Preparing for the Unpredictable and the Inevitable


Estate Documents

Last Will and Testament

A will is the basic estate planning document for distributing assets owned at death, that are not either owned jointly with right of survivorship, paid or transferred on death under beneficiary designations, or are in a trust established during your lifetime. A will is not operative until after your death, so that other documents are needed during your lifetime if you become incapable of handling your own affairs. A will is subject to probate and becomes a public document upon your death. A pour-over will is used in conjunction with a revocable living trust (RLT) and has the purpose of directing the distribution of assets left out of the RLT, such as tangible personal property, checking accounts and later acquired property from inheritances and personal injury claims. In most cases, The will is used to pour these assets over into the RLT. A will can be used to appoint guardians for dependent children, and to establish a testamentary special needs trust for the benefit of your surviving spouse and not cause the spouse to be ineligible for Medicaid.

Revocable Living Trust

A revocable living trust provides functionality and flexibility as an estate planning document. The RLT is established during your lifetime to hold and manage assets including investments, financial accounts, securities, home and other property. The RLT is funded by assigning assets to the trust through deeding, titling or other transfers in the name of the trust. You, as the settlor, also called grantor, retain the beneficial ownership of all assets in trust and have complete control over the management of the trust. You have the right to add or remove assets, and to amend or revoke the trust at any time. The settlor is usually the initial trustee of the RLT and appoints one or more other persons to act as co-trustees or successor trustees. Unlike a will, an RLT is operative upon establishment and funding, it does not become a public document, and the trust assets are not subjected to the probate process after your death. An RLT provides a mechanism for organizing your assets and providing the continuity of having a trustee to manage the trust assets. The trustee makes distributions as you direct during your lifetime, and as directed by the trust document during your incapacity and after your death. Income from assets in the RLT is taxed to you during your lifetime. The RLT can contain sub-trusts which become irrevocable and continue long after your death to provide for your beneficiaries.

Durable Power of Attorney

The durable general power of attorney is the basic legal document for appointing an agent to act on all matters and things relating to your property, affairs, finances or business of any kind during your lifetime. The agent has a fiduciary responsibility to act in good faith, within the the scope of authority you granted, in accordance with your best interests and your expectations. The agent is responsible for matters not related to the administration of the trust, although you could appoint the agent to represent you in directing the trustee. The durable power of attorney becomes effective when you no longer want to handle your own affairs or when you are unable to act. A limited power of attorney can be used for specific purposes, while a general power of attorney gives your agent blanket powers. Durability ensures that your agentís powers continue during your incapacity. You determine when the power of attorney becomes effective, and when it is withdrawn.

Advanced Medical Directive

An advanced medical directive is the legal document for designating an agent to make health care decisions on your behalf, if you become incapacitated and certified to be incapable of making an informed decision. This means that, because a mental or physical disorder precludes communication or impairs judgment, you are unable to understand the nature, extent, risks, and benefits of a proposed health care decision. This informed decision determination is generally made by your attending physician and a capacity reviewer authorized under the law. The agent also can be designated to have access to your health care records required under the federal HIPAA Privacy Authorization statute. The advanced medical directive can include a living will which expresses your end-of-life intentions and medical treatment. The advanced medical directive is no longer effective when you regain the capacity for making an informed decision. An advanced medical directive and living will can be essential in assuring that your intentions are carried out by health care providers.

Family Trust

A family trust can be established in your estate plan to become effective after your death for purposes such as to specify a continuing distribution plan for your beneficiaries, provide spendthrift protection, protect assets from creditors; and, ensure that children from a prior marriage receive a certain amount of your assets. Your surviving spouse can receive the income and other benefits from the family trust, and not have the assets included in your spouse's estate. Other assets could be distributed to your spouse outright or into a marital trust (below). A family trust, also called a credit shelter trust, can be exempt from estate tax and generation skipping tax up to the available lifetime federal tax exclusion amounts, such that future distributions to beneficiaries would not be taxed. The trust can be structured to provide flexibility in allocating assets between the family trust and your spouse after your death. Determinations can be made at that time considering relative estate size, transfer tax laws, and other postmortem factors. When a marital trust is used with a family trust, they are referred to as A-B trusts.

