Estate Planning Services and Documents Explained, By Attorney Brian F. Mahoney

As an attorney for twenty-three years, I have learned that estate planning is needed for many reasons.

1. We plan for when we are alive:
   
   
1. In case we become disabled (even if it is temporary or even a minor set back – it’s not just for permanent total disability) we need could someone to assist us, even if it is a broken leg and one cannot get to the Bank to cash a check or to withdraw funds, then we need Powers of Attorney. If we become incapacitated then a Power of Attorney is absolutely paramount.
   
   
2. Nursing home care or lengthy hospitalizations can lead to the Government charging us hefty co-pays which drain our assets, income and/or lead to a government lien on our homes and estates often forcing us to repay huge medical and/or nursing home bills. So we plan to try to avoid this from occurring. When do we begin to plan in this regard? If you are in your sixties. If you have no Long Term Care Insurance. If you have a family history of major illness or disease. If you are terminally ill.
   
   
3. If we become incapacitated then a Health Care Proxy is paramount. In the now infamous Terri Schiavo case in Florida, a mere $250.00, well drafted Health Care Proxy would have eliminated the heartache, pain and public spectacle surrounding this unfortunate woman's life and ultimately her death, not to mention the thousands of legal fees. It is inexpensive, straightforward and easy to execute.
   
   
2. We plan for when we are gone:

1. We need to ensure Guardians and Trustees will be appointed for our children and grandchildren.
   
   
2. We need our property goes go to who we want it to go.
   
   
3. We want to ensure certain people or creditors do get at our estates.
   
   
4. We may need to make our Probate Court Estate as little as possible.
   
   
5. We want to avoid State and Federal Estate Taxes. The Massachusetts Estate taxable estate in 2005 is $950,000.00 and then in 2006 it goes up to $1 million. The Federal taxable estate is now $1.5 million, and will increase to $2 million in 2006-08, in 2009 it escalates to $3.5 million, and then the estate tax disappears in 2010. After 2010 it may be set at $2.5 million, but that is open to conjecture at this point. Life Insurance is included in determining the amount of your taxable estate.
   
   
6. We help you to avoid ambiguity and the potential for argument thereby decreasing the probability of a Will or Probate Court contest.
   
   
7. When appropriate and where possible we advise you to avoid Probate Court to:
1. Save your estate Legal fees and Court costs.
2. Avoid the cost of buying a Surety Bond for the Executor/Administrator of your estate, which avoids notifying the Government that you passed away (they like to know in order to lien your estate if they have paid benefits to or for you, i.e., Medical or Nursing care.)
3. Avoid the cost and hassle of obtaining a license to sell realty, this could delay or make more costly a sale of the realty.
4. Avoid publication in the newspaper of your death and thus avoiding notifying potential creditors.
5. Allow property to pass privately by deed or through trusts, which are not public records. So, when property passes privately through the trusts, creditors will not be notified and it passes without undue delay or subject to Court approval.
6. Eliminate problems for your surviving spouse or family members.

Trusts can become very important if both parents have passed away leaving minor children. Guardians for minor children need to be selected and named in your Will.

I have compiled the following brief description of Estate Planning documents we offer our clients along with oversimplified explanations of the need or contraindication for them. These are not all of the documents we can draft. Everyone’s plan is unique to them. We can customize a plan to fit your needs, which usually requires: Wills, Trusts, Powers of Attorney and Health Care Proxies.

COMMON ESTATE PLANNING DOCUMENTS INCLUDE:

Will or Reciprocal Wills for Couples

As the name implies, these documents provide for the disposition of the client's assets when they pass away. It can provide that all assets pass to the surviving spouse, if any, and then next to the client's children or to other specifically named individuals. In the Will parents should nominate a Guardian and a back up.

Pour over wills provide that all of the clients' as­sets be distributed to their respective revocable trusts. An exception is made for personal property (jewelry, furnish­ings, etc.), which is given outright, to the surviving spouse or to the client's children or others.

