Law News and Tips
ELDER LAW PLANNING:
PROCEED WITH CAUTION
Fred L. Vilbig © 2017
“Elder Law” keeps popping up, and not in a particularly good way.
I’ve recently met with a couple of clients who as part of an elder law plan put together an irrevocable trust and transferred most of their assets into it. The problem with this plan is that it is basically irrevocable. Although the makers of the trust typically retain the right to the trust income, they are irrevocably giving away the principal, the underlying assets. One of the clients had their air-conditioner go out after they gave everything away, and they didn’t have enough money to pay to fix it. Things got hot. Another client didn’t do the math right and ran out of money.
For anyone in this predicament, there may be a way out, but it does cost money. It also requires the cooperation of everyone involved. The trust makers and all the beneficiaries (this even includes the kids who now have a right to the principal) may be able to enter into what is called a “nonjudicial settlement agreement” (an “NJSA”), but depending on the situation, an NJSA may not work. The other alternative is to go to court. Never a good thing.
Elder Law planning requires some careful, conservative calculations. Clients need to make sure that if they irrevocably put their savings into a trust, they will still have enough money to live on and to meet any reasonably foreseeable emergencies. It may be that they can only put part of their savings into such a trust and keep part of it out as a rainy day fund. Of course, assets that are left out could be lost to pay for medical costs, but I’d rather have clients run that risk than to just run out of money.
Another issue clients need to consider is what of their assets can be transferred into an irrevocable trust. For instance, if you transfer an IRA (many times a client’s largest asset besides their house) into an irrevocable trust, that constitutes a taxable event which accelerates all the unpaid taxes on the entire amount. That’s probably a bad plan. It’s questionable (and probably ill-advised) whether clients can transfer their homes into an irrevocable trust while they are still living there. You probably can transfer life insurance in, but then you have to figure out how premiums will be paid. It gets complicated.
In any event, irrevocable income trusts can be useful planning tools, but they are not for everyone. Clients need to plan very carefully before creating one. After all, they are irrevocable.
Contact Fred now about your situation. The first consultation meeting is free.
HURRICANE RELIEF FROM THE IRS
Fred L. Vilbig © 2017
Retirement plans are designed for… well, retirement. You put tax-deferred income into the plan to grow tax deferred. Beginning at age 59 ½, you can start withdrawing plan assets and just pay the income tax on what you take out. The assets that remain in the plan continue to grow tax free. Beginning at age 70 ½, a plan beneficiary must begin taking out a minimum amount (the “required minimum distribution” or “RMD”) which is a pro rata amount based on the participants life expectancy.
If a participant begins withdrawing money too soon, there is a 10% early withdrawal penalty. Some (but not all) plans allow participants to borrow funds, but there are restrictions. If the plan includes the required language, you can borrow up to the lesser of $50,000 or one half of the amount in the plan. You have to pay the loan back in five years in at least quarterly equal payments of principal and interest. Finally, the loan must be evidenced by a legally enforceable agreement.
In two recent Announcements (Announcement 2017-11 and 2017-13), the IRS has loosened these requirements for victims of Hurricane Harvey in Hurricane Erma. People who live or work in one of the Texas or Florida counties identified by FEMA for individual assistance are eligible. The IRS wants employers to try to comply with the requirements, but they sympathize (a word rarely used in the context of the IRS) with the victims of the storms. Therefore, eligible individuals can access their retirement assets to make it through the storms and to rebuild.
I recognize that St. Louis was not affected by the storms. However some readers may have family in these areas. If so, they may want to get in touch with them to let them know that they can contact their employers about accessing these retirement funds. Yes they will have to pay it back, but it is a source of funds during very difficult times.
Fred L. Vilbig ©2017
Whenever clients with trust-based estate plans sign their documents, we handle their real estate with a deed of some sort and their stuff (i.e., their tangible personal property) with an assignment.
With regard to their other assets, we typically don’t get actively involved. As Abraham Lincoln once said (and you should always quote Honest Abe to make a point), “A lawyer’s time is his stock in trade.” That is, all a lawyer has to sell is his or her time, so if they do work for someone, they are going to charge them.
To keep costs down, we give clients a detailed letter about funding their trusts. We tell them to go to their bank, their investment advisor, their broker, and their insurance agent. Clients just need to show them the letter and say “Do what he says.”