Marital Trust

A marital trust can be established which allows you to control the ultimate distribution of the trust assets set aside for your spouse. Your spouse receives income and other benefits from the trust for life, and you can specify the beneficiaries or class of beneficiaries of the trust assets after your spouse's death. This form of marital trust called a qualified terminal interest property trust, or QTIP, is often used in second marriages. The QTIP would receive an unlimited federal estate tax deduction for a spouse who is a U.S. citizen, and not use any of your lifetime estate tax exclusion amount. Your spouse would then be subject to estate tax on the remaining amount in the trust, and the spouse's estate tax exclusion would apply upon your spouse's death. For a non-U.S citizen surviving spouse, the estate tax marital deduction is not available at your death, unless a marital qualified domestic trust, called a QDOT, is established. The QDOT provides a marital deduction by deferring payment of estate taxes until the death of the surviving spouse, or when distributions of principal are made. The non-citizen spouse can receive QDOT income and certain hardship distributions from the trust principal, free of estate taxation.

Special Needs Trust

Provisions for supplementing the benefits provided to disabled persons under government means based programs are included in federal and state rules covering Medicaid and SSI. Providing benefits which are not otherwise available from Medicaid can greatly improve the quality of life of a disabled person. The benefits can be provided through a self-settled "d4A" special needs trust, or SNT, a special needs pooled trust arrangement, or a third-party SNT, and not cause Medicaid ineligibility penalty periods for the disabled person. A self-settled SNT is established with the funds and assets of the disabled person, such as from a personal injury settlement or an inheritance. The self-settled SNT is limited to a disabled person under 65 years of age, is irrevocable, and the trust assets remaining after death are subject to claims by the state for payback of the Medicaid benefits paid. A third-party SNT is established with the funds of a third-party donor such as the disabled person's parents, relatives or friends. The third-party SNT can be for a disabled person of any age, can be revocable or irrevocable, testamentary or established during the donor's life, and other third-parties can make gifts and bequests to the trust. There is no Medicaid payback from a third-party SNT, and other persons can be beneficiaries of the trust. A gift or uncompensated transfer to a SNT could subject a third-party donor personally to the 60 month Medicaid penalty period, discussed below, unless the trust is established for the benefit of a disabled person under age 65.

Elder Law Planning

Elderly persons have the same need for estate planning as everyone else. Well structured estate documents, updated for significant changes in laws and personal circumstances, can serve through their lifetime. However, special planning may be required if there is concern that a person will require nursing home, or other long-term care. Persons with limited financial resources who believe that they may ultimately have to rely on Medicaid, may want to consider how they can manage their affairs and dispose of resources that are not otherwise exempt resources or exempt transfers under Medicaid rules. Gifts or other uncompensated transfers made prior to making application for Medicaid, and during the Medicaid look-back period, can cause penalty periods that can delay Medicaid eligibility for months or years. Medicaid counts all uncompensated transfers made after the look-back date, which is 60 months prior of the date that the person meets all requirements for Medicaid eligibility, but for the uncompensated transfers. Transfers made outright or into a properly structured irrevocable trust executed before the look-back date are not counted against Medicaid, and should not cause ineligibility. For uncompensated transfer made after the look-back date, a penalty period would be imposed, but may be reduced or eliminated if assets are returned by the recipient. Also, transfer of a resource in exchange for a Medicaid qualified annuity or promissory note is not considered an uncompensated transfer or countable resource. The periodic income from the transaction could then be used to make nursing home payments to avoid a penalty period or reduce a penalty period imposed by an uncompensated transfer. In the case of a married person, resources of both spouses are considered in determining Medicaid eligibility of the institutionalized spouse, while the community spouse's income is not counted. A Medicaid qualified annuity or promissory note acquired by the community spouse should not be considered an uncompensated transfer or countable resource, and the income should not be counted against the institutionalized spouse.

Charitable Trust

A charitable remainder trust (CRT) can be established by a person who wants to make charitable gifts, and also wants to achieve other estate planning objectives. A CRT is an irrevocable trust that pays an income amount each year to the grantor (trust settlor) or to other individual non-charitable beneficiaries for life, or for a specified term of years (not to exceed 20). The annual income amount can be in the form of an annuity, when the trust is called a CRAT, or a percentage of the trust assets (unitrust amount), when the trust is called a CRUT. Following the termination of payments, the remaining trust assets are distributed to charity. The grantor receives a charitable income tax deduction on the actuarial value of property that eventually goes to charity, subject to certain maximum percentages of income. The CRT is generally exempt from trust income taxes, including capital gains on appreciated property transferred to the trust that otherwise would have been taxable to the grantor. The grantor avoids capital gains tax on appreciated property, receives an income, and achieves charitable objectives. In the case of a testamentary CRT, estate tax is offset by the charitable deduction. Certain other rules apply, such as the actuarial value of the charitable remainder must be at least 10%, with less than 5% chance of charitable remainder exhaustion. There are also charitable lead trusts, when the charity receives an annuity (CLAT) or unitrust (CLUT) payments each year for a term of years and the individual beneficiaries receive the remaining trust assets after the term.

