estate basics

ESTATE PLANNING BASICS

Errold F. Moody Jr.

Master of Science in Financial Planning, Life and Disability Insurance Analyst

WWW.EFMOODY.COM

Unlimited Marital Deduction: No matter how much one spouse has, upon death, he or she can pass an unlimited amount of money to the surviving spouse without any tax whatsoever. (There are various caveats however. If you are NOT a citizen, this does NOT work. See an ESTATE PLANNING attorney first. Actually, see one anyway. If you have any substantial assets whatsoever, you will need help. Just make absolutely sure they can use a calculator or you undoubtedly got the wrong attorney). Anyway, assume I had $1,000,000,000,000. I could transfer it all to my wife upon death with no federal tax. However, she would pay enormous taxes upon her subsequent death (unless she spent it all).

$10,000 gift: Each person has the right to gift $10,000 to anyone per year without any gift implications. If I had 25 friends/relatives, etc. I could gift away $250,000 without any taxes. And they would NOT pay taxes either. You don't have to file a gift tax form either, but I would absolutely keep a WRITTEN record of each gift. Couples can do a joint gift of $20,000 per person per year. (Now $11,000 in 2002)

$675,000 exemption: Every person has the right to pass, once in their lifetime, $675,000 without estate tax. If you add the $10,000 available during lifetime, then you can give a person $685,000 without exposing yourself to gift tax. (Yes, you can do this at any time in your life. It is not required that you use it at death.) Of course, you will then be taxed on everything else you owned when you die since you had no more exemption. (Now $1,000,000 in 2002)

As an extension of the above, assume you gave someone (not your spouse) $25,000 in one year. What happens? The first $10,000 is the annual gift amount available. The other $15,000 must be used against your lifetime exemption of $675,000 and you would therefore have only $660,000 to offset when you die ($675,000- $15,000). You keep doing this until all the $675,000 is used up and then you start paying gift tax. (Excludes commentary on net gifts)

And more for spouses: Assume you and your wife had an estate of $1,350,000. When you died, you could give your wife whatever you owned (we'll say half at $675,000) under the unlimited marital transfer and NO estate tax would be paid. But think about this. When the survivor died, her estate (assume no growth) is now the total $1,350,000. Subtract the once in a lifetime exemption (assuming none of it had been used) and the remaining $675,000 starts to be taxed at 37% "right from the get go." That's $270,800 that must be paid to the IRS within 9 months of death. Yuck!

Want to avoid that? Simple. When the first person dies, $675,000 of assets is put into an irrevocable trust for the benefit of the survivor. (It may be called an A trust, credit shelter trust, etc.) The survivor can get income, support and maintenance and the greater of $5,000 or 5% of assets. That's not bad. The trust can therefore effectively utilize the $675,000 exemption of the first to die and, voila, no tax. The survivor gets the other $675,000 and, assuming no growth, dies with $675,000. Using their $675,000 exemption, voila, no tax. Upon the last death, the assets of both can go to the ultimate beneficiaries, so they are still "happy".

Now, which is better? No tax or $270,000+ tax? That's why trusts can help.

You can set up this first trust through a will, but it will go through probate (Testamentary trust) and will cost you time and money. Mostly illogical and expensive. Or you can use a Living Trust (Revocable trust) and avoid probate since the trust had already been established and the assets (very important) had already been put in it. Which is better? Assuming a decent sized estate and considering what can go wrong with probate, I'd opt for the trust. But trusts might be expensive to set up (from $500 to $1,500). Further, probate is NOT always bad.

Lastly, as a necessary basic, remember that all life insurance that you own and where you have an incidence of ownership, will be taxed in your estate. For example, assume you have $500,000 of net assets when you die PLUS a $300,000 policy that goes to your son. Your estate is actually $800,000 and the estate will owe tax on the amount above your lifetime exemption of $675,000= $150,500. That's $47,300 in estate taxes that will go to the IRS. Always address the life insurance element in estate tax planning.

ISSUE PER STIRPES: 1998 This is a designation for beneficiaries. For example, a father has two children- Joe and Sue. Sue has four kids. Under per stirpes designation, Joe and Sue each gets one half of the estate. If Sue dies, Sue's family still gets the ½ of assets from Dad. But if Sue was deceased and then Dad died and had used per capita, Joe and each of Sue's children get 1/5th. If per stirpes is not indicated on the beneficiary form, the money will be distributed Per Capita.

ESTATE TAX STATISTICS: (1999) The 1996 average tax on estate of $600,000 to $1,000,000 was 6%. It cost the IRS 2 cents on the dollar to administer the tax and say that the combined private and government costs totaled about 7 cents on the estate tax dollar.

Size of Estate Percent of Percentage

in $ Millions Estate Tax of Estate Tax

_____________________________________________

0.6 to 1 5. 6 5.6

1 to 2.5 25.6 31.2

2.5 to 5 20.3 51.5

5 to 10 14.9 66.4

10 to 20 11.5 77.9

over 20 22.1 100.0

The recent report noted that it is NOT estate taxes that cause most businesses to fail to pass on the asset to beneficiaries. The primary reason "is the burden on heirs who want to keep the business and must raise cash to pay off the heirs who do not".

