Ronald Morton's Elder Law Blog

The Imporance of Adequate Planning (and a good forfieture clause)

I am witting this post while sitting in the Chancery Courthouse of Leake County, Mississippi, waiting for my turn before the judge to get an order signed.  The matter in front of mine illustrates the importance of adequate estate planning.  The case involved a lawsuit between the niece of a decedent and the decedent's wife.  The lawsuit involved the transfer of some CD's, approximately $200,000, to the wife prior to the death of the decedent.  At first I thought the case was going to involve transfers by the wife on husband's behalf using the power of attorney, but as the testimony developed, it turned out that the banker, who personally knew the decedent, carried the transfer papers to the hospital where the decedent was a patient.  By all accounts the decednt understood what he was doing and had the legal right and capacity to make the transfers.  Nevertheless, the parties and the court spent a day and a half on testimony trying to prove the decedent did not have capacity, or was unduly influenced, to make the transfer.  The court ultimately ruled in favor of the wife, but at the expense of thousands of dollars to all parties who saw it necessary to try this case in open court.  The lesson to be learned is the imporance of including a good forfieture clause in one's estate plan to make parties think long and hard before bringing such an action.  I suspect that if the will had a clause that disinherited the niece in the event of any such challenge, that this action would never have been brought.  It also shows the importance of being prepared in the event that there may be a challenge to capacity.  It is important when such a challenge is expected to have good witness testimony available, and possibly an expert, to defeat such a challenge am ensure that the wishes of the decedent are carried out. 

Post Death Conflict over Account Beneficiaries Can be Avoided

Over the past several weeks I have had occasion to address an all too common circumstance surrounding surprise beneficiary designations. Unfortunately, these "suprises" usually only become known at the death of the account owner when the surviving spouse or children seek to claim benefits they were expecting, only to discover that the beneficiary designation contains a different name from what was expected. Unfortunately, these surprises often turn into family disputes, often between the decedent's children and their step-parent, the decedent's 2nd spouse. These types of disputs usually take one of three common themes:  (1) the decedent executed the beneficiary form many years prior and had simply forgotten or did not realize the need to change his designation following a change in his circumstance; or (2) the decedent remarried subsequent to filling out the beneficiary form, often giving legal intervening rights to the surviving spouse that the decedent may not have even known existed; or (3) the decedent named his then spouse as beneficiary and later divorced, but forgot to execute a new beneficiary form after the divorce naming new beneficiaries.  To add to the confusion, spouses are given priority rights as beneficiaries to some plans, like 401(k) plans, which rely on federal ERISA law, but hold completely different rights, or no rights at all, under other types of plans, such as IRA''s or 403(b)'s, which are not governed by ERISA. 

Sadly, all of this confusion and conflict can be avoided through simple planning.   Everyone should periodically reviewed their beneficiary designations, and if there is any doubt, simply file a new designation of beneficiary. This is the only way to ensure with certainty of the decedent's wishes are carried out, and completely avoid unnecessary disputes between family members.  Over the past several years, our office has been able to help many spouses receive the retirement benefits to which they were legally entitled, albeit at a heavy price of family harmony.  The families would have been far better off had these matters been directly addressed by the account owner before death.

Can my Estate take care of my pet?

In modern society, our pets are an important part of our families. We take them to the groomer so they look their best, take them to the doctor when they are sick, and take them to stay in the “Pet Hotel" or “Spa” when we travel. We even pay extra so they get played with while we are out of town.  Our desire to care for our animals after our death is only natural.  Indeed, while common pets like dogs and cats may only live a few years beyond our death, more exotic pets like reptiles and birds have a life expectancy much greater than their human owners. Many states have specific laws that allow the creation of a “pet trust." A pet trust is simply the set-aside of money and perhaps other property, for the specific purpose of caring for animals. Currently, Mississippi does not have a specific statute on trusts, and there are no Mississippi cases declaring such trusts to be valid. However, many other states do provide specifically for pet trusts. The most notable pet trust in recent years is the one created by Leona Helmsley, who left $12 million dollars in trust for her dog. One solution to the dilemma of caring for Mississippi pets is to simply set aside a sum of money to an individual with a stated preference that the funds be used firs for the care of the animal during its remaining life. However, if an individual wants to provide, with full certainty, that the trust will be enforceable, they should execute a trust that is formed under the laws of one of those states that specifically provide for creation of the pet trust.

Favorable IRS Ruling Allows Substitution of Assets in GRAT

In Private Letter Ruling 200846001, the IRS ruled favorably for the taxpayer with regard to a Grantor Retained Annuity Trust, or “GRAT,” that contained a provision allowing the grantor, or creator of the trust, to substitute assets of the GRAT for other assets of equivalent value.