That almost always works… except with retirement accounts. Retirement accounts include IRAs, 401(k)s, and 403(b) accounts to name the most common ones. As you probably know, these are accounts in which you can deposit pre-tax money, let it grow tax deferred, and take it out after you reach 60. You only owe tax on what you take out, when you take it out. Of course, once you reach 70 ½ you have to take out your “required minimum distribution” (your “RMD”), but anything left in the account grows tax-deferred. It’s a good retirement plan many people take advantage of.
I’m going to focus on IRAs here because that is where most of the money ends up. If you are participating in a 401(k) plan, when you retire, they’ll probably make you roll it over into an IRA. You’ll have to be careful doing that too since there are time limits.
When someone has a trust-based estate plan, if they’re married, we always tell them to name his or her spouse as the initial IRA beneficiary. That allows for the maximum planning opportunities on the death of the first spouse to die. The surviving spouse can do a tax-free rollover, and there may be some tax benefits available. You want to leave your options open.
But on the death of an IRA owner where there isn’t a surviving spouse, I tell clients to name the trust as the beneficiary. In 2015, the US Supreme Court ruled that an inherited IRA is liable for bankruptcy claims. I haven’t seen the cases, but I’d have to think that regular lawsuits won’t be far behind. Running an IRA through a trust can give a beneficiary some asset protection.
Here’s where we get the questions. Some financial planners worry that if you name a trust is the beneficiary of an IRA, on the death of the employee/owner, all of the assets in the IRA will become immediately taxable. That is not true.
In 1999 the IRS promulgated some regulations to cover this very point. They said that if your trust contained their magic language, it would not cause the immediate taxation of 100% of the IRA. But what the IRS said was that the trust could not hold on to the IRA distributions. If the trustee received the RMD, it had to pass it through the trust and pay it to the named beneficiary. If there are multiple beneficiaries, then the IRA administrator can break the IRA into equal subaccounts for each beneficiary, but each payment still had to pass through the trust to the appropriate beneficiary.
That has been the law since 1999. I can point to the section in the trust agreement with the magic language, but we still get pushback. Maybe it just seems like it’s too good to be real, but here it’s real.
Fred L. Vilbig ©2017
I try not to repeat topics in this column, but it’s been a while since I wrote about the complications from addiction, and the problem keeps raising its head. I keep seeing articles and hearing stories about the opioid crisis, and I encounter it time and again when meeting with clients. My mom was in her 70s which she told me that she still wanted a cigarette after dinner, and I had no recollection of her ever smoking. Nicotine is terribly addictive, but I understand that narcotics are even worse.
From what I hear, people can get hooked on narcotics by using prescription painkillers while following doctors’ orders. And then there are some doctors who allegedly sell prescription painkillers to make some extra money. The US attorney general is looking into that now.
But those “safe” drugs can be expensive. Heroin on the street is apparently pretty cheap, although you may not be comfortable with the level of quality. That is evidently not that important when someone needs a fix.A funeral director recently commented that people would be surprised to know how many deaths now are drug related.There are so many drug related deaths the County has had to rent temporary morgues to hold the bodies. Addiction is a horrible thing.
What you don’t want is for an addict to receive a lot of money outright, but even basic trust planning may not be enough. We recently settled a dispute between a trustee and beneficiary. I had written the trust when the client’s son was still a toddler, and now her son was approaching 22. She had died in a car wreck, and the son was the beneficiary of the trust.It was what is called a discretionary trust (the beneficiary did not have an absolute right to the trust funds), and the trustee refused to give the beneficiary any money outright. We tried to set up a plan where the trustee would directly pay the beneficiary’s landlord, health insurance provider, utilities, tuition and books, and the rehab clinic. She was willing to pay the beneficiary an allowance for food, but that was pretty small, only enough to buy basic food.
That wasn’t enough for the beneficiary. He hired a newly minted attorney and proceeded to make the trustee’s life pretty miserable. She finally just resigned. The funny thing is that knowing what happened to her, none of the successor trustees wanted to serve. The trust is stuck in limbo until they petition the court to appoint a successor trustee. The trust has been paying a lot of legal fees, and it looks like it’s going to continue.