HEALTH CARE DIRECTIVE: (American Medical Association 2000) A health care advance directive is a document in which you give instructions about your health care if, in the future, you cannot speak for yourself. You can give someone you name (your "agent" or "proxy") the power to make health care decisions for you. You also can give instructions about the kind of health care you do or do not want.

In a traditional Living Will, you state your wishes about life-sustaining medical treatments if you are terminally ill. In a Health Care Power of Attorney, you appoint someone else to make medical treatment decisions for you if you cannot make them for yourself.

The Health Care Advance Directive in this booklet combines and expands the traditional Living Will and Health Care Power of Attorney into a single, comprehensive document.

Why Is It Useful?

Unlike most Living Wills, a Health Care Advance Directive is not limited to cases of terminal illness. If you cannot make or communicate decisions because of a temporary or permanent illness or injury, a Health Care Advance Directive helps you keep control over health care decisions that are important to you. In your Health Care Advance Directive, you state your wishes about any aspect of your health care, including decisions about life-sustaining treatment, and choose a person to make and communicate these decisions for you.

Appointing an agent is particularly important. At the time a decision needs to be made, your agent can participate in discussions and weigh the pros and cons of treatment decisions based on your wishes. Your agent can decide for you wherever you cannot decide for yourself, even if your decision-making ability is only temporarily affected.

Unless you formally appoint someone to decide for you, many health care providers and institutions will make critical decisions for you that might not be based on your wishes. In some situations, a court may have to appoint a guardian unless you have an advance directive. An advance directive also can relieve family stress. By expressing your wishes in advance, you help family or friends who might otherwise struggle to decide on their own what you would want done."

WILLS AND TRUSTS: (2000) An experienced journalist had these comments about my initial article on wills and trust - "This is wonderful material--making several points a lot more clearly and better than I've seen elsewhere." The question was What type of boomer can truly benefit from a living trust versus a will? Here is my most recent answer.

"What people have been sold in regards to living trusts is the inherent ability to save estate taxes. Well, they do that- but then so does a will if it is properly structured. The main point with a trust is that it is a great management tool that attempts to define who will do what, when , where and how should the trustees become incapacitated or die. Wills are usually not that detailed and tend to leave major facets unaddressed. For example, literally all trusts will incorporate living wills and other documentation on what medical procedures should be undertaken if one is in a coma or becomes terminally ill. These are issues that must be confronted prior to the problem since beneficiaries- even well meaning- can potentially force a court to negate life terminating request that are made close to death.

And, very important to people with assets, are the issues associated with probate. With small estates, probate is not necessarily an onerous exercise. Some small estates will not be charged any fees by the state. Many states try to make this as simplistic as possible. But we are not talking about small estates with baby boomers- we have at least $1,350,000 at death. While a will can set up the trusts used in basic estate planning, the assets normally have to go through probate. So what is necessarily wrong with that? Nothing- if it works well. But think about this- would you really want a bunch of people you never met now reviewing the disposition of your assets through the court system? Not me. If anything can go wrong, it's apt to happen in a paper ridden system with too many people that takes too long and (potentially) costs too much. When addressing time, remember the emotional toil of a surviving spouse (or child or other loved one) being constantly "bombarded" by mail notice after mail notice (via court or probate documents) that your loved one has died. How much in tears is that worth? And in California, for example, probate can take 9 months MINIMUM. Additionally the costs for the attorneys and administrators can be prohibitive. Again in California, the total fees that could be charged on a $675,000 GROSS asset is $28,800. (Here is a tricky point that readers need identify. Estate tax is based on a NET estate. But California probate is based on a GROSS estate. As an example, assume you had a house or other assets worth $800,000 with $500,000 in mortgages. The net estate ($300,000) is UNDER the $675,000 lifetime exemption and hence no estate tax. But the probate fees would be based on $800,000- huge difference. Check your individual state.) The point being that while a will can get an asset into a trust for the survivor, the costs can many times greater than what a trust would cost initially (most states- look for costs between $750 and $1,500). That is not to say the utilization of a trust is without cost once someone dies since an attorney and accountant will need to be hired anyway. But I can assure you the costs will be/should be minimal compared to the costs of probate.

There are several other widely promoted issues for trusts. It is PRIVATE. Probate with a will effectively allows anyone to see what you have done. A trust prohibits the nosey and uninvited from knowing what was done and why. Another issue for many baby boomers is that they may own assets in different states. With a will, probate will be required in each state. A trust avoids that cost and the associated time and mess since the trust really owns the asset- not you. Lastly, a trust is easier to defend against a beneficiary (or other) wants to contest the distributions. Admittedly it is not prefect since anyone can sue anyone else. But you simply decide initially how contentious the problem might be and detail the trust document appropriately. In essence, don't expect a sloppily drawn trust to escape lots of litigation.

In summary, look at a trust simply not for the cost savings- which can be substantial- but in terms of defining what you- or you and your wife- would want to have done given "certain" circumstances. Certainly it costs some money up-front, but the peace of mind can be extensive. Add in the other unique benefits and they are certainly worth consideration. But don't get drawn into the trust mills that (almost exclusively) promote the tax benefits. They simply use a computer program that spits out a document that is rarely specific for your situation. By the same token, almost any attorney in any state can do the same. I would therefore definitely suggest State Certified Estate Planning Attorneys (if available in your state) and for more detailed work, those associated with the American College of Trust and Estate Counsel."