A Grantor Retained Annuity Trust is a “freeze” technique used by individuals with taxable estates.  Assets that are expected to appreciate in value are contributed to a grantor trust.  A grantor trust is a trust that is disregarded for income tax purposes – meaning it is treated as the alter-ego of the taxpayer.  Because the grantor trust is disregarded for income tax purposes, there is no recognition of gain when the assets are transferred to the GRAT.  The grantor retains a beneficial interest in the GRAT, thus the name Grantor Retained Annuity Trust.  The beneficial interest comes in the form of a series of payments, or an annuity, that will be paid back to the grantor.  At the end of the annuity term, any remaining assets in the GRAT are distributed, either outright to or in trust for, the remainder beneficiaries.

Let’s look at a simple example of how this might work in order to see the estate planning benefits.  A taxpayer creates a start-up business that is currently valued at $1 million.  The taxpayer expects the value of the business to explode in the future.  For purposes of this illustration we will assume a 20% growth rate.  The taxpayer transfers the business to a GRAT with a five-year term.  As part of the transaction, the taxpayer will receive a $222,109 annuity payment for each of the next five years.  Given that this is a start-up company, this payment would probably be paid by returning some of the stock of the start-up company to the taxpayer each year.  Using a formula provided by the IRS, we can calculate that the present value of the five payments of $222,109 is $1 million.  Because the present value of what the taxpayer gets back is equal to what the taxpayer put into the GRAT, there is no gift tax to be paid as a result of the transfer.  However, if the company does in fact increase in value by 20% annually, the value of the remaining stock at the end of the five-year period would be $835,477.  The taxpayer would have frozen the value of the assets contributed to the GRAT, effectively getting the $835,477 out free of gift tax.

An advantage of the “zeroed-out” GRAT (this is a GRAT where no gift tax is owed) is that it is a “no harm, no foul” planning strategy in the event the assets do not appreciate as anticipated.  This is especially important in our current uncertain economic environment.  Had the start-up business in the example turned out to be a bust, there would be no loss to the taxpayer since there was no use of gift tax exemption to shelter the failed gift.

The taxpayer in PLR 200846001 wanted to contribute the shares of two separate companies to the GRAT.  The GRAT contained a provision allowing the grantor to substitute trust assets for other assets of equivalent value. This provision, which is defined under IRC § 674, is commonly used to make a trust a grantor trust for income tax purposes.  In order to qualify as a GRAT, there must be a provision in the GRAT prohibiting additional contributions to the trust after its formation.  The taxpayer desired to contribute the stock in two publicly traded companies on the initial funding of the GRAT, but retain the right in the future substitute shares of company 1 for an equivalent value of shares of company 2 or shares of company 2 for an equivalent value of shares in company 1.  The taxpayer’s advisors were concerned that while the right to substitute assets is not a problem for income tax purposes under IRC § 674, it might cause the GRAT to be disqualified under IRC § 2702, or cause inclusion of the GRAT assets in the grantors estate after death under the provisions of IRC §§ 2036 or 2038.  The IRS ruled that the substitution of assets would not disqualify the GRAT under IRC § 2702, or cause inclusion under IRC §§ 2036 or 2038.

A GRAT is a very powerful planning tool for individuals with taxable estates, especially those individuals who have or plan to use their lifetime $1 million gift tax exemption amount on other planning strategies.  It is a freezing technique that allows the future appreciation of assets to be removed from the estate of the taxpayer at little to no cost.

What is a life estate?

In first week of the first year of law school, every lawyer learns that property is "a bundle of sticks." What this quaint saying means is that ownership of property can be divided into multiple sections. The most common example of this division of property rights is probably the severance of the “mineral” rights from the “surface” rights.  Similarly, an individual may own a tract of land, but sell the timber on the land in the form of a "timber deed." Another way to divide property is between present interest and future interest.  The present right to use and enjoyment of the property is what is known as a “life estate.” The owner of the life estate has exclusive rights to the use and enjoyment of the land, including the right to live there, and all income rights from the property, as long as the life estate owner has a pulse. The “remainder” interest of the property is what remains at the death of the life tenant.  This right is called a future interest in the property because it does not grant present rights until the death of the life estate owner, some time in the future.  Frequently, the life estate and remainder interests are severed when an individual desires to leave a spouse or other loved one with the rights to enjoy or reside in property during their remaining life, but want to ensure certain other individuals receive the property upon the death of the intended love one. A transfer of the remainder interest gives him these assurances, since the life estate tenant is unable to control ultimate distribution of the property because what they been only exists as long as they have a pulse.

 

Skilled practitioners frequently used the severance of the present and future interest in property to reduce values, and therefore potential gift or estate taxes, or as a mechanism of asset protection planning such as protecting land from a Medicaid liens or loss to a nursing home or other creditors.

What is a pour-over will?

