Maroney Law Blog

Tuesday, June 28, 2011

Five Reasons to have a Last Will and Testament

In previous blogs, we have discussed a number of aspects of a last Will and Testament.  Below is a quick summary of those discussions and why, if you haven’t established a Last Will and Testament, you should do so without delay: 

  1. Establishes your beneficiaries to inherit your estate after death.
  2. Establishes who will act as the fiduciary to settle your estate after death.
  3. Establishes the guardian for your minor children in the event of an untimely death.
  4. Create Trusts in your Will so as to avoid estate taxes, care for a special needs individual without jeopardizing his or her government benefits, and to avoid a minor from having access to an inheritance at 18 years of age.

And the most important reason:

       5.  Avoid the government making decisions “1 through 4” above for you.


Saturday, May 28, 2011

Debts of the Decedent

Unfortunately, when a family member dies, his or her survivors must not only deal with grief, but often, with debt collectors seeking to collect from the estate of the decedent. This often leads to panic on the part of the surviving family members, especially a spouse, who may be concerned about having enough assets to survive.
In general, family members are not responsible for a decedent's debts, but this does not necessarily stop the collection agencies from trying to collect.
An estate should have a personal representative, known as an executor if there is a will and an administrator if there is no will. One of the main duties of the estate's personal representative is to marshal all of the assets of the estate, and pay any just debts of the decedent. However, if the estate does not have sufficient funds to pay creditors, the debt will go unpaid and without recourse against the survivors.
The exception to this rule relates to debts that were jointly held. For example, if a credit card was shared between the decedent and his or her spouse, or another family member, then even if the estate of the decedent does not have sufficient funds to pay the debt, the surviving spouse or family member who was “on the card” may be personally responsible.
To be clear, we used the example of a credit card, but the rule applies to any just debts that were jointly held between the decedent and the surviving family member; the surviving spouse or family member may be personally responsible for a jointly held debt.
It is critical that the personal representative make sure that just debts are paid, while other interests are protected.   Scammers are out there and will actively seek out surviving relatives of a recently deceased person, and then create debts where there are none, in an effort to get an unjust payment.  The executor/administrator must be sure to not provide personal information to debt collectors unless they are certain that the debt collector is legitimate.
If one of your loved ones has died, Maroney Associates invites you to contact us, so as to answer any and all questions you may have about winding up the estate, and taking care of any just debts owed by the decedent.

Tuesday, May 17, 2011

Duties of a Trustee

We have discussed in prior blogs various types of trusts. We have also discussed the necessity and importance of selecting the right trustee.  The purpose of this blog is to give our readers assistance in making that proper selection by advising them of the duties of a trustee.

For starters, a trust is a legal arrangement where one person, known as creator, grantor, settlor, or trustor, establishes a legal entity known as a trust, and selects a person or entity known as a trustee, who will hold legal title to property for another person, who is called a beneficiary. A trustee, therefore, should be someone in whom the grantor has great confidence, and whose qualities include using good sound judgment.  A trustee’s duties include, but are not limited to the following:
Fiduciary Duty
A trustee has a fiduciary duty to the initial beneficiary who is entitled to the income or principal of the trust, as well as the remainder beneficiaries, which are the people who will receive the trust assets upon the death of the initial beneficiary.  A fiduciary is held to a very high standard with respect to the prudence that he or she must show toward the trust assets.
Comprehensive Duty
A trustee has a duty to truly know and understand the terms of the trust. The terms of the trust are contained in the words that make up the trust, and act as instructions to the trustee with respect to what she/he can do with the asset, its income, and its remainder.  It may sound simple, but if you are a trustee, you must read and fully understand the trust, and/or hire a professional to help you.
Investor Duty
A trustee must be a prudent investor. This means that the trustee cannot be needlessly risky or speculative with respect to the assets for which she or he is responsible as trustee. It is not his or her money to invest but, in fact, is for the beneficiary.  The trustee must be careful to make sure that she or he protects the assets for the current beneficiary as well as the future remainder beneficiaries. Seeking high income may be a natural desire, but the trustee must be careful not to indulge in choices so risky that the assets could be lost.
Distribution Duty
Certain trusts allow the trustee discretion with respect to whether or not she or he should make distributions to the beneficiaries of the trust.   This discretion requires the trustee to evaluate the needs of the beneficiary and future beneficiaries, against the assets of the trust.

