid. Many times, the loan balance is so large that the children cannot afford to pay it off. The bank then forecloses on the mortgage. Often, the bank ends up owning the home. The bank can then sell the home at a profit, and keep all the profit, in addition to the interest and fees that were charged. The children get nothing.

Also, a reverse mortgage makes it impossible to protect your home from nursing home costs. One of the best ways to protect your home from nursing home costs is to transfer it to an irrevocable trust for your children, and to keep a life estate in the property. A reverse mortgage does not allow you to use this asset protection technique. Also, with a reverse mortgage, if you have to go into a nursing home, the bank will demand that you pay the entire balance of the loan.  Since you will probably not be able to pay off the reverse mortgage, you either have to sell the home, or the bank will foreclose.  When your home is sold, the reverse mortgage could eat up all of the money from the sale.  If it doesn’t, then the bank will take everything that is owed them, and you will end up with some cash.  That cash will disqualify your from Medicaid (unlike a life estate in the home, which would have been an exempt asset).

If you absolutely need more income to survive, before getting a reverse mortgage, see if your children or other loved ones would be willing to buy a remainder interest in your home, with your keeping the right to live in the home. You could charge a low interest rate, much lower than the bank would, and have your children pay a monthly amount, without any down payment. If they could afford to do that, you could have your increased income, and they could end up with the home at a low cost.

 

© OKURA & ASSOCIATES, 2011



Probate & Taxes vs. Nursing Home Costs (November 2011)

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Sanford Okura
on November 18, 2011
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PROBATE & TAXES vs. NURSING HOME COSTS

 

Many senior citizens are worried about probate and death taxes.  For most people, the fear of probate and estate taxes is misplaced.  The greatest threat to our hard earned money is not probate or taxes, but nursing home costs.

This year and next year, a person can die with $5,000,000 of assets without any estate tax.  Under current law, beginning 2013, $1,000,000 will be tax free at death.  Estate taxes will not be a problem for most of us.

Probate (a court proceeding) is required when a person dies with assets in his or her sole name.  Although going through probate is inconvenient, it usually is not very expensive.  If a person dies owning a home and bank accounts, the probate might cost $5,000 to $10,000.

Nursing home costs, on the other hand, run $8,000 to $14,000 a month!  If staying in a nursing home costs $9,000 a month, that totals $108,000 a year.  Three years in a nursing home will cost $324,000.  This could wipe out everything a person has saved over a lifetime.

Medicare, which most of us have after age 65, pays only for a maximum of 100 days of nursing home costs.  Even though the rules say that they can pay for up to 100 days, on the average, Medicare only pays for about 25 days of nursing home costs.  As soon as the patient’s condition stabilizes, Medicare stops paying.  The patient then has to use his or her own money to pay $8,000 to $14,000 a month.  To get Medicaid (which is different from Medicare) to pay for nursing home expenses, the patient’s assets have to be below a certain amount.  If you are married, you and your spouse together can have $111,560 in assets and still qualify for Medicaid.  If you are single, you can have only $2,000 in assets.

Some senior citizens, because they don’t want to lose their assets to nursing home costs, will give their assets away to children.  You need to be careful, because when you give away assets, there will be a penalty period during which Medicaid will not help you.  Many people think the penalty period is 5 years.  The penalty period can be shorter or longer than 5 years.  These rules are complicated, and you should not give away assets without expert advice.

If you do get your assets below $2,000 and qualify for Medicaid, the government will help pay your nursing home expenses.  But watch out, because there is a trap.  Even though the home is an “exempt asset” and is not counted when adding up your assets, if you are single, the government can usually put a lien on your home.  Even if you are married, if you are in a nursing home and your spouse dies first, a lien will go on your home.  A lien is like a mortgage.  It guarantees that the government will someday get back all the money it pays for your nursing home expenses.  Your children are forced to sell the home or mortgage it to pay back the government.

Another trap is having your home in a revocable living trust.  A trust is good for protecting your assets from probate.  However, a revocable living trust cannot protect your assets from nursing home costs.  In fact, since May 10, 2003, you cannot qualify for Medicaid if your home is in a trust, even if you have less than $2,000 in assets.  To qualify for Medicaid, the Medicaid office will force you to take your home out of your revocable living trust.  When you take your home out of your trust, the government will be able to put a Medicaid lien on it!

Estate planning is now a lot trickier than it used to be.  Many senior citizens who have trusts think they are safe.  They actually face the risk of nursing home costs, which for the ordinary person, is a far greater threat than probate or taxes.