MANY MARRIED COUPLES FACE A CLASSIC ESTATE planning dilemma. (2000) They have combined estates large enough to require them to pay estate taxes, but each spouse has insufficient separate assets—other than retirement plans—to fund the bypass trust that could cut their estate tax bill. Funding a bypass trust with retirement plan assets could have adverse income tax consequences.

HCFA Amends Policies on Medicaid Estate Recovery 2001

The U. S. Health Care Financing Administration has amended the State Medicaid Manual, section 3810, on Medicaid estate recovery. The amendments specify recovery procedures for states that impose the Tax Equity Fiscal Responsibility Act (TEFRA) liens. They also mandate recovery from the estates of dual eligibles (QMBs, etc.), decedents with long-term care insurance, and beneficiaries of Medicaid managed care organizations. The amendments describe the circumstances under which recovery may be had from annuities and defines "homestead of modest value."

Fiduciary Tax Returns. 2001 Very good article. Estates and trusts are separate taxable entities and are generally required to file their own tax returns. Net income or losses on the estate or trust tax returns may be taxable at the entity level or at the beneficiary level The most that a beneficiary is required to report on their personal tax return is the distributable net income (DNI) of the estate or trust. DNI is equal to "taxable income exclusive of capital gains and losses plus (1) tax exempt income less allocable deductions; (2) distribution deduction and (3) personal exemption." If a trust is a simple trust, which requires all trust income to be distributed, then the DNI is reportable by the beneficiary each year. If a trust is a complex trust, which does not require trust income to be distributed, the DNI is only reportable up to the amount that was actually distributed during the year. "For income tax purposes, estates are treated like complex trusts." Because the tax brackets for estates and trusts are so much higher at lower indices than individuals (i.e., a trust or estate gets to the 39.6% tax bracket when taxable income reaches $8,650 while a married individual filing a joint return doesn't reach 39.6% until taxable income reaches $288,350), it is often beneficial to distribute income from the trust to the beneficiary in order to be taxed at a lower rate. Capital gains rates are capped at 20% for estates and trusts as with individuals. When a beneficiary is required to report DNI on their personal return, it must be done in the year within which the estate or trust return ends.

Executors or trustees may make the following elections on fiduciary tax returns which affect the amount and timing of income required to be reported by beneficiaries: (1) Tax year selection - the executor can elect a fiscal year for an estate which would affect the tax year in which the beneficiary must report DNI; (2) Decedent's revocable trust - "an election by both an executor and a trustee can be made to have a decedent's revocable trust under IRC Section 676 become part of his or her estate for income tax purposes"; (3) 65-day rule - an executor or trustee can elect to have any distributions made from an estate or trust within 65 days after the end of the tax year as treated as made before year end of the previous year. (4) Placement of deductions - "an estate can deduct fiduciary fees and other administrative expenses on either the federal estate tax return or the fiduciary income tax return"; (5) Excess deductions upon terminations - "excess deductions in the final year of a trust or estate will be passed out to the beneficiaries". (6) Estimated tax payments - if estimated taxes are overpaid by a trustee (or by an executor in the estate's final year), an election can be made within 65 days of the end of the trust's (or estate's) tax year to treat the excess payments as being made by the beneficiary. (7) Capital gains - although typically capital gains are taxed at the trust or estate level there are times when capital gains are part of DNI including: "(a) capital gains that are allocated to income under the terms of the governing document or local law are included in DNI; (b) capital gains allocated to principal that is actually distributed to the beneficiaries during the tax year; (c) capital gains will be carried out if the trustee follows a regular practice of distributing the exact net proceeds; (d) capital gains are passed out to the beneficiaries in the final year of the trust or estate. (8) Elections regarding S Corporation holdings - if a trust owns Subchapter S stock and the trustee elects to be an electing small business trust (ESBT) the income that flows through from the S-Corporation is taxed at the trust level at the top marginal rate. Another election that may be available to a beneficiary of a trust holding S-Corporation stock is to be a qualified subchapter S trust (QSST). Under a QSST all the income from the S-Corporation flows through to the beneficiary in DNI. (9) Property distributions - if property is distributed to a beneficiary (in not more than 3 installments) to satisfy a specific bequest then DNI is not carried out. (Source: Journal of Financial Planning, "Added Attention Needed in Representing Beneficiaries of Trusts or Estates"/Weller, November, 2000, www.journalfp.net)

Decedent's Journal Not a Holographic Will (VA) (PDF 2001) Decedent maintained a journal, on the first page of which she had written "This journal has been set up to eliminate problems for my family at the time of my death." The following pages clearly expressed testamentary intent, but the only place her name appeared was as a printed version on the inside front cover. The heirs objected to the admission of the journal as a holographic will, acknowledging that it was in the decedent's handwriting and included dispositive provisions but challenging the document for lack of a signature. The state Supreme Court rules that the printed signature at the beginning of the document is an "equivocal act" and does not satisfy the requirement that the signature "make it manifest" that she intended to sign the journal as a will. The journal does not satisfy state statutory requirements to be treated as a holographic will.