This may often require the trustee to tell the beneficiary that she or he cannot have any more money, which moves the trustee's role into the personal realm in addition to the legal.  This can be especially tricky when the beneficiary is a relative.
This duty should be taken very seriously when considering and/or selecting your trustee, as a professional trustee (such as a bank, trust company, attorney, a financial adviser, accountant, etc.), may have an easier time saying no to a loved one.
Monitoring the Trust Duty
The trustee must be organized and have some bookkeeping skills.  She or he need not become an expert in accounting, but must have some understanding of accounting/bookkeeping, so as to track income, distributions, and expenditures.
Certain trusts must file a tax return, and as with the above paragraph, the trustee need not become an accountant or professional tax preparer, but if a tax return is required to be filed, it is the trustee’s duty to insure that it gets done.  This may involve delegating the job to a professional, which is discussed immediately below.
Delegating Duties
The trustee will be responsible for delegating duties that she or he is not equipped to handle.  A good trustee does not have to be an accountant, skilled and able to prepare a tax return, or an attorney able to handle interpretation of the trust.  A good trustee must, however, be skilled at selecting the proper professionals to help him or her complete their role as trustee.
Trustee Fee
Both the creator of the trust and the selected trustee should know that a trustee is entitled to a reasonable fee for his or her services. This may be especially important for family members named as trustees as they often do not wish to accept the fees.  The job of a trustee may require a serious time commitment, so in order to insure the job is done well and without a “grudge,” it may be prudent to establish in writing that you, as the creator, direct the trustee to take his or her reasonable fee.
If a trusted professional such as a bank, trust company, or law firm, etc. is selected as trustee,  they are entitled to and will take a reasonable fee, whether it be an hourly fee, a percentage of the fees under which they are charged to oversee as a trustee, or something else.
Having the appropriate information on the duties of a trustee should help you better understand how to select a trustee and/or how to serve as a trustee.  As always, should you have further questions regarding the selection of Trustees, or any other legal matter, Maroney Associates invites you to call our offices.

Wednesday, April 20, 2011

Guardianship for Your Minor or Special Needs Child: The Human Factors

 In this Blog we will step outside of our legal counsel role and into the human aspects of selecting a Guardian for your minor child and/or special needs child.

It is critical that when you select a Guardian for your child, you have a very honest and open discussion with the person or persons that you are considering. Many people automatically believe that if something happened to them, a certain family member or friend would without hesitation or regret, take on this critical role in the life of their child. The fact is, however, sometimes those family members or friends may actually be reluctant or unable to take on such an important role.
Prior to selecting a Guardian and naming him or her in your legal documents, we suggest that you have an honest and open discussion about the fact that you would like them to accept this role.  Ask them to truthfully consider whether they would be ready, willing, and able to do this.  Also explain to them up front that it is okay to say they cannot, will not, and/or simply do not want to be selected for this awesome responsibility.  They may have great love and affection for you and your child, but simply cannot accept this responsibility, due to circumstances and/or challenges that they are facing in their own lives.
If you have a special needs child, the considerations are expanded exponentially.  In this case, we actually suggest that you prepare a lengthy written document setting forth anything and everything that you do on a daily basis with respect to your special needs child. We further suggest, if possible, you prepare a day in the life video.   You need to also think of everything that impacts your special needs child, such as certain music, books, songs, foods, and special places that benefit your child positively and/or that have a negative impact on your child.  This information will not only help the person whom you are asking to accept the role of Guardian to make the decision but will be critical if in fact something happens to you and your chosen Guardian suddenly finds themselves the full-time caretaker of your special needs child.
Here at Maroney Associates, we do not simply prepare elder, estate and special needs planning documents. We get to know our clients and raise these very critical issues, both legal and human, so as to assist our clients in making the best decisions possible.
Please contact us if you would like to further discuss decisions regarding Guardians for your minor and/or special needs child.

Thursday, April 7, 2011

Special People Have Special Needs

Many of our clients who have children, whether minors or adults, with special needs (mentally retarded, autism, Down’s syndrome, etc.), are specifically concerned about what will happen to the child after they pass away.  Put another way, they are fully engaged in taking care of this special needs person, but must consider what will happen when they are no longer around.

