The New Tax Plan and You

With gratitude to the Journal of Accountancy….  We will be posting over the next three days how your economic life will be changed by the new tax act. 
Tomorrow we will move to Small and Family Businesses.
We have received calls from financial planners about things that their clients heard on the radio yesterday which were old news and WRONG.
The name of the game is still, and even more so now, living within your means.  However, as Ben Franklin would say from his place on the “C” note: A penny saved is a penny earned.”  So let tax savings be icing on the cake, not the cake itself.
And remember, all this goes away automatically in 2025 unless the Congress… unless the Congress….  Never mind.  Good Luck.

SCOTUS goes 5-4 for Obergefell; Impact on planning for same-sex couples

On June 26, 2015 the United States Supreme Court issued its opinion in Obergefell v. Hodges, the name assigned to a series of consolidated cases on same-sex marriage rights. The Court ruled 5-4 in favor of the petitioners, holding that same-sex married couples are entitled to equal protection under the laws, and that their marriages must be recognized nationwide.

Case background

Jim Obergefell & his longtime partner, John Arthur, sought to enter into a legal marriage. They were residents of Ohio and Mr. Arthur was terminally ill with ALS. They wanted to solemnize their relationship before Mr. Arthur’s death. They chartered a plane to Maryland, where same-sex marriage is legal, and they were married on the tarmac at a Baltimore airport. They then returned to Ohio as a married couple.

Soon after, Mr. Arthur died. The State of Ohio issued a death certificate that did not identify Obergefell as surviving spouse. Mr. Obergefell sued the state (naming Hodges, director of the Ohio Department of Health) to have himself named as Mr. Arthur’s surviving spouse, arguing that Ohio’s state constitutional ban on same-sex marriage – including nonrecognition of marriages solemnized in other states –violates the equal protection clause of the 14th Amendment[1]. Obergefell’s case was consolidated with a series of other related same-sex marriage cases to resolve two specific issues under the 14th Amendment.

Issues resolved by Obergefell Opinion

  1. The 14th Amendment requires states to issue marriage licenses to individuals of the same gender.
  2. The 14th Amendment requires states to formally recognize same-sex marriages of that state’s residents, when those residents entered into a same-sex marriage in another state where the marriage was legally valid.

Impact of Obergefell for same-sex married couples

State laws banning same-sex marriage are effectively invalidated. Same-sex spouses will now enjoy all state tax benefits and other spousal benefits that other couples enjoy. (Including marriage, divorce, adoption & child custody, separation agreements & QDROs, marital property, survivorship spousal death benefits, inheritance through intestacy, priority rights in guardianship proceedings, contract rights, etc., as referenced above.)

After Obergefell, same-sex couples are afforded the same spousal rights that other couples enjoy. Some of these occur independent of proactive planning, like:

  • Adoption or child custody proceedings, even in states that previously did not recognize two persons of the same gender as a child’s parents (at issue in some of the cases that were consolidated with Obergefell);
  • Divorce proceedings, if necessary, now that states must recognize the validity of the marriage wherever solemnized;
  • Spousal priority in matters concerning an incapacitated spouse’s care, or recognition in the event guardianship or conservatorship proceedings are necessary;
  • Spousal survivorship rights under state pension or other retirement benefits, even in states that previously did not recognize same-sex marriage;
  • Spousal inheritance through intestacy (when a spouse dies without a valid will or trust);
  • Spousal identity or priority in the event will or trust proceedings are contested after death;
  • The ability to file taxes jointly as a married couple;
  • Spousal privilege in criminal proceedings where a spouse is a defendant;
  • Any other spousal contract right where the contract is construed under the laws of a state that did not recognize the marriage.

Couples absolutely should still proactively plan. Just because states recognize marriage doesn’t mean couples should not take control of their will and trust planning, and clearly set forth their wishes in enforceable legal documents. All the good reasons to plan apply just as much to same-sex married couples as well as opposite-sex couples:

  • Proactively expressing their wishes concerning their medical care during periods of incapacity (through durable powers of attorney);
  • Structuring the distribution of their property – ideally in protective trusts – for the benefit of their surviving spouse and children after death;
  • Establishing trusts to preserve privacy, and to avoid the delay and expense of guardianship or probate proceedings during incapacity and after death;
  • Providing mechanisms that allow flexibility in administering those trusts to account for changes in the law, or changes in beneficiary circumstances after death (through carefully-tailored choice of law, decanting, or trust protector provisions);
  • Providing clarity and discretion to a trustee to make strategic tax decisions through trust administration after death (through various investment powers, and accounting and tax provisions);
  • Providing for family members other than a spouse or child through their estate plans;
  • Making gifts to religious or other charitable organizations through their estates;
  • Allowing orderly operation and transition of businesses or professional practices through incapacity or death

Obergefell likely represents the last word on same-sex marriage, elevating these relationships to equal stature with other marriages. While same-sex married couples are now entitled to equal protection under the laws of every state, the efficacy of those laws in ensuring dignity in disability and death, and orderly and structured distribution of property after death is very limited for all couples. Families should always take control of their planning and leave as little to state law interpretation as possible. That is best done through careful planning with experienced professionals who can intelligently guide the family through the process.