Holographic Will Admitted Despite Multiple Additions (2001) Decedent first drafted a holographic will in anticipation of a trip he was about to take. Upon his return he made a notation at the bottom of the will that the trip had turned out "OK" and that the terms of the will were to remain the same. Over the next several years he made additional notations about upcoming trips, and in one case modifying the distribution of the original document. When he died (not while on any of the referenced trips) an heir challenged the entire will, arguing that (a) it was conditional, to be effective only if he died on a listed trip, and (b) it was defective under the state holographic will statute, which requires a signature at the end of the document. The Court of Appeals rejects these challenges, finding that the existence of a condition precedent to the validity of a will must be clearly ascertainable from the document, and that the statutory requirement for a signature at the end of the document should not be read as an overly technical requirement.

Estate taxes (Investment Advisor 2001) The U.S. treasury shows that there were 47,483 decedents with taxable estate in 1999 but that only 58% of these had estates above $1,000,000. Estate below $1,000,000 only paid 4.5% of the total revenue collected.

Estate planning attorneys: I have frequently commented that attorney are highly suspect in providing definitive estate plans since they design will and trusts that will never do what the clients intended. for example, if the intent was to leave equal assets of $100,000 each to a son and daughter, but the daughter's inherited funds were in an IRA and the son's in a mutual fund, how much does each get? Assuming a 30% income tax bracket, the daughter gets just $70,000 while the son gets a full $100,000. I further included that attorneys MUST know the element of basis (see my basis video for full information). They don't and I believe that about 75% of all wills and trusts that leave money to beneficiaries are drawn incorrectly.

Yet in a recent Financial Planning magazine article, this statement was noted- "Lawyers are not trained to perform a review of the expected financial implication of an estate plan- that's why a financial planner is needed." Unfortunately, I rarely think that a planner is engaged to help an attorney- nor that planners inherently know the implications of basis or tax in any case. So you better!

10/21: AIDS: It is the leading cause of death in South Africa with women in their 20's are dying faster than women in their 60's. 40% of adult deaths last were caused by AID's related diseases. Over the next decade, AIDS will kill between 5 and 7 million South Africans.

Trust language (Financial Planning 2001) This is a list of key statements that a grantor may wish to include in a trust. Some were pretty good, others ??????

1. I would like my spouse to receive an annual income of $______ starting this year and adjusted for inflation.

2. My spouse can obtain an additional $________ each year just by asking for it

3. The initial investments for my trust will be ______% stocks and _____% bonds

4. As stocks increase in value, do not rebalance the portfolio. (The position is too static if you consider 20 or 30, more years of a lifetime coupled with economic scenarios such as existed in 1973/74).

5. All required payments can be made from principal as well as income.

6. My spouse shall have the authority to remove the trustee and appoint a new trustee. (Very necessary)

7. My spouse can instruct my trustee to distribute income to any or all of my children in amounts that she determines each year

8. My spouse, subject to limitations I have set, can instruct my trustee to distribute principal in equal amounts to my children (but they still must understand basis.)

9. The trust will pay reasonable travel expenses for visits by my children to my spouse when he or she is ill or in a nursing home (good idea)

10. The trust will pay reasonable travel expenses for visits by our grandchildren to my spouse when he or she is ill or in a nursing home

11. The trustee will pay travel expenses for children to attend the funeral of my spouse.

Also include any special needs of the client's family such as a particular requirements for individual members, providing for special events, anticipating unplanned or unusual happenings that may occur in the lifetime of the family.

Income in Respect of a Decedent (National Underwriter 2001)

1. Renewal commission of a life agent or securities broker, real estate agent, etc.

2. Commissions trails of a securities broker

3. Payment for services rendered before death

4. Payments under a deferred compensation agreement

5. Proceeds under an installment sale

7. Distributions for the decedent's qualified plan or IRA

8. Distributions from a decedent's IRA

9. Annuities paid to beneficiaries death.

Federal law protects company pensions and 401(k) plans from seizure by creditors. (2002) But many people don't realize that IRAs are subject to different state rules. States that offer some protection- Alabama, California, Delaware, District of Columbia, Georgia, Idaho, Kentucky , Maine, Montana, Nebraska, Nevada, New Jersey, Oregon, Rhode Island , South Carolina, South Dakota, Vermont, Washington

Annuity plans, while expensive, have become a popular tax-deferred vehicle for retirement savings. About one-third of states protect them from creditors and judgments.

Though state laws vary, they generally protect the death benefit and the cash value, especially when a parent, for example, buys a policy on his or her life, and the beneficiary is a child.

Once the child begins receiving payouts from the policy, the money also is generally out of reach of creditors and courts.

However, if the beneficiary takes the insurance proceeds in a lump sum instead of receiving regular payments from the insurer, that could change the protection.

College savings plans: State-sponsored 529 plans might be protected from judgments against the owners and beneficiaries.

Homes: Protection for a primary residence varies considerably from state to state. Five states — Texas, Florida, Iowa, Kansas and South Dakota — have unlimited homestead exemptions.