The case of a special needs person requires more than simply naming a guardian for your child.  This is something that will have a major impact on the life of this special needs person who not only needs someone to take care of them but needs someone to take care of any resources that they have in such a way that they do not disqualify the special needs person from government benefits to which they would otherwise be entitled.

For those of our clients who have a loved one with special needs we offer advice, guidance, and preparation of specific documents to address all of these needs.
First, if you have a loved one with special needs who is receiving benefits under a government entitlement programs, it is important to note that these programs are asset based, and can be lost if the special needs person has an amount of money that exceeds the government limit.  Sometimes the government programs limit the resources of the recipient to as low as $2000.  Leaving assets to such a person without consideration of these limitations can cause the special needs person to become disqualified for benefits until they use up all of their newly inherited assets.  Others who do know something about these issues often determine it best to disinherit that loved one or possibly leave his or her share to another loved one who promises to take care of the special needs person.  This is a very dangerous maneuver because the future of the person holding the money is uncertain and if they pass away, the monies will be distributed as part of their own estate.  If they get divorced, the monies could be subject to the taking by the divorcing spouse. Likewise, if they declare bankruptcy or get sued for a personal injury they might have caused someone, the assets of the special needs person may be in jeopardy.
A more dependable solution to these problems is what is known as a Special or Supplemental Needs Trust.  These special trusts allow monies to be held for the benefit of a special needs person in such a way that it will not disqualify that person’s eligibility for government assistance programs.  Of course, the details are critical, but in summary the concept is that the monies held in trust must be used to “supplement” but not replace the government benefits that are being provided to the special needs person.  In essence, the monies can be used for almost anything that would make the special needs person’s
life better, so long as the monies are not used to replace the government benefit that is being provided for that person.  For example, if shelter is provided for the special needs person, the monies cannot be used to buy a house.  However, if transportation is not provided as part of the government program, the monies out of the Special Needs Trust can be used to purchase transportation assistance.
There are several types of Special or Supplemental Needs trusts, and a complete explanation of each might be best covered in future blogs.  However, in summary, the differences are as follows.
A Third Party Supplemental Needs Trust is a trust set up during the lifetime by the grantor or maker of the trust.  The monies are not and never were in the name of the special needs person, but rather are coming from a third person who is funding a trust for the special needs person.  These trusts do not have any “pay back” provisions, meaning that at the end of the special needs person’s life, any money left in the trust can go to beneficiaries designated by the grantor.  There is no pay back to the government for benefits rendered to the special needs person.
Another type of special needs trust is known as the First Party Special Needs Trust.  This is when the special needs person at issue uses his or her own monies to fund the trust.  These funds often come from a law suit for personal injuries that caused the person to have special needs and issues about government benefit programs.  The money from the law suit can be used to fund the First Party Special Needs Trust that will be used in the same way as the above referenced Third Party Trust except there is a “pay back” provision.  At the end of the special needs person’s life, any monies left in the trust must be paid back to the government to the extent that the government provided benefits.  If there is any remainder after the government if paid back, then monies can be distributed to the beneficiaries set forth by the special needs person when he or she established the trust.
Finally, a Testamentary Supplemental Special Needs Trust is a trust that is set up in a person’s last will and testament.  This trust basically allows the person drafting the will to establish that if a certain person is on special needs government assistance at the time of their death, his or her share of the estate will be placed into a Special Needs Trust and used to supplement but not replace the government benefits of that person.
Future blogs will address funding a Special Needs Trust (using specific monies, life insurance policies and even real estate), as well as how to pick a special needs trustee, and the specific tasks that a special needs trustee must be aware of.  Meanwhile, please feel free to contact us for a consultation about this, or any other matter.

Tuesday, March 22, 2011

The Importance of a Living Will

Many of us can recall the heartbreaking story of the young woman in Florida who did not designate her end of life wishes, and a terribly drawn out and expensive battle resulted between her young husband and her parents.  He insisted that she would have wanted life support to be turned off whereas her mother and father insisted that she would not.  The result was seven years of agony for the family from the human standpoint, as well as a financially devastating situation for the surviving spouse.  All of this could have been avoided if the young woman had designated her wishes in a Living Will or Health Care Proxy, which would have given clear direction to the health care providers as to what her wishes were.

