Many people think that estate plans are for someone else, not them. They may rationalize that they are too young or don't have enough money to reap the tax benefits of a plan. But as the following list makes clear, estate planning is for everyone, regardless of age or net worth.
1. Loss of capacity. Some people procrastinate so long on their estate planning, they never complete before they become or have dementia. In order to make a valid Last Will, Trust, and Power of Attorney, the law requires that you know what you are doing. What if you become incompetent and unable to manage your own affairs? Without a plan in place, the courts will select the person to manage your affairs. With a plan, you pick that person (through a power of attorney or Trust).
2. Minor children. Who will raise your children if you die? Without a plan, a court will make that decision. With a plan, you are able to nominate the guardian of your choice.
3. Dying without a will. Who will inherit your assets? Without a plan, your assets pass to your heirs according to your state's laws of intestacy (dying without a will). Your family members (and perhaps not the ones you would choose) will receive your assets without benefit of your direction or of trust protection. With a plan, you decide who gets your assets, and when and how they receive them.
4. Blended families. What if your family is the result of multiple marriages? Without a plan, children from different marriages may not be treated as you would wish. With a plan, you determine what goes to your current spouse and to the children from a prior marriage or marriages.
5. Children with special needs. Without a plan, a child with special needs risks being disqualified from receiving Medicaid or SSI benefits, and may have to use his or her inheritance to pay for care. With a plan, you can set up a Supplemental Needs Trust that will allow the child to remain eligible for government benefits while using the trust assets to pay for non-covered expenses.
6. Keeping assets in the family. Would you prefer that your assets stay in your own family? Without a plan, your child's spouse may wind up with your money if your child passes away prematurely. If your child divorces his or her current spouse, half of your assets could go to the spouse. With a plan, you can set up a trust that ensures that your assets will stay in your family and, for example, pass to your grandchildren.
7. Financial security. Will your spouse and children be able to survive financially? Without a plan and the income replacement provided by life insurance, your family may be unable to maintain its current living standard. With a plan, life insurance can mean that your family will enjoy financial security.
8. Retirement accounts. Do you have an IRA or similar retirement account? Without a plan, your designated beneficiary for the retirement account funds may not reflect your current wishes and may result in burdensome tax consequences for your heirs (although the rules regarding the designation of a beneficiary have been eased considerably). With a plan, you can choose the optimal beneficiary.
9. Business ownership. Do you own a business? Without a plan, you don't name a successor, thus risking that your family could lose control of the business. With a plan, you choose who will own and control the business after you are gone.
10. Avoiding probate. Without a plan, distribution of your estate may be subject to delays and your estate may be incur excess court, personal representative, and probate attorney fees. With a plan, you can structure things so that probate can be avoided entirely.
11. Long-term care. 50% of all adults over age 65 spend some time in a nursing home. In Michigan, the average monthly cost exceeds $6,300. At that rate, all but the largest of estates can quickly be depleted. If you are married, you can establish a trust so that assets the surviving spouse receives from the first spouse to die are protected from nursing home costs. If you are single, you should consider planning in advance with certain trusts and powers of attorney so that all of your assets do not have to spent down to $2,000 before you could qualify for Medicaid skilled nursing facility benefits. For more information on planning for long-term care, see my section on Medicaid.
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Facing a December 31 deadline, the U.S. House of Representatives has voted 225-200 to make permanent the federal estate tax rules that have applied in 2009. The measure would exempt from taxation the first $3.5 million ($7 million for a couple) of inherited wealth and would impose a 45 percent tax on estates above those levels. The question of what to do about the estate tax now moves to the Senate, where prospects for passage of a similar bill are uncertain.
The House bill, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009 (H.R. 4154), was introduced by House Ways and Means Committee Member Earl Pomeroy (D-ND). The bill generally makes permanent the estate, gift, and generation skipping transfer tax laws in effect for 2009. If Congress fails to act by December 31, the estate tax is scheduled to disappear for 2010 and then return in 2011 with a Clinton-era exemption of $1 million and a top rate of 55 percent.