Durable Powers of Attorney

This is an extremely important document that everyone needs because it enables the named attorney-in-fact to do virtually anything the client could personally do. Even if you are laid up at home with a back injury or something non-life threatening, you might need someone to go to the Bank for you, etc, the Power of Attorney would permit them to do this for you. If someone suffers from Alzheimer’s or a dreadful disease like that, or is in a coma, assets may need to be transferred to avoid liens or to qualify a client for Mass Health Nursing home benefits. This is one of the most valuable documents anyone can possess.

Gifting should be allowed in the Power of Attorney in the event Mass Health (formerly known as Medicaid) planning issues arise. The less property you have, the less Mass Health can count against you when applying for benefits and the less they can lien upon death. (See also the Gift tax issue for transfers over $11,000 per year—and also such gifts in excess of the $11,000 can reduce the Massachusetts exclusion when computing a Mass. Estate tax.)

We can advise you on the so-called “half a loaf planning mechanism,” and the use of “annuities,” to qualify a client for Mass Health Nursing home benefits.

Living Will/Health Care Proxy

By now the entire world knows of the Terri Schiavo case. The Health Care Proxy is akin to, but much more than a "living will" and this document allows another to make health care decisions for you in the event you cannot, whether it is due to coma or Alzheimer’s disease. A Health Care Proxy with included Health Care Directive (I like to draft it all in one document) can express an intent that no heroic measures be taken when there is no realistic hope of recovery. It is always up to the individual client what to instruct their family to do if life and death decisions need to be made by them for you –all Proxies are customized to the individual –we are all different and have unique concerns, beliefs, fears and desires. We also include an H.I.P.A.A. clause so the agent/holder can obtain medical records needed to make an informed medical decision based upon all available information. Without that document due to a recent Federal law known as the H.I.P.A.A. act, a spouse cannot even get medical information about the other at a hospital. Some laws are well intentioned yet a nightmare in the real world.

Without a Health Care Proxy, in the event of a catastrophe we might need to go to Court to obtain a Medical Guardianship, which would, be very costly, and worse –it takes time- the Court process is slow.

A Health Care Proxy is also about your family and those who you leave behind. If you spell out what you want done in the event of a medical emergency it lessens their burden because they know what you want so they can sleep better at night not having to guess or wrestle with such heavy decisions on their own.

EVERYONE SHOULD HAVE A WILL, A POWER OF ATTORNEY AND A
HEALTH CARE PROXY . EVERYONE NO MATTER WHAT AGE.

Joint Ownership of Property between Spouses

Jointly held property is simple and cheap and passes property on to the Surviving spouse by operation of law upon the death of the first spouse. Spouses often own the realty as Tenants By the Entirety, but this isn’t advisable where the Estate might be taxable Federal or State or where the spouses are into their 60’s or older and may have no Long Term Care Insurance and/or when MassHealth / Nursing home issues loom as potential problems.

Homestead

A Homestead prevents your home from being taken and sold if a judgment is rendered versus you in Court if your equity is less than the Homestead exemption: $500,000.00 now. Your home can still be attached if your equity is less, but it cannot be levied upon, which means they cannot seek a court ordered sale of your home, so the attachment is rendered useless, unless you want to sell or transfer your interest in the property. If a creditor cannot sell your home by levying on the attachment, then they may not sue you personally for your assets, and may accept what insurance you have.

It costs about $35.50 for Registry of Deeds filing and certified mailing, so there is no reason not to declare. If your residence is not in a Trust or otherwise protected then no reason on earth exists not to purchase this cheap and extensive protection.

We need Adequate Insurance

We all need to have adequate coverage on auto and home. A good homeowner’s policy with $100,000 in coverage should cost only about $600/year, including $1,000 in medical coverage and which includes your fire loss in the event of a tragedy. Personal umbrella policies only cost about $350/year for $1 million in coverage.

Mass Health Planning (Formerly Know as Medicaid Planning):

For those who are elderly, seriously ill or disabled, going into a Nursing facility could lead to the loss of one’s home , assets or legacy to the family so we may need to do some “Medicaid Planning”. If someone is elderly or is ill or if there is a history of catastrophic/chronic illness in the family and you are over 60 with no Long Term Care Insurance, then Mass Health planning must be discussed.