While not pleasant to discuss, end of life documents are most critical so as to make our transition from this world as easy as possible for our loved ones.
Many, if not most people, would prefer not to be kept alive on life support in the event an illness or an accident places them into a physical situation where they are in what is know as a brain dead or permanently irreversible vegetative state. When and if most people think of such things, they say that they would never want to be kept alive that way.  However, in the day and age in that we live, health care providers will generally refuse to turn off life support and/or will be obligated to perform heroic measures to keep a person alive no matter what their actual wishes may have been unless so stated in a properly written document. 
Many people are concerned that if they sign a Living Will, they will be left to die if they simply have a heart attack, stroke, or go into a coma while under medical care or in the ER.  That, in fact, is not the case.  The Living Will would apply only if a medical team determines that you have absolutely no brain activity and that in their learned and experienced opinion the situation is permanent and irreversible.  Then and only then, will a properly drafted “Living Will” (sometimes known as a “Do Not Resuscitate Order”) come into play in which case artificial nutrition, artificial hydration, and/or artificial breathing apparatus will be discontinued.  Thereafter, if your body goes into cardiac arrest or any other type of situation where death is imminent, the doctors will not perform CPR, heart massage, or any other heroic life saving measures.
As further protection, we recommend that our clients provide a copy of the Living Will and Health Care Proxy to their primary care physician, for she or he is going to surely be contacted when and if you become ill or in an accident.  The primary care physician can then affirm that the documents exist.
Aside from the human factor, there is another consideration and that is the cost of being kept alive on life support for what could be years, which can leave the family in a financially devastated situation.
Many of our clients, for religious or other reasons, do not wish to have a Living Will.  We do not insist that they have such a document. However, we think it critical to discuss these issues, so that if the client does not wish to be kept alive on life support, his or her wishes are clearly delineated in a legal document such as a Living Will.
End of life decisions will never be easy or comfortable, but the existence of a Living Will can ease the transition for you and your family.  We invite you to contact our office to discuss this, and other important end of life documents.  We can even help with the conversation with your loved ones.

Tuesday, March 8, 2011

Incapacitated Without a Plan; What happens now? (Part II)


In the previous blog, we spoke about the advisability of having a Health Care Proxy and Durable Power of Attorney in place.  Not having these documents in place begs the question, how does anything get done if a person becomes incapacitated?
The answer is a Guardianship Proceeding.  This is when some caring individual, or a health care facility when someone does not have anyone in the world available to them, brings a petition to the court seeking a Guardianship for the incapacitated person.  A Guardianship Proceeding is prolonged and time consuming and therefore very expensive from a legal fee standpoint.  Even when the Guardianship is unopposed, it is nevertheless a major court process which requires significant court intervention, and the fees to go with that intervention.
In a Guardianship Proceeding, the court will generally assign an Attorney for the Incapacitated Person (AIP).  This trained attorney will seek out the incapacitated person to see whether they object to, and/or even understand what is happening to them.  If the person says that they do not want a guardian, or do not want the person petitioning for guardian to be their guardian, the attorney has a duty to stand up and fight for the rights of the alleged incapacitated person.
The court will also assign what is called a Court Evaluator (CE), who will act as the eyes and ears of the court, spending time with the alleged incapacitated person as well as the petitioner for guardianship and any other interested persons.  The Court Evaluator will take a complete picture of the situation and report his or her recommendations back to the court. Neither the attorney for the alleged incapacitated person or the court appointed Court Evaluator is working for free. The court will award them attorney fees and those fees will come out of the alleged incapacitated person’s estate.
If the alleged incapacitated person objects to being appointed a guardian, and/or another loved one steps forward and says that they wish to be the guardian or at least oppose the petitioner being the guardian, the proceeding becomes an even more time consuming and expensive litigation type situation.
From an emotional standpoint, our firm has experienced that often times when someone suffers incapacity it is often at first not a total and complete incapacity.  They are often “in and out of capacity”.  When the alleged incapacitated person is brought to court for a Guardianship Proceeding, it is a very emotionally draining and difficult process if they happen to be with capacity when they are on the witness stand.  In this situation, they become very aware that someone is petitioning to become their guardian because they do not have capacity to manage their own affairs anymore.  This is a very emotionally charged and depressing situation for them because they realize that in essence their liberties are being taken away.
In short, the lesson here is that failing to plan is planning to fail.  To avoid a gut-wrenching, expensive, and time consuming guardianship application, all one needs to do is prepare a Durable Power of Attorney and a Health Care Proxy, and/or a Trust, wherein they appoint a trustee.
If you don’t have these very important estate planning documents, please contact us at Maroney Law.  We can walk you through the process and help you protect your estate and health care choices should you become incapacitated sometime in the future.