WealthCounsel is a nationwide association of trust & estate attorneys. WealthCounsel provides its members with everything they need to elevate their law practice — best-in-class legal drafting technology; virtual and live education forums with an extensive online legal library; and practice development and law firm management programs.


[1] The 14th Amendment applies the 5th Amendment equal protection clause to the states. (Note: Same-sex couples already receive equal treatment under federal law after U.S. v. Windsor. For all federal tax purposes and other benefits under federal law (ERISA, etc.), same-sex couples are treated the same as any other married couple.)

Estate Planning in 2013 and Beyond under the New Tax Law

The recent tax legislation dealing with the “fiscal cliff” included significant revisions to the estate tax law that will affect estate planning for the foreseeable future. These revisions include:

  • The federal gift, estate and generation-skipping transfer tax provisions were made permanent as of December 31, 2012. This is great news because, for more than ten years, we have been planning with uncertainty under legislation that contained expiration dates. And while “permanent” in Washington only means that this is the law until Congress decides to change it, at least we now have some certainty with which to plan.
  • The federal gift and estate tax exemption will remain at $5 million per person, adjusted annually for inflation. In 2012, the exemption (with the adjustment) was $5,120,000. The amount for 2013 is expected to be $5,250,000. This means that the opportunity to transfer large amounts during lifetime or at death remains, so those who did not take advantage of this in 2011 or 2012 can still do so. Also, with the amount tied to inflation, more assets can be transferred each year.
  • The generation-skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5 million, adjusted for inflation). This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at death) to grandchildren and others who are more than 37.5 years younger than you; in other words, transfers that “skip” a generation. Having this exemption now be “permanent” allows for planning that will greatly benefit future generations.
  • Married couples can take advantage of these higher exemptions and, with proper planning, transfer up to $10+ million through lifetime gifting and at death.
  • The tax rate on estates larger than the exempt amounts increased from 35% to 40%.
  • The “portability” provision was also made permanent. This allows the unused exemption of the first spouse to die to transfer to the surviving spouse, without having to set up trust planning specifically for this purpose. However, there are still many benefits to using trusts, especially for those who want to ensure that their estate tax exemption will be fully utilized by the surviving spouse.
  • Separate from the new tax law, the amount for annual tax-free gifts has increased to $14,000.
Therefore, for most Americans the 2012 Tax Act has removed the emphasis on estate taxplanning and put it back on the real reasons to do estate planning: taking care of ourselves and our families the way we want. Those who might be tempted to skip estate planning because their estates are less than the $5 million range should remember that proper estate planning provides peace of mind by allowing Americans to:
  • Avoid state inheritance/death taxes that have lower exemptions than federal taxes;
  • Avoid probate, which can be quite expensive and time-consuming in some states; 
  • Ensure their assets are distributed the way they want;
  • Protect an inheritance from irresponsible spending, a child’s creditors, and from being part of a child’s divorce proceedings;
  •  Provide for a loved one with special needs without losing valuable government benefits;
  •  See that control of their assets remains in the hands of a trusted person;
  • Provide for minor children or grandchildren; 
  •  Help protect assets from creditors and frivolous lawsuits (especially important for professionals);
  • Protect themselves, their family and their assets in the event of incapacity; and
  • Help create meaningful charitable gifts.
For those with larger estates, ample opportunities remain to transfer large amounts tax-free to future generations. But with the increase in estate and income tax rates, it is critical that professional planning begins as soon as possible. Also, with Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated. Thus, it is best to put these strategies into place now so that they are more likely to be grandfathered from future law changes.
For those who have been sitting on the sidelines, waiting to see what Congress would do, the wait is over. Now that we have some certainty with “permanent” laws, there is no excuse to postpone planning any longer.