When parents have children or family members with substance abuse problems, planning is critical. You don’t want to give money to the beneficiary outright. That could be like a death sentence. Instead you can provide that the trustee will only distribute trust income and principal to the beneficiary on a discretionary basis for their health, education, welfare, and support. That can put a trustee in a difficult position, so it’s probably best not to have a sibling as the trustee who will be making those decisions. I always try to keep families together, and that almost certainly will create a lot of tension in that relationship. Sometimes I’ve required beneficiaries to submit to drug testing before any distributions are made to them. Trustees can also require receipts for how previously distributed money was spent. This requires a lot of work, but it is a pretty serious situation.
It’s sad that so many people need to deal with these issues, but it is a reality. Ignoring the problem can be deadly. Plan accordingly.
If you would like to confidentially discuss these issues further, please feel free to contact me.
SUCCESSOR TRUSTEE BOOT CAMP
Fred L. Vilbig © 2017
Maybe it’s a sign that my clients are “maturing.” I’m getting more calls now from their children. Mom and dad or both are acting a little strange; their bills are not getting paid; they have to go into the hospital or nursing home and decisions need to be made; or they have both died. Typically these calls come from the child who has been put in charge of things. Mom and dad may have written a will and/or a trust, and that child has been named as the person in charge (the “fiduciary”). And they don’t know what to do.
The duties of a fiduciary vary widely depending upon the situation. Mom and dad may just be losing mental capacity. We can all be forgetful, but sometimes people get dangerously forgetful. Bills can become seriously delinquent. They may get lost when out driving or walking around. They may not know how to dress for the weather. Prescribed medicines may become too complicated to administer. Although everyone wants to maintain their own independence, there comes a time when that isn’t reasonable. So what do you do?
And when mom and dad get to the end of their lives, someone may need to make difficult medical decisions. People cavalierly say, “just go on and pull the plug,” but actually doing it is another matter entirely. And then there is the funeral to handle.
After mom and dad have died, there is an asset cleanup to do. What do you do about jointly held assets? What about insurance policies, brokerage accounts, or bank accounts with beneficiary designations? What about the IRA? What about jointly held real estate? We’ve had clients ignore these things for years, and fixing them later can be a lot of work.
If a person only has a will and dies owning property in his or her name alone, then probate is necessary. Even when mom and dad have created a trust, assets sometimes get overlooked. Probate can be a scary idea for people, but sometimes it’s a necessary evil. One of the things that the fiduciary needs to do after mom and dad have died is to determine whether all of the assets were properly put into a trust if there was one. If any assets were held in a decedent’s name alone, then those assets are going to have to be probated. That can be overwhelming for some people.
If mom and dad did create a trust, there are a lot of questions that come up regarding trust administration. Under the law, a trustee has to provide beneficiaries with an accounting. The trustee needs to start with a beginning balance which requires an inventory. Most people don’t have an accounting background, so this can be quite a challenge. Just preparing the inventory can be overwhelming.
There is a lot involved when a son or daughter is named as the trustee, personal representative, or attorney-in-fact, under mom or dad’s estate planning documents. As I often tell clients, these are not normal things to deal with, although in our practice they tend to happen on an almost daily basis.
For that reason, I am putting together a seminar to discuss what’s involved in being a fiduciary. We are calling it the “SUCCESSOR TRUSTEE BOOT CAMP” (although we’ll cover other fiduciary roles as well). The seminar will be held on JUNE 15 at 7 PM at the SCHNUCKS MARKET on Kehrs Mill at Clarkson in Ballwin. Click here to register for the free Successor Trustee Boot Camp.
This seminar should be of interest to anyone who is named in estate planning documents as a personal representative or a successor trustee. We look forward to seeing you there.
WHEN MOM DIES … (Part 2)
More Things to Be Done
In another paper, I talk about some of the things that people need to take care of when a family member or close friend dies.That paper dealt with things such as notifying government agencies and financial institutions in order to avoid identity theft or fraud. Now I want to turn to some of the administrative things you may need to do.
First I should talk about the funeral. Although I have had some people say that planning a person’s funeral can be rewarding since everyone reminisces about the decedent, it can also be stressful. If you are lucky, the decedent had pre-arranged their funeral which takes a lot of the burden off of loved ones.However, there are still a few administrative things that need to be taken care of.