Life Insurance Trust

An irrevocable life insurance trust (ILIT) can be established to hold a life insurance policy on your life. As the grantor, you relinquish all incidents of ownership of the insurance policy, and the ILIT becomes the owner and the beneficiary. In the event of your death, the proceeds of the insurance policy are paid to the ILIT and are excluded from your estate, and not subject to estate tax. The proceeds can be used by the ILIT trustee to make loans to your estate to increase the estate's liquidity, pay debts and purchase assets, such as to retain your home in the family. The trustee would ultimately distribute remaining assets of the ILIT to the beneficiaries you designate in the ILIT, or to your revocable living trust. During your lifetime, you and other persons can make gifts to the trust to pay the premium payments on the insurance policy, and not incur any gift tax liability. While gifts in trust are generally gifts of future interest and subject to gift tax, gifts to the ILIT can be gifts of present interest when the trust is established under Crummey power rules. When funds are transferred to a trust that gives designated beneficiaries certain withdrawal rights, which can be exercised or allowed to lapse, the transfer can qualify for the annual gift tax deduction. Provisions can also be be included so that the lapse is not treated as a taxable gift to the trust by a beneficiary.

Irrevocable Gift Trusts

An irrevocable gift trust can be established by a person during the person's lifetime. Gifts can be made for the benefit of children, grandchildren and following generations; to provide asset protection from creditors and for spendthrift beneficiaries; to remove assets with large potential appreciation from the grantor's estate; to minimize income, gift, generation skipping, and estate taxes; and to retain income and other lifetime interests for the benefit the grantor. The trust in whole or in part can continue for a term of years, for the lives of beneficiaries, or until the occurrence of an event or circumstance, subject to the applicable state's rule against perpetuities. Once executed, an irrevocable trust cannot be revoked or amended by the grantor, although an independent trust advisor can be appointed to make limited amendments, and change trustees. The grantor or a beneficiary can be a trustee under certain conditions, and the grantor can retain a qualified interest under the Virginia qualified self-settled spendthrift trust provisions. The transfer of assets to an irrevocable trust can be subject to gift and generation skipping taxes, unless specific exceptions apply.

Gift Tax Exempt Trusts. There are certain transfers to irrevocable trusts that have exemptions from gift taxes. Gifts to trust that are established exclusively to pay educational expenses or medical expenses for the benefit of the beneficiaries can be nontaxable gifts. Gifts to trust where property and income may be expended for the benefit of an individual minor, and to the extent not so expended, pass to the donee on attaining age 21 years, or the minor's estate, can be nontaxable gifts. Gifts to trust can be exempt to the extent of the annual gift tax exclusion if the trust qualifies under the Crummey power rules, as discussed above under Life Insurance Trust. Also, gifts to trust, to the extent they are nontaxable gifts, can also be exempt from generation skipping transfer taxes, if the trust is established for the benefit of only one individual.

Grantor Retained Interest Trusts. A person can establish a grantor retained interest trust to transfer property to the trust for the benefit of noncharitable beneficiaries, and reduce the net gift by retaining an interest in the trust for a term of years. If a beneficiary is a member of grantor's family, the grantor is limited to retained interests in the form of a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT). In the case of a GRAT, the gift to the beneficiaries is determined as the fair market value of the property transferred to the GRAT minus the present value of a fixed annuity retained by the grantor. The present value of the annuity is determined actuarially based on the applicable federal rate specified by the IRS. The aspiration is that the assets in the trust will appreciate at a rate greater than the AFR rate and that the trust assets remaining for the beneficiaries, would be greater than the amount of the gift determined for federal gift tax purposes. A GRAT can be "zeroed out" so that no gift is recognized for tax purposes, which is particularly important when a person's gifts are likely to exceed the lifetime gift tax deduction. The grantor must outlive the term of the trust, otherwise all remaining trust assets may be included for estate tax purposes.

Qualified Personal Residence Trust. A QPRT allows an individual or married couple to retain the right to use their primary or secondary residence for a fixed term of years, and transfer by gift the remaining interest after the term to their beneficiaries. The QPRT can be beneficial for individuals that plan to gift the residence to their children at some time in the future. The earlier transfer can be advantageous, since the retained interest may reduce the value of the gift, give them the exclusive use of the property, and any appreciation of the residence can be removed from their estates. The value of the gift is the fair market value of the residence when the trust is executed minus the value of the retained interest, which is actuarially determined based on the applicable federal rate. At the end of the term, the individual or couple can use the residence and pay rent. If the individual or couple die before the end of the term, an amount up to the value of the residence may be included in the person's estate. A consideration in gifting a residence is the loss of any step-up in basis that could be available for a testamentary transfer.