How Should Non-Traditional Partners Hold Title to Property

In my July 2009 article in the WealthCounsel Quar­terly entitled Special Considerations in Planning for Non-traditional Families, I briefly addressed the topic of how non-traditional partners should hold title to property. This article takes an expanded look at the ways non-traditional partners can take and hold title to property, and some of the advantages, disadvantages, tax conse­quences and potential pitfalls of each.
Joint Tenancy With Right of Survivorship
As stated in my previous article, non-traditional partners typically come to the table with the assumption that joint tenancy with right of survivorship (JTWROS) is the obvi­ous and best way for them to hold title to their shared property to ensure efficient transfer of the property at their death. Frequently, a real estate or title agent will suggest the partners choose this form of ownership because of the survivorship benefit, but seldom have the partners consid­ered the implications of this type of ownership beyond the right of survivorship.
Most non-traditional partners are aware that JTWROS al­lows property to pass to the surviving owner by operation of title, thereby avoiding probate. This can be particularly beneficial when one or both non-traditional partners have family members who may not agree with their choice of partner, since this method of passing property at death is not subject to challenge.
JTWROS, however, is not a complete answer to avoid­ing probate and passing property at death. This method of planning only looks one step ahead to when the first partner dies. When the second partner dies, if no additional plan­ning has been done, the property will be subject to probate. The property will also pass through probate if both partners die simultaneously.
If no additional planning has been done, JTWROS can also pose a problem if one partner becomes incapacitated. Since this method of ownership requires the signature of both partners to transfer the property, the property cannot be sold while one partner is incapacitated. Absent a du­rable power of attorney, the incapacity of one partner could necessitate time consuming and expensive guardianship or conservatorship proceedings if the property is to be sold while the partner remains incapacitated.
JTWROS can also be unilaterally severed by one partner without consent of the other by transfer or encumbrance of that owner’s separate share. Such action automatically converts the JTWROS to tenancy in common, and the other partner has no recourse to prevent this conversion.
JTWROS also exposes the property to the creditors of each individual partner. With JTWROS, each partner is consid­ered to own a separate share of the property. Thus a credi­tor of one partner may attach that partner’s portion of the property to recover that partner’s individual debt.
Another potential pitfall is that when one owner of property that is held JTWROS by unmarried partners dies, §2040 of the Internal Revenue Code requires inclusion of 100% of the fair market value of the property in the estate of the first partner to die, unless the surviving partner can prove contribution to the acquisition of the property. To overcome this presumption, the surviving partner must provide evi­dence as to his or her contribution to both the down pay­ment and the mortgage payments.
JTWROS is also only available to partners who wish to own equal percentages of the property. If one partner contributes a greater share to the down payment, mort­gage payments, or improvements, that partner has made a taxable gift to the other. A taxable gift also occurs when one partner adds the other partner to the title of the first partner’s existing property – a commonly overlooked is­sue among non-traditional partners. It is very important to counsel non-traditional partners who wish to add their
partner to the title of their existing property that doing so creates a permanent gift that cannot be revoked if they later have a parting of the ways.

Tenancy in Common
Non-traditional partners may choose to hold property as tenants in common (TIC) to avoid some of these potential pitfalls. As TIC, partners can own different percentages of the property, and that percentage can be defined and can change over time by separate agreement. For example, one partner can gift a share of the property equal to his or her annual exclusion amount each year until one half of the property has been gifted. The value of the gifted shares may be reduced by a fractional share discount, due to the reduced marketability of undivided interests in real proper­ty. Use of a fractional share discount can allow the partners to equalize their ownership more quickly without exceed­ing their annual gift exclusion amount.
One partner can also sell a percentage of his or her exist­ing property to the other partner as TIC, either in install­ments or in contract for proceeds of a future sale. The sale of shares to the partner need not be for fair market value; however, if the shares are sold at an egregious discount, a taxable gift may be inferred. If the sale of shares of proper­ty to the second partner reflects an appreciation in property value from the selling partner’s initial acquisition cost, the selling partner may incur capital gains tax. If the property in question is the selling partner’s principal residence, the selling partner may exclude capital gains up to the allow­able amount (currently $250K). The partners must keep in mind, however, that when the property is eventually sold, whatever capital gains exclusion the original selling partner previously claimed on that property will have been already used up to the extent of the previous exclusion amount. The partners should still be able to claim the unused balance of the then available capital gains exclusion at the time of the later sale.
With TIC, on the death of the first partner, only that part­ner’s share of TIC property will be included in his or her estate. A fractional share discount should also be allowed, since §2040 does not apply to TIC property. Compare Ellie B. Williams v. Com’r, 75 T.C.M. 1758 (1998) (fractional discount allowed for estate tax value of share of TIC prop­erty) with Estate of Young v. Com’r, 110 T.C. 297 (1998) (no fractional discount allowed for estate tax value of JTWROS property under §2040).
Unlike JTWROS, with TIC, some estate planning is required to pass title upon death of the first partner. How­ever, probate can still be easily avoided by placing the TIC shares in the partners’ revocable living trusts.
Tenancy By the Entireties
Tenancy by the entireties (TBE) is a form of joint own­ership with survivorship benefits plus additional asset protection benefits. TBE is not available in all states, and it is only available to married couples. However, with same-sex marriage laws constantly evolving, TBE is available to same-sex married couples in Massachusetts and presum­ably now in Vermont, with other states likely to come on board in the future.
Unlike JTWROS, where each partner is considered to own a separate share of the property, with TBE, the spouses as a spousal entity own the entire property, thus one TBE owner cannot unilaterally sever his or her property interest. In Massachusetts, creditors may still attach TBE property for the debts of one spouse; however, if the non-debtor spouse survives the debtor spouse, the creditor takes nothing. Creditors may attach TBE property for any debt which is the joint debt of both spouses. Keeping this in mind, to the extent that the spouses are careful to keep their debt sepa­rate, TBE affords a level of asset protection that JTWROS does not.
One Partner’s Name Only
Depending on the partners’ circumstances, there may be situations where it is advantageous for only one partner to hold legal title to the partners’ shared property. Some examples include where one partner may own the entire property to begin with and the relationship may be too new for joint ownership to be appropriate. Or one partner may have credit problems that the property may be needlessly subjected to by adding that partner to the title. Or perhaps one partner may earn most or all of the income and thus the partnership would benefit from that partner taking the entire income tax deduction.
The danger of this method of ownership is that if the sec­ond partner contributes to the acquisition or improvement cost of the property and there is no documentation of this contribution, the second partner will have no way to recoup his or her contribution in the event of a break up.

