A New York trial court recently approved a trustee's petition to reform his deceased father's trust in order to protect his disabled sister's Medicaid benefits. In Matter of Newman (2008 NY Slip Op 50127, Jan. 22, 2008).
When he died in 1988, William Newman established a trust in his will for his disabled daughter. The will required the trustee to use the trust income for the daughter's benefit and gave the trustee discretion to spend the trust principal for her support and maintenance. Mr. Newman's daughter lived on her own until 2006, when she moved into an adult care facility and qualified for Medicaid. In order to maintain her eligibility, her brother, the trustee, then petitioned the court to reform the trust to make it a Supplemental Needs Trust. The guardian ad litem opposed the petition, arguing that the trustee, who was also a remainderman, had a conflict of interest.
The court approved the petition, finding that the trust meets all of the statutory conditions for reformation. Specifically, the court determined: 1. that the beneficiary is disabled; 2. that the intent of the donor was to supplement her benefits; 3. that the trust prohibits the trustee from using the assets to jeopardize her benefits; and 4. that the beneficiary cannot compel distributions from the trust. Finally, the court dismissed the guardian ad litem's argument regarding the conflict of interest, calling the analysis "restrictive" and contrary to the intent of the donor.
Friday, April 25, 2008
Friday, April 18, 2008
New guidance on fixing a botched IRA stretch after it's "too late"
To preserve the ability to stretch IRA distributions for a beneficiary, that individual must start taking withdrawals based on his/her life expectancy in the year after death. If those required withdrawals don't start on time, can you still rectify the situation to preserve the tax deferral? A recent private letter ruling procured our by our law firm indicates the answer is "yes."
In the recently released Private Letter Ruling 200811028, an IRA owner died in 2002 and the beneficiary failed to take any distributions from the account until 2005. In 2005, the beneficiary took all of the make-up distributions from the RMDs that were not taken in 2003 and 2004 (in addition to taking the 2005 amount), and paid the 50% excise penalty for the insufficient RMDs for 2003 and 2004, but in return the IRS allowed the beneficiary to subsequently continue RMDs based on the beneficiary's life expectancy, preserving a significant amount of tax deferral for the bulk of the IRA.
Normally, to preserve the ability to stretch over the beneficiary's life expectancy, distributions should have commenced by December 31, 2003, as required by Treas. Reg. 1.401(a)(9)-3, Q&A-3 and IRC Section 401(a)(9)(B)(iii). However, the Service acknowledges that the "default" rule for post-death distributions is to apply the life expectancy rule (as supported in Treas. Reg. 1.401(a)(9)-3, Q&A-4); thus, in essence the Service's view was not that the beneficiary had made an election to take distributions out more rapidly (e.g., under the 5-year rule since the decedent died prior to his/her required beginning date), but simply that the beneficiary had failed to take withdrawals according to the default rule. Thus, the beneficiary could come back into conformance with the life expectancy stretch rules by simply making up the missed RMDs, paying the associated penalty, and then proceeding forward with the stretch from that point on.
Although this PLR is only that - a private letter ruling, and not necessarily binding on the IRS - the logic in the ruling is fairly straightforward, and some IRA experts have suggested for many years that this should be an available (albeit untested) remedy. Whether it is appealing in any particular situation, though, will still depend on the facts and circumstances of the situation. The cost for fixing a botched RMD situation is not cheap - aside from the potential concentrated income (and thus higher marginal tax rates) on several years of RMDs lumped into a single year, the beneficiary must still pay the whopping 50% excise tax on the amounts that were not appropriately withdrawn. If it's only one year's worth of RMDs, and the beneficairy is young and may stretch the IRA for 4-6+ decades, this is probably still a very good deal. On the other hand, if there are more years of failed RMDs and associated penalties, or if there's a high risk the beneficiary will withdraw the funds more rapidly anyway, and/or if the beneficiary is older and doesn't have as long of a life expectancy, this remedy may not be as appealing. And of course, because this is only guidance via a PLR, some beneficiaries may ultimately wish (or find it necessary as a mandate from the IRA custodian) to get their own ruling to secure their particular situation (which has its own associated cost).
Nonetheless, the fact that the strategy has now worked at least once in a direct ruling from the IRS is promising, and provides a better roadmap for how other beneficiaries that have botched IRA RMDs or a failed stretch may be able to remedy their own situation in the future!
In the recently released Private Letter Ruling 200811028, an IRA owner died in 2002 and the beneficiary failed to take any distributions from the account until 2005. In 2005, the beneficiary took all of the make-up distributions from the RMDs that were not taken in 2003 and 2004 (in addition to taking the 2005 amount), and paid the 50% excise penalty for the insufficient RMDs for 2003 and 2004, but in return the IRS allowed the beneficiary to subsequently continue RMDs based on the beneficiary's life expectancy, preserving a significant amount of tax deferral for the bulk of the IRA.
Normally, to preserve the ability to stretch over the beneficiary's life expectancy, distributions should have commenced by December 31, 2003, as required by Treas. Reg. 1.401(a)(9)-3, Q&A-3 and IRC Section 401(a)(9)(B)(iii). However, the Service acknowledges that the "default" rule for post-death distributions is to apply the life expectancy rule (as supported in Treas. Reg. 1.401(a)(9)-3, Q&A-4); thus, in essence the Service's view was not that the beneficiary had made an election to take distributions out more rapidly (e.g., under the 5-year rule since the decedent died prior to his/her required beginning date), but simply that the beneficiary had failed to take withdrawals according to the default rule. Thus, the beneficiary could come back into conformance with the life expectancy stretch rules by simply making up the missed RMDs, paying the associated penalty, and then proceeding forward with the stretch from that point on.
Although this PLR is only that - a private letter ruling, and not necessarily binding on the IRS - the logic in the ruling is fairly straightforward, and some IRA experts have suggested for many years that this should be an available (albeit untested) remedy. Whether it is appealing in any particular situation, though, will still depend on the facts and circumstances of the situation. The cost for fixing a botched RMD situation is not cheap - aside from the potential concentrated income (and thus higher marginal tax rates) on several years of RMDs lumped into a single year, the beneficiary must still pay the whopping 50% excise tax on the amounts that were not appropriately withdrawn. If it's only one year's worth of RMDs, and the beneficairy is young and may stretch the IRA for 4-6+ decades, this is probably still a very good deal. On the other hand, if there are more years of failed RMDs and associated penalties, or if there's a high risk the beneficiary will withdraw the funds more rapidly anyway, and/or if the beneficiary is older and doesn't have as long of a life expectancy, this remedy may not be as appealing. And of course, because this is only guidance via a PLR, some beneficiaries may ultimately wish (or find it necessary as a mandate from the IRA custodian) to get their own ruling to secure their particular situation (which has its own associated cost).
Nonetheless, the fact that the strategy has now worked at least once in a direct ruling from the IRS is promising, and provides a better roadmap for how other beneficiaries that have botched IRA RMDs or a failed stretch may be able to remedy their own situation in the future!
Saturday, April 5, 2008
Living Trusts Are Revocable And Not An Asset Protection Tool
This great post comes from Jennifer N. Sawday of The California Estate Planning Blog.
Her post is titled: Living Trusts Are Revocable And Not An Asset Protection Tool and describes a fundamental (and often misunderstood) aspect of asset protection planning - if you have relatively unfettered access to your money, so do your creditors. It comes up all the time, she writes.
A call comes in from a potential client: “I need to set up a living trust now to protect my assets.”
Generally, if the person (called the settlor) who created the living trust and transfers property to this living trust has retained the right to revoke the living trust then he also retains an interest in the trust assets. There is no protection from outside entities or creditors regarding what has been transferred into the living trust.
In other words, a living trust is known as a revocable trust. As such, living trusts are not considered a vehicle for asset protection. A living trust is used mainly to allow assets to transfer at death without going through probate or to allow a co-trustee or successor trustee manage assets in the event of incapacity of the settlor of the trust.
Her post is titled: Living Trusts Are Revocable And Not An Asset Protection Tool and describes a fundamental (and often misunderstood) aspect of asset protection planning - if you have relatively unfettered access to your money, so do your creditors. It comes up all the time, she writes.
A call comes in from a potential client: “I need to set up a living trust now to protect my assets.”
Generally, if the person (called the settlor) who created the living trust and transfers property to this living trust has retained the right to revoke the living trust then he also retains an interest in the trust assets. There is no protection from outside entities or creditors regarding what has been transferred into the living trust.
In other words, a living trust is known as a revocable trust. As such, living trusts are not considered a vehicle for asset protection. A living trust is used mainly to allow assets to transfer at death without going through probate or to allow a co-trustee or successor trustee manage assets in the event of incapacity of the settlor of the trust.
Saturday, March 15, 2008
Mediating Probate Disputes
A lawyer involved in a probate dispute must be able to advise his or her client both about the client's legal rights and remedies and about the client's options for resolving the dispute. If the lawyer advises the client only about the costs and chances for successfully litigating the dispute, the lawyer will not have served the client well. The lawyer should be able to discuss knowledgeably the alternative forms of dispute resolution available to the client and to advise the client on which approach is most appropriate.
Mediation has played a role in dispute resolution for centuries in legal systems as diverse as those of China and various American Indian groups. In the United States, interest in mediation has grown dramatically since the 1970s. One area of the law in which mediation plays an increasingly important role is family law, where parties routinely use mediation to resolve divorce and custody disputes. Surprisingly, in probate, another area of the law in which family issues predominate, mediation is still in its infancy. Although mediation will not be appropriate for all probate disputes, in many cases mediation may allow parties to reach agreements preferable to the decision a court would reach and may promote healing of strained family relationships. This article examines the potential uses of mediation in probate proceedings.
Nature of Probate Disputes
Disputes arise in probate for a variety of reasons. Conflict may occur over the disposition of a decedent's property because relatives are dissatisfied with the decedent's estate plan. Grief associated with the death of a loved one creates tensions, and lawsuits may follow from misdirected anger over the death. Death may cause dormant family disputes to resurface and a dispute nominally over property may in fact be a dispute over family relationships.
Disputes may arise because family members have different views of a fair distribution of a decedent's property. For example, one of a decedent's children may regard equal distribution among all the children as fair, while another child may believe that he or she should have received more because of care given an older or incapacitated parent. A dispute may arise between children of one marriage and the surviving spouse of a later marriage. The decedent's children may view the decedent's property as theirs, while the surviving spouse may feel a right to a sizable portion of the property. Litigated solutions to these problems ignore the complex emotional issues that may underlie the dispute.
Probate courts are also the forum for conservatorship and guardianship proceedings. Disputes may arise in these proceedings if the proposed protected person contests the guardianship or if family members disagree among themselves over the appropriate approach for their older relative. Disputes may develop between a care facility and family members. These disputes all involve emotional issues.
Finally, disputes may arise between beneficiaries of a trust or estate and a fiduciary. The family may disagree over who should act as fiduciary, or the beneficiaries may be concerned about investment decisions or property management issues under the fiduciary's control. If the fiduciary is also a beneficiary, the other beneficiaries may perceive inequities or conflicts of interest, whether real or imagined.
Benefits of Mediation
Family members involved in a dispute often resolve their differences without seeking assistance outside the family. Even after one party contacts a lawyer, a negotiated settlement may be possible. For some families, however, a more formal dispute resolution process becomes necessary. Some benefits of using mediation instead of litigation to resolve disputes are of particular interest in the probate context.