Although Senate Finance Committee Chairman Max Baucus (D-MT) has said he would like to bring to the Senate floor a bill similar to the House bill, Senate Republicans and even some Democrats want a bill that is even more generous to the wealthy, one that raises the individual exemption to $5 million and imposes a top rate of only 35 percent. "Clearly, there is a lot of support for greater relief," comments Hani Sarji on the Future of the Federal Estate Tax blog, noting the closeness of the House vote.
But there will also be likely concern among some Senate Democrats that the House bill is too large a giveaway to the rich that will only add to the federal deficit. The bill would result in $234 billion in lost tax revenue over 10 years compared to what will be the case if Congress does nothing. Reuters quotes one analyst that the House bill is "pretty much a non-starter" in the Senate because of its price tag. Reuters notes that a "likely compromise in the Senate is a one-year extension of current law, which would raise some money because of the 2010 phase out."
Nevertheless, Sens. Tom Carper (D-DE) and George V. Voinovich (R-OH) have reintroduced S. 2784, which would freeze the estate tax at its 2009 level. One point of conflict between the House and Senate is that while Senate leaders have expressed a wish to extend the estate tax exemption at the 2009 levels and index the rate to inflation, the House bill would not index for inflation.
It is not even clear that the Senate will act before the end of the year. The Associated Press reports that "the health care debate there could preclude action on the estate tax before Congress breaks later this month for holidays." But at the same time it observes that lawmakers "don't want to delay action until next year because they are wary of enacting retroactive tax changes."
Congressional Inaction Would Hit Families of More Modest Means
Tens of thousands more families will be facing tax bills in 2010 if Congress fails to act on the estate tax by December 31. For 2010, the vanished estate tax would be replaced by a 15 percent or 28 percent capital gains tax on all but the first $1.3 million in inherited wealth. This would subject the heirs of 75,000 estates to capital gains taxes, compared to an estimated 7,500 families that would face estate taxes this year, according to a 2005 study by the Ways and Means Committee's chief tax counsel. Moreover, heirs would have to calculate capital gains taxes based on the original price paid for inherited property, not on the price assets are worth at the time they are bequeathed to heirs, as under current law.
Most of the discussion about health reform has centered around issues like the "public option," but buried in both the House and Senate reform bills are important provisions that would make long-term care more affordable, help the elderly and disabled remain at home rather than move to a nursing home, and make nursing homes safer for those who have no choice.
The CLASS Act
The CLASS Act would establish a new national long-term care insurance program offering basic help for the elderly and disabled. After paying a modest monthly premium for five years, Americans would be covered under the program and eligible to receive benefits averaging around $50 a day to pay for a range of long-term care services that would help them stay in their homes. Versions of the CLASS Act are contained in both the health reform bill passed by the House, the Affordable Health Care for America Act, and the bill now being debated in the Senate, the Patient Protection and Affordable Care Act.
Ending Medicaid's Institutional Bias
The Senate bill contains a number of provisions aimed at ending Medicaid's "institutional bias," which forces elderly and disabled individuals in many states to move to nursing homes because Medicaid won't pay for care that could be provided at home and in the community, often at much less cost.
For starters, the Senate bill includes the Community First Choice Option, which would give states more federal Medicaid money if they set up community services and supports for Medicaid recipients who otherwise would require nursing home care. (The House bill includes a statement of support for the Community First Choice Option.)
The Senate bill also would give increased Medicaid funding to states that can divert more Medicaid recipients from nursing homes and other institutions to home and community based care. And the bill extends for another five years an important demonstration project in 31 states called Money Follows the Person. This program encourages states to transition Medicaid recipients from institutions to the community, where they will continue to receive Medicaid coverage through new community services.
The Senate proposal would give the spouses of Medicaid recipients who are receiving services at home or in their community the same financial protections that the spouses of nursing home residents currently enjoy. However, under the current measure spouses would not become eligible for these protections until 2014 and the protections would disappear in five years unless renewed by Congress.
These reforms would certainly be helpful in Michigan, where there has traditionally been a long waiting list before individuals could receive assistance with home care under Michigan's MI Choice Waiver program.