Shared Property Agreements
Regardless of how non-traditional partners hold title to property, a shared property agreement is always a good idea. Such an agreement can detail what percentage each partner owns, what each has contributed and will contribute in the future to the acquisition, maintenance and improve­ment of the property, and whether and how the ownership percentage will change over time. For the purposes of documentation or equalization of contribution, the value of non-monetary consideration – such as labor to improve the home – can be detailed in the agreement. (Practitioners should take care not to draft any phraseology that could possibly be interpreted as using sex for consideration.)
Non-traditional partners should expressly document their agreed understanding in writing at the time they take title to shared property, or as soon thereafter as possible. While there is a great body of family law that has created known precedent for the disposition of property in a dissolution of marriage, the law regarding disposition of property in a break up of non-traditional partners is sparse and unpredict­able. If issues of disagreement about the partners’ shared property arise, these issues are much more easily resolved at the time the partners take title to property together, while the relationship is good and minds are not clouded by the emotions of a break up.
Other Considerations
When re-titling property, it is important to look to the laws of your state to determine how issues such as documentary stamp tax, property tax assessment and homestead laws ap­ply. In some instances, these issues are a mild to moderate annoyance. In other instances, these issues have the poten­tial to defeat the goals of the partners’ plan. For example, in Florida, persons having minor children are prohibited from devising their homestead property. Thus, if a partner has a minor child from a past relationship or marriage and now has a new partner, the first partner may not devise his or her homestead property to the new partner, even if the minor child is living full time at the other parent’s homestead property. Thus, if the first partner wishes to ensure that the second partner receives the first partner’s homestead property upon the death of the first partner, then a vehicle of devise, e.g. a will or a revocable living trust, would not be an appropriate choice to achieve the partners’ goal as to that specific property.
There are many options available to non-traditional partners when deciding how to take or hold title to shared property. The most important concept to take away from this article is that, contrary to popular misconception, there is no one right way for non-traditional partners to hold title to their shared property. What is best for any particular partners depends on their unique circumstances, including their finances, their goals, their family situation, and the laws of their state.

Young Adults Need Estate Planning Too

Most young adults think they are invincible. But the reality is that anyone, at any time, can become seriously ill or be injured in an accident or a random act of violence. And far too many of us know the tragedy of a promising young life that was abruptly cut short.
Once a child turns 18, parents lose the legal ability to make decisions for their child or even to find out basic information. Learning you will not be able to see your college student’s grades without his/her permission can be mildly frustrating. But a medical emergency can take this frustration to a completely different level. The parents (or a sibling or another person) will probably have to go to court and ask for permission to obtain information about the student’s medical condition, be able to make decisions about treatment, and have access to the student’s financial records and accounts.
The following legal documents, prepared by an estate planning attorney, allow you to name another person to make medical and financial decisions for you if you are unable to make them for yourself. The person(s) you select should be someone you know and trust, and a candid discussion should occur now so they know what your wishes would be. These documents are not expensive, and everyone over the age of 18 should have them.
Parents should consider scheduling a visit with their estate planning attorney after each child’s 18th birthday, and encourage other parents to do the same with their young adults. Having these documents in place does not mean anyone expects to use them, but everyone will be glad to have them should they be needed.
In the Event of Incapacity
  • A Durable Power of Attorney for Heath Care gives another person legal authority to make health care decisions (including life and death decisions) if you are unable to make them for yourself.
  • A Durable Financial Power of Attorney gives another person legal authority to manage your assets without court interference. (A “regular” power of attorney ends at incapacity; a “durable” power of attorney remains valid through incapacity.) Your attorney can write it in such a way that it does not go into effect until you become incapacitated.
  • HIPPA Authorizations give your doctors permission to discuss your medical situation with others, including family members and other loved ones.
In the Event of Death
Most young adults do not have substantial assets, so a simple will is probably all that is needed at this time. It will let the young adult designate who should receive his/her assets and belongings in the event of death. Otherwise, the laws of the state in which the young adult lives will determine this, and that may not be what anyone would want.
After the Documents Have Been Signed
A little housecleaning may be in order. It is important that the designated person knows where to find financial records and passwords if needed. Tidy up your computer’s desktop. Make a list of accounts and passwords (including your computer’s password), print the list and put it in a safe place; a hard copy is important in case your computer is lost or stolen. If you use an online back-up system, be sure to include it. Don’t forget online accounts and social media. If there is anything you don’t want someone (think, parents) to see, either get rid of it now or ask a friend to delete files or remove things if something happens to you. Finally, update your documents as your life changes.