Confidentiality. Mediation allows parties to a dispute to air their grievances in a private setting. Although the level of confidentiality depends on agreement between the parties and varies depending on state law, the parties may keep much of what they discuss out of the public record. The mediator usually asks the parties to sign an agreement not to disclose information conveyed during the mediation. In addition, state law generally limits the disclosure of information obtained in settlement discussions and extends that protection to mediation. Some states grant additional evidentiary privileges for mediation, but many states also impose a duty to report specified information, such as disclosures of abuse or threats of harm.
If a family involved in a will contest is airing "dirty laundry" or if information about an older person's eccentric behavior is relevant to a guardianship proceeding, the family will benefit from privacy if they mediate the dispute. If the parties agree not to disclose information revealed during the mediation, they might speak more freely and address messy relationship issues in crafting solutions to their dispute. Both sides may be more open, and that willingness to discuss difficult issues may lead to a better understanding between the parties.
Emotional benefits. The emotional benefits of mediation can be significant. Mediation gives parties a chance to be heard. For some family members, being able to air grievances and receiving an apology or explanation for troubling behavior may be more important than receiving a property settlement. In addition, giving parties more control over the outcome may increase psychological well-being.
In a guardianship proceeding, mediation involves the older adult in the process, giving that person a voice and helping him or her listen to the concerns of other family members. Mediation may leave the person less angry and confused than a more formal court proceeding.
Mediation also helps families avoid some of the emotional costs of litigation. Mediation may be less stressful and traumatic than litigation because litigation pits parties against each other and tends to escalate the conflict. Mediation may even have emotional benefits when compared with disputes that remain unresolved. If a family member knows that he or she will not likely prevail in a lawsuit, that person may not pursue a legal remedy. Although no lawsuit ensues, the conflict within the family may persist. Anger and estrangement between family members may continue for years.
Improved ongoing relationships. Mediation can repair, maintain or improve ongoing relationships. Probate disputes involve family members. In most cases, continuing the relationships among the various family members will benefit the family. Because the parties must work together during the mediation to develop a solution to their conflict, they may acquire communication and problem solving skills that will aid them in the future. Mediation is less likely than litigation to drive family members farther apart.
Unique solutions. Mediation allows the parties to forge their own solution to a dispute. There are limited remedies available to a judge to resolve a dispute over property. Mediation allows the parties to take nonlegal as well as legal interests into consideration. Parties may best handle the division of property with sentimental value in this way. For example, if two siblings who are to receive the decedent's tangible personal property work together to divide the property, they will likely achieve a better result for both of them than they would if a court divided the property to reach a financially equal result.
In guardianship proceedings in most states, the court faces an all or nothing choice--the court can either appoint a guardian and deprive the protected person of all rights or decide not to appoint a guardian and leave the person on his or her own. Through mediation, the older person, family members and others can develop less intrusive solutions that will protect the older person while minimizing the loss of rights. The mediated solutions can also take into account the interests of family members who are concerned about the care of the older person.
Cost-effectiveness. Mediation may also be more cost-effective than litigation. Particularly in small estates, litigation costs may be disproportionate to the amount at issue. More parties may be able to protect their interests if a less expensive alternative is available.
Potential Problems with Mediation
Although mediation is appropriate in many situations, some characteristics of probate disputes may make mediation difficult or even inappropriate.
Grief. If the dispute involves a decedent's estate, the family may still be grieving over the death of a loved one. Grief may be a factor in the dispute itself because one family member may blame another for the death. If, for example, parents of a decedent have not accepted the fact that the decedent is homosexual, they may misdirect their grief over the death as anger at the decedent's domestic partner who is the primary beneficiary under the decedent's will. Grief may also affect the parties' ability to mediate. Delay may be necessary to allow the parties to progress through the grieving process.
Power imbalance. Power imbalances are always a concern in mediation, but may be of particular concern in probate disputes. In a guardianship proceeding, if the older person contests the guardianship, mediation will be appropriate only if he or she can participate effectively. An advocate can assist the older person, not by taking the older person's place but by facilitating the older person's expression of his or her concerns. If the older person cannot participate, even with assistance, mediation is inappropriate.
Power imbalances may also exist in disputes between family members over a guardianship for a relative or in disputes over property. An older surviving spouse may be intimidated by younger family members, or preexisting power imbalances between siblings may adversely affect the mediation. If minors are involved, it may be necessary to arrange for one or more advocates to represent their interests. A skilled mediator should be aware of potential power imbalances and manage them during the mediation so that all parties are protected. In some situations, however, the power imbalance may be too great for mediation to be appropriate.
Long-term dispute. Although triggered by a family death, some probate disputes may grow out of a longstanding family feud. If parties have become entrenched in their positions after years of animosity, mediation may not be appropriate.
Need for a precedent. In some situations, litigation may be appropriate to create a precedent for use in subsequent cases. This situation is less likely to occur in the probate context than in other areas of the law, such as racial discrimination cases. If, however, the situation is one for which establishing a precedent is important, that will be a factor in weighing the merits of litigation versus mediation.
Guidelines for Using Mediation
In considering mediation to resolve probate disputes, a lawyer should evaluate a number of factors. The presence of some factors makes mediation more appropriate, while other factors may mean that the lawyer should recommend against the use of mediation. Each case is unique, and a lawyer should evaluate each case individually. The guidelines that follow may help to determine whether a lawyer should recommend mediation.
Ongoing relationship. If the parties would benefit from an ongoing relationship--the case with most family relationships--mediation may help. Further, if the parties express concern about maintaining an ongoing relationship, they are likely to work together constructively in mediation. Parties may be more concerned with rebuilding or preserving a family relationship among siblings than one between a stepparent and stepchildren. Even in the latter situation, though, a family relationship may be important, if only out of respect for the decedent.
Willing parties. Mediation works best if all parties want to participate. If the parties come to mediation willingly, they are more likely to work together to resolve their dispute. Mandatory mediation has been criticized and is inappropriate in probate. If the parties have entrenched positions due to a longstanding dispute or moral or religious beliefs, then a negotiated or litigated resolution of their dispute will be more appropriate than mediation.
Competent parties. All parties must be able to participate effectively. The mediator may need to make accommodations for older persons who may have restricted mobility, may have difficulty hearing or may be confused by new settings. Arranging the mediation to take personal concerns into consideration and allowing an advocate to participate when necessary may make mediation possible. If any party is mentally incapacitated, so overcome by grief that he or she cannot function or physically unable to attend the mediation, the lawyer should not recommend mediation.
Nonlegal issues. If a dispute involves nonlegal issues, mediation may benefit the parties. Mediation permits parties to create their own solution to the dispute and allows them to address both nonlegal and legal issues in reaching that solution. Mediation also allows parties to express their personal concerns, anger or grief. Being heard by other family members may be part of what some disputants want or need.
Confidentiality. If parties want confidentiality because of the sensitive nature of the dispute, mediation will provide greater privacy than litigation. In family disputes, minimizing the public record may benefit the parties. If one of the disputants is a public figure, this factor may be of particular importance. If the dispute involves relationships outside of society's accepted norms, the privacy associated with mediation may also be desirable.
Minimal power imbalances. A lawyer recommending mediation should consider whether power imbalances might adversely affect the mediation. Although a skilled mediator can manage some power imbalances, and although power imbalances can affect litigation as well as mediation, effective participation remains an important factor. An older person with weakened physical or mental abilities may not be able to participate adequately. If there is a history of dominance in the family, between either generations, spouses or siblings, the power imbalances may be too great to overcome. If there is an indication of physical or mental abuse, mediation will be inappropriate. In addition, if an entity such as a hospital or nursing home is on one side of the dispute and an older person or the person's family is on the other side, the individual or family may feel intimidated by the institution. Mediation may not adequately protect the rights of someone who feels overwhelmed by the other party.
Example
A probate dispute has legal issues that a court can resolve. A litigated outcome will likely mean that one party "wins" and the other party "loses," based on legal rules. A dispute, however, may also involve a number of emotional issues. For example, parties may disagree on what would be a "fair" distribution of the decedent's estate. The court can determine whether the will was valid but will not be able to address the underlying family issues. In contrast, parties who mediate their dispute may construct a solution that allows both sides to win.
To demonstrate a situation for which mediation would be appropriate, consider a family consisting of a mother, a father and their two adult daughters, Alice and Barbara. After the father died, the mother moved in with Alice and lived with her for eight years until the mother died. In the last two years before her death, the mother was bedridden, and Alice cared for her at home. Barbara lived in another state. She called frequently but was unable to visit much or to help with the care of her mother. On the mother's death, the mother's will left her entire estate to Alice. A prior will that the mother executed before the father's death gave the estate to the father, or if he predeceased the mother, divided the estate equally between the two daughters.
Alice thinks that the result under the will is fair because she cared for her mother for many years. Alice thinks that Barbara does not need the money and that Barbara does not deserve a share of the estate. Barbara is hurt by her mother's will. She thinks that if her mother loved the daughters equally, she would have divided the estate equally. She thinks Alice convinced her mother to leave the estate to Alice.
Barbara talks to a lawyer about what she can do. The lawyer first considers the legal issues around whether the will disinheriting Barbara is valid. The lawyer looks for evidence of undue influence and lack of mental capacity. Several facts raise suspicions about the will and about whether Alice unduly influenced her mother to execute a new will. The mother was in declining health, she lived with Alice, and Alice had both the motive and opportunity to influence her mother. Other factors, such as when the mother executed the will, whether the mother was under medication and whether witnesses can speak about the mother's mental capacity, could be important. After gathering this information, the lawyer might be able to put together a case of undue influence by Alice and lack of the mother's testamentary capacity. The facts, however, may be difficult to establish. Alice may have neighbors who can testify that the mother told them repeatedly that she was thankful for Alice's care and that she would reward Alice in her will. The will does not give property outside the family and could be viewed as rewarding Alice. The evidence will likely go both ways, and it will be difficult to predict the outcome in court.
If Alice and Barbara litigate the case, one of them will win and the other will lose. In addition, they will lose their relationship with each other, at a time when they have lost their mother and would otherwise benefit from family connections. They will also face legal bills and the emotional strains of litigation.
After reviewing the facts, weighing the legal arguments and considering the potential benefits of mediation for these particular parties--repairing the sibling relationship and addressing the emotional issues involved in this dispute--Barbara's lawyer might suggest mediation. Even if Alice thinks that she would win in a lawsuit, she may be willing to mediate to avoid the litigation and because she cannot be sure of the outcome in court. Barbara may be willing to mediate for the same reasons.
Assuming Alice and Barbara agree to mediate, they will meet with the mediator, either with or without their lawyers present. If the lawyers are not present at the mediation, the parties most likely will agree to have their lawyers review any agreement that they reach before they sign it. The mediation process may benefit the sisters in a number of ways. During the mediation each sister will have a chance to tell her story and will listen to her sibling's story. Barbara may be able to understand the sacrifices that Alice has made and the toll that the years of caring for their mother took. Alice may be able to understand Barbara's hurt feelings and her distress over feeling that their mother did not love her. Alice may even be able to soothe those hurt feelings by telling Barbara that their mother did love both daughters but changed her will in gratitude for the care Alice provided and not because she loved Barbara less. The daughters may be able to reach an agreement on dividing the property, for example, by agreeing that Barbara will take some sentimental items or a small share of the estate. In addition to whatever Alice and Barbara agree to do with the property in the estate, they will have opened channels of communication and may be able to build a better sibling relationship. The result may well be a "win" for both of them.
Although this example provides a best case scenario for mediation, the example is not unrealistic. Many probate conflicts could benefit from mediation rather than litigation.
