At Procino-Wells & Woodland, LLC, we understand that estate planning isn’t just about creating a stack of documents but rather is about creating a plan to take care of you and your family upon your disability or death. We know that an estate plan needs to work when you first create it and years later when it’s actually needed. With that knowledge, we use strategies that marry thoughtfully drafted documents with the most crucial aspect of estate planning, asset alignment. Through asset alignment, we make sure that your asset ownership and beneficiary designations align with your overall plan and wishes. Unfortunately, the importance of asset alignment is overlooked by many attorneys but here at PWW Law, we know that thorough and ongoing asset alignment is critical to making a plan work as intended.
Whether you are creating your estate plan for the first time or updating an outdated or incomplete plan, the PWW team can help. Below is a descriptive list of the types of planning our clients typically put in place to do the best they can to care of their families upon their disability or death.
Powers of Attorney
A Power of Attorney allows you to appoint another individual or entity to act on your behalf. When you create a Power of Attorney, you are known as the “Principal” and the person you appoint is known as the “Agent” or “Attorney in Fact.” Powers of Attorney commonly allow the Agent to complete financial or legal transactions on the Principal’s behalf when the Principal is unavailable or incapacitated. A Power of Attorney can give the Agent authority to act immediately, or only upon the incapacity of the Principal as determined by a doctor. Powers of Attorney should give the Agent broad authority to act on the Principal’s behalf as you never know under what circumstances authority may be needed. At PWW law, we consider Powers of Attorney to be the most important estate planning document because without one, a Court-ordered guardianship proceeding is the only other way someone else can gain authority to act on your behalf. Because guardianships involve the Court, they are expensive and often cumbersome.
In Delaware, the legal name for an Advance Directive is “Advance Health Care Directive” and in Maryland it is “Advance Directive for Health Care.” Regardless of the differences in the names, in both states these documents allow you to give instruction in advance regarding your health care if you become incapacitated and unable to state your wishes yourself. A standard Advance Directive includes three sections, as follows:
- Living Will: This section allows you to set forth end-of-life healthcare decisions if you ever become terminally ill or permanently unconscious. It allows you to state your wishes and give instruction regarding the use of life sustaining procedures to prolong life or not;
- Organ Donation: This section permits you to state your wishes regarding organ donation (also known as “anatomical gifts”) by allowing you to make specific decisions regarding what, to whom, and for what purposes you wish to donate. Alternately, it allows you to opt-out and state that you are not interested in organ donation at your death;
- Medical Power of Attorney: In this section, you are to name agents to make your health-related decisions if you become incapacitated and are unable to make those decisions for yourself.
If you become incapacitated and unable to handle your own affairs, only two ways exist by which another person can legally act for you, as follows:
- As Agent under a valid, thorough Power of Attorney; or
- By being appointed your legal guardian by a Court. Giving authority through a Power of Attorney is much easier and less expensive than a guardianship. But if you do not have a valid Power of Attorney or if a conflict arises, a guardianship could become necessary. The Court can appoint a guardian of the property to handle your assets and financial affairs and a guardian of the person to handle matters related to your health and personal care. A person desiring to be appointed as guardian must petition the Court and provide medical and other evidence that the incapacitated person is truly incapable of managing his or her own affairs. Once appointed, the guardian must account to the Court on an annual basis throughout the disabled person’s lifetime and provide regular medical updates to the Court.
Whereas a Power of Attorney is a private way to decide who will have the authority to act for you if you become incapacitated, a guardianship is a public proceeding and the person appointed as your guardian may not be the person you would have chosen. Because guardianship proceedings involve Court filings they are typically costly and are always subject to the Court’s supervision.
A Will is one part of a comprehensive estate plan. Simply defined, a Will (sometimes referred to as a Last Will and Testament) is a legal document that contains your wishes for how your assets will be distributed upon your death. Additionally, it allows you to name a personal representative, or executor, which is the person who will carry out those written wishes. Parents of minor children can nominate a guardian for their children in a Will. Without a Will, a person would die “intestate.” In that case, state law divides and distributes the estate to surviving family members based on their relationship to the deceased. A Will does not help an estate avoid probate. A Will has no legal effect until death, therefore, a Will does not help manage a person’s affairs if they are incapacitated.
A Word on Trusts, Generally
Many different types of Trusts exist to accomplish various estate planning goals. Generally speaking though, Trusts allow you to pass your assets according to your specific instructions, privately and without Court intervention, and with considerably less expense, delay, and paperwork. A Trust is a legal entity with at least three parties: the person who makes the trust (often referred to as the “Grantor,” “Trustor” or “Settlor”), the person who has legal title and manages the Trust (the “Trustee”), and the person entitled to the benefits of the Trust (the “Beneficiary”).