Frequently our clients create revocable living trusts as a substitute for a will. There are a number of reasons that they choose this estate planning mechanism, most common among them being probate avoidance and control during periods of incapacity. However, in order for the trust to control the estate, it must hold title to all of the decedent's property. Unfortunately, sometimes due to poor planning, and sometimes simply because of an unknown or unexpected windfall, individuals with living trusts die with some estate property outside the trust. In such circumstances, it becomes necessary to transfer the decedent's property into the living trust after death in order for the decedent’s planned distribution to be followed. This is accomplished through what is known as a "pour-over" will. A pour-over will simply "pours over" any assets owned by the decedent at the time of death into the revocable living trust. Such wills should always be executed whenever revocable living trust based planning is done if the individual desires the trust to control distribution of all estate assets. The absence of a pour-over will in such circumstances will result in some assets being distributed pursuant to the plan laid out in the trust, and other assets being distributed through the probate court process under the intestacy statutes of the State. In a Mississippi, that means that children and spouses would share in the probated estate assets equally.

Is a handwritten will valid?

Many states, including Mississippi, recognize handwritten or "holographic" wills. A holographic will is a will is written entirely by the hand of the testator.  It must be signed by the testator or himself, but need not be witnessed or notarized. Any challenge to the handwritten will is likely to raise the possibility of disputes over authentic of handwriting, and possibly the testator’s competency. Because the will lacks the formalities of 2 witnesses, there is always the possibility that an individual may claim the drafter was incompetent at the time of drafting, and there would be an absence of any witnesses to testify otherwise. Additionally, in all but the simplest of the cases, the potential for error by a layperson drafting their own will is a significant.  The drafter may have a clear idea in their mind as to their intentions, but because they lack the skill and training of a professional, their expressions may not be completely clear, or more likely, may not address an unanticipated event, such as the prior death or incompetency of an heir.  To the trained professional, such circumstances are certainly foreseeable and will be addressed in a properly drafted will. 

Are Oral Wills Valid

Oral wills are known as "nuncupative" wills. Such wills are valid in about half of the states, including Mississippi. In order to be valid, the "nuncupative" will must be expressed during an individual’s last illness, and if the bequest exceeds $100 in value, must be proven by 2 witnesses. Additionally, the individual's death must be within 6 months of the oral declaration in order to be valid.

 

In short, while technically such a deathbed oral will may be valid, it would be imprudent to rely on such a will except as a last resort. In addition to the strict limiting requirements, the other difficulty in enforcing such an oral will is the potential for uncertain or varying memories of the decedent's oral expression. A handwritten, or "holographic" will is preferred over the nonpunitive wheel.

What is a revocable living trust?

A revocable living trust, more commonly called simply a "living in trust" is usually used as a will substitute and probate avoidance device. Probate is the process of transferring property from the dead to the living. It requires several legal formalities and court oversight, including petitions, an oath, court orders, and notices, before the transfer of the decedent’s property can be completed. Property owned by a trust at the time of death avoids the formal probate process. The reason that the living trust can avoid probate is that the trust does not die with its grantor. The grantor or “trustmaker” may die; the beneficiary may die; the trustee may even die. But the entity that owns the property - the trust - continues to exist, and therefore the probate process - the transfer of property from the dead at the living - is not required. Instead, the trustee simply follows the instruction set contained in the trust document. Frequently these instructions will be different depending on whether the trustmaker is living or deceased. In other words, the creator of the trust usually has one set of instructions as to how the trust should be managed during life, and another set for how the trust should be managed after the trustmaker dies. Usually during the trustmaker’s lifetime, the trust instructions require that trust assets be used for the benefit of the trustmaker.  Upon death, the instructions frequently provide for the distribution of the trust assets to the trustmaker’s heirs.  This process of managing the trust after the trustmaker’s death is known as trust administration.

Important Veteran Benefit Pays for Assisted Living

I am frequently asked whether there are any public benefits available to pay for assisted living care.  Unfortunately, benefits available to pay for this type of care are limited. Other than some very limited trial or Medicaid waiver programs, the only governmental benefits available to pay for home care and some assisted living care is the Veterans Administration’s Aid and Attendance pension benefit. This benefit is available only to veterans, and their spouses, who served at least one day during wartime, and there 90 consecutive days in the military. There is no requirement that the Veteran have served in an active war theater.  State side service qualifies.  For those Veterans with a qualifying service record, a benefit of up to almost $2,000 per month is available to assist with expenses associated with their, or their spouse’s care. Widows of Veterans also qualify for this benefit.  These expenses frequently take the form of the cost of care at an assisted living facility, or the cost of in-home care to assist the Veteran with their activities of daily living. There are some income and asset limits to this benefit, but anyone who meets the above service requirements should look into whether they can qualify for his benefit. They have earned it.  For more information on this important benefit, please order our Long Term Care Benefits guide by clicking here, or contacting our office for an appointment.