New Law: Transfer on Death Deed (October 2011)

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Sanford Okura
on October 31, 2011
in Estate Planning
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NEW LAW:  TRANSFER ON DEATH DEED

Hawaii has a new law which allows real estate to go to a beneficiary when the owner dies, without having to go to court for probate. This new procedure requires a new kind of deed, called a “Transfer on Death Deed.” Governor Abercrombie signed Act 173, which creates this new law, on June 27, 2011. The law became effective on July 1, 2011. The law is called the Uniform Real Property Transfers on Death Act.

Let me explain how the law in Hawaii works for anyone who doesn’t have a Transfer on Death Deed. If a person dies owning any real estate in her name only, when she dies, there would have to be a probate proceeding in court before the persons named in the will could inherit. Probate usually takes about one year.  Sometimes it takes much longer. In the experience of our law firm, the attorney’s fees for handling a typical probate without complications can run between $3,000 and $6,500.  If the person dies with $100,000 or less, then the court can handle the probate as a “small estate” proceeding without an attorney. Still, the court charges 3% of the value of the property as a fee, and adds court costs and newspaper publication fees, and often takes as long as an attorney handling a probate case. Even if a person dies owning a tiny portion of land worth only a few hundred dollars, a probate or small estate proceeding is required before ownership can pass to the heirs.

Because of the time and expense caused by probate, many people use revocable living trusts to avoid probate. Others add a joint owner to the property to allow the joint owner to inherit without probate. Adding a person as a joint owner creates special problems, because then you are actually giving away half of the property at the time the joint owner is added.

Now, with the new Transfer on Death Deed, it is possible to avoid probate without a revocable trust and without adding a joint owner to the property. A Transfer on Death Deed names a beneficiary who will inherit the property upon death of the current owner.  It is similar to a “pay on death” bank account or credit union account, where upon your death, the money goes to the beneficiary you named. With a Transfer on Death Deed, you still own the property, you can still sell it or mortgage it, and you can change your beneficiary at any time. Yet, if you die, the property goes to your beneficiary without having to go to court for probate. To cancel or change a beneficiary, the legal document showing the change must be recorded in the Bureau of Conveyances in Honolulu before you die.

The Transfer on Death Deed could be a good idea for some people.  However, it does have some problems of which you need to be aware.  If you have or need an A-B Trust to protect assets from estate taxes, you should probably have your real estate in your trust. Having real estate go directly to a beneficiary could mess up the way the A-B Trust is supposed to work to protect assets from estate taxes. If you are old enough to start being concerned about nursing home costs, then I would not recommend a Transfer on Death Deed, because that kind of deed will not protect real estate from nursing home costs.  Instead, I would recommend transferring the property to an irrevocable trust, keeping a life estate in the property. Also, if you would like the property to be protected after your death in case your child gets a divorce or has enough assets to be taxed by the estate tax, I would recommend putting your property into a generation skipping trust, for asset protection.

The Transfer on Death Deed might be appropriate for someone with a small estate who is not concerned about nursing home costs.



The Revocable Living Trust Trap (June 2011)

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Sanford Okura
on June 22, 2011
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THE REVOCABLE LIVING TRUST TRAP

Here is a Medicaid rule that often surprises those in nursing homes: if your home property is in a Revocable Living Trust, you cannot qualify for Medicaid for nursing home costs until you take your home out of the trust.  However, if the healthy spouse is living in the home, the Medicaid worker generally ignores the rule, and does not require the home to be taken out of the trust. Then the Revocable Living Trust can become a trap, so that your home could later be lost to nursing home costs.

Let me give you an actual example.  Husband and Wife are elderly.  Wife suffers from dementia, and is not mentally competent.  She is in a nursing home.  Husband is healthy.  Husband and Wife own a home, which is held in their Revocable Living Trusts.  The trusts say that when both Husband and Wife die, the property will go to their children equally.  Medicaid has been paying Wife’s large nursing home expenses for years. 

Wife’s trust says that her half of the trust assets are to be used for her support. Wife is not mentally competent, so she cannot take her half of the property out of the trust.  Husband can take his half of the property out of the trust, but he can only take Wife’s half out of the trust to put it in her name.  If the property is left in both trusts and Wife dies first, the property will all go to husband, and he may be able to give it to his children.  However, the gift will cause a Medicaid penalty period if he needs nursing home help for himself.  If Husband dies first, the property will all go to wife, a Medicaid lien will probably be placed on it, and the entire property could be lost to nursing home costs. 