Conclusion
Mediation will not be desirable in every case, but the personal and family aspects of probate make this area of the law particularly appropriate for mediation. Lawyers practicing in this area should familiarize themselves with the benefits of mediation and be able to recommend it to their clients when appropriate.
By Susan N. Gary
Copr. (C) 2005 West, a Thomson business. No claim to orig. U.S. govt. works. This article is reprinted with permission from West, a primary sponsor of the General Practice, Solo and Small Firm Section
Mediation has played a role in dispute resolution for centuries in legal systems as diverse as those of China and various American Indian groups. In the United States, interest in mediation has grown dramatically since the 1970s. One area of the law in which mediation plays an increasingly important role is family law, where parties routinely use mediation to resolve divorce and custody disputes. Surprisingly, in probate, another area of the law in which family issues predominate, mediation is still in its infancy. Although mediation will not be appropriate for all probate disputes, in many cases mediation may allow parties to reach agreements preferable to the decision a court would reach and may promote healing of strained family relationships. This article examines the potential uses of mediation in probate proceedings.
Nature of Probate Disputes
Disputes arise in probate for a variety of reasons. Conflict may occur over the disposition of a decedent's property because relatives are dissatisfied with the decedent's estate plan. Grief associated with the death of a loved one creates tensions, and lawsuits may follow from misdirected anger over the death. Death may cause dormant family disputes to resurface and a dispute nominally over property may in fact be a dispute over family relationships.
Disputes may arise because family members have different views of a fair distribution of a decedent's property. For example, one of a decedent's children may regard equal distribution among all the children as fair, while another child may believe that he or she should have received more because of care given an older or incapacitated parent. A dispute may arise between children of one marriage and the surviving spouse of a later marriage. The decedent's children may view the decedent's property as theirs, while the surviving spouse may feel a right to a sizable portion of the property. Litigated solutions to these problems ignore the complex emotional issues that may underlie the dispute.
Probate courts are also the forum for conservatorship and guardianship proceedings. Disputes may arise in these proceedings if the proposed protected person contests the guardianship or if family members disagree among themselves over the appropriate approach for their older relative. Disputes may develop between a care facility and family members. These disputes all involve emotional issues.
Finally, disputes may arise between beneficiaries of a trust or estate and a fiduciary. The family may disagree over who should act as fiduciary, or the beneficiaries may be concerned about investment decisions or property management issues under the fiduciary's control. If the fiduciary is also a beneficiary, the other beneficiaries may perceive inequities or conflicts of interest, whether real or imagined.
Benefits of Mediation
Family members involved in a dispute often resolve their differences without seeking assistance outside the family. Even after one party contacts a lawyer, a negotiated settlement may be possible. For some families, however, a more formal dispute resolution process becomes necessary. Some benefits of using mediation instead of litigation to resolve disputes are of particular interest in the probate context.
Confidentiality. Mediation allows parties to a dispute to air their grievances in a private setting. Although the level of confidentiality depends on agreement between the parties and varies depending on state law, the parties may keep much of what they discuss out of the public record. The mediator usually asks the parties to sign an agreement not to disclose information conveyed during the mediation. In addition, state law generally limits the disclosure of information obtained in settlement discussions and extends that protection to mediation. Some states grant additional evidentiary privileges for mediation, but many states also impose a duty to report specified information, such as disclosures of abuse or threats of harm.
If a family involved in a will contest is airing "dirty laundry" or if information about an older person's eccentric behavior is relevant to a guardianship proceeding, the family will benefit from privacy if they mediate the dispute. If the parties agree not to disclose information revealed during the mediation, they might speak more freely and address messy relationship issues in crafting solutions to their dispute. Both sides may be more open, and that willingness to discuss difficult issues may lead to a better understanding between the parties.
Emotional benefits. The emotional benefits of mediation can be significant. Mediation gives parties a chance to be heard. For some family members, being able to air grievances and receiving an apology or explanation for troubling behavior may be more important than receiving a property settlement. In addition, giving parties more control over the outcome may increase psychological well-being.
In a guardianship proceeding, mediation involves the older adult in the process, giving that person a voice and helping him or her listen to the concerns of other family members. Mediation may leave the person less angry and confused than a more formal court proceeding.
Mediation also helps families avoid some of the emotional costs of litigation. Mediation may be less stressful and traumatic than litigation because litigation pits parties against each other and tends to escalate the conflict. Mediation may even have emotional benefits when compared with disputes that remain unresolved. If a family member knows that he or she will not likely prevail in a lawsuit, that person may not pursue a legal remedy. Although no lawsuit ensues, the conflict within the family may persist. Anger and estrangement between family members may continue for years.
Improved ongoing relationships. Mediation can repair, maintain or improve ongoing relationships. Probate disputes involve family members. In most cases, continuing the relationships among the various family members will benefit the family. Because the parties must work together during the mediation to develop a solution to their conflict, they may acquire communication and problem solving skills that will aid them in the future. Mediation is less likely than litigation to drive family members farther apart.
Unique solutions. Mediation allows the parties to forge their own solution to a dispute. There are limited remedies available to a judge to resolve a dispute over property. Mediation allows the parties to take nonlegal as well as legal interests into consideration. Parties may best handle the division of property with sentimental value in this way. For example, if two siblings who are to receive the decedent's tangible personal property work together to divide the property, they will likely achieve a better result for both of them than they would if a court divided the property to reach a financially equal result.
In guardianship proceedings in most states, the court faces an all or nothing choice--the court can either appoint a guardian and deprive the protected person of all rights or decide not to appoint a guardian and leave the person on his or her own. Through mediation, the older person, family members and others can develop less intrusive solutions that will protect the older person while minimizing the loss of rights. The mediated solutions can also take into account the interests of family members who are concerned about the care of the older person.
Cost-effectiveness. Mediation may also be more cost-effective than litigation. Particularly in small estates, litigation costs may be disproportionate to the amount at issue. More parties may be able to protect their interests if a less expensive alternative is available.
Potential Problems with Mediation
Although mediation is appropriate in many situations, some characteristics of probate disputes may make mediation difficult or even inappropriate.
Grief. If the dispute involves a decedent's estate, the family may still be grieving over the death of a loved one. Grief may be a factor in the dispute itself because one family member may blame another for the death. If, for example, parents of a decedent have not accepted the fact that the decedent is homosexual, they may misdirect their grief over the death as anger at the decedent's domestic partner who is the primary beneficiary under the decedent's will. Grief may also affect the parties' ability to mediate. Delay may be necessary to allow the parties to progress through the grieving process.
Power imbalance. Power imbalances are always a concern in mediation, but may be of particular concern in probate disputes. In a guardianship proceeding, if the older person contests the guardianship, mediation will be appropriate only if he or she can participate effectively. An advocate can assist the older person, not by taking the older person's place but by facilitating the older person's expression of his or her concerns. If the older person cannot participate, even with assistance, mediation is inappropriate.
Power imbalances may also exist in disputes between family members over a guardianship for a relative or in disputes over property. An older surviving spouse may be intimidated by younger family members, or preexisting power imbalances between siblings may adversely affect the mediation. If minors are involved, it may be necessary to arrange for one or more advocates to represent their interests. A skilled mediator should be aware of potential power imbalances and manage them during the mediation so that all parties are protected. In some situations, however, the power imbalance may be too great for mediation to be appropriate.
Long-term dispute. Although triggered by a family death, some probate disputes may grow out of a longstanding family feud. If parties have become entrenched in their positions after years of animosity, mediation may not be appropriate.
Need for a precedent. In some situations, litigation may be appropriate to create a precedent for use in subsequent cases. This situation is less likely to occur in the probate context than in other areas of the law, such as racial discrimination cases. If, however, the situation is one for which establishing a precedent is important, that will be a factor in weighing the merits of litigation versus mediation.
Guidelines for Using Mediation
In considering mediation to resolve probate disputes, a lawyer should evaluate a number of factors. The presence of some factors makes mediation more appropriate, while other factors may mean that the lawyer should recommend against the use of mediation. Each case is unique, and a lawyer should evaluate each case individually. The guidelines that follow may help to determine whether a lawyer should recommend mediation.
Ongoing relationship. If the parties would benefit from an ongoing relationship--the case with most family relationships--mediation may help. Further, if the parties express concern about maintaining an ongoing relationship, they are likely to work together constructively in mediation. Parties may be more concerned with rebuilding or preserving a family relationship among siblings than one between a stepparent and stepchildren. Even in the latter situation, though, a family relationship may be important, if only out of respect for the decedent.
Willing parties. Mediation works best if all parties want to participate. If the parties come to mediation willingly, they are more likely to work together to resolve their dispute. Mandatory mediation has been criticized and is inappropriate in probate. If the parties have entrenched positions due to a longstanding dispute or moral or religious beliefs, then a negotiated or litigated resolution of their dispute will be more appropriate than mediation.
Competent parties. All parties must be able to participate effectively. The mediator may need to make accommodations for older persons who may have restricted mobility, may have difficulty hearing or may be confused by new settings. Arranging the mediation to take personal concerns into consideration and allowing an advocate to participate when necessary may make mediation possible. If any party is mentally incapacitated, so overcome by grief that he or she cannot function or physically unable to attend the mediation, the lawyer should not recommend mediation.
Nonlegal issues. If a dispute involves nonlegal issues, mediation may benefit the parties. Mediation permits parties to create their own solution to the dispute and allows them to address both nonlegal and legal issues in reaching that solution. Mediation also allows parties to express their personal concerns, anger or grief. Being heard by other family members may be part of what some disputants want or need.
Confidentiality. If parties want confidentiality because of the sensitive nature of the dispute, mediation will provide greater privacy than litigation. In family disputes, minimizing the public record may benefit the parties. If one of the disputants is a public figure, this factor may be of particular importance. If the dispute involves relationships outside of society's accepted norms, the privacy associated with mediation may also be desirable.
Minimal power imbalances. A lawyer recommending mediation should consider whether power imbalances might adversely affect the mediation. Although a skilled mediator can manage some power imbalances, and although power imbalances can affect litigation as well as mediation, effective participation remains an important factor. An older person with weakened physical or mental abilities may not be able to participate adequately. If there is a history of dominance in the family, between either generations, spouses or siblings, the power imbalances may be too great to overcome. If there is an indication of physical or mental abuse, mediation will be inappropriate. In addition, if an entity such as a hospital or nursing home is on one side of the dispute and an older person or the person's family is on the other side, the individual or family may feel intimidated by the institution. Mediation may not adequately protect the rights of someone who feels overwhelmed by the other party.
Example
A probate dispute has legal issues that a court can resolve. A litigated outcome will likely mean that one party "wins" and the other party "loses," based on legal rules. A dispute, however, may also involve a number of emotional issues. For example, parties may disagree on what would be a "fair" distribution of the decedent's estate. The court can determine whether the will was valid but will not be able to address the underlying family issues. In contrast, parties who mediate their dispute may construct a solution that allows both sides to win.
To demonstrate a situation for which mediation would be appropriate, consider a family consisting of a mother, a father and their two adult daughters, Alice and Barbara. After the father died, the mother moved in with Alice and lived with her for eight years until the mother died. In the last two years before her death, the mother was bedridden, and Alice cared for her at home. Barbara lived in another state. She called frequently but was unable to visit much or to help with the care of her mother. On the mother's death, the mother's will left her entire estate to Alice. A prior will that the mother executed before the father's death gave the estate to the father, or if he predeceased the mother, divided the estate equally between the two daughters.
