Orlando Estate & Elder Law

Asset Protection Trusts Sailing Onshore Again

Michigan recently became the 17th state to allow asset protection trusts. While these trusts are controversial, they are a good option for people who want to shield their assets from creditors.

People have always wanted the ability to protect their money from current or future creditors. It is only natural. Who wants to lose all of their assets? No one.

Short of filing for bankruptcy, which requires that you have no assets, creditor protection has been difficult to achieve. One solution is to create an asset protection trust.

Asset protection trusts are controversial, especially if you are a creditor.

However, Michigan recently became the 17th state to allow them, according to Forbes in "Michigan Debuts The Latest State Asset Protection Trust."

What asset protection trusts do is to allow someone to transfer their assets into a trust that is controlled by an independent trustee. That trustee can then refuse to pay any creditors with trust assets.

To make this a little more fair for “current” creditors, suits against trust assets are allowed within a statute of limitations. These trusts are controversial enough when talking about institutional creditors, but they become even more controversial when they are used to shield assets from family law courts, which some states allow. These trusts allow people to protect assets from a spouse in a divorce.

Most states do have an exception for child support, but not all do.

As asset protection trusts become more popular, more states will probably start to allow them. Michigan is not likely to be the last state to do so.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Forbes (February 10, 2017) "Michigan Debuts The Latest State Asset Protection Trust."

Inheriting an Annuity Can Be Taxing

If you inherit a non-qualified annuity, then before you decide what to do it is important to understand the different options and tax implications.

Annuities have become an extremely popular tool in people's retirement plans. Like any other asset, these contracts can be the subject of an inheritance.

If they are inherited then the beneficiary needs to know what the options are for handling the annuity and what the tax consequences are. First, if a spouse inherits the annuity, then he or she can almost always continue the annuity contract as it is and thus face no immediate tax issues.

As the Motley Fool discussed in an article entitled "Tax Rules for an Inherited Non-Qualified Annuity," non-spouse heirs typically have three options, including:

• Take a Lump Sum – If an heir chooses a one-time payment, then the heir will need to pay income tax on any appreciated amount over the original premium payments the deceased made.
• Arrange for Smaller Payments Over Time – By accepting smaller period payments, the heir can avoid a large one-time income tax payment. However, income tax will still be owed on any appreciation of the annuity.
• Switch to a Different Annuity – The person who purchases an annuity can switch to a different provider without paying income tax. However, it is unclear if someone who inherits the annuity can do the same. In a private letter ruling the IRS allowed one heir to do so, but many annuity providers do not wish to rely on the ruling as it technically only applies to the person who asked for it. Some providers will work with heirs on switching providers though.

If you inherit a non-qualified annuity and have questions about what to do with it,consider setting an appointment with me to talk about these options and which is the best choice for you.

Reference: Motley Fool (Dec. 19, 2015) "Tax Rules for an Inherited Non-Qualified Annuity"

One More Scary Halloween Story!

A Halloween riddle for you: What's scarier than ghosts and goblins to Americans 50 and older? Answer: Their finances.

That's the upshot of the latest Country Financial Security Index, and two other surveys I've seen lately back it up. In fact, there's a strong case to be made that many boomers have grown truly scared of investment risk as a result of what they experienced in the 2008-2009 financial crisis and market crash. The new survey of 1,000 adults from Country — a group of insurance and financial service companies — found that 81% of people 50+ have at least one financial fear. What spooks them most: being able to afford health care expenses and being able to retire comfortably. Women 50 and older were more likely than men to worry about being able to retire comfortably, 34% (men) vs. 39% (women) cited this as a fear.

Forbes recently published an article, "What Spooks Us Most About Money," in which they reported that health care expenses are the biggest fear among Americans 65 and older, according to the survey. Compare that to the top worry of Millennials, which is affording their rent or mortgage.

But here's the scariest part of the survey: about 21% of the 50+ respondents said their financial fears are holding them back from reaching their goals. That's gotta give you some estate planning chills! Many people 50+ are also undoubtedly scared of what will happen to their financial assets after they die and whether their loved ones will receive proper care.

The whole subject of estate planning gives some people the willies. It is scary to think about dying and planning for what may happen after your death. But not thinking about it could wind up haunting your family for years to come.

If you fail to name guardians for your children in your will, the court might name them for you. And if you don't have a written estate plan, your wealth could go to heirs you hardly know or do not want to have an inheritance.