There is another option.  Husband could give his half of the property to his children now.  However, if Wife outlives Husband and still owns her half of the property at the time she dies, the government will be able to get reimbursed for Medicaid payments out of her half of the property.  This is not a good situation to be in. 

The problem with this trust is that it does not clearly allow Husband or the children to transfer Wife’s property out of the trust to themselves after she is incapacitated.  The trust provides that after she is incapacitated, her trust assets are to be used for her benefit.  If the trust assets can be used only for her benefit, then since Medicaid is paying her nursing home costs, her assets in the trust may have to be used to pay back the government.  A trust like this may be fine for a single person with no children who wants to make sure that no one gets any of her assets unless some assets are left after she dies.  However, if a person has a spouse or children, or would prefer to have a relative or friend, rather than the government, receive her assets, the trust should be worded differently.

Our law office has seen many different trusts written by many different attorneys.  Most trusts have the problem described above.  Most trusts are written so that the assets may become trapped if the person becomes incapacitated and enters a nursing home.  The reason for this is that most trusts were written to avoid probate or estate taxes.  The attorney who prepared the trust was not thinking about protecting assets from nursing home costs. 

The problem can be solved by amending the trust to make it more flexible.  There should be some way of transferring the assets to someone else in case of incapacity.  If you have a trust, it would be a good idea to have it reviewed to make sure it gives you the flexibility you need in case nursing home care becomes necessary.   



Asset Protection For Your Family (May 2011)

Published
by
Sanford Okura
on May 22, 2011
in Estate Planning
. 0 Comments

ASSET PROTECTION FOR YOUR FAMILY

 

Your will or trust probably says that you give your assets to your children when you die.  (Whenever I mention “children,” I also mean nieces and nephews, brothers and sisters, or anyone else who will be inheriting your assets.)  The problem with giving property or money directly to your loved ones is that it can be taken away from them by death, divorce or taxes.

Let me give you an example.  Suppose you and your spouse die, and leave an inheritance to your daughter.  Your daughter is married, and has children.  She dies before her husband.  When she dies, everything she owns, including the property she inherited from you, goes to her husband.  Her husband remarries.  Then he dies.  Everything he owns, including the inheritance you left for your daughter, goes to his new wife.  Your own grandchildren get nothing.  Your son-in-law’s new wife, who is a stranger to you, ends up owning the property you worked hard for all your life, and your own grandchildren get none of it!

Here is another example:  divorce.  Suppose you and your spouse die, and leave your property to your daughter.  She puts her husband’s name on the property with her.  They get a divorce.  In the divorce, her husband takes half of the property you gave to your daughter.  Even if your daughter does not put her husband=s name on the property, in a divorce, he may be able to get half of the growth in value.

Here is another way you can unintentionally hurt your children by giving them an inheritance.  Suppose when you and your spouse die, you leave your son an inheritance worth $400,000.  Your son is a hard worker.  He saves money and invests.  He becomes successful.  The years go by.  Your son dies.  When he dies, his estate has to pay estate taxes before his children can inherit his assets.  He is in a 50% estate tax bracket.  The property you gave your son as an inheritance has grown to $600,000 in value.  Therefore, the inheritance you gave your son increases his estate taxes by $300,000 when he dies.  Your grandchildren get only half of the property you left for your son! The IRS gets the other half.

There is a way to avoid the kinds of problems I describe above.  The answer is a special kind of trust called a “generation skipping trust” or “dynasty trust.”  Here is how it works.  When you and your spouse die, the trust does not give your assets directly to your children.  You may have the trust split into separate trusts so that each of your children gets his or her own trust.  Each son or daughter becomes trustee of his or her own trust.  As trustee, they can control their own inherited assets.  Each son or daughter is also beneficiary of his or her own trust.  Anytime they need money, they can take out of the trust any amount of money they need for their own health, education or support.  To get money out of the trust, all they have to do is write a check from the trust account to themselves.  It is that simple.

As Trustees, your children have control of your assets after you die.  As Beneficiaries, your children can use the assets.  Yet, technically, they do not own the assets; the trust does.  Therefore, when your children die, the inheritance you left them does not go to their spouses; it is guaranteed to go to your own grandchildren.  If there is a divorce, the divorcing spouse cannot take away any of the inheritance you left to your own child.  If your son or daughter dies wealthy, there is no estate tax on the assets in the generation skipping trust, no matter how large it may grow!

If your trust is not a generation skipping trust, this is something worth looking into.

© OKURA & ASSOCIATES, 2011



© Okura & Associates, 2008