Alice thinks that the result under the will is fair because she cared for her mother for many years. Alice thinks that Barbara does not need the money and that Barbara does not deserve a share of the estate. Barbara is hurt by her mother's will. She thinks that if her mother loved the daughters equally, she would have divided the estate equally. She thinks Alice convinced her mother to leave the estate to Alice.
Barbara talks to a lawyer about what she can do. The lawyer first considers the legal issues around whether the will disinheriting Barbara is valid. The lawyer looks for evidence of undue influence and lack of mental capacity. Several facts raise suspicions about the will and about whether Alice unduly influenced her mother to execute a new will. The mother was in declining health, she lived with Alice, and Alice had both the motive and opportunity to influence her mother. Other factors, such as when the mother executed the will, whether the mother was under medication and whether witnesses can speak about the mother's mental capacity, could be important. After gathering this information, the lawyer might be able to put together a case of undue influence by Alice and lack of the mother's testamentary capacity. The facts, however, may be difficult to establish. Alice may have neighbors who can testify that the mother told them repeatedly that she was thankful for Alice's care and that she would reward Alice in her will. The will does not give property outside the family and could be viewed as rewarding Alice. The evidence will likely go both ways, and it will be difficult to predict the outcome in court.
If Alice and Barbara litigate the case, one of them will win and the other will lose. In addition, they will lose their relationship with each other, at a time when they have lost their mother and would otherwise benefit from family connections. They will also face legal bills and the emotional strains of litigation.
After reviewing the facts, weighing the legal arguments and considering the potential benefits of mediation for these particular parties--repairing the sibling relationship and addressing the emotional issues involved in this dispute--Barbara's lawyer might suggest mediation. Even if Alice thinks that she would win in a lawsuit, she may be willing to mediate to avoid the litigation and because she cannot be sure of the outcome in court. Barbara may be willing to mediate for the same reasons.
Assuming Alice and Barbara agree to mediate, they will meet with the mediator, either with or without their lawyers present. If the lawyers are not present at the mediation, the parties most likely will agree to have their lawyers review any agreement that they reach before they sign it. The mediation process may benefit the sisters in a number of ways. During the mediation each sister will have a chance to tell her story and will listen to her sibling's story. Barbara may be able to understand the sacrifices that Alice has made and the toll that the years of caring for their mother took. Alice may be able to understand Barbara's hurt feelings and her distress over feeling that their mother did not love her. Alice may even be able to soothe those hurt feelings by telling Barbara that their mother did love both daughters but changed her will in gratitude for the care Alice provided and not because she loved Barbara less. The daughters may be able to reach an agreement on dividing the property, for example, by agreeing that Barbara will take some sentimental items or a small share of the estate. In addition to whatever Alice and Barbara agree to do with the property in the estate, they will have opened channels of communication and may be able to build a better sibling relationship. The result may well be a "win" for both of them.
Although this example provides a best case scenario for mediation, the example is not unrealistic. Many probate conflicts could benefit from mediation rather than litigation.
Conclusion
Mediation will not be desirable in every case, but the personal and family aspects of probate make this area of the law particularly appropriate for mediation. Lawyers practicing in this area should familiarize themselves with the benefits of mediation and be able to recommend it to their clients when appropriate.
By Susan N. Gary
Copr. (C) 2005 West, a Thomson business. No claim to orig. U.S. govt. works. This article is reprinted with permission from West, a primary sponsor of the General Practice, Solo and Small Firm Section
Monday, February 25, 2008
Introduction to Special Needs Estate Planning
Special Needs Estate Planning focuses on the need to provide for the special needs of our loved ones with disabilities when we are no longer there to organize and advocate on their behalf. It is essential that we start planning now for the coordination of the legal, financial, and care components that will provide for the maintenance of the quality of life and dignity of the beneficiary of the plan.
Its all about maximizing opportunities and minimizing risks.
The four strategic steps are:
PLANNING - DRAFTING - FUNDING - ADMINISTRATION
Planning - It is important to carefully consider all the factors that impact the individual situation. It is critical to take the time to design a complete plan that takes into account the beneficiary's unique circumstances, and that fully explores all the options available to address his/her special needs. This advance planning could include a professional financial assessment, a public benefits profile, a distribution plan, and the exploring of housing options.
Planning the future of a child or adult with a disability is an enormous challenge. It requires specialized planning and where possible it is wise to incorporate the help of professionals such as financial planners or accountants, public benefits technicians, care coordinators, and yes, attorneys who specialize in this area. Its investing in drawing up the plans for the house before we start building. Remember the old adage, pay a little now (prevention), or pay a lot later (cure).
Drafting - Finding a competent attorney to put together the right documents. This can be difficult, as many are entering the field, but are not familiar with trust law, and public benefit or disability issues.
Funding - A great plan that is has no funds available is useless. It is important to determine accurately the financial need balanced against current resources. Initiating the right strategies now can help to accumulate and preserve funds over the grantor's lifetime.
Administration - This is arguably the most critical step as its 90% of the plan. This covers the execution of the plan. The key to successful administration is the distribution plan set out in the Special Needs Trust. The distribution plan is critical to getting the right people in place with the necessary funds to execute the care plan when you are no longer around to oversee caregivers and hold them accountable.
Another perspective on Special Needs Estate Planning is likening it to the proverbial three legged stool.
PEOPLE - PAPER - MONEY
People - Beneficiary, grantor, trustee, attorney, financial planner, health care providers
Paper - Special Needs Trust, Will, Letter of Intent, Power of Attorney, Medical Directives
Money - Savings, Life Insurance, Gifts from relatives, Retirement Benefits
The right people and the right paper can preserve, enhance and leverage the money. The right paper can preserve both.
None of the individual steps alone, will usually be enough, and some of these steps must be taken simultaneously. It may seem impossibly complicated now, but every journey starts with first steps.
Get information on the basics of good Special Needs Estate Planning
Start gathering the information for what will become a comprehensive future care plan
Find a competent attorney, draft, and put in place the 80% or Basic Plan
History and current statistics indicate we are chronic procrastinators, so it shouldn't be too long before we at the very least have the Basic Plan in place with signed, effective documents.
Reference: www.nami.org
Its all about maximizing opportunities and minimizing risks.
The four strategic steps are:
PLANNING - DRAFTING - FUNDING - ADMINISTRATION
Planning - It is important to carefully consider all the factors that impact the individual situation. It is critical to take the time to design a complete plan that takes into account the beneficiary's unique circumstances, and that fully explores all the options available to address his/her special needs. This advance planning could include a professional financial assessment, a public benefits profile, a distribution plan, and the exploring of housing options.
Planning the future of a child or adult with a disability is an enormous challenge. It requires specialized planning and where possible it is wise to incorporate the help of professionals such as financial planners or accountants, public benefits technicians, care coordinators, and yes, attorneys who specialize in this area. Its investing in drawing up the plans for the house before we start building. Remember the old adage, pay a little now (prevention), or pay a lot later (cure).
Drafting - Finding a competent attorney to put together the right documents. This can be difficult, as many are entering the field, but are not familiar with trust law, and public benefit or disability issues.
Funding - A great plan that is has no funds available is useless. It is important to determine accurately the financial need balanced against current resources. Initiating the right strategies now can help to accumulate and preserve funds over the grantor's lifetime.
Administration - This is arguably the most critical step as its 90% of the plan. This covers the execution of the plan. The key to successful administration is the distribution plan set out in the Special Needs Trust. The distribution plan is critical to getting the right people in place with the necessary funds to execute the care plan when you are no longer around to oversee caregivers and hold them accountable.
Another perspective on Special Needs Estate Planning is likening it to the proverbial three legged stool.
PEOPLE - PAPER - MONEY
People - Beneficiary, grantor, trustee, attorney, financial planner, health care providers
Paper - Special Needs Trust, Will, Letter of Intent, Power of Attorney, Medical Directives
Money - Savings, Life Insurance, Gifts from relatives, Retirement Benefits
The right people and the right paper can preserve, enhance and leverage the money. The right paper can preserve both.
None of the individual steps alone, will usually be enough, and some of these steps must be taken simultaneously. It may seem impossibly complicated now, but every journey starts with first steps.
Get information on the basics of good Special Needs Estate Planning
Start gathering the information for what will become a comprehensive future care plan
Find a competent attorney, draft, and put in place the 80% or Basic Plan
History and current statistics indicate we are chronic procrastinators, so it shouldn't be too long before we at the very least have the Basic Plan in place with signed, effective documents.
Reference: www.nami.org
Sunday, February 24, 2008
THE ABCs OF STRETCH IRAs
You can plan to have your heirs inherit your IRA assets.
Can an IRA keep growing for a century or more? In theory, it can. Some people are planning to "stretch" their Individual Retirement Accounts over generations, so that their heirs can receive IRA assets accumulated after decades of tax-deferred or tax-free growth. A stretch IRA can potentially create a legacy of wealth to benefit your heirs, and it could also help to reduce your estate taxes.
Usually, this is a choice of the high net worth investor. Typically, an individual, couple or family has amassed sizable retirement savings – so sizable that they don't need to withdraw the bulk of their IRA assets during their lifetimes.
How does this work? Simply put, a stretch IRA is a Roth or traditional IRA with assets that pass from the original account owner to a younger beneficiary when the original account owner dies. The beneficiary can be a spouse or a non-spousal heir (or in some cases, not a person at all but a "see-through" trust.)1
If the beneficiary is a person, this younger beneficiary will have a longer life expectancy than the initial IRA owner, and therefore may elect to "stretch" the IRA by receiving smaller required minimum distributions (RMDs) each year of his or her life span. This will leave money in the IRA and permit ongoing tax-deferred growth – or tax-free growth, in the case of a Roth IRA.
In fact, since you don't have to take RMDs from a Roth IRA at age 70½, you could opt to let your Roth IRA grow untapped for a lifetime. At your death, your beneficiaries could then stretch payouts over their life expectancies without having to pay tax on withdrawals.2
What options do the beneficiaries have? Well, the rules governing inherited IRAs are quite complex. The explanation below is simply a summary, and should not be taken as any kind of advice or guide.
If you have named your spouse as the beneficiary of your IRA, your spouse can roll over the inherited IRA assets into his or her own IRA after your death (presuming they don't need the money).
If you die before age 70½, your spouse can treat the inherited IRA as his or her own and make contributions and withdrawals. Or, instead of treating the IRA as his or her own, your spouse can elect to begin receiving distributions on either December 31st of the calendar year following your death, or the date that you would have been age 70½, whichever date is later.
If your beneficiary is non-spousal, he or she cannot treat the IRA as his or her own, and cannot make contributions to it or rollovers into or out of it.3 A non-spousal beneficiary can either take the lump sum and pay taxes on it, or transfer the IRA assets to an IRA distribution account.
If your non-spousal beneficiary elects to set up a distribution account and you have passed away before age 70½, he or she must follow either the one-year rule or the five-year rule.
Under the one-year rule, annual distributions are based on the life expectancy of the designated beneficiary and must start by December 31st of the year following the original IRA owner's death. In this way, your beneficiary can stretch out the distributions over his or her life expectancy, which can allow more of the inherited IRA assets to remain in the IRA and enjoy tax-deferred or tax-free growth.
Under the five-year rule, there are no minimum annual distribution requirements, but the beneficiary must withdraw their full interest by the end of the fifth year following the owner's death.