Sit down with a qualified estate planning attorney and have him or her draw up a will or trust, if you haven't done so already. Ask if it would be wise for you to have one or more trusts, which can be extremely helpful if you have children or grandchildren with special needs.

Please call for a consultation and we can deal with those fears one step at a time.

Reference: Forbes (October 30, 2015) "What Spooks Us Most About Money"

What Do The Uber-Wealthy Do with Their Money?

Art makes up 2.5 percent of the biggest estates and just 0.6 percent of those who had between $10 million and $20 million. A Picasso fetched more than $95 million in 2006. The superrich are different from the very, very rich. For one thing, they own more art. Estate tax data recently released by the Internal Revenue Service show what the wealthiest Americans possess when they die—and where the money goes.

In The Wall Street Journal's "When the Superrich Die, Here's What's in Their Wallets," reported that the estate tax returns in the data sample were all filed in 2014, so they came from the estates of people who died in 2013 (the estate tax applied to estates of individuals over $5.25 million and a top rate of 40%). Estates can deduct charitable contributions and bequests to surviving spouses, who then pay when they pass away.

The most important thing to remember about the estate tax is that it really doesn't apply to most folks, just to a few of the very rich. Congress increased the exemption and indexed it to inflation, ensuring that almost all of the 2.6 million people a year who die in the U.S. need not worry about estate tax. That leaves just the very wealthiest in the country.

Fewer than 12,000 estate tax returns were filed in 2014—more than 50% of those didn't yield any tax for the federal government.

The data showed that the uber-wealthy don't provide much information about the ways they shift assets out of their ownership or the planning maneuvers that can decrease the size of estates prior to death. Those who died with more than $50 million (the top tier) were heavily invested in stock and closely held businesses.

Those who were rich enough to file an estate tax return–but not at the very top–relied much more heavily on retirement accounts like 401k's and real estate. The types of assets change as people get wealthier. The merely rich have houses, cash, farms and retirement accounts. The very rich have bonds and real estate. But the very, very rich own art and stocks of businesses which they often want to pass to future generations.

The richest people pass on smaller shares of their estates to their heirs and it's not merely due to the fact that more of their wealth is subject to taxation. They tend to have bigger debts and make bigger charitable contributions. Charities collected $18.4 billion from bequests from the returns filed in 2014, with 58% of that coming from just 1.4% of estate tax returns.

Whether you're "uber-rich" or just getting by, you can truly benefit from a discussion with an qualified estate planning attorney.  Please contact my office to schedule a consultation.

Reference: Wall Street Journal (October 30, 2015) "When the Superrich Die, Here's What's in Their Wallets"

Avoid These Common Estate Planning Mistakes

The most common estate planning mistake may surprise you. "The mistake actually isn't part of the will and trust," said Dan Prebish, head of life services events at Wells Fargo Advisors, based in St. Louis. "It actually has to do with beneficiary designation." Prebish said people sometimes fail to designate who will gain control of various assets upon one's death. "It's not uncommon to find that someone still had their ex-spouse named," as the one to receive control of the asset, he added.

According to thestreet.com's article, "How to Avoid the Most Common Estate Planning Mistake," addressing and fixing one of the most common estate planning mistakes is relatively simple.

When you change the beneficiary on a retirement account, the update can be as easy as filling out a form. But it's the communication with your heirs that's key, especially since estate planning isn't the most enjoyable topic to discuss.

Surprises are what cause hurt feelings and even litigation. As a result, you need to figure out a way to explain the estate planning changes to your children or heirs. The starting point to any successful estate plan is a will, which is a legal document that details which heirs are to receive which assets or properties you own.

Online programs can be helpful, but user error is typically how things go wrong when drafting wills without the help of an attorney.

Another factor is taxes. A person who has a total estate of less than $5.45 million in 2016 won't pay any federal estate tax, but above that, it's a 40% flat rate (the threshold for the federal estate tax was raised a bit for 2016 from $5.43 million in 2015.).

All the same, federal estate taxes generally won't be a concern for most Americans because one would need an estate worth over $5.45 million in order for the federal estate tax to apply.

Each of us has a lifetime exemption up to that threshold. However, you should keep in mind that individual states have different thresholds. For example, some states have thresholds that are only in the six figures, which may affect more people.

Please contact my office to start working on your comprehensive estate plan. Don't be tempted to go to the Internet and try it yourself.