High net worth families often set up trusts and limited partnerships for estate planning and asset protection. If you put assets into an irrevocable trust, with your children as beneficiaries, they generally can't be touched by your creditors.

Several states also allow asset-protection trusts. These are irrevocable trusts that you can set up for your own benefit. You have to give up most of the control of the assets, but you can receive some income from it.

Lawsuit protection (NY Times 2002) Community property states: Arizona, California, Wisconsin, Idaho, Louisiana, New Mexico, Washington, Nevada and Texas

Undue elderly influence by Timothy L. Takacs, CELA, Robert B. Fleming, CELA, and Professor Rebecca C. Morgan (2002)

In Practice

In an elder law practice, attorneys need to be vigilant to the possibility of undue influence. This is not to say that a client may not make an unwise decision. However, certain red flags should not be ignored. For example: (a) be clear who is the client: is it the elder or someone else? (b) have you a prior relationship with either? (c) who made the appointment? (d) how did the elder get to your office? (e) is anyone else present during the interview? (f) does someone else tell you what the client "wants"? (g) do you give the other person the drafted documents to take to the elder to execute?

What do you do? First, make sure that you know who your client really is and make it clear to everyone involved. Needless to say, if your client is not the testator, or cannot be the testator (because you represent a beneficiary, for example), you have no business drafting a will for her. Turn the case loose, with a letter to all persons involved if necessary.

If you are representing the testator, try to talk to the testator alone. Satisfy yourself that the client is competent to execute the requested documents, that the client understands the purpose of the documents, and that the documents accurately reflect the client's decisions and desires. If appropriate, explain the potential for a will contest to the client. Are there steps you can take in the execution to protect the will? For example, should you videotape the will execution and have the testator explain the reasons for a change in devise? Should you ask the testator to furnish you a medical record to "prove" her mental capacity? Do you give the client a brief competency evaluation? If your client is seeking a power of attorney, should you include some of the safeguards we suggested in the November 13, 2001, eBulletin (http://www.tn-elderlaw.com/telb/011112.html)?

Be careful you don't go overboard in your efforts, however. Imagine yourself being cross-examined by the disinherited heir's lawyer. If you don't tape every signing, why did you decide to videotape this one? The inference invoked in the minds of the jury is that you suspected undue influence. What if the reasons given by the testator for excluding an heir turn out not to be grounded in fact? Testator says (on tape) that she can never forgive her niece for visiting her dying sister in Pittsburgh. Unknown to you, there is no sister, no one died, and no one went to Pittsburgh. Now, imagine yourself explaining to the will proponent's lawyer why you taped this signing (or explaining it to your own lawyer in the malpractice case against you).

Do not let anyone take unexecuted documents to the client for signature. You cannot control what happens in an execution if you are not present for the signing, nor can you be satisfied that your client has the requisite competency at the time of the execution. Remember that you have a duty under the Model Rules of Professional Conduct 1.4(b) to "explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation." That duty almost certainly encompasses going over the language of your client's documents with her. If necessary, go to the client's home or hospital for the signing and explain the document to your client. If you are going to the client's home, bring members of your staff with you to serve as witnesses to the document.

What if you suspect undue influence? Do you talk to the client and explain your concerns? Probably. Can you report suspected abuse without your client's permission? Not likely. Unless your state includes attorneys as mandatory reporters under an abuse statute (and even then your obligation under the ethics rules may trump), you need your client's consent. You may share your concerns if, at the outset of the representation, you establish that the terms of representation allow you to reveal to family or others information about the client when you believe the client is in need of help. If you do so, then include some language in your engagement letter, for example, "In the event that I [Attorney] determine that your [Client's] best interest so requires, you [Client] specifically authorize me [Attorney] to contact your [Client's] family members and/or appropriate authorities regarding the possibility of abuse, neglect or exploitation, either to obtain additional information or to report my [Attorney's] concerns and observations."

Another option would be to have language authorizing disclosure if you determine it is in the client's best interest or if the client becomes ill during representation. (This is the approach taken by The Elder Law Clinic at Wake Forest University, superbly run by Prof. Kate Mewhinney.) For example, you can include language in your engagement letter: "you have authorized me to release any information to your (relative, treating physician, etc.) if I determine it is in your best interest for me to do so." If you anticipate that your client will suffer a physical or mental decline, you could include language that limits your disclosure to a situation when your client becomes ill, in line with your obligations under Model Rule 1.14.

Do not represent the person who is exerting undue influence over the elder. You do not want to be a part of it (and, unfortunately, there are other attorneys who will represent this person in achieving her goals). If your client is the victim and she refuses your good counsel, document that fact. Caution a client against giving power of attorney or any other authority to a caregiver she has known for a brief period of time, or to anyone with whom she has had a business relationship. Remind clients that if something seems too good to be true, it is because it probably is. And remember, we can't protect the foolish from themselves.

Trustees (WSJ 2003) the age-old practice of putting a relative in charge is now facing some new challenges. After centuries of relatively little change in the rules of trusts, a series of new state laws has jacked up the financial and investment responsibilities of trustees.

Trustees have to be more sophisticated in the way they handle the money.