There are a variety of measures including giving away property outright; transferring all property to the spouse who is not in need of assistance (but what happens if they both are in need or one spouse passes away?), granting a Life Estate by deed (while reserving special powers over the so-called remaindermen), selling all assets and investing in an annuity, revocable trusts and irrevocable trusts. For every action there is a reaction. Each method has advantages and drawbacks.

While a so-called Medicaid Trust can take many forms, one alternative is a revocable trust wherein the Trustee is given the power essentially to gift away all of the client's property in order to make the client eligible for Medicaid/MassHealth should the client become in need of nursing home care. At least one-third off all people will need nursing home care at some point in their lives. But it is doubtful whether this type of trust will stand up.

Generally a person is rendered ineligible for Nursing home/MassHealth benefits if they have transferred property out in the last six months. There is a penalty divisor, of approximately $7,000 (rounded off for ease –not the specific figure). If you gave away $70,000 in the six months before you applied you would be ineligible for $70,000 divided by 7,000 or for as long ten months. A gift could mean transferring real estate to your children or a series of cash gifts to several children. There is also a “look back” period: generally 3 years for property transferred outright - but 5 years regarding property placed into trust. During the look back period your benefits will be reduced according to a formula. So, there are timing implications here.

If a trust can be revoked at any time (Revocable Trust) has the person in need of services actually given up control over the property? There is doubt whether the Government (for nursing home planning purposes) honors a revocable Trust and so assets in that Trust would be countable assets. Normally one’s residence is not countable against the allowed assets cap which is $2,000 and / or if married, one half of your assets up to $93,000.00. I do not believe it would effective at all, yet it is commonly offered and selected by other attorneys. But it does avoid Probate. Alternatively, the trust can be irrevocable with the client merely having a life estate (see below).

In an Irrevocable Trust the client can retain the right to receive all the income from trust assets during his lifetime. Assuming whatever applicable waiting periods are met, the property in the trust can be protected for the client's children. The only thing that may be counted for Medic­aid purposes would be the income. However, some Attorneys believe the trust can even provide that the income stream be terminated in the event the client enters a nursing home to protect not only the principal, but the income as well, but the Commonwealth would challenge this type of trust clause, so I question whether it would be effective – and so I believe: why take that risk?

Annuities & Medicaid

Certain annuity contracts can qualify you for Medicaid, even if your property is sold and invested into an annuity after the application for benefits is made.

Please keep in mind that every action we might take has a reaction, either regarding Estate taxation; Medicaid issues or most importantly regarding the property owners ‘Control.”

Sometimes Medicaid planning involves only a specially worded Deed called a Life Estate.

MORE SOPHISTICATED ESTATE PLANNING DOCUMENTS INCLUDE:

So-called A&B Trusts (with or without Q-Tip, or using so-called Clayton language) with Pour Over Wills for Client and Spouse.

In Massachusetts the difference between the State and Federal estate tax exclusions can create a problem, because the levels at which an Estate is taxable are different for Massachusetts as opposed to the Federal government, but due to a D.O.R. directive, we can make a Federal Q-Tip and also a Mass Q-Tip election to maximize both the Federal and State estate tax exclusions.

We can establish two trust shares, the Marital (“A”) share and the Family (“B”) share. The Marital share is intended to benefit the surviving spouse and is funded to the maximum amount possible to eliminate federal estate taxes and minimize state estate taxes at the first spouse's death. The Marital Share can be limited by a Q-Tip trust, or the surviving spouse can be given a power to withdraw the entire Marital Share.

The Family share is funded with the remainder of the estate. Often the Family share will provide lifetime income to the surviving spouse (including dis­cretionary distributions of principal), with the client's chil­dren taking the remainder when the second spouse passes away.

An inter vivos A&B trusts can be funded with the clients' assets during their lifetimes, thereby avoiding probate at death.

Revocable Trust in a Pour Over Will for Client without Spouse

This provides management for the client's assets for the benefit of the client's children and their children typically. It can be used to provide for the benefit of minor children, or to provide for children who are not able to handle their own fi­nances, etc. We regularly draft trusts in the Will itself and Living Trusts to which the Will leaves property to be held in Trust for minors until they are of age (usually I recommend age 25.)