Estate Planning for Young Families

Many young families put off estate planning. If asked, they may say they are too young, healthy or can’t afford it. Some have trouble just thinking about what could happen if they should die while their minor children and spouse are depending on them. But even a healthy, young adult can be taken suddenly by an accident or illness, and those with young families need estate planning precisely because others are depending on them.
Of course, you are not expecting to die while your family is young, but planning for the possibility is being prudent and responsible, and it shows your family how much you care.
A good estate plan for a young family will include naming someone to administer the estate (a trustee or executor), naming a guardian to care for minor children, providing instructions for the distribution of your assets, and naming someone to manage the inheritance for the children until they become adults. It will also include reviewing your insurance needs and planning for disability.
Naming an Executor or Trustee for Your Estate
This person will be responsible for handling your final financial affairs—locating and valuing assets, locating and paying bills, distributing assets, hiring an attorney and other advisors—so it should be someone who is trustworthy, willing, able, knows you and will carry out your wishes.
Naming a Guardian for Minor Children
If something happens to one parent, the other parent will continue to raise the children (unless he or she is physically or emotionally unable to do so). But who will raise them if something happens to both of you? This is often a difficult decision for parents, but it is very important because if you have not named a guardian, the court will have to appoint someone without knowing your wishes, your children or your family members.
Providing Instructions for Distribution of Your Assets
Most married couples want their assets to go to the surviving spouse if one of them dies. If both parents die and the children are young, they want their assets to be used to care for their children. Some assets will transfer automatically to the surviving spouse by beneficiary designations and how title is held. However, an estate plan is still needed in the event this spouse becomes disabled or dies, so that the assets can be used to provide for the children.
Naming Someone to Manage Your Children’s Inheritance
Unless you include this in your estate planning, the court will appoint someone to oversee your children’s inheritance. This will likely be a friend of the judge and a stranger to your family. It will cost money, which will be paid from the inheritance. Also, the children will receive their inheritance (in equal shares) when they reach legal age, usually age 18. Most parents prefer that their children inherit when they are older and to keep the money in one “pot” so it can be used to care for the children’s different needs. Establishing a trust for your children’s inheritance lets you accomplish these goals and select someone you know and trust to manage it.
Reviewing Insurance Needs
Part of the estate planning process is to review the amount of life insurance on both parents. Income earned by one or both parents would need to be replaced; also, one or more people would probably be needed to take over the responsibilities of a stay-at-home parent. Additional coverage may be needed to provide for your children until they are grown; even more if you want to pay for college.
Planning for Disability
There is the possibility that one or both parents could become disabled due to injury, illness or even a random act of violence. This should be planned for, as well. Both parents need medical powers of attorney that give someone else legal authority to make health care decisions for you if you are unable to do so. You would probably name your spouse to do this, but one or two others should be named in case your spouse is also unable to act. HIPPA authorizations will give your doctors permission to discuss your medical situation with others (parents, siblings and close friends). Disability income insurance should also be considered because life insurance does not pay at disability.
Putting Your Plan in Place
Estate planning will require you to think about family relationships and some decisions may be difficult. But an experienced estate planning attorney will be able to help you through the process, provide valuable guidance and make sure your plan will do what you want when it is needed. If finances are tight, as they usually are for young families, start with the most essential legal documents and term life insurance, then update and upgrade your plan as your financial situation improves. The most important thing is to not put this off. Once your plan is in place, you will have peace of mind that your family will be protected if something should happen to you.

Originally published November 28, 2012 by our friends at

The Perils of Making Lifetime Gifts and Loans to Your Children

When counseling clients, I am always concerned when I learn that parents have made, or are proposing to make, large monetary gifts or loans to their adult children. The reasons for such gifts or loans vary. Perhaps a child finds him or herself in financial difficulty, often as a result of a job loss, divorce, business failure, or dependency addiction. Few parents, even if they have limited means, turn away a child in need.