Monday, February 21, 2011

Incapacitated Without a Plan


What Happens Now? (Part I)

What happens if you become incapacitated without a proper plan and/or protective documents in place?  Your loved ones will be unable to make decisions, major, minor or critical, relative to your financial and personal health care needs/desires, unless or until a Guardian is appointed.
Doctors and other medical personnel may have listened to and acted upon comments from the spouse of the patient who has for years attended doctor visits, and even spoken for their spouse at those visits, because the more silent spouse could speak up for him or herself if they did not agree with the direction of his or her care.  All of that would stop, however, when and if one of the spouses became incapacitated.  If the incapacitated person is unable to speak for himself or herself, and does not have a Health Care Proxy in place, health care providers are precluded from doing anything except what they think is medically necessary for the ill person.  Even if the ill person would rather not have:
  • Surgery
  • A breathing tube
  • An infusion
  • A transplant
  • A diagnostic procedure;
The doctors will do whatever they think is medically necessary to treat the patient.  If a Health Care Proxy is in place, the well spouse or another trusted individual can step in and advise the medical personnel as to what he or she thinks best for the ill person and, even more importantly, what the ill person wants for himself or herself.
A Living Will is also a critical document for any incapacity plan.  The Living Will is often known as a Do Not Resuscitate (DNR) order.  It is a person’s written and explicit wishes to their health care providers as to whether they do or do not wish to remain on life support if they are in a permanently brain dead or vegetative state.
This document is similar to a Health Care Proxy and, in fact, most Health Care Proxies contain Living Will language as well.  The difference is that the Living Will can only take place if the person is in a permanently brain dead or vegetative state.  The Health Care Proxy, on the other hand, will trigger when the person is incapable of making their own decisions, but may be far from a permanently brain dead or vegetative state.
Likewise, with respect to financial or business matters, incapacity will bring your bank account, personal accounts, business accounts, property and other business transactions to a standstill, unless a Durable Power of Attorney is in place.  Even your spouse cannot act for you relative to business and financial matters, if the asset that is the subject of the intended action is in your own name and not jointly held with your spouse. Without the Durable Power of Attorney, your business and financial matters will be in limbo because no one can act for you.
All of this can be avoided, if while you have the capacity, you prepare a Health Care Proxy and a Durable Power of Attorney. These two forms will allow you, while of sound mind and body, to designate who you would like to be making your decisions for you when and if you become incapacitated.  Likewise, if your estate plan involves a Living Trust, the person you designate as your trustee will be able to immediately step in and take over the management of the assets held in the trust.  However, the Living Trust only applies to the assets held in the trust, so making a Health Care Proxy and Durable Power of Attorney are still very important in any estate plan.
If you don’t have these very important estate planning documents, please contact us at Maroney Associates.  We can walk you through the process and help you protect your estate and health care choices should you become incapacitated sometime in the future.
In our next blog, we will discuss the consequences of not having these documents which is a Guardianship Proceeding.

