Tag Archives: elderlaw

INCOME ONLY TRUSTS: HAVING YOUR CAKE AND EATING IT TOO

INCOME ONLY TRUSTS:

HAVING YOUR CAKE AND EATING IT TOO

Recently a healthy single woman came to my office with the following demand: “Protect my money in case I ever enter a nursing home, make sure my children do not pay any capital gains tax on the appreciation of the assets, and protect my dignity and self-respect so that I do not have to go my children and ask for money every time I need it.”

The woman’s assets included a home which she and her late husband had bought over thirty years ago for $45,000.00 and is now worth approximately $500,000.00. She also has stocks and bonds in the amount of $600,000.00 which were purchased for $80,000.00. I proceeded to enumerate the three options available to her and the consequences of each.

WAIT & SEE” APPROACH

This first option is also known as the “do nothing” alternative. Here, the client’s hope is that she will never need long term care. If it is eventually required, she will do something about it “when the times comes.” This usually results in the senior citizen spending all of her hard-earned assets on nursing home care. Clients and family members lose greatly and are often left with nothing, while the nursing homes are the big winners.

GO ALL OUT” APPROACH

This second option is where the client transfers all of her assets to her children, without considering capital gains tax and nursing home penalty periods. The children now own these largely appreciated assets, but upon any sale, will suffer a 20% tax hit, in the amount of $195,000.00.

Furthermore, several risks are associated with an outright transfer to children. If the children were to divorce or declare bankruptcy, the client’s money would be used to satisfy the claims of the children’s creditors. Additionally, if the client needed nursing home care immediately, that money may not be available to her, since it now legally belongs to her children. Here the client certainly loses her dignity by asking her children for money as she needs it.

INCOME ONLY TRUST

The third strategy is the course of action the client selected. Income Only Trusts provide a wonderful planning opportunity for both single and married couples who wish to protect their appreciated assets from the nursing home, while at the same time retain control over the income.

Clients who wish to protect their hard earned assets from future nursing home care usually list several factors why they decide to create a trust rather than transfer the assets to children outright. Control is one of the top reasons cited by clients. By transferring the assets to an Income Only Trust, as opposed to an outright transfer to children, the client has more control over the assets, since income is being paid directly to the grantor, rather than to the children. The client feels a greater sense of independence because of this direct payment.

In order to ensure that the assets in the trust are protected from the nursing home, the trust must be irrevocable. The grantor retains the right to receive income but the principal can not be accessed. For Medicaid planning purposes, the five year lookback period begins when assets are transferred into the trust. When assets are transferred from this trust to third parties, no lookback period is imposed because the penalty had been imposed when assets were placed into the trust.

Another reason not to transfer assets directly to children is to avoid some potential risks. If the child has creditors, gets divorced or has certain types of bad habits (gambling, drug addiction, alcoholism, and the like), the assets in the child’s hands may be squandered and will no longer be available to the parent. These risks are not found when creating an Income Only Trust, because the assets only belong to the Trust and not the child, and can’t be attached by the child’s creditors or divorcing spouse, or squandered due to the child’s bad habits.

Tax implications also warrant the use of an Income Only Trust. Since the income flows back to the grantor, the parent will be taxed on the income at the parent’s lower tax rate. Furthermore, if appreciated real estate is placed in the trust, the $500,000.00 exclusion from capital gains tax on the sale of the principal residence is preserved if sold by the trust; it is lost if the house is transferred directly to child who then sell it. From a capital gains tax perspective, the appreciated assets placed into this trust would be included in the client’s estate upon her death. Thus, the children will receive a step-up in basis and avoid paying significant capital gains taxes.

Income Only Trusts can be used in crisis planning but are even better in situations where it does not appear that Medicaid will be needed for a considerable period of time. The Deficit Reduction Act of 2005, signed February 8, 2006 created a five year lookback period for nursing home Medicaid eligibility for both transfers to individuals and to trusts. As a result of this level playing field, many clients have chosen to establish an Income Only Trust, if it is anticipated that Medicaid nursing home will not be required for five years, or if the Medicaid penalty period is less that the look back period.

The sole pitfall using this trust is that the State may seek to recover against the principal, to the extent of payments made by Medicaid on the grantor’s or spouse’s behalf. To prevent this from happening, the trust must terminate before the grantor or spouse applies for Medicaid. Distributing the principal to the beneficiaries during the grantor’s or spouse’s lifetime will not create a penalty as the gift was made when the trust was created. Distributing the income to the beneficiaries during the grantor’s or spouse’s lifetime will create a penalty but only on the income that is foreclosed to the grantor or spouse.