If the decedent did not have a pre-arranged funeral, then you will need to choose a funeral home. Once you’re selected the funeral home, you need to (1) arrange for the body to be transported there; (2) pick out a casket (which is not fun); (3) discuss all of the arrangements with the funeral director (and it seems like there are millions of them); and (4) then figure out how to pay for all of this. This process can be a lot of work under very stressful conditions.
I have found that it isn’t until after the funeral that you really have time to grieve. It’s not until all the activity is over and everyone has left that you realize what has happened.It is important to take time to get through that period, but don’t drown in it.
When you’re ready, you need to start the work. You need to search all of the decedent’s records to see what assets they owned and to find any important papers.If you find an original will, you are required to file it with the probate court where the person died.If you only find a copy, you are not required to file the copy. The will might be in a safe or safe-deposit box, but you need to try to locate it.If a will isn’t filed within a year of a decedent’s death, then it is invalid, and any probate required would be what is called intestate.
In your search, you may come across one or more life insurance policies.Sometimes our clients find very old, rather small policies.In fact, some of those particular insurance companies may no longer be around.However, paid-up outstanding insurance policies don’t just disappear.Some insurance company would have taken them over, and they will be required to pay the benefit.You just need to talk to the state Department of Insurance to track them down.Then you need to figure out who the beneficiaries are, and they need to file a claim.
You may also come across retirement accounts such as IRAs or 401(k)s (403(b)s for employees of nonprofit corporations).You need to determine who the beneficiaries are and notify them so they can file a claim.If you don’t know who they are, you should contact the plan administrator.In any event, the beneficiaries may want to ask you questions about these accounts, but be very careful.Inherited IRAs can be kind of tricky with some tax land mines hidden below the surface.It is best to direct them to their financial planner or tax professional.Better safe than sorry.
Then there is the question of joint property. If property – whether it be bank accounts, real estate, brokerage accounts, individual stocks, or any other property – is owned jointly, then ownership transfers to the surviving joint owner(s).In the case of financial assets, either you or the joint owner(s) need to notify the financial institution.If the asset is real estate, then you need to file an affidavit as to death with the appropriate deed recorder’s office.
If it turns out that some or all of these assets were owned solely in the decedent’s name, and if the total value of the assets is less than $40,000, then you can administer those assets in a small estate. However, if the value of the assets is over $40,000, then you need to open a full estate.Either way, those assets are frozen until you get some sort of a court order.
Taking care of things after a person’s death is not necessarily an easy thing to do. Still, it is important for the survivors that things get done properly.Care and attention to detail is invaluable.Otherwise, problems may pop up in future years.And fixing things 10 or even 20 years from now is harder than just fixing them now.
WHEN MOM DIES …
When mom dies – or for that matter, whenever any close family member or friend dies and you are responsible for taking care of things – you can be overwhelmed. First, you have to deal with the loss. Even when they have been sick for some time, and you knew it was coming, it’s still hard.People are immeasurably valuable, and the death of anyone is a great loss.
But after dealing with the personal and the emotional loss, unfortunately, there’s business to be done. We live in a world full of opportunists. With all of our connectivity, people on the other side of the world may try to steal a decedent’s identity for financial gain. Local people may have other purposes.In order to avoid a lot of problems when someone dies, you need to do certain things.
If the decedent was receiving some kind of government benefits, the proper government agency needs to be notified.With older people, that is typically Social Security.If the decedent was receiving some kind of military benefit, then the appropriate defense agency needs to be contacted.If they were a former civil servant, then the Office of Personnel Management needs to be contacted.Also, don’t forget to notify the Department of Revenue and cancel their driver’s license.
On the financial side of things, you need to search and find all of the decedent’s records regarding credit cards, bank accounts, mortgages, investment or brokerage accounts, and pension benefits.You need to let all of the appropriate people know that the decedent has died.You need to cancel the decedent’s credit cards.If the financial accounts were owned solely by the decedent, then once you tell the financial institution of the decedent’s death, then the accounts are going to be frozen until they receive a copy of a court order appointing a personal representative.