Reference: thestreet.com (October 31, 2015) "How to Avoid the Most Common Estate Planning Mistake"

Motivate Heirs Via Trust

One of the most difficult issues in estate planning is what to do about heirs who may need something like a parent's guiding hand long after they become adults. A child or grandchild may have a mental illness, a problem with substance abuse, or chronic trouble holding a job. Helping such a person by giving them money may in fact be harmful, by enabling bad or self-destructive behavior. One possible solution for such dilemmas is what's known as an incentive trust. This gives the trustee power to enforce provisions that encourage desired behaviors – or penalize the heir for failure to meet a certain standard.

The Greater Wilmington Business Journal article, "Trusts Can Include Incentives For Heirs To Act Responsibly," says that this is different from situations in which a person with a disability, or the beneficiary of a settlement as the result of an accident, is cared for through a trust.

You must use great care when creating an incentive trust.

Attempting to control too many aspects of an heir's life can be counterproductive: it's called trying to "control from the grave," or making an inheritance conditional. Examples of "incentives" include completing a certain degree or entering a certain line of work that may not be in line with an adult's actual talents or aspirations.

Nonetheless, where a clear pattern of negative actions exists, the right incentives can encourage an heir to make better life choices.

It's important to be realistic. The promise of inherited money may not be enough to overcome a pattern of severe substance abuse, so the threat of giving the inheritance to charity if specified incentives aren't met might be needed.

It may be a good idea to attach age restrictions.

If you have a kid who is irresponsible with money, a trust might be structured so that s/he will not have access to the estate's principal until a certain age. Some trusts set up staggered distributions, at specified ages, to keep them from burning through their inheritance right away. Another way to encourage a responsible lifestyle is to distribute trust funds on a matching basis. That might be dollar for dollar, based on what the beneficiary earns on his or her own. This is known as a "work ethic" clause.

Another sort of incentive clause could specify that the trustee wouldn't distribute any money until the heir showed an ability to handle the funds. For someone with an abuse problem, this could be enforced by requiring the beneficiary submit to random drug testing. Failure to comply could result in the assets being distributed to alternate beneficiaries, like charities.

Instead of just disinheriting a child or grandchild, an incentive trust can work as an escape clause. It might just help to get someone who's struggling to turn his or her life around.

I would be happy to help you create the appropriate incentives for your unique circumstances.  Please contact my office for more information or to set an appointment.

Reference: Greater Wilmington Business Journal (November 1, 2015) "Trusts Can Include Incentives For Heirs To Act Responsibly"

Irrevocable Trusts Require Expert Planning

The death of a loved one can create a lot of financial complexity. For families that have set up irrevocable trusts to facilitate the transfer of assets from one generation to another, the tax implications can be even more complicated. However, there are some basic rules that any heir should know if they get an inheritance from an irrevocable trust.

The Motley Fool recently published an article entitled, "Tax Consequences of an Inheritance From an Irrevocable Trust," in which it noted that generally speaking, whether an irrevocable trust will be subject to estate tax at the death of the person who set it up will depend on the trust's terms and how it was created.

Because an irrevocable trust is typically a separate legal entity, it's not part of the estate of the person who created it. Its creation is usually a taxable gift that requires a gift tax return, which can have implications for eventual estate tax liability. Nonetheless, heirs receive the benefit of avoiding estate tax on the trust asset's appreciation in value.

One caveat is life insurance trusts. If the person creating the trust retained incidents of ownership in the policy (retaining power to change beneficiaries, canceling or transferring the policy, putting the policy up as collateral for a loan, or borrowing money against the policy's value), it will be included in the person's estate—regardless of the irrevocable trust's ownership. If this is the case, estate taxes may be due, and your inheritance could decrease.

The impact of income taxes also depends on the terms of the irrevocable trust. If the trust terminates at the person's death and the trust distributes assets to the heirs, your tax basis in those assets will be that of the trust. Make sure you have detailed information from the trustee before making plans to sell those inherited assets.

But if the trust continues beyond the death of the person who created it, then some complex trust tax rules apply. There may be regular distributions that the trust makes to you which will be treated as taxable income. You'll receive a year-end informational return that shows how much income is taxable and if it's ordinary income, capital gains, or other specialized types of income.

Every trust is different, so please get in touch if you have questions about setting one up or inheriting from one.