In order for any Trust to work as intended, you must properly align your asset ownership and beneficiary designations with the terms of the Trust. Unfortunately, many estate planning lawyers miss this critical step. At PWW law, we do all that we can to ensure thorough asset alignment occurs upon the initial creation of a Trust and that you review that alignment on a regular basis to make sure your Trust carries out your wishes at the time you need it to, upon your disability or death.
Revocable Living Trusts
A Revocable Living Trust is a popular estate planning tool that you can use to determine who will get your property when you die. Revocable Trusts are “revocable” because you can change them as your circumstances or wishes change. Revocable Living Trusts are “living” because you make them during your lifetime. Sometimes these Trusts are referred to as “inter vivos” trust, which in Latin means “living.”
Revocable Living Trusts do the same thing as Wills in that they allow you to direct how you want your assets distributed at your death and let you appoint a Trustee who will manage the trust assets when you no longer can, but Trusts offer an advantage that Wills don’t; Trusts avoid probate. Probate is the court-supervised process of wrapping up a person’s estate. Probate creates a public record of your assets, wishes and beneficiaries and can be expensive, time consuming, and is often more of a burden than a help. Property left through a Living Trust passes to beneficiaries without probate and allows your assets and wishes to remain private.
Asset Protection Trusts
When established and administered properly, an Asset Protection Trust allows you to transfer assets to a certain type of irrevocable Trust and shelter those assets from the costs of extended long-term care. Under current law, transfers to an Asset Protection Trust are considered a gift. Therefore, such transfers are subject to a five year look back period, meaning that once five years pass from the date you transfer assets (real estate, cash, investments, etc.) to an Asset Protection Trust, the transferred assets are no longer counted as resources available to you when applying for government long term care benefits like Medicaid or Veteran’s Aid and Attendance. Because the transferred assets are not considered resources, you do not have to sell and/or spend them before you can qualify for benefits. Without planning, a person generally must sell off everything they own, spend all their cash and become completely destitute before they can qualify for benefits.
Asset Protection Trusts offer significant benefits over outright gifts to individuals since individuals can die, become disabled, get divorced, file bankruptcy, etc. Trusts are generally not subject to these types of risks, so an Asset Protection Trust allows you to shelter assets in a low-risk way.
Some trade-offs exist when creating an Asset Protection Trust, but most people believe those trade-offs are worth it to gain the protection the Trust offers. You cannot serve as your own Trustee of an Asset Protection Trust, but you do get to choose who your Trustees will be. You will also give up direct control of the assets placed in the Trust, but the Trust does allow your Trustees and certain Lifetime Beneficiaries access to the Trust assets during your lifetime and you can direct who will receive the assets at your death. An Asset Protection Trust must also be irrevocable, meaning once you create it, it cannot be changed (with some exceptions) or revoked. Thus, it is extremely important that you fully consider the risks, benefits and administrative requirements of this sophisticated estate planning tool before implementing it and particularly before deciding what assets to place into it. But that’s where PWW law can help – we will guide you through the process, answer all your questions, and help you make those important decisions so you can protect part of your hard-earned assets and savings.
Retirement Account Trusts
In general, the receipt of an inheritance is not subject to income tax. The major exception to this rule is retirement accounts because they consist of pre-tax income. After an IRA owner’s death, the beneficiaries of the IRA must pay tax as they withdraw funds from the account. Ideally, the beneficiaries will defer paying that tax for as long as possible by postponing withdrawals from the account. Unfortunately, that often doesn’t happen.
Under current law, beneficiaries are permitted to “stretch” inherited retirement account payments (known as “required minimum distributions”) over their life expectancy. The ability for IRA investments to compound, tax free, over a much longer period of time, makes IRAs one of the most valuable assets when planning for intergenerational transfers of property.
This income tax “stretch” can be obtained by naming individuals as beneficiaries of IRAs or by naming a certain type of trust as beneficiary. Unfortunately, naming individuals as beneficiaries, with no safeguards in place to protect the IRA, subjects the IRA to the risks of the beneficiaries such as poor money management, disability, death, divorce or spendthrift habits.
Without exception, all these risks can be avoided by designating a certain type of trust called a “Retirement Account Trust” or a “RAT” as the IRA beneficiary. When a RAT is the beneficiary, the terms of the trust must adhere to certain requirements to obtain maximum “stretch” of the IRA over the lifetimes of the beneficiaries of the trust. A standard revocable trust generally does not meet these requirements. A RAT is specially designed to meet all of the IRS requirements and offers the best of both worlds: it allows beneficiaries to still maximize the “stretch” but also provides protection from risk.
Retirement Account Trusts offer a smart planning option for individuals with retirement accounts of significant value, especially when they have concerns about how those accounts will be managed after their deaths. Simply stated, the income tax savings and asset protection planning that this type of trust provides can typically save families hundreds of thousands of dollars.