Saturday, February 5, 2011

Medicaid Then, Now & in the Future

Elder law can be best described as estate planning for the middle class. Rather than planning so as to avoid estate tax implications, those who use an elder law plan generally are those people trying to avoid losing all of their assets to the devastating cost of long term care.
Long term care is unfortunately an event that many of us or our loved ones will ultimately face.  In the NY metropolitan region, a nursing home on average costs $15000-$18,000 per month at current rates.  These rates are only going to go up.
There are 3 ways to pay for long term care: 
  • Private pay
  • Long term care insurance
  • Medicaid
Medicaid is an asset and income based government program.  One must have his or her assets at or below a very low threshold (approximately $13,800) and must have a very low income level in order to qualify for Medicaid.  If the potential beneficiary of Medicaid benefits has a higher income, the excess will go toward the cost of his or her care. 
With respect to qualifying for Medicaid, one must be aware there is a five-year look back or transfer period, wherein the Department of Social Services will search to see whether or not the applicant made any transfers of assets within 5 years of applying for Medicaid.  (There are certain exceptions to the rule including, but not limited to, a transfer to a spouse.)
One common tool that we use is to prepare an irrevocable asset protection or “Medicaid” trust.  Provided assets are transferred into such a trust at least 5 years before the applicant applies for Medicaid, the principal of those assets will be protected for purposes of leaving an inheritance to the beneficiaries or loved ones.  Any income earned from such assets, however, will have to go toward the cost of the applicant’s care.
Medicaid is a constantly changing field and further changes are sure to come, especially since New York has a new governor who has committed to visiting the issue of Medicaid.  For these reasons, we believe it critical that our clients and/or potential clients listen to their trusted advisor relative to how to plan for Medicaid as opposed to listening to the neighbor over the back fence who tells them what they should and should not do, based on the advice of a distant relative, friend, cousin, etc., who had some prior bad experience.  Medicaid planning is fact sensitive to each individual, and is equally fact sensitive to the time frame within which the application is made.  What was then may not be today and will likely not be tomorrow.

Thursday, January 13, 2011

The Federal Estate Tax Yesterday, Today and Tomorrow

The Federal Estate Tax has been the subject of political turmoil for some time.  After much wrangling, the tax has been “re-set,” but again, only in temporary fashion.  This gives the wealthy and their planners some peace of mind for the near future, but leaves uncertainty going forward.  Thus, we believe a brief summary of the recent past, present condition, and future predictions, warrants a blog from us to you.

A short visit to the recent history of the federal estate tax will show how much it has changed in such a short time.

In 2009 the annual exclusion was $3,500,000. The provisions of the tax law called for the federal estate tax exclusion to be repealed, and to that end, in 2010 there was no federal estate tax.

After the mid-term elections of 2010, Congress revived the estate tax, at least temporarily.   For 2011 and 2012, the estate tax exclusion amount and tax rates have been set at a $5 million applicable exclusion, with assets exceeding that amount being subject to a 35% tax.   

We report that this is a “temporary estate tax,” because under current law, the applicable estate tax exclusion will only be in place for 2011 and 2012.  Thereafter, there is a “Sunset Provision,” which means that on December 31, 2012, the estate tax provisions in effect for 2011 and 2012 will expire, and on January 1, 2013, the estate tax exclusion will revert back to a $1 million exclusion with all assets exceeding $1 million being subject to a 55% tax.
Whether this reversion will actually happen is unknown, because the present Congress has stated that it will re-visit what will actually happen to the estate tax in 2013.  We at Maroney Associates believe that one of four things will happen on or before January 1, 2013:
  1. The Sunset Provision will apply and the estate tax will revert to a $1 million exclusion with assets exceeding the excluded amount being taxed at 55%;
  2. The 2011 and 2012 limits will be extended, meaning that the exclusion will remain at $5 million with assets exceeding that amount being subject to a 35% tax;
  3. A political compromise may be had, with the exclusion amount being lowered to approximately $3.5 million but the tax rate being set at approximately 45%; or
  4. There may be a total repeal of the Federal Estate Tax.
Many political pundits predict that if the Republicans maintain the present majority position they took in Congress during the 2010 mid-term elections, and if they also take a majority control over the U.S. Senate and possibly the U.S. Presidency in the 2012 elections, there is a significant likelihood of there being a total repeal of the federal estate tax in 2013.  This means that as of January 1, 2013, there would be no federal estate tax.
For the present time, there is a major tax benefit relative to the use of the unlimited marital deduction.  There is also a benefit for those whose assets exceed $5 million and/or couples whose assets exceed $10 million, to use the marital/credit shelter trust rules.
The federal estate tax exclusion is the amount a person can have in their estate without having the estate owe a federal estate tax.  Critical for any married couple is the knowledge that an unlimited amount of property may be left to a surviving spouse without him or her incurring any federal estate tax.  This is certainly a good financial argument for marriage,  however, without proper planning, the property left in the surviving spouse’s estate will be subject to federal estate and gift taxation upon the surviving spouse’s death.
For example, without proper planning through the use of the marital/credit shelter trust, the surviving spouse who receives an inheritance in an amount in excess of $5 million,  will have lost the opportunity to shield the $5 million from the estate of the deceased spouse and may cause the estate to become taxable upon his or her own death.
With proper planning, namely the use of a credit shelter trust, each spouse can enjoy his or her own $5 million exclusion, thus leaving up to $10 million without paying an estate tax.