Reference: The Motley Fool (October 24, 2015) "Tax Consequences of an Inheritance From an Irrevocable Trust"

The High Cost of Dementia Requires a Plan

Three diseases, leading killers of Americans, often involve long periods of decline before death. Two of them — heart disease and cancer — usually require expensive drugs, surgeries and hospitalizations. The third, dementia, has no effective treatments to slow its course. So when a group of researchers asked which of these diseases involved the greatest health care costs in the last five years of life, the answer they found might seem surprising. The most expensive, by far, was dementia. The study looked at patients on Medicare. The average total cost of care for a person with dementia over those five years was $287,038. For a patient who died of heart disease it was $175,136. For a cancer patient it was $173,383. Medicare paid almost the same amount for patients with each of those diseases — close to $100,000 — but dementia patients had many more expenses that were not covered. On average, the out-of-pocket cost for a patient with dementia was $61,522 — more than 80 percent higher than the cost for someone with heart disease or cancer. The reason is that dementia patients need caregivers to watch them, help with basic activities like eating, dressing and bathing, and provide constant supervision to make sure they do not wander off or harm themselves. None of those costs was covered by Medicare.

A recent The New York Times article, "Costs for Dementia Care Far Exceeding Other Diseases, Study Finds," reports that for many families, the cost of caring for a dementia patient will in many cases consume all of their household wealth.

Most families just aren't prepared for the financial burden of dementia. They assume that Medicare covers all of the expenses. Not so. Patients and their families don't realize that isn't the case. Plus, everything gets more complicated when an individual has dementia.

For example, if a dementia patient in a nursing home gets a fever, the staff may say that they aren't equipped to handle it. They call 911. The patient is then admitted to the hospital. This can lead to complications for the patient suffering from dementia. They may get delirious and confused, slip or fall out of bed and sustain injuries, or they choke on their food. This can cause medical costs to sky-rocket.

There are large disparities in out-of-pocket costs for the three diseases. Medicare covers discrete medical services like office visits and acute care, including hospitalization and surgery. These are the types of expenses experienced by cancer patients and heart patients. Those patients usually don't need full-time home or nursing home care until the very end of their life, if at all. As a result, they don't see that continuing cost. On the other hand, dementia patients need constant care for years. In addition, these dementia patients may not be sick enough for a nursing home, but they still will need supervision and care.

When dementia patients are sick enough for a nursing home, the cost is not covered by health insurance. More than half of patients with dementia— with three-quarters of those from racial minorities—spend down, using savings to pay for the nursing home until the money is all gone. After that, Medicaid takes over.

There are steps that can be taken to avoid some of the more dire financial outcomes.  But planning early is critical.  As a board certified specialist in elder law, I deal with caring for the elderly, Medicaid, and dementia all the time.   Please call me and schedule an appointment to go over how to best address your family's situation.

Reference: The New York Times (October 26, 2015) "Costs for Dementia Care Far Exceeding Other Diseases, Study Finds"

Easy to Explain Estate Taxes? ROFL!

Seems like the subject of estate taxes becomes part of every politician's election promises, and today's election environment is no different. Even though we are not really expecting significant changes in that area, estate taxes have changed dramatically, and some folks may still be uncertain about how those changes relate to them. First of all, remember that there are two kinds of estate taxes and each can be significantly different from the other in certain ways. What gets taxed? Essentially everything you own (even the face value of life insurance policies where you are listed as owner). The amount of each person's estate that can be excluded from federal estate taxes stands at a whopping $5 million. That means the federal estate tax of roughly 35% would be exacted on any estate valued over $5 million. Another relatively new provision is that married persons, each of whom has the $5 million exclusion, can pass any unused portion of their $5 million to their spouse. This is called "portability."

The article, "Estate taxes explained," from nj.com explains that state estate taxes are entirely different animal: many are not very easy to understand and state laws can differ drastically from state to state. For example, married persons have the flexibility of knowing that they don't have to pay either federal or state estate taxes in New Jersey when one of them dies. This is called the unlimited marital deduction.

But things can get pretty tricky quickly when you own real estate in a state or states that are not your state of residence. When you die, those other states may seek to tax your estate with their own very different state estate tax. A smart way to avoid this issue is to establish a trust to hold that property. The surest way to avoid estate taxes is to give assets away. However, that's a serious step when you might need those assets to provide for you and your family during your lifetime.

Another way would be to create an irrevocable life insurance trust. In that situation, the trust, and not you, "owns" the life insurance, and if life insurance is purchased directly into the trust, there is no waiting period. But if existing life insurance is transferred into the trust, there's a three-year wait before the life insurance is considered out of your estate.