As the father of two children, I have nothing against such a parental bailout where a child is in genuine need. After all, family is family. However, I frequently see situations where an adult child convinces his or her parents into transferring a significant portion of the parents’ life savings for non-essential needs—often for a questionable business venture. In a perfect world, the child should first look to a bank for financing. If a bank will not provide financing, it should be a red flag to the parent to think twice before providing the requested funds, unless the parent is prepared to permanently part with the money.

In one recent case, my client had given her son $300,000 that the son applied to the purchase of a sports bar. The transaction was deemed a loan and the son gave his mother a rudimentary promissory note. However, the mother did not retain an attorney so she did not have a mortgage placed upon the property, leaving her loan unsecured. In relatively short order, the son’s “can’t miss” sports bar went bust and the mother’s chances of getting the $300,000 back is now uncertain, at best.

In other situations, money may be given to a child in drips and drabs. Typically, the child in such cases has chronic financial problems and even as an adult is largely dependent upon the parent for support. Sometimes, the child is just unlucky in life, but all too often I see cases where a parent enables a lazy or unmotivated child to live off of the parents’ resources.

In cases where a parent is providing help to an only child, my main concerns are typically (i) to ensure that the parent retains sufficient resources to maintain their standard of living, (ii) to understand the estate and gift tax implications of the transfers, and (iii) to understand the implications of such asset transfers on the parent’s potential Medicaid eligibility should long-term care someday be necessary. If those three issues are satisfactorily addressed, then a parent can make such transfers without significant concern.

However, when there is more than one child in the picture, the situation takes a different turn. In a situation where parents who have multiple children are financially assisting fewer than all the children, it is important that the clients understand the potential for significant strife among their children if the parents haven’t made clear in their estate plan how such lifetime payments are to be treated after the parents’ deaths.

Often the most equitable approach is to provide in the parents’ will or living trust that the lifetime transfer to a child is to be deemed an advance on that child’s inheritance. This is what was done in the case mentioned above where the mother gave her son $300,000 for his ill-fated sports bar. This woman’s estate plan provides that to the extent that the son hasn’t repaid the loan, his share of the inheritance is to be offset by the unpaid amount.

For example, if the mother’s total estate is $1,000,000 at her death, the client’s son and daughter would have otherwise been entitled to one-half of the assets, or $500,000 each. Luckily, the mother’s plan provides that the $300,000 loan amount (or any remaining unpaid amount) is added to the total estate for determining each child’s equitable share. If the son’s entire $300,000 loan remains unpaid at his mother’s death, then the total estate for distribution purposes is $1,300,000, with each child to be allocated from that sum the amount of $650,000. Since the son has already received $300,000 of that amount, he would only receive $350,000 of the $1,000,000 from his mother’s estate and his sister would receive $650,000.

Under this scenario, each sibling will receive substantially equal amounts of their mother’s estate, including the large lifetime transfer to the son. Such an equitable solution is far more likely to be palatable to the children and is far more likely to result in harmonious sibling relations, rather than the case where large lifetime gifts and/or unpaid loans are not factored into the estate planning design.

Naming a Guardian for Your Minor Child(ren)

If you have a minor child, you need to name someone to raise your child (a guardian) in the event that both parents should die before your child becomes an adult.  While the likelihood of that actually happening is slim, the consequences of not naming a guardian are great.
If you don’t name a guardian, a judge (a stranger who does not know you, your child, or your relatives) will decide who will raise your child without knowing whom you would have preferred.  You can’t assume the judge will automatically appoint your mother or sister to raise your children; anyone can ask to be considered and the judge will select the person he/she deems most appropriate.
If you have named a guardian in your will, the judge will still need to appoint the guardian, but will usually go along with your choice.  If you are divorced, the judge will usually name the other parent, but will appreciate knowing if you have any concerns about his or her parenting capabilities.
Choosing a Guardian
The person you name as guardian does not have to be a relative, so consider all of your options. You may, in fact, be very close with another family with whom your child is already comfortable, and you may agree to be guardian for each other’s kids if something happens to either of you.
As you begin to list and evaluate your candidates, consider the following:

  • Parenting style, values, and religious beliefs should be similar to your own.  If your candidates have children, observe how they are raising and disciplining them.  If they don’t have children, find out all you can about how they were raised; people tend to parent how they were parented.
  • How far away from you do they live?  Would your child have to move far away from a familiar school, friends, and neighborhood at an emotionally difficult time?
  • How comfortable with them is your child now?
  • How prepared emotionally are your candidates to take on this added responsibility?  Someone who is single may resent having to care for someone else’s children.  Someone with a houseful of their own kids may not want more around or they may welcome the addition.
  • Do they have the time and energy?  Your parents may have the time, but consider if they would have the energy to keep up with a toddler or teenager.  Someone who works long hours may not seem the ideal candidate at first, but they may be willing to change their priorities if needed.
  • If your candidates have children of their own, would your child fit in or feel lost?
  • Consider the age of your child and of your candidates.  An older guardian may become ill or even die before your child is grown.  A younger guardian, especially an adult sibling, may be concentrating on finishing college or starting a career.  If your child is older and more mature, he or she should have some input into your decision.
  • Is your selection willing to serve?  Ask.  Don’t assume they will take the job if it comes to them.
The Financial Side
Raising your child should not be a financial burden for the person you select as guardian and a candidate’s lack of finances should not be the deciding factor in your decision.  You will need to provide enough money (from your own assets, from life insurance, or both) to provide for your child the way you want.  You may even want to help the guardian buy a larger car or add onto their existing home, if needed.
Consider naming someone else to handle the finances.  Naming one person to raise the children and handle the money can make things simpler, because the guardian would not have to ask someone else for money.  The best person to raise your child may not be the best person to handle the money and it may be tempting for them to use this money for their own purposes.
Many parents set up a trust for the child’s inheritance (so the child will not inherit everything at age 18) and name someone other than the guardian to be the trustee of the trust.  There can be disagreements over expenses (for example, whether the child should go to public or private school), so be sure to name two people who can work together for the best interests of your child.
Provide a Letter of Instruction
Consider writing a letter to the guardian explaining your expectations and hopes for your child’s upbringing.  Include your desires about your child’s education, activities, and religious training.  Read and update your letter every year as your child grows and interests develop.  You may also want to discuss these with your selected guardian.
Having a Hard Time Making a Decision?
If you are having trouble making a decision, list the pros and cons for each candidate.  If you and your child’s other parent are having trouble coming to a mutual agreement, try making your own separate lists of top candidates and look for some common ground. Be sure to name at least one alternate in case your first choice becomes unable to serve.
Keep in mind that the person you select as guardian will probably not raise your child.  The odds are that at least one parent will survive until your child is grown.  You are simply being a good parent here and planning ahead for an unlikely, but possible, situation.  Next, realize that no one but you will be the perfect parent for your child, so you are probably going to have to make some compromises in some areas.  Also, you can change your mind.  In fact, you should review and change the guardian as your child grows and if the guardian’s situation changes.
Don’t wait too long.  Remember, if you do not name someone to raise your child and the unlikely does happen, a total stranger will decide who will raise your child without your input.

Special Needs Planning

In this article, we will focus on an area that will likely apply to you or someone close to you: planning for a loved one with special needs. We will look at the increasing need for this planning; the decrease in government benefits; the concerns families have about providing for their loved ones; whether it is worth protecting government benefits; and planning tips to help you provide for and protect your loved one for as long as he or she lives.

The Increasing Need for Special Needs Care and Planning
Chances are there is or will be someone in your family (child, grandchild, nephew, niece, parent, grandparent) who will need long-term help managing personal care and/or finances. A quick look at the following statistics confirms that the need for special needs care and planning is increasing:

  • In 1992, there were 15,580 children ages 6-22 who were diagnosed as having what is now called an Autism spectrum disorder. In 2006, the number was 224,594.
  • In 2006, there were an estimated 24.9 million adults in the United States with Serious Psychological Distress.1
  • An estimated 4.4 % of U.S. adults may have some form of bipolar disorder during some point in their lifetime. 2
  • In 2006, an estimated 22.6 million people in the U.S. (9.2% of the population age 12 or older) were substance dependent or abusive in the previous year.3

Because many of the conditions causing a need for special care do not decrease life expectancy, families are seeking answers on how to provide the best quality of life for their loved ones for the rest of their lives . . . which, for a young child, could be 70 years or longer.

Fewer Programs Are Available
At the same time that the need for support services is increasing, government and non-government programs are being reduced and even eliminated due to the strain on state and local budgets and pressures to reduce deficit spending at the federal level. Once a program benefit is lost, for whatever reason, it may be difficult if not impossible to get it back.

Many families with special loved ones are losing faith that these programs will be there to provide the needed benefits in the future. They are wisely (and often fearfully) looking at alternatives to provide those services. Common concerns are:

  • Who will care for my loved one when I am gone?
  • Who will be my loved one’s advocate?
  • Where will my loved one live?
  • How much independence can my loved one maintain?
  • Will the money I provide last for my loved one’s lifetime?

Preserving Government Benefits/Special Needs Planning Today
Are government benefits for a special needs person worth preserving? For families of modest or limited means, the answer is almost always, “Yes.” However, for more affluent families, the answer may be, “Maybe not.”