Irrevocable Life Insurance Trust (I.L.I.T.)

If the client owns life insurance policies, and / or wishes to purchase life insurance, this trust mechanism can be used to own those policies, thereby excluding the value of the policies and ultimate death benefit from the client's estate to avoid estate taxes. It is irrevocable; however, it can be “revocable” through powers given to the client's spouse or to other persons. For a single client, the irrevocable trust can be used to provide for the client's children or other beneficiaries, with a goal to exclude the value of the policy from the client's estate. There are many annual duties associated with an ILIT, which we would need to discuss before proceeding.

“ Second-to-Die” Irrevocable Insurance Trust

If the client and his spouse are insured (or wish to be insured) under a “second-to-die” (or “survivorship”) life insurance policy, a separate irrevocable trust can be used in order to keep the policy out of both es­tates. This trust works like the revocable trust and other irrevocable trusts after both client and spouse are deceased.

Qualified Personal Residence Trust

The Qualified Personal Residence Trust (QPRT) is designed to hold title to the client's principal residence or vacation home, whereby the client gives the property away to his children, but retains the right to use the property for a specified length of time. The idea is to maximize the amount of gifts the client can make while minimizing the amount of the Federal estate tax "exclusion amount" to be used. The value of the gift is reduced by the value of the client's retained interest.

Charitable Remainder Trust

Assets can be transferred into this trust and the client and/or his spouse will receive an interest for life, but ultimately the assets will pass to charity. Such a trust is often ideally used when the client has a low-yield asset (e.g., unproductive land or low-income stock), which he would like to sell without significant capital gains taxes. The charitable remainder trust (“CRT”) enables the client to take a charitable income tax deduction today, avoid a tax on the sale of the assets that he contributes to the trust, and guarantee himself an income of some stated percentage from the trust for as long as he is alive.

The “CRT” is also often used when a client is contemplating selling an asset with a very low cost basis, e.g., his closely held business .The CRT is often used in conjunction with an irrevocable insurance trust. If the client uses part of the “extra” income (i.e., the additional income that can be generated by the trust assets because no capital gains tax is paid) he earns by paying insurance premiums on a new policy with a face amount equal to the value of the asset given to the CRT, the client's children will actually inherit more. The reason is that the insurance will replace the CRT asset, but if the insurance is owned by an irrevocable trust as discussed above, the proceeds can avoid all estate taxation

Realty Trust

A common pur­pose of it is to acquire title to real estate on behalf of the revocable trust(s). This avoids recording the revocable trust(s) at the registry of deeds, while still permitting real estate to be part of the revocable trust(s) and to avoid probate. Once title to the client's real estate has been deeded into the trust, beneficial ownership can be easily changed at any time by the execution of a new schedule of beneficiaries, with­out the need for executing and recording a new deed.

We can also use so-called Nominee Trusts which are more like a Principal Agent relationship than a normal so called grantor trust and these can help us to place realty into it and then to amend the schedule of the beneficiaries on a private schedule of beneficiaries without re-recording a deed and without ever having to record the trust-which maintains further privacy (but these will not be good for Mass Health issues though.) The Nominee trust can be used to make gifts of realty to one’s children at $11,000 per year, but they do not know it (cannot check it is private- and the trout can be revoked at any time by the Husband and Wife who are also the Beneficiaries.

Irrevocable Gift Giving Trust

This is a trust designed to allow the client to irrevocably give away assets to named beneficiaries, often to his/ her children. The assets or at least the appreciation thereon can be excluded from the client's estate then invested and paid to the beneficiaries of the trust A "Crummy" power is generally included so that the gifts, when made, will constitute gifts of a present interest and to qualify for the annual gift tax exclusion.

We also advise everyone to look into : LONG TERM CARE INSURANCE, TERM LIFE INSURANCE, VARIABLE LIFE INSURANCE: which can allow for tax-free growth.

We need to review the client’s Deed and Homestead and may also need to update all Beneficiary Clauses on all Life Insurance and Investments.

Thank you.

Brian F. Mahoney, Esq.