Finally, a "Sense of the Senate" provision of the bill states that, "(1) during the 111th session of Congress, Congress should address long-term services and supports in a comprehensive way that guarantees elderly and disabled individuals the care they need; and (2) long term services and supports should be made available in the community in addition to in institutions."
Nursing Home Protections
Both the House and Senate bills would help protect nursing home residents and other long-term care recipients from abuses, and give families of nursing home residents more information about the facilities their loved ones are living in or considering moving to.
Both bills would set up a nationwide program for national and state background checks of long-term care employees who have direct contact with patients. Both bills would also require nursing homes to publicly disclose all individuals and entities that own, govern, operate, finance, provide services to, or control them. In addition, information about nursing home staffing levels, including hours of care per resident day, turnover and retention rates, and facility expenditures for wages and benefits, would be added to Medicare's Nursing Home Compare Web site.
The stress of taking care of an elderly family member can tear families apart. Conflict can erupt between siblings or between an adult child and his or her parent. Siblings may disagree on who should have power of attorney, one sibling may feel that he or she is doing all the caregiving, or a parent and child may disagree about the best living situation for the parent. In these situations, mediation may be the solution.
Mediation allows all the parties to sit down and discuss the issues and try to come up with a solution that everyone can agree on. A mediator is a neutral third party who can help families come to a consensus on a number of family issues from estate planning to guardianship decisions to living arrangements.
Mediation is completely voluntary. For it to be effective, all relevant family members should be involved. You can also involve other professionals, such as a geriatric care manager, a family lawyer, or a financial planner. The mediator doesn't make any decisions and doesn't take sides. Instead, the mediator listens to the issues, keeps the family focused on the goals, encourages consideration of all the options, and helps clear up misunderstandings and address hurt feelings. Through this process, the family can come up with answers to problems or ways of solving conflicts. The idea is not to have a winner or loser, but to have a solution everyone is happy with.
Having proper estate planning in place can also significantly reduce the likelihood of family conflicts. Including a checklist of actions upon incapacity or death for a successor trustee to review in the Estate Planning Portfolio, as well as a more in-depth memorandum outlining the successor trustee’s responsibilities, helps ensure the successor trustee fulfills their responsibilities in administering a trust within a reasonable period of time. We also help our clients’ successor trustees settle the trust, as most of them have never settled a trust before and are not aware of all of the requirements the law imposes. This helps ensure there will be no family conflicts due to a successor trustee not settling the estate properly, thus fulfilling many of our clients’ primary estate planning goals: that family harmony will be preserved after they are gone.
Many people believe that joint accounts are a good way to avoid probate and transfer money to loved ones, and such accounts are sometimes referred to as "the common person's estate plan." But while joint accounts can be useful in certain circumstances, they can have dire consequences if not used properly. Adding a loved one to a bank account can affect Medicaid qualification as well as expose your account to the loved one's creditors or their soon to be ex-spouse in a divorce.
When a person applies for Medicaid long-term care coverage, the Michigan Department of Human Services looks at the applicant's assets to see if the applicant qualifies for benefits. While a joint account may have two names on it, the state assume the applicant owns the entire amount in the account regardless of who contributed money to the account. If your name is on a joint account and you enter a nursing home, the state will assume the assets in the account belong to you unless you can prove that you did not contribute to it. Such proof can be difficult to produce, due to lack of records, and can take months.
In addition, if you are a joint owner of a bank account and you or the other owner transfers assets out of the account, this can be considered an improper transfer of assets for Medicaid purposes. This means that either one of you could be ineligible for Medicaid for a period of time, depending on the amount of money in the account. The same thing happens if a joint owner is removed from a bank account. For example, if your elderly mother enters a nursing home and you remove her name from the joint bank account, it may be considered an improper transfer of assets, which may result in a period of ineligibility for Medicaid.
Another problem with joint accounts is that the account is vulnerable to all the account owners' creditors. For example, suppose you add your daughter to your bank account. If she falls behind on credit card debt and gets sued, the credit card company can use the money in the joint account to pay off your daughter's debt.
Finally, you need to be sure you can trust the joint account holder because he or she will have full access to the account. Either account owner can take money out of the account regardless of who contributed to the account.