Tuesday, January 4, 2011

Protecting Your Estate: Testamentary and Living Trusts

In our last blog, we stated that:
“Through the use of trusts, both living and testamentary, an individual can plan to mitigate their estate tax liability.”
Today’s blog will address the differences between Testamentary and Living Trusts.
Testamentary Trusts
A testamentary trust is a trust that is established in a person’s last will and testament, hence the term “testamentary.”  The trust language is set forth in the last will and testament and the trust is not “funded” until the testator passes away.  At that time if the contingency set forth in the last will and testament, such as the minor child is still a minor at the time the testator passes away, then the trust will be funded accordingly.  Funding a trust means placing the asset, whether it is a hard asset or liquid asset, into the name or term of a trust.
Living Trusts
A living trust is a trust that is set up during a person’s lifetime, hence the term “living.”  Living trusts come in two forms, revocable and irrevocable.  Both forms enjoy the benefit of having the assets held in the trust pass outside of probate.  This is a very useful tool when the beneficiaries of the estate are likely to be in dispute as a trust is more difficult to challenge than a probate of a last will and testament.  Also, the fact that the assets will pass outside of probate is a benefit when some of the assets are located out of state.  For example, a New York resident who owns a condominium in Florida will allow his family a much easier transfer of that condominium if it is owned by a trust instead of by the individual.  If owned by the individual, the family would have to probate in Florida.
The difference between a revocable trust and an irrevocable trust is a matter of control.
  • A revocable trust will allow the person establishing the trust to control the assets until such time as he or she becomes incapacitated or passes away.  While this allows control, it does not protect the asset relative to estate taxes or the devastating cost of long-term care.  That is, if the person controls the asset until he or she takes his or her last breath or needs long-term care, then the asset is not out of his or her name.
  • An irrevocable trust is very useful for protecting assets against estate taxes and/or the cost of long-term care.  However, the challenge to an irrevocable trust, at least for some people, is that the person establishing the trust and funding the trust must give up control of the asset(s) placed in the trust.
There are other rules relative to irrevocable trusts and how they might best benefit the person establishing them.  For example, if the purpose of a trust is to protect an asset or assets from the cost of long-term care, which is also known as an asset protection trust or a Medicaid trust, the asset may not be touched by the person establishing the trust and any income generated by the asset must be paid to the person establishing the trust.
Likewise, another useful tool is an irrevocable life insurance trust, which will allow the beneficiary to avoid not only income tax, but also estate tax.  Certain rules must be followed, however.  For example, the person establishing the trust cannot directly pay the insurance premiums.  Instead she or he should make a donation to the trustee, who will offer that amount of money to the beneficiary of the trust.  The beneficiary will waive their right to the money, at which point, the trustee will pay the life insurance premium.
Which is the better choice?
The question arises as to which is the “better” type of trust.  The answer depends upon the wishes and needs of the person establishing the plan.
  • If estate taxes are not an issue, and the person establishing the trust wishes to retain control over the assets, and does not have an issue relative to the devastating cost of long-term care (likely due to the fact that she or he has a long-term care insurance policy), then a revocable trust will work just fine.
  • On the other hand, if a person has significant wealth such that there will likely be a substantial estate tax impact on death, and/or is unable or unwilling to secure long-term care insurance, then an irrevocable trust would be the way to go.  This would remove the assets from the estate for the purposes of being counted toward long-term care and/or estate taxes.
This explains some of the similarities and differences between testamentary trusts and living trusts, both irrevocable and revocable in nature.
If you have any questions about these types of trusts, or any other matter, please feel free to contact us for a consultation.
Matthew J. Maroney, Esq
Cristina Prieto-Maroney, Esq
Maroney Associates, PLLC
Phone: 631-881-0877
Fax: 631-881-0874

Based in Melville and Garden City, New York, the attorneys at the Law Offices of Maroney Associates, PLLC assist clients throughout Nassau County, Suffolk County, Queens, and the cities of Mineola, Hempstead, New Hyde Park, Franklin Square, Williston Park, Queens Village, Melville, Huntington, Farmingdale, Patchogue and Uniondale, NY.

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| Phone: 866-994-2025
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| Phone: 866-994-2025

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