Uses For Nominee Trusts In Estate Planning , By Attorney Brian F. Mahoney

Introduction

A Massachusetts nominee trust is (a) in writing, (b) has one or more persons or corporations named as trustees, (c) has an identified corpus, (d) has beneficiaries identified on a written schedule held by the trustees but not disclosed to the public, and (e) contains various trustee powers as to corpus dispositions that can only be exercised when authorized by the beneficiaries.

The beneficiaries are the owners of the corpus for all purposes, including income, gift and estate taxation, except being the owners of record of the corpus. There is a Principal/Agent relationship between the Trustees and the Beneficiaries, and it is somewhat the reverse where usually in a Grantor Trust, the Trustee instructs the Beneficiaries on what he will/is allowed to do for them, but in a Nominee Trust the Beneficiaries direct the Trustee.

The nominee trust was conceived as an estate-planning vehicle to allow a decedent’s real estate to pass to beneficiaries without the necessity of it being probated, e.g., the undisclosed beneficiaries would be also be the trustees of the Nominee trust (you can’t have the same trustee be the only beneficiary, but the same two trustees can be the same two beneficiaries!)

The trustees have liability in tort but not in contract if the trust has appropriate language stating that those dealing with the trust may look only to trust property when a dispute arises with the trustee and giving the trustee ostensible authority to deal with the trustee.

The reasons for holding title in such a trust are:

• Anonymity of ownership,
• Ease of title transferability: you do not need to re-record a deed every time you want to change the percentage of interest in a property held by the trust,
• Avoidance of state recording fees for deeds and a transfer tax (formerly known as tax stamps). Regarding new deeds (you can allocate and change a percentage of ownership in Realty merely be amending the percentage of ownership in the Schedule of beneficiaries)

Use In Estate Planning to Avoid Estate Taxes

Family Gifts Reduce Estate Size to Avoid Estate Taxes

Hypothetical Facts No.1:

Peter and Carol and their four children enjoyed the summer home jointly owned by Peter and Carol. The home is now worth $440,000; is mortgage free; and is now solely owned by Peter because Carol died. The four children are now married with families and use the summer place more than Peter. Assuming Peters’s estate will be subject to estate taxes, then the transfer of the summer home out of his estate could save estate taxes

Documentation Needed for Situation No.1:

• Written opinion of value from a realtor to support fair market value of $440,000;
• Record (a) Nominee Trust Declaration (not the whole trust but a certificate only) with Peter and one or more of his children as initial trustees, and (b) Deed of Summer Home to the trustees;
• Unrecorded Nominee Trust and Nominee Trust Schedule of Beneficial Interests showing Peter as 100 percent beneficial interest holder;
• Off-record assignments in Year 1 from Peter to each or his four children and their spouses of a 2.5 percent beneficial interest in the nominee trust worth $11,000 for a total of $88,000 for all assignments; thereby reducing his estate (without a gift tax) by that $88,000.00, and so in year one we merely (Off-record) revise the Schedule of Nominee Trust Beneficial Interests showing Peter as owning 80 percent and each of his four children and their spouses owning 2.5 percent;
• Off-record assignments in Years 2 through 5 or beyond, of percentage interests to each child equal to not more that $11,000 based upon current opinions of value.

Expected Results:

Peter’s estate will be reduced each year and there will be no gift taxes or gift tax returns required since each gift is within the annual exclusion amount. Please keep in mind that gifts over the $11,000.00 per anum reduce the allowable Estate Tax Exclusion (i.e. in Mass. Assume the exclusion is $950,000 and lifetime gifts of $100k were made and no gift tax was paid then the Exclusion is reduced to $850,000.00.) The children’s and their spouses cost basis of the real estate will probably be the same as John’s and will not be stepped-up upon John’s death.

Regarding Equitable Division: Second Marriage Residence:

Hypothetical Facts No.2:

Bill, a widower with two children, and Jean, a widow with three children, marry and contribute equally to the purchase of a new home and take title as tenants by the entirety. Their wish is to have a place to live and on the death of the survivor to sell the home and divide the proceeds by distributing one-half to Bill’s children and one-half to Jean’s children.