The beneficiary can be determined even after the original IRA owner dies – if there is somehow no named beneficiary, you have until the end of the year following the death of the primary IRA owner to establish one.4 But it is vital to establish a beneficiary during your lifetime: if you don't, your IRA assets could end up in your estate, and that will leave your heirs with two choices. If you pass away after age 70½, the RMDs from the IRA are calculated according to what would have been your remaining life expectancy. If you pass away before age 70½, the five-year rule applies: your heirs have to cash out the entire IRA by the end of the fifth year following the year of your death.2
Things to think about. The decision to stretch your IRA cannot be made casually. A beneficiary must be selected with great care, and there is always the possibility that you may end up withdrawing all of your IRA assets during your lifetime. A stretch IRA strategy assumes that your beneficiary won't deplete the IRA assets, and it also assumes a constant rate of return for the account over the years. It's also worth remembering that stretch IRA planning is based on today's tax laws, not the tax laws of tomorrow.
If you are interested in stretching your IRA, you must find a truly qualified advisor to help you. While many advisors know something of the rules and regulations governing stretch IRAs, look for an advisor with an advanced education in IRA planning.
Citations.
1 investmentnews.com/apps/pbcs.dll/article?AID=/20080501/REG/74256949/1031/RETIREMENT
2 kiplinger.com/retirementreport/features/archives/2006/06/Cover_Jun2006_03_01.html
3 irs.gov/pub/irs-pdf/p590.pdf
4 moneycentral.msn.com/content/Taxes/Taxshelters/P33760.
Tuesday, February 5, 2008
A Change in Domicile to Florida Can Help Minimize Taxes
The below article applies to New Jersey, as well as New York
Retirees who have homes in both New York and Florida may be able to reduce or eliminate New York income and estate taxes, and also reduce the real estate taxes on their Florida home by changing their domicile to Florida. The benefit of doing so has been enhanced by the elimination of the Florida estate tax and the repeal of the Florida intangible tax on stocks and bonds, which went into effect on January 1, 2007
It has been further enhanced by the Florida constitutional amendment that places a cap of 3% on any annual increase in assessments applicable to a Florida homestead, but not to a Florida home owned by a New Yorker.
Retirees who have a substantial securities portfolio have benefited from the 15% federal income tax on stock dividends and capital gains. In contrast, both the dividends and capital gains are subject to New York income taxes at a rate as high as 7%. Similarly, Congress has increased the federal estate tax unified credit to $2 million, while New York continues to impose its estate tax on estates greater than $1 million. The failure of New York to give comparable tax relief has motivated many New Yorkers with homes in both New York and Florida to consider a change of domicile to eliminate New York income and estate taxes in their entirety.
Checklist to Determine Eligibility
Not all retirees who own homes in New York and Florida are eligible to elect Florida as their domicile. Domicile is characterized in the New York tax regulations as the place that an individual intends to be his permanent home and the place to which he intends to return whenever he may be absent. The regulations provide that, once established, a domicile continues until the person moves to a new location with the bona fide intention of making his fixed and permanent home there. A person’s declarations are given due weight, but they will not be conclusive if they are contradicted by conduct. For example, the regulations state that registering and voting in one place is important but not necessarily conclusive. Likewise, the length of time customarily spent at each location is important but not conclusive. A person can have only one domicile. If an individual has two or more homes, the domicile is the one regarded and used as the permanent home.
The leading case in New York was decided by the New York Court of Appeals in 1908 (Matter of Newcomb, 192 N.Y. 238). It remains “good law.” Mrs. Newcomb, during a 30-year period, and until she was 80, was domiciled in New York City. She generally resided during the winter in her home in New Orleans and resided during the summer in her residence in New York City. She wanted to make substantial bequests to Tulane University and was concerned that the will might be contested by her relatives. She consulted with a Louisiana attorney, who advised her to change her domicile by making an express declaration in writing to that effect. She signed a declaration stating that New Orleans was her permanent home and her place of domicile. It was argued that Newcomb resided in New York City and merely visited New Orleans, and that her later visits to New Orleans differed in no material respect from those made earlier. It was also argued that she sought to become a nominal resident of Louisiana merely for the purpose of making a Louisiana will and not for making a permanent home. The court rejected that approach and established the following rules for determining domicile when the retiree maintains two residences:
There must be a present, definite, and honest purpose to give up the old place and take up the new place as the domicile.
Every retiree may select and make his or her own domicile, but the selection must be followed by proper action. Motives are immaterial except as they indicate intention.
A change of domicile may be made through caprice, whim, or fancy; for business, health, or pleasure; to secure a change of climate or a change of laws; or for any reason whatsoever, provided that there is an absolute and fixed intention to abandon one and acquire another and that the acts of the persons confirm this intention.
A retiree may elect between a winter and summer residence and make a domicile of either, provided she acts in good faith.
The right to choose implies the right to declare one’s choice, formally or informally, as he or she prefers, and even for the sole purpose of making evidence to prove what the choice was.
No pretense or deception can be practiced, for the intention must be honest, the action genuine, and the evidence clear and convincing. The burden of proof rests upon the party who alleges a change of domicile.
Demonstrating Intent
Retirees who elect to make Florida their permanent residence should demonstrate such intention in a clear and convincing way by taking as many of the following steps as appropriate:
File a declaration of domicile.
File for a Florida homestead exemption.
Obtain a Florida driver’s license and relinquish a New York license.
Acquire Florida license plates and relinquish New York license plates.
Register to vote in Florida and remove oneself from the New York voting rolls.
File a nonresident, rather than a resident, New York income tax return if there is New York–source income.
File a federal income tax return with the IRS Center in Atlanta.
Transfer safe deposit box contents to Florida and close out a New York box.
Open a Florida bank account.
Change credit cards to the Florida address.
Execute a new Florida will, Florida durable power of attorney, and Florida health care proxy.
Refer to Florida residence in all trusts and other legal documents.
Affiliate with Florida organizations and consider disaffiliation with New York ones.
Have family gatherings and social activities centered in Florida rather than New York.
Affiliate with a church or temple in Florida.
If investing in real estate or businesses, focus on areas in Florida rather than New York.
Transfer works of art, expensive furniture, heirlooms, and other valuable personal items to Florida.
Consider acquiring cemetery plots in Florida.
List the Florida residence as the primary residence on all homeowners insurance.
Turn in any New York resident fishing or hunting licenses.
License pets in Florida.
If a retiree is a New York notary public, resign and become a Florida notary public.
Cancel any New York real estate STAR exemption.
Stay in Florida as long as practically possible each year.
Consider acquiring a larger or more expensive home in Florida, or remodeling or redecorating it, and acquiring a smaller or less expensive home in New York, and document any steps taken in doing so.
If a physician has advised that either extremely cold weather or hot, humid weather may be harmful to the retiree’s health, the physician should document the medical issues accordingly.
A change of domicile from New York to Florida will not save any New York income taxes if the retiree is present in New York in a calendar year for more than 183 days. Taxpayers will be considered “statutory residents” of New York only if they maintain a “permanent place of abode” in New York and are present in New York for more than 183 days. A diary should be kept, and a partial day is considered a full day. Therefore, if a retiree leaves New York at 6 a.m. on Friday morning and returns at 11 p.m. Sunday night, he will be considered absent from New York for only one day. In addition to a diary, the burden of proof as to the taxpayer’s physical presence can be onerous. The taxpayer should retain as much documentation as possible to support the entries in the diary. Failure to account for a day will be presumed by auditors to be a day inside New York. There are some exceptions to the general rule, such as when a retiree is confined to a New York hospital or is present in New York only to go to or from an airport.
Savings in New York Income Taxes
Certain income derived from, or connected with, New York sources will continue to be taxable in New York even if paid to the retiree after a change of domicile to Florida. For example, New York will tax items such as the distributable share of income from a former law or accounting partnership and rental income from New York real property. New York will not continue to tax income from annuities, dividends, and interest, even if from New York sources, unless the income is from property employed in a business, trade, profession, or occupation carried on in New York. In 1996, Congress passed legislation that prohibits New York from imposing its income tax on any retirement income of an individual who is no longer a resident or domiciliary of New York. To quantify the savings in New York income taxes, taxpayers may want to restate the most recent New York resident income tax return on a nonresident return and include only New York–source income.
Savings in New York Estate Taxes
The amount of New York estate tax is based on the net taxable estate as shown in the Exhibit. The following simplified examples illustrate the magnitude of the estate tax savings that will result from a change of domicile to Florida:
If a former New Yorker has changed his domicile to Florida and dies with net assets of $10 million (none of which are in New York), his estate will pay federal estate taxes of approximately $3,680,000 and no New York estate taxes.
If that same individual had not changed his domicile to Florida and all his assets are in New York, his estate will pay New York estate taxes of approximately $1,067,600. That amount will be deducted on the federal estate tax return and the federal estate taxes will be reduced from $3,630,890 to $3,190,000. Thus, the estate will pay a total of $4,257,600 versus a total of $3,680,000, a difference of $577,600.
If that same individual has changed his domicile to Florida, but at the time of his death owned a home in New York valued at $1 million, his estate will pay a federal estate tax of $3,630,890 and a New York estate tax of $106,760 for a total of $3,737,650. Thus, the estate pays additional net estate taxes of $57,650 because the home is located in New York. Note the computation of the New York tax starts out with a calculation of a New York tax on all assets wherever located and then applies the applicable percentage (one-tenth of $1,067,600).
A retiree dies in New York with an estate of $1,500,000. His estate will pay a New York estate tax of $64,400. There will be no federal estate taxes because of the $2 million threshold (i.e., equivalent to the federal unified credit). If the decedent had changed his domicile to Florida and had no assets in New York, there would be neither a federal estate tax nor a Florida estate tax. If the $1,500,000 included a New York home valued at $500,000, however, then there would be a New York estate tax of $21,465 (one-third of $64,400).
As indicated in the above examples, even if there is a change of domicile, New York will nevertheless impose a New York estate tax on real property and tangible personal property having any actual situs in New York. If retirees decide to change their domicile to Florida, it may be desirable to transfer the New York home to a limited liability company or other similar entity. Because shares of the limited liability company constitute intangible property, they should not be subject to New York estate taxes even though the entity owns real property in New York.
Marriage and Domicile Change
Most married couples have the same domicile. When a change of domicile occurs, both spouses change their domicile at the same time. The primary residence of one is the primary residence of the other. But consider the situation where they have a home in New York and a home in Florida and the wife stays in Florida from mid-October until mid-May and is not in New York for more than 183 days during a calendar year. On the other hand, the husband returns to their New York home one week a month for business reasons while his wife stays in Florida. As a result, he is in New York for more than 183 days in each calendar year, although his wife is not. The husband and wife file a joint federal income tax return. The husband files a resident New York tax return. The wife has no New York–source income and files no New York tax return. The wife has substantial income from her stocks and bonds. The Florida home is titled in the wife’s name. She files a declaration of Florida domicile, registers to vote in Florida, receives a homestead exemption on her Florida home, and follows many of the items on the checklist. As a result, there is a 3% cap on any increase in its assessment. A New York auditor claims she must pay New York income taxes on the dividends and interest she receives because she has not effectively changed her domicile. The auditor points out that her husband retained a significant tie to a New York business and, therefore, she cannot change her domicile to Florida. The auditor cites the New York tax regulations:
Husband and wife. Generally, the domicile of a husband and wife are the same. However, if they are separated in fact, they may each, under some circumstances, acquire their own separate domiciles even though there is no judgment or decree of separation. Where there is a judgment or decree of separation, a husband and wife may acquire their own separate domicile. [20 NYCRR 105.20(i)(5)]
This regulation should be changed. A 2005 decision of the New York Court of Appeals recognizes that spouses can each elect their own domicile (Glenbriar Co. v. Lipsman, 5 N.Y.3d 388). Although the case involved an issue related to a rent stabilized residence in New York City, its reasoning appears to sanction a change of domicile by one spouse while the other remains a New Yorker.