The changes in the law have been driven partly by the miserable performance of many trusts in recent years. But the laws have also been pushed hard by banks, which have a big financial incentive in steering trusts away from family members and toward their own trust departments.

Banks and trust companies generally charge sliding fees, often about 1.25% to 1.5% on the first million dollars in trust assets, 0.80% to 1.0% on the next several million, and a smaller percentage as the trust increases. But investors aren't always happy with professional trustees. Standish Smith, an advocacy group for heirs and creators of trusts, with a 2,400-person mailing list, says that about 95% of the complaints the group receives are directed toward banks serving as trustees."

My opinion of bank trustees is abysmal. Over and over again I have found incompetency. Always use a "trust protector" in any trust agreement. It allows the use of a separate adviser to review the activities and suggest a change if deemed necessary- and without the court's approval.

Planning? (2003)In a survey by Massachusetts Mutual of 1,000 established small businesses with annual revenue at least $1,000,000, 55% of executives over age 60 had not chosen a successor. 19% of all respondents had not done any estate planning at all, outside of a will.

Asset-protection trust. (WSJ 2003) The idea is to put a big chunk of your money in an irrevocable trust. The trust is run by an independent trustee, who may opt to give you payments from time to time. If done correctly, the trust -- which has to be located in a jurisdiction that has passed special laws -- generally can't be touched by creditors if you're sued or file for bankruptcy protection.

Due to the passage of the Sarbanes-Oxley Act, which makes top executives and directors accountable for their company's financial results, more executives are seeking asset-protection trusts.

Most asset protection trusts are located offshore, in locales like the Cook Islands, Nevis and Gibraltar, which have attracted sizable trust business by enacting laws that protect trusts from U.S. creditor claims.

But the number of U.S.-based trusts is now picking up as states change their laws, partly to lure people who are worried about putting their wealth abroad. Alaska, Delaware, Rhode Island, Nevada, and as of this year, Utah, now permit these trusts for both residents and nonresidents.

Rising malpractice insurance rates are a key reason for physicians. In Florida, for example, climbing premiums have spurred many physicians to forgo coverage altogether, and instead use other asset-protection techniques. Marc Singer, a partner at Singer Xenos Wealth Management, Coral Gables, Fla., says that about 60% of his physician clients "go bare" and drop malpractice insurance because of the high cost and limited coverage of policies. That's a big jump from 10 years ago, when only about 20% of his clients practiced without insurance.

A recent survey of individuals with more than $1 million in assets found that 35% had some form of asset-protection plan, compared with just 17% of respondents in 2000. And more than 61% of the respondents who didn't have an asset-protection plan were interested in creating one, up from only 43% in 2000

Domestic asset-protection trusts are controversial, because they haven't yet been tested in court and it is still unclear how well they'll hold up.

Domestic asset-protection trusts also can also be used to ease estate taxes. Because you give your assets to the trust, the funds are out of your estate for estate-tax purposes. However, the trust can't make payments to you on a regular basis, or that would invite the scrutiny of the IRS.

Offshore asset-protection trusts can cost anywhere from $20,000 to $50,000 to set up, plus annual administrative fees of $2,000 to $5,000 and asset-management fees of about 1% on the assets placed in the trust. Domestic asset-protection trusts cost less, running anywhere from $3,000 to $10,000 in attorney's fees, plus asset-management fees of roughly 1%.

Because of the high fees, asset-protection trusts generally don't make sense unless you're willing to put at least $1 million in them.

Planning For The Financial Independence and Security of A Disabled Child, Philip H. Mondschein, Esq 2004

As an elder law attorney, I am often asked by a parent of a disabled child “How can I provide for my child’s financial needs when I am no longer alive?” People are concerned that, by leaving an inheritance directly to their disabled child, this will usually disqualify the child from most means tested public assistance programs. If the parents make an outright gift to another sibling can they be assured that this child will properly look after the disabled child?

The solution to the problem is to create a trust known as a “supplemental needs trust” for the benefit of the disabled child. The purpose of the trust is to preserve eligibility for public assistance programs, such as Supplemental Security Income (SSI). In most states, eligibility for SSI automatically creates eligibility for Medicaid, which may be the only health insurance the disabled child is able to receive. In addition to maintaining public assistance eligibility, assets held in the supplement needs trust may be used to substantially improve the disabled child’s quality of life by providing goods and services above those provided by federal and state agencies.

There are two main types of trusts. The third party "supplemental needs trust" and the self-settled "special needs trust." The third party supplemental needs trust is a trust which is usually created with the assets of a parent or grandparent for the benefit of the disabled child. The trust may be created while the parent is alive or at death through a testamentary trust under the parent’s will or revocable trust. As long as the child cannot revoke the trust or compel distributions, assets held in the trust will not be considered an available resource and will not disqualify the child from receiving public assistance.

During the child’s lifetime, depending on the laws of your particular state, the trustees may be granted broad discretionary authority to use trust assets to purchase goods and services not otherwise available from governmental programs. These may include supplemental medical, dental, diagnostic work and treatment, nursing and attendant care, travel and entertainment, supplemental housing, support and transportation. In drafting the trust, the attorney will have to take into consideration both federal and state law. In some states the mere existence of the trustee’s ability to use trust assets to provide food, clothing or shelter will disqualify the child from receiving public benefits. However, in other states direct payments to third parties for food, clothing or shelter known as "in-kind support and maintenance" will only cause a reduction in the disabled child’s SSI for the month.

