1. Should I/we put the house into the children’s names to protect it from long term care claims and estate taxes? Never! A simple transfer will result in the loss of your property tax exemptions, it will result in negative capital gains consequences to the kids and the house will be exposed to the children’s liabilities, such as divorce claims.
2. Will a Revocable (Living) Trust protect the house? No. If you can take your house and other assets out of the trust whenever you want, then so can a nursing home. Moreover, to the extent that you have access to the trust assets, they are completely includible in your gross taxable estate at death. Only an irrevocable trust can help with long term care and estate tax planning.
3. Does Irrevocable mean that nothing in the trust can be changed? No. If the trust is properly drafted, then you can retain the ability to remove and replace your trustee. You can also retain the ability to change your beneficiaries. If your house is in the trust, it can still be sold, but only with your written permission. Retaining the ability to remove and replace the trustees is important psychologically, but it will also enable the trust to qualify as a Grantor trust for income tax purposes thereby obviating the need to file a separate income tax return for the trust.
4. When do estate taxes kick in? Each person has a federal credit of $11mil and a NYS credit of $5.74 mil.
5. If each person can leave $5.74 mil free of NYS (and federal) estate taxes, then how much can a husband and wife leave together? This is sort of a trick question. Without credit shelter trust planning, we end up losing the credit of the first spouse to die. If an individual or couple has more than $5,740,000 then you need to explore tax planning options.
6. Can I avoid estate tax by putting named beneficiaries on my accounts? No. If it were that simple to avoid estate taxes, then the government wouldn’t collect any. Just because you may successfully avoid probate, does not relieve you of your estate tax obligations.
7. What if the estate is Greater than $11,480,000? Then we will need to rely on some combination of LLPs, LLCs and trusts. First, we create a business entity and fund it with real estate and/or securities. Then we have a child or children contribute cash or securities valued at 1% to 10% of all assets. The business entity will then issue stock or membership units of two classes. The child will be given non-voting units or “B” shares that are proportionate to his or her contribution. We then have the business entity valued, and should benefit from “Minority Interest” and Lack of Marketability” discounts of approximately 30 to 35%. The parent can gradually gift his or her 95% interest to the children. All of the post transfer growth and appreciation will permanently escape transfer tax.
8. Can I avoid buying Long Term Care Insurance and rely solely on Medicaid Planning? No. Medicaid should really be viewed as the payor of last resort. We have seen eligibility restrictions tighten over the past 10 years. This trend will surely continue. Many remember when the so-called look-back period was 3 years. It is now 5. There is a bill in Congress now that would make it 10. The long term care insurance options have never been better. At the very least, you should educate yourself about what’s out there.
9. One of my children needs more help than the others. How should this be dealt with in the will? Whenever possible, it is advisable to treat your children equally under the will. This will prevent hurt feelings and discord between the children. If you wish to provide more for someone, better to do this outside of the will. A separate account or CD can have one child’s name as the beneficiary. This will pass automatically upon death and not be counted when the will leaves everything “equally”.
10. I own my home and live there with my second husband. How can I protect him if I die first? I would avoid giving him the house under the will. What if he dies 1 year after you. His will leaves everything to his children, not yours. Better to give him a right to occupy the home upon your death. This right of occupancy can be made to terminate upon the earlier of his death, nursing home admission or cohabitation with an unrelated person. (Not in my house-thank you!)
11. What is the difference between a Health Care Proxy and a Living Will. A Health Care Proxy allows you to appoint an individual to make health care decisions for you in the event that you are unable to express yourself. The living will, on the other hand, allows you to state your subjective preferences regarding health care treatments ahead of time. Within the Living Will, I can state, for example, that I don’t wish to live in a permanent vegetative state dependent upon some machine and fluids from a bottle. In that situation, my living will directs my family to “pull the plug”. I point out to them though that this does not give them license to disconnect my computer and dump out my Chardonnay.
12. How should I provide for a child with a special problem? If a child has a developmental disability, long term illness, shaky marriage, gambling or substance abuse issue, consider placing his or her interest under your estate into a trust. The assets in trust will not have an impact on Medicaid or SSI. The trust will also protect the assets from other liability issues.
13. Was Spousal Refusal abolished as part of the recently passed NYS budget? No, the Governor’s proposed budget would have eliminated this protection for the “well spouse” but it did not pass as part of the final budget.
14. Bottom Line? Laws and life change. Create flexible documents and review them yearly.