Caveat
A change of domicile makes the laws of Florida, rather than New York, applicable, including marital rights. Although a New Yorker may have the requisite intent to make a domicile change, if challenged, such intent must be demonstrated by clear and convincing evidence, which requires a high degree of proof. The lack of such evidence may result in not only an assessment, but also substantial interest and penalties. Where the result is uncertain, a change of domicile should not be attempted unless the taxes that will be saved are substantial. No change should be made without professional legal guidance.
By Allan R. Lipman
Allan R. Lipman, JD, is a partner in the Buffalo, N.Y., law firm of Lipman & Biltekoff, LLP, and also has an office in Boca Raton, Fla.
Retirees who have homes in both New York and Florida may be able to reduce or eliminate New York income and estate taxes, and also reduce the real estate taxes on their Florida home by changing their domicile to Florida. The benefit of doing so has been enhanced by the elimination of the Florida estate tax and the repeal of the Florida intangible tax on stocks and bonds, which went into effect on January 1, 2007
It has been further enhanced by the Florida constitutional amendment that places a cap of 3% on any annual increase in assessments applicable to a Florida homestead, but not to a Florida home owned by a New Yorker.
Retirees who have a substantial securities portfolio have benefited from the 15% federal income tax on stock dividends and capital gains. In contrast, both the dividends and capital gains are subject to New York income taxes at a rate as high as 7%. Similarly, Congress has increased the federal estate tax unified credit to $2 million, while New York continues to impose its estate tax on estates greater than $1 million. The failure of New York to give comparable tax relief has motivated many New Yorkers with homes in both New York and Florida to consider a change of domicile to eliminate New York income and estate taxes in their entirety.
Checklist to Determine Eligibility
Not all retirees who own homes in New York and Florida are eligible to elect Florida as their domicile. Domicile is characterized in the New York tax regulations as the place that an individual intends to be his permanent home and the place to which he intends to return whenever he may be absent. The regulations provide that, once established, a domicile continues until the person moves to a new location with the bona fide intention of making his fixed and permanent home there. A person’s declarations are given due weight, but they will not be conclusive if they are contradicted by conduct. For example, the regulations state that registering and voting in one place is important but not necessarily conclusive. Likewise, the length of time customarily spent at each location is important but not conclusive. A person can have only one domicile. If an individual has two or more homes, the domicile is the one regarded and used as the permanent home.
The leading case in New York was decided by the New York Court of Appeals in 1908 (Matter of Newcomb, 192 N.Y. 238). It remains “good law.” Mrs. Newcomb, during a 30-year period, and until she was 80, was domiciled in New York City. She generally resided during the winter in her home in New Orleans and resided during the summer in her residence in New York City. She wanted to make substantial bequests to Tulane University and was concerned that the will might be contested by her relatives. She consulted with a Louisiana attorney, who advised her to change her domicile by making an express declaration in writing to that effect. She signed a declaration stating that New Orleans was her permanent home and her place of domicile. It was argued that Newcomb resided in New York City and merely visited New Orleans, and that her later visits to New Orleans differed in no material respect from those made earlier. It was also argued that she sought to become a nominal resident of Louisiana merely for the purpose of making a Louisiana will and not for making a permanent home. The court rejected that approach and established the following rules for determining domicile when the retiree maintains two residences:
There must be a present, definite, and honest purpose to give up the old place and take up the new place as the domicile.
Every retiree may select and make his or her own domicile, but the selection must be followed by proper action. Motives are immaterial except as they indicate intention.
A change of domicile may be made through caprice, whim, or fancy; for business, health, or pleasure; to secure a change of climate or a change of laws; or for any reason whatsoever, provided that there is an absolute and fixed intention to abandon one and acquire another and that the acts of the persons confirm this intention.
A retiree may elect between a winter and summer residence and make a domicile of either, provided she acts in good faith.
The right to choose implies the right to declare one’s choice, formally or informally, as he or she prefers, and even for the sole purpose of making evidence to prove what the choice was.
No pretense or deception can be practiced, for the intention must be honest, the action genuine, and the evidence clear and convincing. The burden of proof rests upon the party who alleges a change of domicile.
Demonstrating Intent
Retirees who elect to make Florida their permanent residence should demonstrate such intention in a clear and convincing way by taking as many of the following steps as appropriate:
File a declaration of domicile.
File for a Florida homestead exemption.
Obtain a Florida driver’s license and relinquish a New York license.
Acquire Florida license plates and relinquish New York license plates.
Register to vote in Florida and remove oneself from the New York voting rolls.
File a nonresident, rather than a resident, New York income tax return if there is New York–source income.
File a federal income tax return with the IRS Center in Atlanta.
Transfer safe deposit box contents to Florida and close out a New York box.
Open a Florida bank account.
Change credit cards to the Florida address.
Execute a new Florida will, Florida durable power of attorney, and Florida health care proxy.
Refer to Florida residence in all trusts and other legal documents.
Affiliate with Florida organizations and consider disaffiliation with New York ones.
Have family gatherings and social activities centered in Florida rather than New York.
Affiliate with a church or temple in Florida.
If investing in real estate or businesses, focus on areas in Florida rather than New York.
Transfer works of art, expensive furniture, heirlooms, and other valuable personal items to Florida.
Consider acquiring cemetery plots in Florida.
List the Florida residence as the primary residence on all homeowners insurance.
Turn in any New York resident fishing or hunting licenses.
License pets in Florida.
If a retiree is a New York notary public, resign and become a Florida notary public.
Cancel any New York real estate STAR exemption.
Stay in Florida as long as practically possible each year.
Consider acquiring a larger or more expensive home in Florida, or remodeling or redecorating it, and acquiring a smaller or less expensive home in New York, and document any steps taken in doing so.
If a physician has advised that either extremely cold weather or hot, humid weather may be harmful to the retiree’s health, the physician should document the medical issues accordingly.
A change of domicile from New York to Florida will not save any New York income taxes if the retiree is present in New York in a calendar year for more than 183 days. Taxpayers will be considered “statutory residents” of New York only if they maintain a “permanent place of abode” in New York and are present in New York for more than 183 days. A diary should be kept, and a partial day is considered a full day. Therefore, if a retiree leaves New York at 6 a.m. on Friday morning and returns at 11 p.m. Sunday night, he will be considered absent from New York for only one day. In addition to a diary, the burden of proof as to the taxpayer’s physical presence can be onerous. The taxpayer should retain as much documentation as possible to support the entries in the diary. Failure to account for a day will be presumed by auditors to be a day inside New York. There are some exceptions to the general rule, such as when a retiree is confined to a New York hospital or is present in New York only to go to or from an airport.
Savings in New York Income Taxes
Certain income derived from, or connected with, New York sources will continue to be taxable in New York even if paid to the retiree after a change of domicile to Florida. For example, New York will tax items such as the distributable share of income from a former law or accounting partnership and rental income from New York real property. New York will not continue to tax income from annuities, dividends, and interest, even if from New York sources, unless the income is from property employed in a business, trade, profession, or occupation carried on in New York. In 1996, Congress passed legislation that prohibits New York from imposing its income tax on any retirement income of an individual who is no longer a resident or domiciliary of New York. To quantify the savings in New York income taxes, taxpayers may want to restate the most recent New York resident income tax return on a nonresident return and include only New York–source income.
Savings in New York Estate Taxes
The amount of New York estate tax is based on the net taxable estate as shown in the Exhibit. The following simplified examples illustrate the magnitude of the estate tax savings that will result from a change of domicile to Florida:
If a former New Yorker has changed his domicile to Florida and dies with net assets of $10 million (none of which are in New York), his estate will pay federal estate taxes of approximately $3,680,000 and no New York estate taxes.
If that same individual had not changed his domicile to Florida and all his assets are in New York, his estate will pay New York estate taxes of approximately $1,067,600. That amount will be deducted on the federal estate tax return and the federal estate taxes will be reduced from $3,630,890 to $3,190,000. Thus, the estate will pay a total of $4,257,600 versus a total of $3,680,000, a difference of $577,600.
If that same individual has changed his domicile to Florida, but at the time of his death owned a home in New York valued at $1 million, his estate will pay a federal estate tax of $3,630,890 and a New York estate tax of $106,760 for a total of $3,737,650. Thus, the estate pays additional net estate taxes of $57,650 because the home is located in New York. Note the computation of the New York tax starts out with a calculation of a New York tax on all assets wherever located and then applies the applicable percentage (one-tenth of $1,067,600).
A retiree dies in New York with an estate of $1,500,000. His estate will pay a New York estate tax of $64,400. There will be no federal estate taxes because of the $2 million threshold (i.e., equivalent to the federal unified credit). If the decedent had changed his domicile to Florida and had no assets in New York, there would be neither a federal estate tax nor a Florida estate tax. If the $1,500,000 included a New York home valued at $500,000, however, then there would be a New York estate tax of $21,465 (one-third of $64,400).
As indicated in the above examples, even if there is a change of domicile, New York will nevertheless impose a New York estate tax on real property and tangible personal property having any actual situs in New York. If retirees decide to change their domicile to Florida, it may be desirable to transfer the New York home to a limited liability company or other similar entity. Because shares of the limited liability company constitute intangible property, they should not be subject to New York estate taxes even though the entity owns real property in New York.
Marriage and Domicile Change
Most married couples have the same domicile. When a change of domicile occurs, both spouses change their domicile at the same time. The primary residence of one is the primary residence of the other. But consider the situation where they have a home in New York and a home in Florida and the wife stays in Florida from mid-October until mid-May and is not in New York for more than 183 days during a calendar year. On the other hand, the husband returns to their New York home one week a month for business reasons while his wife stays in Florida. As a result, he is in New York for more than 183 days in each calendar year, although his wife is not. The husband and wife file a joint federal income tax return. The husband files a resident New York tax return. The wife has no New York–source income and files no New York tax return. The wife has substantial income from her stocks and bonds. The Florida home is titled in the wife’s name. She files a declaration of Florida domicile, registers to vote in Florida, receives a homestead exemption on her Florida home, and follows many of the items on the checklist. As a result, there is a 3% cap on any increase in its assessment. A New York auditor claims she must pay New York income taxes on the dividends and interest she receives because she has not effectively changed her domicile. The auditor points out that her husband retained a significant tie to a New York business and, therefore, she cannot change her domicile to Florida. The auditor cites the New York tax regulations:
Husband and wife. Generally, the domicile of a husband and wife are the same. However, if they are separated in fact, they may each, under some circumstances, acquire their own separate domiciles even though there is no judgment or decree of separation. Where there is a judgment or decree of separation, a husband and wife may acquire their own separate domicile. [20 NYCRR 105.20(i)(5)]
This regulation should be changed. A 2005 decision of the New York Court of Appeals recognizes that spouses can each elect their own domicile (Glenbriar Co. v. Lipsman, 5 N.Y.3d 388). Although the case involved an issue related to a rent stabilized residence in New York City, its reasoning appears to sanction a change of domicile by one spouse while the other remains a New Yorker.
Caveat
A change of domicile makes the laws of Florida, rather than New York, applicable, including marital rights. Although a New Yorker may have the requisite intent to make a domicile change, if challenged, such intent must be demonstrated by clear and convincing evidence, which requires a high degree of proof. The lack of such evidence may result in not only an assessment, but also substantial interest and penalties. Where the result is uncertain, a change of domicile should not be attempted unless the taxes that will be saved are substantial. No change should be made without professional legal guidance.