Several miscellaneous things need to be tended to as well.Although it can be problematic, you really should notify the insurance company insuring the decedent’s home.The problem with this is that most insurance companies don’t like to insure vacant property.They are usually willing to insure the property for a reasonable time for administration, but that is a limited time.They will want you to sell it or lease it as soon as possible, and if neither of those happen, then they may cancel the insurance.
You should also notify the credit reporting agencies so they can close those accounts.You should put the decedent’s name on the “Deceased Do Not Call List.”You should also notify social media companies such as Facebook, Twitter, LinkedIn, Instagram, and whatever else the decedent might have been on.
As annoying as all of this might be, tending to all of these details can save a lot of future headaches, time, and even financial loss. There are some bad people prowling around out there, and we all need to protect ourselves and our loved ones.
One of my partners recently came into my office with a story. He has a client who has lost her mental capacity. She signed a durable power of attorney (a “POA”) several years ago naming her daughter as her attorney-in-fact (her “agent”) to take care of things when she was no longer able to do so. The daughter had taken the POA to her mother’s bank to do some banking for her mother. The bank refused to honor it. They said they had a policy that they would not accept POAs over 2 years old. Absurd!
One of my clients recently had a run-in with an insurance company over a POA. The POA said that the named agent could do anything they needed to do with annuity contracts, “including but not limited to” several listed options. The client needed to change the beneficiaries on the contract in order to avoid probate. The insurance company refused. They said that since changing the annuity beneficiaries was not one of the specifically listed activities, it was not permitted. Again, absurd!
Until fairly recently, POAs were not very helpful. They were only valid as long as the person giving the power (the “principal”) was competent. They were primarily used in business transactions when travel and communication was difficult. However, there was always a lot of uncertainty about whether the principal was still competent when the agent was acting under the POA.
Beginning in about the 1980s, states started adopting what are called “durable” power-of-attorney statutes. What these statutes did was they made POAs valid even after the principal lost his or her mental capacity. What this means is that an agent can continue handling the principal's business even after the principal becomes incompetent.
This is a huge advantage for estate planning. If no one can handle your business affairs for you when you are incompetent, then your family will need to petition the court to have a guardian and conservator appointed to handle those necessary things. Even if you have a trust, there are assets that are not transferred into a trust that need attention. And the law gives the agents the power to do those things. That's why the bank and the insurance company were in the wrong.
I recently wrote a column in the West Newsmagazine about a new Missouri law designed to protect the elderly and disabled from financial predators. As I mentioned in the column, that law (which isn’t effective until 2017) is really designed to protect people during their lifetimes. It isn’t designed to recover assets.
The problem is that many times, families don’t discover that they’ve been hoodwinked until after mom and dad are gone, and so is the money. So the question is, what do you do then?
We’ve run into a number of cases recently where after the parents’ funeral, the kids find out that all the money is gone. Sometimes the house is even in someone else’s name. And that may not even be a relative, but some complete stranger.
The available remedies depend on when the assets are taken. If the assets are taken during the parents lifetime – deeds are changed, new names have been added to bank accounts or investment accounts, those kinds of things – then clients need to file what is called a “discovery of assets,” petition. In that kind of a lawsuit, the family can investigate what assets and accounts had belonged to mom and/or dad, who has them now, and why. The process of discovery involves questionnaires called interrogatories; subpoenas for documents and information; and deposition where you interview witnesses.
In some situations the re-titling may have been legitimate. For instance, maybe your mom or dad were perfectly competent and wanted to regard someone for everything they had done for them during their life.
However, in other situations, there may have been undue influence on the part of the perpetrator or a lack of capacity on the part of mom and/or dad in regard to the transfer or re-titling. In these situations your main witness is dead, and so gathering evidence is often circumstantial. These are not necessarily easy cases to prove, but depending upon the amount involved, the family may have no alternative. Since they can be difficult cases, clients need to be pretty certain of the facts before they commence litigation. What I mean by that is that you need to have a solid idea of the assets that are missing.
It may be that the assets were not transferred during the life of the parent(s), but only upon death, either by will or trust. If that is the case, then the clients have to bring a will contest or trust contest to have those documents set aside. These kinds of lawsuits, like a discovery of assets, action, or also difficult. You have to prove that the parent did not have testamentary capacity or that the perpetrator exercise undue influence. Since the perpetrator will certainly assert capacity and deny influencing the parent, it can come down to a “he said/she said” sort of argument.