In the past, many planners focused exclusively on preserving public benefits at all costs. Today, special needs planning is not necessarily “poverty planning.” The proper focus today is how to provide the best quality of life throughout the person’s lifetime. It may be better to privatize some special needs care instead of spending thousands to protect a benefit that has a low probability of being available in the future.

Careful planning is necessary to craft a plan that will supplement government benefits that are worth preserving, is flexible enough to adjust to changes in future benefits, will preserve and expand assets, will make sure this person receives proper care, and may even save taxes.

It Takes a Team
For a special needs trust, the proper funding, implementation and periodic review are especially critical because it may have to last a lifetime and often cannot be replaced. Once the plan is in place, it will be need to be managed. Who should do that? The ideal trustee would:

  • use discretion, acting in the best interest of the disabled beneficiary;
  • understand public benefits and keep up with changes in the law;
  • wisely invest and conform to all statutory fiduciary requirements;
  • understand taxes;
  • keep perfect books;
  • provide advocacy and prevent abuse; and
  • be immortal.
Since no one person can meet all of these requirements, often the most effective solution is to divide the responsibilities into areas and have a team of professionals work together. For example:
  • A Corporate Fiduciary Trustee (bank or trust company) keeps perfect books; carries insurance, is bondable or has deep pockets; is immortal.
  • A Care Manager uses discretion and acts in the best interest of the beneficiary; understands public benefits; provides advocacy and prevents abuse.
  • A Financial Advisor invests wisely; conforms to all statutory fiduciary requirements; understands taxes.
  • A lawyer skilled in special needs matters keeps up with the ever-changing laws and regulations and provides wise counsel to the family and the other team members.

Often a professional trustee will manage the funds, make distributions, prepare tax returns and keep the records, but will be directed by a Trust Advisory Committee that makes distributions, can amend the trust or replace the trustee. A care manager can be on this committee or be appointed by the committee.

Another alternative is to have a trustee manage the funds but be directed by a care manager who interacts with the beneficiary. A trust protector or advisor would oversee the trustee and care manager from a distance and would be able to replace either for any reason.

Planning Tip: Many parents think a sibling would be the best trustee, but this is rarely a good idea. Most individuals are just not prepared to handle the responsibilities. A professional trustee likely will, in the long run, be less expensive than the mistakes that are often made by a well-meaning but inexperienced family member. Also, some siblings may be torn between using the trust assets to provide for the beneficiary and preserving the assets, especially if they will inherit the assets after the beneficiary dies. It is usually better to have a professional as trustee, and have the family member be on the Trust Advisory Committee or to be the trust protector.

Planning Tip: The role of the care manager is critical. In most families, one person has been a fierce advocate, actively seeking benefits and supervising the special needs person’s care and progress. The care manager will assume that role and will become the beneficiary’s advocate, seeking and evaluating benefits and programs, supervising the person’s care and preventing abuse. Selecting a care manager while the current advocate is living will give families peace of mind that their loved one will have the quality of life they so strongly desire.

Managing the Trust Assets
Careful investment of the trust assets is critical, since loss of these assets could be catastrophic for the beneficiary. The assets will need to earn or grow enough to provide for or supplement the beneficiary’s care. Trust income can be distributed in such a way that it is taxable to the beneficiary (because the beneficiary will typically be in a much lower tax bracket than the trust itself), but without unintentionally jeopardizing any public benefits the beneficiary may be receiving. This can often be accomplished by having the trustee make direct payments to the providers for care and/or supplemental benefits.

Planning Tip: Insurance on the life of a parent or grandparent is often used to fund these trusts. Using a separate, stand alone trust (instead of a parent’s revocable living trust) will also allow other family members to make gifts to support the beneficiary.

Planning Tip: Tax planning combined with special needs planning can present some unique opportunities. For example, using qualified plans to fund these trusts can offer tax advantages. Charitable trusts can also be used to benefit both the beneficiary and an organization. Families are often grateful to organizations that have provided assistance and benefits to the family member and to them, and often want to help make sure these organizations can continue to provide services to not only their loved one but to other families in the future.

Planning Tip: Families with affluent means will be able to provide more opportunities for their special needs beneficiary. For example, purchasing a home in a residential community will guarantee your loved one will always have a familiar, safe home.

If you or someone close to you has a loved one with special needs, we can help with all phases of the planning and implementation. Contact our office for a consultation.

AN UPDATE ON THE ESTATE TAX: With each day that passes we are less likely to see any Congressional action this year on the estate tax; thus, it is becoming more likely the law will revert to a $1 million federal estate tax exemption in 2011. Your estate plan may need some additions or changes. If you have questions, please contact our office.



3 Based on criteria specified in the Diagnostic and Statistical Manual of Mental Disorders, 4th edition (DSM-IV).