By Allan R. Lipman
Allan R. Lipman, JD, is a partner in the Buffalo, N.Y., law firm of Lipman & Biltekoff, LLP, and also has an office in Boca Raton, Fla.
Sunday, January 27, 2008
“Leave a Legacy” - Beneficiary Designation on your Retirement Plan
Published in the Robert Wood Johnson Foundation newsletter.
By Parag Patel Esq.
Your largest asset may be your retirement plan. But did you know that your retirement plan can be taxed TWICE at your death?
When you plan your estate, it may seem natural to automatically designate a child or other relative as the contingent beneficiary of the account after your death, then use other assets to make a charitable gift.
But there's a tax trap in such an arrangement: The IRS considers the balance left in your retirement account to be untaxed income. The income tax is in addition to estate tax on the retirement account balance. The result of this double taxation? For estates fully subject to the estate tax, up to 70 percent of the value of the retirement plan can be consumed in taxes before your child, relative or friend receives it.
There is a sensible charitable alternative:
Consider naming the RWJ Foundation as the beneficiary of your retirement plan, and use your other non-retirement plan assets, not subject to income tax, to make gifts to your heirs. Since the RWJ Foundation is a exempt organization, it will not pay income tax on the distribution (nor will the gift be subject to estate tax); meanwhile your heirs will receive other assets of your estate without the burden of extra taxes.
Distributions may be made to the RWJ Foundation outright or fund a charitable remainder trust or gift annuity that pays income to your heirs. Be sure to direct the gift to the RWJ Foundation through your plan's beneficiary designation form rather than through your will. If you fail to do so, the assets will be included in your taxable estate.
Talk to your financial advisor and an attorney expert in retirement planning and charitable gifts for more information.
By Parag Patel Esq.
Your largest asset may be your retirement plan. But did you know that your retirement plan can be taxed TWICE at your death?
When you plan your estate, it may seem natural to automatically designate a child or other relative as the contingent beneficiary of the account after your death, then use other assets to make a charitable gift.
But there's a tax trap in such an arrangement: The IRS considers the balance left in your retirement account to be untaxed income. The income tax is in addition to estate tax on the retirement account balance. The result of this double taxation? For estates fully subject to the estate tax, up to 70 percent of the value of the retirement plan can be consumed in taxes before your child, relative or friend receives it.
There is a sensible charitable alternative:
Consider naming the RWJ Foundation as the beneficiary of your retirement plan, and use your other non-retirement plan assets, not subject to income tax, to make gifts to your heirs. Since the RWJ Foundation is a exempt organization, it will not pay income tax on the distribution (nor will the gift be subject to estate tax); meanwhile your heirs will receive other assets of your estate without the burden of extra taxes.
Distributions may be made to the RWJ Foundation outright or fund a charitable remainder trust or gift annuity that pays income to your heirs. Be sure to direct the gift to the RWJ Foundation through your plan's beneficiary designation form rather than through your will. If you fail to do so, the assets will be included in your taxable estate.
Talk to your financial advisor and an attorney expert in retirement planning and charitable gifts for more information.
Supplemental Needs Trusts
Supplemental Needs Trusts, also called a special needs trust, is a trust in the United States that is designed to provide benefits to, and protect the assets of, physically disabled or mentally disabled persons and still allow such persons to be qualified for and receive governmental health care benefits, especially long-term nursing care benefits, under the Medicaid welfare program. Supplemental or Special Needs Trusts are frequently used to receive an inheritance or personal injury litigation proceeds on behalf of a disabled person in order to allow the person to qualify for Medicaid benefits.
Medicaid law Background
Medicaid is the Federal program administered by the states which provides health care for those that can't afford it. See 42 U.S.C. § 1396 et seq. Federal law establishes certain mandatory requirements which each state must adopt in its local Medicaid program, and the states are also given options to elect certain other components in the health care plan which they may decide to provide. Accordingly, Medicaid does vary from state to state in certain aspects, but there are also mandatory Federal law provisions.
One significant governmental benefit which is available only through Medicaid is long-term nursing care which includes care for the physically disabled and the mentally disabled. Long-term nursing care can be extremely expensive. Medicaid is a welfare program. To qualify for Medicaid and its long-term nursing care benefits, the applicant must be “poor” and there is a limit to the countable assets which he or she can own. To qualify for Medicaid, the applicant must meet the asset guidelines for Supplemental Security Income (“SSI”). SSI allows a single applicant to own no more than $2,000 in countable assets and a married applicant to own no more than $3,000 in countable assets. Certain assets are specifically exempted and are not countable.
Trusts as Medicaid countable assets
A trust is a legal arrangement in which legal title to assets is held by a trustee under certain defined restrictions of a governing instrument (usually a will or a written trust agreement) for the benefit of another party known as the beneficiary. Trusts can be used as a vehicle to make assets available to a beneficiary but still significantly restrict them. Recognizing the gray area which trusts can provide concerning the ownership of assets, Federal Medicaid law places significant restrictions on the types of trusts which can be used to preserve assets of a beneficiary and still qualify the beneficiary for governmental benefits.
Prior to the enactment of the Omnibus Budget Reconciliation Act of 1993 (O.B.R.A), P.L. 103-66, it was possible to create a self-settled, discretionary trust for the benefit of the settlor and still allow the settlor to qualify for Medicaid’s long-term nursing care benefits. These trusts were called “special needs trusts” or “supplemental needs trusts” because restrictive language in the trust agreement allowed the trustee to pay only for the support needs of the settlor-beneficiary which the government did not pay. The trust was not for the unrestricted, general support of the beneficiary which is typical in normal estate plans. Special needs trusts were perceived by the United States Congress to be abusive and were effectively abolished by O.B.R.A.
In general, with limited exceptions, regardless of the purposes, provisions, or discretion contained in the trust, a self-settled trust which is created after August 11, 1993 will be treated as an available asset which can disqualify the settlor-beneficiary from Medicaid. 42 U.S.C. § 1396p(d)(2)(C). This means that generally a person cannot create his or her own trust, transfer his or her own assets into the trust, and still be qualified for Medicaid.
Medicaid exempt trusts
Since the effective date of O.B.R.A., only a limited number of trusts can now be used and still preserve an applicant’s Medicaid eligibility. One major distinction should be made when analyzing Medicaid trusts. Trusts created by the disabled beneficiary (or a third party with legal authority over the disabled beneficiary) with the disabled person’s own assets for the disabled person’s own benefit are classified as first-party, self-settled trusts. These types of trusts must be distinguished from trusts created by a third party for the benefit of a disabled individual with the third party’s own assets (such as a grandparent creating a trust for a grandchild). Legal restrictions generally exist for first-party, self-settled trusts which do not exist for third-party trusts.
First-party, self-settled trusts
Most self-settled trusts holding the disabled beneficiary’s own assets created after August 11, 1993 are countable resources for Medicaid. The Medicaid statute, however, provides for three specific types of trusts which can be funded with the applicant’s own assets and which will not disqualify the applicant from Medicaid. These trusts are called “D-4A Trusts” after the subsection of the law which authorizes them. They are also called “Federalized Special Needs Trusts” because the Federal Medicaid statute makes them available in every state.
Because of the requirement that the State be reimbursed for medical assistance, D-4A Special Needs Trusts may have limited utility when the goal is to pass assets of the disabled individual to family members. The main benefit of the D-4A Trusts is to provide a quality of life for the Medicaid beneficiary. Assets can be held in the trust and used to pay for the beneficiary’s special and supplemental needs which the government does not provide, while Medicaid pays the significant medical bills. If the medical assistance provided during life does not turn out to be costly, then upon the death of the beneficiary, there is a chance that assets may be preserved in the trust and pass to loved ones.
Disabled Individual’s Special Needs Trust
Under the provisions of 42 U.S.C. § 1396p(d)(4)(A), a Disabled Individual’s Trust will not be counted as a Medicaid asset even when it is funded with the applicant’s own assets. The requirements for the trust are that the individual must be under age 65 at the time the trust is created (and funded), and disabled under the Social Security definition. Further, the trust must be for the "sole benefit" of the disabled individual. The trust must be created by a parent, grandparent, guardian, or court. Upon the death of the individual, the State Medicaid agency must be reimbursed for the costs of the medical assistance which was provided by Medicaid during the disabled individual's lifetime. This is often called the “payback” provision.
It is important to note that the Disabled Individual’s Trust must be created by a parent, grandparent, guardian, or court. The statute does not allow the disabled individual to create his or her own trust, even if he or she is otherwise legally competent. Action by a third party is required in creating the trust. In this regard, these types of special needs trusts are often established by a court on behalf of a disabled person as a part of or ancillary to a serious personal injury lawsuit.
"Miller" Trust
A "Miller" Trust can be used to qualify a Medicaid applicant with income in excess of the eligibility limit (not imposed in all states) for long-term care assistance from Medicaid. Such a trust is not really a "special needs" trust at all, and is not funded with the beneficiary's assets. The Miller trust can be named as recipient of the individual's income, from a pension plan, Social Security, or other source. The Miller trust takes its name from the Colorado case of Miller v. Ibarra, 746 F. Supp. 19 (D. Colo. 1990), and is specifically sanctioned by 42 U.S.C. § 1396p(d)(4)(B). As with a self-settled special needs trust (referred to above as a "Disabled Individual’s Trust"), upon the death of the beneficiary, the State Medicaid agency must be paid back for its medical assistance from any remaining assets in the Miller trust. An older name for the Miller trust, still occasionally used, is “Utah Gap" trusts, reportedly coined by a Colorado advocate describing the gap between the income cap for eligibility and the actual cost of nursing home care as similar to the yawning chasm between mesas dotting the Southern Utah landscape. The Miller trust is only significant in those states which impose an income cap on Medicaid long-term care eligibility; ironically, Utah is not one of those states. Income caps are in place in about half of the states.
Charitable Pooled Income Special Needs Trust
A Charitable Pooled Income Special Needs Trust is authorized by 42 U.S.C. § 1396p(d)(4)(C). Again, the individual must be disabled under the Social Security definition. Unlike the other exempt trusts which can be administered by a private trustee who is an individual (such as a family member), the Pooled Income Trust is run by a nonprofit association, and a separate account is maintained for each individual beneficiary. All accounts are pooled for investment and management purposes. The trust (or more accurately, an account in the pooled trust) may be created by a parent, grandparent, guardian, or court, and it can also be created by the disabled individual himself. Upon the death of the disabled individual, the balance is either retained in the trust for the nonprofit association or paid back to the State Medicaid agency for its medical assistance.
In some states, a disabled individual over age 65 is entitled to transfer assets to a pooled trust and then be immediately eligible for Medicaid. In other states, the transfer must be made before the disabled individual attains the age of 66.
Third-party trusts
Medicaid law governing trusts is designed to prevent disabled individuals qualifying for benefits while still retaining full control over their assets. A third party, however, is still free to plan with his own assets and either give them outright to a disabled individual or tie them up and restrict them in trust as he sees fit. Accordingly, trusts which are created by a third party with the third party’s own assets to benefit a beneficiary who is on Medicaid have their own separate rules and treatment.