Upon the death of the disabled child, assets held in the third party supplemental needs trust may pass to other family members and the trust is not required to reimburse the state for public assistance furnished to the disabled child under the state’s Medicaid program.

What happens when a parent fails to create a supplemental needs trust, during lifetime or at death, and the disabled child receives their inheritance outright, or the child receives funds as a result of a personal injury award? Fortunately, all is not lost. Under the Omnibus Reconciliation Act of 1993 ("OBRA ‘93") Congress specifically authorized the transfer of assets to a self-settled special needs trust, also known as a "1396p(d)4(A) trust," as a means of preserving public benefits. Under OBRA ‘93, the trust must be funded with the assets of a disabled individual under 65 years of age, by a parent, grandparent, legal guardian or the court. As with the third party supplemental needs trust, the trustee may be granted authority to provide benefits over and above those provided by public or private financial assistance.

The major drawback to the self-settled special needs trust is that, at the death of the beneficiary, the state will have to be reimbursed for Medicaid benefits provided to the disabled child prior to distribution of trust assets to other family members.

In choosing a trustee to administer the trust, the family should consider the size of the trust assets, the financial ability of the individual and the expected duration of the trust. Where the assets of the trust are small the appointment of a family member who has some investment experience to serve as trustee may be the only practical solution. However, where the assets of the trust are substantial and the trust is anticipated to last for twenty or thirty years, the appointment of a corporate trustee to serve along with other family members is preferable.

Whether the trust is created as a third party trust or a self-settled trust the advantages are many. The disabled child is able to secure immediate eligibility for public assistance such as SSI or Medicaid. While on Medicaid, the child is able to obtain services at significantly lower cost than the private pay rate. Some programs and services are only available through the Medicaid program. Even if the state Medicaid program has to be reimbursed once the trust is terminated, the availability of public assistance will permit the funds held in the trust to go further in improving the child’s quality of life.

The attorney who drafts the supplemental needs trust must take into consideration a broad range of both public and private benefit programs, including Supplemental Security Income (SSI) and Medicaid, as well as income, gift and estate taxes issues. In addition to peace of mind, the greatest flexibility is achieved when the trust is set up by a parent or other third party either during lifetime or at death, rather than passing the funds on to the disabled child. As in many endeavors, the most successful outcome is achieved by planning ahead.

Guide to Passing on Family Heirlooms. (University of Minnesota 2004) This web site provides people with practical information about the inheritance of personal property. Our goal is improving family decision making through education and research.

Power of Attorney for Health Care – (2005) A written legal document in which one person (the principal) appoints another person to make health care decisions on behalf of the principal in the event the principal becomes incapacitated (the document defines incapacitation). This instrument can contain instructions about specific medical treatment that should be applied or withheld. While its purpose remains essentially the same from state-to-state, the name of this document can vary; for example, in Florida it is called an Appointment of Health Care Surrogate. (Note: This document must not be confused with what most people call a Power of Attorney; that document usually confers only financial responsibility and has nothing to do with health care.)

High Court upholds right of woman to travel abroad for suicide Clare Dyer

Dynasty Trusts: (WSJ 2005) In a typical dynasty trust, a grandparent transfers assets to a person or institution, the trustee, who holds and invests the money for beneficiaries -- the children, grandchildren, great-grandchildren and beyond. As long as money stays in the trust -- and the trust is structured properly -- it can pass from generation to generation without additional estate or generation-skipping taxes, allowing the trust to accumulate vast sums over time. Estate and generation-skipping taxes can grab roughly half of a parent's wealth as money moves to another generation.

Until recently, trusts could effectively last only about 90 to 120 years, under a law called the Rule Against Perpetuities. Since the mid-1990s, a growing number of states moved to relax the term limits. Now, at least 18 states and jurisdictions -- including Delaware, Wisconsin, New Jersey, Illinois, Virginia and the District of Columbia -- allow trusts to last forever. Several states that impose term limits allow much longer durations. Wyoming and Utah, for instance, permit trusts to last 1,000 years, while Florida lets them carry on for 360 years.

To set up a dynasty trust, it isn't necessary for families to live in a state that permits them. Only a trustee has to be located there -- and many trust companies have operations in Delaware, Florida or other states that welcome long-term trusts. Moreover, some of those states, such as Alaska, have other trust-friendly benefits, like no state income taxes on trusts and strong asset-protection laws.

The study found that simply changing a state's perpetuities laws wasn't enough to attract trust assets. Whether a state levied income tax on trust funds mattered, too. If a state abolished its rule against perpetuities, but still taxed trust funds attracted from out of state, the researchers found "no observable increase" on a state's reported trust assets. By contrast, if a state allowed dynasty trusts but also didn't tax trust funds created by nonresidents, the state's reported trust assets increased by roughly $13 billion on average during the time period studied.