Supplemental Needs Trusts
Supplemental Needs Trusts are made specifically for the benefit of disabled or incapacitated beneficiaries. This type of Trust is created with the specific needs, lifestyle, and future of the beneficiary in mind. Supplemental needs trusts are usually used to ensure that the beneficiaries don’t lose government benefits they are receiving and/or to otherwise protect assets for their benefit. The trustees of Supplemental Needs Trusts can be family members or, if appropriate when a trustworthy family member is unavailable, a professional. Choosing the right trustee must be done very carefully, especially for Supplemental Needs Trusts that are used for the benefit of a younger person.
Often times, people with disabilities qualify for government assistance such as Supplemental Security Income (SSI), Medicaid, and subsidized housing. Many people make the mistake of leaving assets to their disabled loved ones through a simple Will which does not address supplemental needs planning. This is problematic because acquiring assets, such as a lump sum of money, can disqualify your loved one for these types of government assistance programs.
By setting up a Supplemental Needs Trust, instead of solely using a Will, you can avoid these issues. Because the trustee has total control over the management of the funds, and the beneficiary does not, government program administrators, like the ones from SSI and Medicaid, must ignore the Trust assets when considering eligibility. Supplemental Needs Trusts can also be used to set up inheritance funds or proceeds from a settlement on behalf of the disabled person. This way, if your loved one is the plaintiff in a successful lawsuit or inherits assets, those funds will go into the trust and will not disqualify him or her from receiving those government benefits. On the flip side, if the beneficiary is ever sued, the funds in his or her Supplemental Needs Trust cannot be touched–they are not subject to any judgment.
Even if you are not currently concerned with eligibility for government benefits, the beauty of Supplemental Needs Trusts is that they address the specific needs of the disabled person, whereas, other types of trusts do not. Even if a family is not interested in government benefits, they should still consider a Supplemental Needs Trust to address those specific needs. Furthermore, you never know what the future holds. There is no sense in sacrificing government services that could be beneficial for your disabled loved one in the future.
Estate Tax Planning
Everyone is interested in reducing their tax exposure, even at death. Several factors must be evaluated to determine whether your lifetime transfers or transfers of your estate at your death will cause your estate or your heirs to be liable for death taxes. Generally speaking, estate tax applies to the transfer of your assets upon death. Gift tax applies when you give another person an asset during your life without receiving something in return. Exemptions allow you to transfer assets as gifts or through your estate without tax liability.
When it comes to taxes, gift and estate taxes are intertwined. Under the Tax Cuts and Jobs Act of 2017, the federal estate tax exemption was increased to $11.2 million per person (adjusted for inflation). The law recognizes an unlimited marital deduction, allowing spouses to transfer an estate of any value to their surviving spouse without incurring any estate tax. By incorporating a concept known as “portability,” married couples can transfer up to two times the estate tax exemption amount (adjusted for inflation) without incurring federal estate tax. In order to take advantage of portability, an estate tax return must be filed at the first spouse’s death. With respect to gift tax, you can minimize your tax liability by taking advantage of the annual exemption amount in addition to the estate exemption amount. Currently, the annual gift tax exemption allows you to give up to $15,000 (in 2018) per person, per year. Married couples can make joint gifts, essentially doubling the annual gift tax exemption as it applies to a particular recipient. If you make gifts in excess of the annual exemption in a given year, you must report the gift; however, unless your total lifetime gifts exceed the estate tax exemption amount, no tax will be paid.
The state of Delaware repealed its estate tax, effective January 2018. While Delaware may no longer have an estate or gift tax, it has levied an estate tax in the past. Therefore, it is always important to check with a qualified attorney or tax professional as to whether there are estate or gift taxes that apply at the state level in addition to federal estate and gift taxes. Even though Delaware no longer has an estate tax, the federal rule, stated above, does still apply to Delaware residents.
In Maryland, the estate tax exemption gradually increased on an annual basis from 2014 through 2018 and it is scheduled to match the federal estate tax exemption in 2019. However, for estates where the decedent passes between January 1, 2018, and December 31, 2018, the Maryland estate tax exemption is $4 million. While Maryland allows unlimited transfers between spouses without tax liability, the law will not offer portability until 2019. Therefore, married couples in Maryland whose combined net worth may reach $4 million should plan for estate taxes so that the unused estate exemption amount of the first spouse can be used when the surviving spouse dies.
An effective way to maximize use of the estate tax exemption for both spouses is to split the assets between spouses and incorporate bypass trusts to shelter assets valued at the amount of the exemption amount to be used by the estate of the deceased spouse. In Maryland, for single individuals whose estates may exceed the applicable exemption, or married couples whose estates may exceed double the applicable exemption, more advanced estate and gift tax planning should be considered. Note that Maryland imposes a separate inheritance tax on certain transfers to individual heirs who do not enjoy an exempt-status relationship with the decedent.
Overall, Procino-Wells & Woodland, LLC provides estate and gift tax planning for clients in conjunction with clients’ chosen tax professionals. In all areas of our planning, we take a comprehensive approach, factoring the impact of such taxes into our broader efforts to help clients care for their families upon their disability or death.