Generally, a properly drafted third-party, discretionary trust is not countable as an asset available to the beneficiary receiving Supplemental Security Income (SSI) and/or Medicaid benefits. Such a trust must be created by a party other than the SSI/Medicaid beneficiary, must not receive any assets belonging to the beneficiary, and must be restricted (not accessible or available) to the beneficiary. The operative principle is whether the trust assets or income are available to the beneficiary. If appropriate trust language is used (and the appropriate language varies from state to state), Medicaid will not treat the resources in the trust as a countable resource. Typically, a third-party trust provides that the trustee is given unfettered discretion to distribute (or not to distribute) principal or income for the benefit of the disabled beneficiary. Often, the trustee is directed only to make distributions for the “supplemental” or “special” needs of the beneficiary or as long as the distributions do not disqualify the beneficiary from governmental benefits. Frequently the trustee will be specifically prohibited from making distributions which provide the beneficiary with food or shelter (the two disqualifying categories under SSI and Medicaid regulations). There is no requirement that the trustee be so restricted, however; it may be preferable in most cases to permit the trustee to make the decision to make distributions which reduce or even eliminate public benefits in cases where the availability of trust resources is more important than continued eligibility for SSI and Medicaid.
A third-party special needs trust should not be drafted as a general support trust or mandate distribution of current income to the beneficiary. In such a case, the trust can be deemed to be “available” and can disqualify the beneficiary from Medicaid. The Medicaid beneficiary should not be given any power to revoke the trust or direct the trustee to make distributions to the beneficiary. The trust can be revocable by the third-party settlor. This means that a parent can fund a trust for a disabled child with the parent’s assets and give it a test run, revoking it later and re-acquiring the assets if the parent decides that it is not serving its purpose. Finally, the third-party trust does not need to include a D-4 “payback” provision reimbursing the State for the medical assistance of the beneficiary upon the beneficiary’s death.
References
http://www.seniorlaw.com/snt.htm
http://www.nsnn.com/frequently.htm
http://www.elderlawanswers.com/elder_info/elder_article.asp?id=2742#6
http://www.wid.org/programs/access-to-assets/fact-sheets/special-needs-or-supplemental-needs-trusts
Medicaid law Background
Medicaid is the Federal program administered by the states which provides health care for those that can't afford it. See 42 U.S.C. § 1396 et seq. Federal law establishes certain mandatory requirements which each state must adopt in its local Medicaid program, and the states are also given options to elect certain other components in the health care plan which they may decide to provide. Accordingly, Medicaid does vary from state to state in certain aspects, but there are also mandatory Federal law provisions.
One significant governmental benefit which is available only through Medicaid is long-term nursing care which includes care for the physically disabled and the mentally disabled. Long-term nursing care can be extremely expensive. Medicaid is a welfare program. To qualify for Medicaid and its long-term nursing care benefits, the applicant must be “poor” and there is a limit to the countable assets which he or she can own. To qualify for Medicaid, the applicant must meet the asset guidelines for Supplemental Security Income (“SSI”). SSI allows a single applicant to own no more than $2,000 in countable assets and a married applicant to own no more than $3,000 in countable assets. Certain assets are specifically exempted and are not countable.
Trusts as Medicaid countable assets
A trust is a legal arrangement in which legal title to assets is held by a trustee under certain defined restrictions of a governing instrument (usually a will or a written trust agreement) for the benefit of another party known as the beneficiary. Trusts can be used as a vehicle to make assets available to a beneficiary but still significantly restrict them. Recognizing the gray area which trusts can provide concerning the ownership of assets, Federal Medicaid law places significant restrictions on the types of trusts which can be used to preserve assets of a beneficiary and still qualify the beneficiary for governmental benefits.
Prior to the enactment of the Omnibus Budget Reconciliation Act of 1993 (O.B.R.A), P.L. 103-66, it was possible to create a self-settled, discretionary trust for the benefit of the settlor and still allow the settlor to qualify for Medicaid’s long-term nursing care benefits. These trusts were called “special needs trusts” or “supplemental needs trusts” because restrictive language in the trust agreement allowed the trustee to pay only for the support needs of the settlor-beneficiary which the government did not pay. The trust was not for the unrestricted, general support of the beneficiary which is typical in normal estate plans. Special needs trusts were perceived by the United States Congress to be abusive and were effectively abolished by O.B.R.A.
In general, with limited exceptions, regardless of the purposes, provisions, or discretion contained in the trust, a self-settled trust which is created after August 11, 1993 will be treated as an available asset which can disqualify the settlor-beneficiary from Medicaid. 42 U.S.C. § 1396p(d)(2)(C). This means that generally a person cannot create his or her own trust, transfer his or her own assets into the trust, and still be qualified for Medicaid.
Medicaid exempt trusts
Since the effective date of O.B.R.A., only a limited number of trusts can now be used and still preserve an applicant’s Medicaid eligibility. One major distinction should be made when analyzing Medicaid trusts. Trusts created by the disabled beneficiary (or a third party with legal authority over the disabled beneficiary) with the disabled person’s own assets for the disabled person’s own benefit are classified as first-party, self-settled trusts. These types of trusts must be distinguished from trusts created by a third party for the benefit of a disabled individual with the third party’s own assets (such as a grandparent creating a trust for a grandchild). Legal restrictions generally exist for first-party, self-settled trusts which do not exist for third-party trusts.
First-party, self-settled trusts
Most self-settled trusts holding the disabled beneficiary’s own assets created after August 11, 1993 are countable resources for Medicaid. The Medicaid statute, however, provides for three specific types of trusts which can be funded with the applicant’s own assets and which will not disqualify the applicant from Medicaid. These trusts are called “D-4A Trusts” after the subsection of the law which authorizes them. They are also called “Federalized Special Needs Trusts” because the Federal Medicaid statute makes them available in every state.
Because of the requirement that the State be reimbursed for medical assistance, D-4A Special Needs Trusts may have limited utility when the goal is to pass assets of the disabled individual to family members. The main benefit of the D-4A Trusts is to provide a quality of life for the Medicaid beneficiary. Assets can be held in the trust and used to pay for the beneficiary’s special and supplemental needs which the government does not provide, while Medicaid pays the significant medical bills. If the medical assistance provided during life does not turn out to be costly, then upon the death of the beneficiary, there is a chance that assets may be preserved in the trust and pass to loved ones.
Disabled Individual’s Special Needs Trust
Under the provisions of 42 U.S.C. § 1396p(d)(4)(A), a Disabled Individual’s Trust will not be counted as a Medicaid asset even when it is funded with the applicant’s own assets. The requirements for the trust are that the individual must be under age 65 at the time the trust is created (and funded), and disabled under the Social Security definition. Further, the trust must be for the "sole benefit" of the disabled individual. The trust must be created by a parent, grandparent, guardian, or court. Upon the death of the individual, the State Medicaid agency must be reimbursed for the costs of the medical assistance which was provided by Medicaid during the disabled individual's lifetime. This is often called the “payback” provision.
It is important to note that the Disabled Individual’s Trust must be created by a parent, grandparent, guardian, or court. The statute does not allow the disabled individual to create his or her own trust, even if he or she is otherwise legally competent. Action by a third party is required in creating the trust. In this regard, these types of special needs trusts are often established by a court on behalf of a disabled person as a part of or ancillary to a serious personal injury lawsuit.
"Miller" Trust
A "Miller" Trust can be used to qualify a Medicaid applicant with income in excess of the eligibility limit (not imposed in all states) for long-term care assistance from Medicaid. Such a trust is not really a "special needs" trust at all, and is not funded with the beneficiary's assets. The Miller trust can be named as recipient of the individual's income, from a pension plan, Social Security, or other source. The Miller trust takes its name from the Colorado case of Miller v. Ibarra, 746 F. Supp. 19 (D. Colo. 1990), and is specifically sanctioned by 42 U.S.C. § 1396p(d)(4)(B). As with a self-settled special needs trust (referred to above as a "Disabled Individual’s Trust"), upon the death of the beneficiary, the State Medicaid agency must be paid back for its medical assistance from any remaining assets in the Miller trust. An older name for the Miller trust, still occasionally used, is “Utah Gap" trusts, reportedly coined by a Colorado advocate describing the gap between the income cap for eligibility and the actual cost of nursing home care as similar to the yawning chasm between mesas dotting the Southern Utah landscape. The Miller trust is only significant in those states which impose an income cap on Medicaid long-term care eligibility; ironically, Utah is not one of those states. Income caps are in place in about half of the states.
Charitable Pooled Income Special Needs Trust
A Charitable Pooled Income Special Needs Trust is authorized by 42 U.S.C. § 1396p(d)(4)(C). Again, the individual must be disabled under the Social Security definition. Unlike the other exempt trusts which can be administered by a private trustee who is an individual (such as a family member), the Pooled Income Trust is run by a nonprofit association, and a separate account is maintained for each individual beneficiary. All accounts are pooled for investment and management purposes. The trust (or more accurately, an account in the pooled trust) may be created by a parent, grandparent, guardian, or court, and it can also be created by the disabled individual himself. Upon the death of the disabled individual, the balance is either retained in the trust for the nonprofit association or paid back to the State Medicaid agency for its medical assistance.
In some states, a disabled individual over age 65 is entitled to transfer assets to a pooled trust and then be immediately eligible for Medicaid. In other states, the transfer must be made before the disabled individual attains the age of 66.
Third-party trusts
Medicaid law governing trusts is designed to prevent disabled individuals qualifying for benefits while still retaining full control over their assets. A third party, however, is still free to plan with his own assets and either give them outright to a disabled individual or tie them up and restrict them in trust as he sees fit. Accordingly, trusts which are created by a third party with the third party’s own assets to benefit a beneficiary who is on Medicaid have their own separate rules and treatment.
Generally, a properly drafted third-party, discretionary trust is not countable as an asset available to the beneficiary receiving Supplemental Security Income (SSI) and/or Medicaid benefits. Such a trust must be created by a party other than the SSI/Medicaid beneficiary, must not receive any assets belonging to the beneficiary, and must be restricted (not accessible or available) to the beneficiary. The operative principle is whether the trust assets or income are available to the beneficiary. If appropriate trust language is used (and the appropriate language varies from state to state), Medicaid will not treat the resources in the trust as a countable resource. Typically, a third-party trust provides that the trustee is given unfettered discretion to distribute (or not to distribute) principal or income for the benefit of the disabled beneficiary. Often, the trustee is directed only to make distributions for the “supplemental” or “special” needs of the beneficiary or as long as the distributions do not disqualify the beneficiary from governmental benefits. Frequently the trustee will be specifically prohibited from making distributions which provide the beneficiary with food or shelter (the two disqualifying categories under SSI and Medicaid regulations). There is no requirement that the trustee be so restricted, however; it may be preferable in most cases to permit the trustee to make the decision to make distributions which reduce or even eliminate public benefits in cases where the availability of trust resources is more important than continued eligibility for SSI and Medicaid.
A third-party special needs trust should not be drafted as a general support trust or mandate distribution of current income to the beneficiary. In such a case, the trust can be deemed to be “available” and can disqualify the beneficiary from Medicaid. The Medicaid beneficiary should not be given any power to revoke the trust or direct the trustee to make distributions to the beneficiary. The trust can be revocable by the third-party settlor. This means that a parent can fund a trust for a disabled child with the parent’s assets and give it a test run, revoking it later and re-acquiring the assets if the parent decides that it is not serving its purpose. Finally, the third-party trust does not need to include a D-4 “payback” provision reimbursing the State for the medical assistance of the beneficiary upon the beneficiary’s death.
References
http://www.seniorlaw.com/snt.htm
http://www.nsnn.com/frequently.htm
http://www.elderlawanswers.com/elder_info/elder_article.asp?id=2742#6
http://www.wid.org/programs/access-to-assets/fact-sheets/special-needs-or-supplemental-needs-trusts
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