For the first time since 1989, when the law was enacted protecting the spouses of institutionalized Medicaid recipients from impoverishment, the federal Centers for Medicare and Medicaid Services is not raising its guidelines for how much money those spouses may keep. With no increase in the consumer price index on which the figures are based, the resource and income guidelines that prevailed in 2009 will apply in 2010 as well. This follows the announcement by Social Security Administration that there would be no cost of living increase in Social Security benefits.
In 2009 and 2010, the spouse of a Medicaid recipient living in a nursing home (called the "community spouse") can keep as much as $109,560 without jeopardizing the Medicaid eligibility of the spouse who is receiving long-term care. Called the "community spouse resource allowance," this is the most that a state may allow a community spouse to retain without a hearing or a court order. While some states set a lower maximum, the least that a state may allow a community spouse to retain in 2009 and 2010 is $21,912. This is the amount that applies in Michigan.
Meanwhile, the maximum monthly maintenance needs allowance for 2009 and 2010 is $2,739. This is the most in monthly income that a community spouse is allowed to have if her own income is not enough to live on and she must take some or all of the institutionalized spouse's income. The minimum monthly maintenance needs allowance of $1,821.25 took effect July 1, 2009, and will not change until July 1, 2010. In determining how much income a particular community spouse is allowed to retain, states must abide by this upper and lower range. Bear in mind that these figures apply only if the community spouse needs to take income from the institutionalized spouse. According to Medicaid law, the community spouse may keep all her own income, even if it exceeds the maximum monthly maintenance needs allowance.
For a more complete explanation of the community spouse resource allowance and the monthly maintenance needs allowance, click here: Division of Assets
Price rollbacks throughout the U.S. economy during the past year did not apply to long-term care service providers, according to the 2009 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs. Private room nursing home rates rose 3.3 percent to $79,935 a year or $219 a day, while assisted living also climbed 3.3 percent on average to $37,572 a year or $3,131 a month.
Home health care aides now cost an average of $21 per hour, a 5 percent jump, and adult day care services now average $67 per day, a 4.7 percent increase over 2008.
The survey also reports on the cost of a semi-private room in a nursing home, which increased 4 percent to $198 a day, or $72,270 a year. The cost of a semi-private room in an Alzheimer's wing averages $75,920 annually.
Once again, the highest rates for a private nursing home room in 2009 were found in Alaska, where the cost is $584 a day on average. The lowest rates were found in Louisiana (with the exception of Baton Rouge and the Shreveport area), at $132 a day.
The cost of assisted living was the highest in Wilmington, Delaware, at $5,219 a month and the lowest in North Dakota at $2,014 a month. Home health care aide services ranged from a high of $30 an hour in Rochester, Minnesota, to $13 and hour in the Shreveport area. Adult day care services were highest in Vermont at an average $150 a day and lowest in the Montgomery, Alabama, area, at $27 a day.
In Southeastern Michigan, nursing homes cost about $6,500 to $7,500 a month. Assisted Living costs about $3,000 to $5,500 a month.
Everyone has heard the terms "will" and "trust," but not everyone knows the differences between the two. Both are useful estate planning devices in Michigan that serve different purposes, and both can work together to create a complete estate plan.
One main difference between a will and a trust is that a will goes into effect only after you die, while a trust takes effect as soon as you create it. A will is a document that directs who will receive your property at your death and it appoints a personal representative to carry out your wishes. By contrast, a trust can be used to begin distributing property before death, at death or afterwards. A trust is a legal arrangement through which one person (or an institution, such as a bank trust department), called a "trustee," holds legal title to property for another person, called a "beneficiary." You can be both the trustee and the beneficiary of a trust you create to manage your property. A trust usually has two types of beneficiaries one set that receives income from the trust during their lives and another set that receives whatever is left over after the first set of beneficiaries dies.
A will covers any property that is only in your name when you die. It does not cover property held in joint tenancy, a trust, life insurance proceeds or annuities. A trust, on the other hand, covers only property that has been transferred to the trust or where the trust has been designated as the beneficiary. In order for property to be included in a trust, it must be put in the name of the trust.