Another way to remove assets from your estate is to establish a 529 Education Savings account with a named beneficiary. With a 529 plan, even though you're the stated "owner" of the account, it's not considered part of your estate.

Keep in mind there are only a few ways to accomplish this, so please get in touch for a review of your vulnerability to estate taxes from other states.

Reference: nj.com (October 18, 2015) "Estate taxes explained"

Don't Let The Music End For Your Family Farm

In February of 1959, rock and roll musicians Buddy Holly, Ritchie Valens and J.P. "The Big Bopper" Richardson were killed when a plane Holly chartered at the last minute crashed near Clear Lake, Iowa. The event later became known as "the day the music died." Richardson had the flu and talked Waylon Jennings into giving up his seat on the plane. Valens won a coin toss with Tommy Allsup for the last seat. The timing of these two fateful actions altered the course of history for these men and their families. My first memory of playing musical chairs was in kindergarten. Our elementary music teacher taught us not only about music but also unknowingly about competition. When the music stopped, the goal of the game was to be in a position to grab the chair and not be left standing, alone and out of the game. We were taught the "Golden Rule" — to be nice to classmates — but at the same time, the game instilled a conflicting desire to grab that last open chair from a fellow 6-year-old who may not have been quite as quick on the draw. There is a perfect storm brewing in agriculture — specifically regarding transition of assets from one generation to the next. The timing of this perfect storm could be catastrophic for a family farm.

Factors included in this perfect storm include the quantity of farms owned by the older age group, as well as the psychological and emotional issues involved with trying to keep a family institution thriving and in the family. Couple these issues with the amount of capital investment required to continue the farm and the uncertainty of when things will happen, and your farm operation could be in trouble. You need a complete plan, says an article in the Iowa Farmer Today, "Discuss farm estate and succession plans now so no heir is 'left standing.'"

The article advises every farm family to create and review an estate plan and a farm succession plan. These two plans may overlap, but they are two different programs. The estate plan includes documents such as a will or trust, powers of attorney, farm continuation language, executors, trustees, distribution plans, and the age of distribution for minor beneficiaries, as well as contingency plans in the event a beneficiary has predeceased or is disabled at the time of your death. The estate plan includes the coordination of beneficiary designations of retirement plans and life insurance. An important point is to maintain liquidity to pay debts, taxes, or administration costs. This may not be accomplished by simply naming your children as beneficiaries, as many do.

A farm succession plan typically includes the business operating agreements, terms of future purchase, the terms for lease if not purchased, and limitations on ownership. Which of the parts of an estate and farm succession plan will be most important to your family will depend on the timing and what stops the music in the estate.

A key part of any estate plan is identifying ownership and an updated fair market value of the estate assets.

Many folks think that an estate plan just deals with the distribution of assets at death. But an estate plan should identify and discuss strategies for the distribution of any assets that could or should be distributed prior to your death, in addition to those distributed when you pass away.

A good estate plan not only identifies assets but sets out a timeline to distribute those assets with a process that is tax efficient, while keeping in mind the general goals of the estate.

Sharing plans for your estate and business succession is critical for the effective and efficient transfer of the operation. You can avoid some hurt feelings and selfishness down the road if you explain your goals and transparently deal with the heirs whose ideas of distributing your estate may not be the same as yours.

A critical aspect of a succession plan is to identify the method of pricing the assets that adequately represents not only the structure of the business but also the goals of the owner. Another important component of a complete plan is a source of funding when the transition occurs, such as a loan or insurance if the buyout would occur at death. Cash flow is essential for any viable business.

Business succession and estate planning is more of an art than a science. Although there are parts of each plan that are consistent, the real value of an estate and a business succession plan is recognizing the unique issues of each individual situation. There's no "boiler-plate" plan that will work and should be automatically used for every family business. You need to find a way to create plans that fit your distinctive goals.

Sometimes being involved in a farm business without a concrete estate and farm succession plan can be a little bit like playing the game of musical chairs: when the music stops in your estate, don't let your farm heir be the one left standing with uncertainty and confusion—and ultimately find themselves out of the game.

If you have questions about succession planning for any family business, please consider scheduling a meeting to discuss your situation.

Reference: Iowa Farmer Today (October 16, 2015) "Discuss farm estate and succession plans now so no heir is 'left standing'"