Documentation Needed:

• Unrecorded Trust Agreement establishing B&J Home Trust with one of Bill’s children and one of Jean’s children as trustees, to be revocable until the first spouse dies, to hold the home for Bill and Jean during their lives with a provision for all income to go to the survivor, and on the death of the survivor to distribute one-half of the trust to the children of Bill and one-half of the trust to the children of Jean (the trustees would typically sell the home and distribute the proceeds but they could sell to a family member at the then fair market value);
• Record: (a) Declaration of Trust establishing B&J Realty Trust, a Nominee Trust with Bill, Jean, and one of Bill’s children as trustees and (b) Deed from Bill and Jean to the trustees of B&J Realty Trust;
• Unrecorded Trust and Schedule of Beneficial Interests showing trustees of B&J Home Trust as 100 percent beneficial interest holders.

Expected Results:

There could be an estate tax marital deduction for the full value of the home in the estate of the first spouse to die, and if so an estate tax on the full value of the home in the estate of the surviving spouse. But, provisions could also be made to allocate an interest each year to the children of the remainder interest as in the first hypothetical to avoid gift taxes and to reduce the estate value before death. The tax basis of the home should step-up on the death of the second spouse.

Important Provisions

The following should be included in any declaration:

• Name and Purpose: i.e.: “This Trust may be referred to as the ‘The Smith Realty Trust’ and is intended to be a nominee trust for federal and state income tax purposes.”
• List of the names and addresses of the Trustees and Successor Trustees (so that if ever the property is to be sold, then a prospective buyer of that property can get clear title by establishing that the person who purports to be a Trustee of this unrecorded and private Trust actually has authority as a Trustee)
• Trustees Powers I.e. “…but the Trustees shall have no authority to maintain bank accounts in the name of the Trusts or Trustees but they may maintain bank accounts in the name of the beneficiaries.”
• Schedule of Beneficial Interests“ The terms of the Smith Realty Trust dated 4-14-05 (the ‘Realty Trust’) are hereby approved and the above-named beneficiary, in consideration of the execution by the Trustees of the Realty Trust therein named, agrees with said Trustees of the Realty Trust (a) to be bound by the Realty Trust; (b) to save said trustees of the Realty Trust and their successors and assigns harmless and indemnified from and against all claims and demands of every name and nature which they may suffer or incur by reason of the Trusteeship, unless caused by their willful act or default; (c) that the Trustees of the Realty Trust may withhold from any distribution, transfer, or conveyance such amount as they from time to time reasonably deem necessary to protect themselves from personal liability; (d) that each Trustee shall be responsible only for such Trustee’s own willful breach of trust; (e) to reimburse said Trustees of the Realty Trust promptly upon request for all costs and expenses, including their reasonable compensation incurred or suffered by them.”

Exculpatory Clauses Needed:

Most trust instruments contain a provision similar to:

“Every agreement, lease, deed, mortgage or other instrument of document executed or action taken by the Trustees or a majority of the persons appearing on record to be Trustees hereunder shall be conclusive evidence in favor of every person relying thereon of claiming thereunder that at the time if the delivery thereof or of the taking of such action this Trust was in full force and effect, that the Trustee’s execution and delivery thereof or taking of such action was duly authorized, empowered and directed by the beneficiaries, and that such instrument or document or action taken is valid, binding, effective and legally enforceable.”

Most grantees, mortgages and easement receivers require a certificate from all beneficial interest holders authorizing and directing the trustees to effectuate the transaction and a certificate of one or more of the trustees reciting their authority from the beneficial holders to carry out the transaction and other fact as to incumbency and trust existence.

The trustee’s certificate is usually recorded (although I think it unnecessary in view of the trust language); the beneficiary’s certificate is not recorded.

If the beneficial holder is also a nominee trust, don’t forget to obtain trustee and beneficiary certificates from the second level players.

Limitations of Nominee Trusts

It will do absolutely no good regarding MassHealth /Medicaid Planning, because it is not really a transfer in their eyes. Also, you cannot take a Homestead declaration on it, so creditors can attach it in a lawsuit, assuming liability.

Copyright by Attorney Brian F. Mahoney 2-25-05