Another difference between a will and a trust is that a will passes through probate. That means a court oversees the administration of the will and ensures the will is valid and the property gets distributed the way the deceased wanted. A trust passes outside of probate, so a court does not need to oversee the process, which can save time and money. Unlike a will, which becomes part of the public record, a trust can remain private.
Wills and trusts each have their advantages and disadvantages. For example, a will allows you to name a guardian for children and to specify funeral arrangements, while a trust does not. However, with a trust based plan, designating a guardian and specifying funeral arrangements can easily be accomplished with a separate writing that accompanies the trust. Moreover, a trust can be used to plan for disability and to protect assets from the costs of long-term care in a nursing home.
In Michigan, wills and trusts can be simple or designed to provide more asset protection. Wills and trusts should not be viewed as forms; these are important documents that come with significant legal consequences and should be drafted in order to accomplish your unique goals and personal situation. An estate and elder law attorney can tell you how best to use a will and a trust in your estate plan. For additional information on Wills and Trusts, visit my website at http://www.andrewbyers.com.
The IRS reports that more than 5 million retirees and disabled veterans who are eligible to receive a tax rebate under the $152 billion economic stimulus package have failed to take the steps necessary to get their checks. Social Security recipients (including beneficiaries receiving Social Security Disability Income) and disabled veterans who earned at least $3,000 in qualified benefits, earned income, or both, may be eligible to receive an economic stimulus payment of up to $300 per person or $600 per couple.
But there is a catch. In order to receive an economic stimulus payment, eligible retirees or veterans must file a 2007 income tax return, even if they are not required to file because their income is below the filing threshold. Since many low-income retirees have not filed a tax return in many years, they may not be aware that they are eligible to receive a stimulus payment. Most people in this situation will be able to file a Form 1040A, with only a few lines filled, in order to meet the filing requirement. This can be done up until October 15, 2008.
People with disabilities also have good news regarding the stimulus payments. Although SSI payments do not count towards the $3,000 annual income requirement for receipt of a stimulus payment, many SSI beneficiaries also receive SSDI benefits which do count. The Social Security Administration (SSA) has issued instructions explaining that the stimulus payments do not count as income in determining SSI eligibility and will not count as a resource for two months following the month in which they are received.
The House of Representatives is likely to propose a temporary, one-year measure to prevent repeal of the estate tax, as time is running short for a bipartisan group of senators to agree on a permanent rate by the end of this year.
Pursuant to the current law, there will be no estate tax in 2010, but only for one year. If nothing is done, following one year of estate tax repeal, in 2011, the estate tax rate will to revert to 55% for estates above $1 million.
Congressional sources indicate the House of Representatives may vote to cancel the one year estate tax repeal and extend the 2009 estate-tax rates for another year. At current levels, the first $3.5 million of estate wealth is exempt from the tax. Above that amount, wealth is taxed at a 45% rate. With proper estate planning, married couples can shelter an amount equal to two times the estate tax exemption amount, through credit shelter trust planning.
Some Washington lobbyists say there is still a chance for Senate Republicans and Democrats to strike a deal this year for a permanent rate structure more favorable to wealthy taxpayers. Sens. Blanche Lincoln (D., Ark.) and Jon Kyl (R., Ariz.) in April won support from a majority of the Senate including 11 Democrats for an amendment that would have exempted estates under $5 million and set a 35% rate.
However, the chances for any Senate deal on estate taxes depend on the availability and the negotiating skill of Senate Finance Chairman Max Baucus (D., Mont.) Sen. Baucus has been leading daily Senate negotiations on health care, a process that is expected to continue into autumn.
So far now, the fate of the estate tax remains unresolved. Of course, this or another Congress can always revisit the estate tax or any other law later. So even if the estate tax law if finally corrected, it can always be changed again later. That is why it is important for revocable living trusts and durable powers of attorney to contain a power to adapt to changing laws.
Andrew Byers is an Elder Law Attorney in Auburn Hills, Michigan. Estate planning, including credit shelter and other estate tax planning are part of our elder law practice.