The researchers also tested for other variables, such as whether a state allows what are called self-settled asset-protection trusts. A handful of states now allow individuals to set up these trusts for themselves to protect their assets from creditors. The authors found "tentative evidence" that permitting asset-protection trusts might increase a state's trust business, but caution that the data set was limited.

FLP: (NY Times) Family partnerships allow parents to transfer assets, including real estate and securities, to their children at a lower tax rate than is assessed on estates and gifts. In a family partnership, the parents retain a few shares of ownership and their children hold most of the shares.

Essentially, the argument is that even highly marketable assets become harder to sell when they are part of a partnership and thus are worth less. Family partnerships generally claim that their assets deserve a discount for this reduced ability to sell them.

The Internal Revenue Service often audits the partnerships,

Obviously, the Internal Revenue Service never liked something where 30 to 40 percent of a taxable asset's value just sort of disappeared. "Almost every practicing attorney that really does this a lot has one or two cases in examination or litigation with the I.R.S. or has had one or two in the last six months or year."

Partnerships should be for a purpose other than avoiding taxes, like limiting liability. Parents wanting to pass money on to their children should not put all of their assets in the partnership because opinions in recent cases have said that payouts to the parents disqualify a partnership from avoiding estate taxes

American or English rules (Mike Malloy) Successive Assignees (2006)

Occasionally, a policyowner assigns the same rights in the same policy to two different assignees. In such a situation, the insurer might face conflicting assignees. Ordinarily, the insurer will pay the proceeds into court by interpleader and let the court decide which assignee is entitled to the process.

For example, suppose Peter Adams assigns the $20,000 life insurance policy he took out on his own life to Andrew Schmidt as security for a $20,000 loan. Adams delivers a written assignment to Schmidt but keeps the policy. Shortly after this, Adams delivers a written assignment of the same policy to Calvin Ching as security for another $20,000 loan. Two weeks later and before Adams has made payments on either loan, he is killed in an airplane accident. Which assignee will be entitled to the policy proceeds, Schmidt or Ching?

First, suppose Ching had notified the insurer of the assignment immediately, and Schmidt failed to notify it at all. Suppose Schmidt was in Europe at the time of Adams’s death and did not hear of it until his return. Meanwhile, the insurer, in good faith, paid the death benefit to Ching. The insurer would not have to pay Schmidt, because it paid Ching in good faith and in ignorance of the assignment to Schmidt.

Now, suppose that Ching notified the insurer of his assignment immediately and Schmidt notified the insurer of his assignment a week later. If Adams was accidentally killed a few days after the insurer received notice of Schmidt’s assignment, who would receive the death benefit, Schmidt or Ching?

In about one half of the states, Schmidt would be entitled to the money, under what is called the American rule. This rule states that the right of the first assignee is superior to that of a subsequent assignee. Here, Schmidt was the first assignee.

About one half of the states follow the English rule. Under the English rule, the first assignee to give notice of his assignment to the insurer would be entitled to the death benefit, regardless of the order in which the policyowner made the assignments. Since Ching gave notice of his assignment one week before Schmidt gave notice of his, Ching would be entitled to the death benefit in those states that follow the English rule.*

As a final example, suppose the policy had a face value of $50,000 and successive assignments had been made to Schmidt and Ching to secure a $20,000 loan made by each of them. Here, the insurer can pay Schmidt $20,000, pay Ching $20,00, and pay the remaining $10,00 to the named beneficiary.

This is how trust mills work (Actual Pennsylvania case 2006) the defendants market their estate planning services to mostly older consumers through mass mailings and seminars to induce the purchase of their estate planning documents and annuity products.

To make the sale, the defendants falsely infer that:

-- The non-lawyer representatives are attorneys or employed by Weinstein as members of his legal office, when they are actually insurance agents who work for American Family or Heritage Marketing or both.

-- The non-lawyer representatives are qualified to legally advise consumers regarding the advantages or disadvantages of revocable living trusts, probate and other estate planning matters.

-- The probate process will greatly reduce the size of the decedent's estate because of attorney and executor fees.

-- Revocable living trusts will lessen or eliminate taxes.

-- Probate will expose private matters to the public but a trust will keep everything private.

-- Probate exposes a decedent's estate to litigation but a revocable living trust will not.

-- Court costs are very expensive and probate will result in delays.

-- Revocable living trusts meet their needs without fully explaining or examining other estate planning vehicles.

-- Other estate planning vehicles are inferior and have negative drawbacks.

-- They were "representatives," "estate planners," "asset preservation specialists," or other titles when they were insurance sales persons.

-- They were exercising independent, unbiased judgments about the consumers' estate planning options when they were primarily interested in making large commissions from the sale of revocable living trusts and annuity contracts.

After consumers agreed to purchase the revocable living trust plans, the defendants then persuaded them to exchange or convert their investments for various types of annuity contracts, even if that move had a negative financial impact or tax consequence, the suit alleged.

As part of the overall scheme, the complaint also accuses the defendants of preying on elderly consumers by selling long-term deferred annuity contracts to those who would not live to derive full benefits, misrepresenting the rates of return, costs, penalties and other terms of the contracts, plus using scare tactics or omissions to sell estate planning products that were not appropriate to their needs.