In summary, a properly drafted Income Only Trust is a marvelous planning technique that is easier for clients to accept than outright transfers to children. By properly drafting an Income Only Trust, I can ensure that your money will be protected from the nursing home, your children will not pay significant capital gains tax on the appreciation of the assets, and your dignity and self-respect will be preserved. This way you and your family members are the big winners!

POWERS OF ATTORNEY: PROTECTING YOUR DIGNITY AND FINANCES IN THE EVENT OF INCAPACITY

POWERS OF ATTORNEY: PROTECTING YOUR DIGNITY AND FINANCES IN THE EVENT OF INCAPACITY

By: BENJAMIN D. ECKMAN, ESQ.
Elder Law Attorney

As the population in this country continues to grow older, most people have engaged in some estate planning. A thorough estate plan, however, generally consist of five documents. It includes a Power of Attorney, a Last Will and Testament, a Testamentary Trust, a Living Will and a Health Care Proxy. This article highlights some of the advantages and practical considerations associated with Powers of Attorney.
 
 The prospect of becoming incompetent and no longer able to make decisions and care for one’s self is extremely troubling. Yet most people are more concerned about how their assets will be distributed at death. This is reflected by the fact that far more people have properly executed Last Will and Testaments in place, or have purchased Life Insurance policies, than they do Powers of Attorneys. However, long-term incapacity is an issue for which everybody, young and old, must be prepared.

 A Power of Attorney is a document in which the Principal gives the Agent or attorney-in fact, the legal authority and power to act on his or her behalf. The grant of authority can be limited to particular acts, such as dealing with a certain bank or securities account. Alternatively, it can be broader in scope allowing your agent to sign checks, pay bills, deal with the Internal Revenue Service, and handle other legal and financial matters. There is a great advantage for you to select the person who will act on your behalf if you become incapacitated, and spelling out the instructions that your agent is to follow in managing your personal care or property.
 
 The Power of Attorney is a fairly simple, private and inexpensive way to protect your finances and dignity in the event of incapacity. If the document is not properly executed, most often the family members, with the assistance of a lawyer, will petition the court in a guardianship action. This process, in which the senior is declared a legally incapacitated person, is very lengthy, expensive and humiliating.

 There are generally two types of Powers of Attorney. A “durable” Power takes effect the moment the document is executed, and continues even if the principal subsequently becomes disabled or incompetent due to sickness, accident or age. It is critical that the document include language that “This power of attorney will remain effective despite the subsequent disability of the principal”. The grant of authority terminates at the time of the principal’s death, but can be revoked by the principal at any time during capacity. Since the grant of authority is effective during your capacity, it is important to select an agent who is trustworthy. This often is a spouse, a child, or a long time friend. It is wise to appoint alternate agents who will act if the first named agent declines to serve.
 
 The second type is known as a “springing” Power.  This document becomes effective only in the event the principal becomes disabled. There are many problems attached with this type of power, i.e. when has the power “sprung”, proving with doctors help that the principal has in fact become incapacitated? To avoid this issue, it may be better to execute a durable Power.
 
Furthermore, the document must include language allowing the agent to make gifts. Many incapacitated individuals find themselves in a nursing facility. Their family members or agent consult with an attorney to qualify the individual for governmental assistance programs such as Medicaid. However, it is problematic if the document does not authorize the agent to make gifts. Instead, a guardianship proceeding must be brought to allow the guardian to act and make gifts for the individual’s benefit.

The Power of Attorney is the cornerstone of any successful estate plan. Thus, it is critical that before one executes a Power of Attorney, he or she discuss it with an attorney competent in the area of Elder Law and Estate Planning. Please contact the Law Firm of Benjamin Eckman to assist with all your Estate Planning and Elder Law Needs.

2013 IRS ANNUAL GIFT TAX EXCLUSION INCREASE

Annual Exclusion from Federal Gift Taxes Increases to $14,000 In 2013

Download the 2013 IRS Gift Tax Exclusion Increased article in PDF format from www.Eckman-Elderlaw.com

Download the PDF version of this article by clicking the icon above or clicking here!

 

The Internal Revenue Service recently issued Revenue Procedure 2012-41 in which it announced that the annual gift tax exclusion amount will increase from $13,000 in 2012 to $14,000 in 2013. Married couples can therefore combine their annual exclusion amounts and gift $28,000 in 2013 to any person, per year, without incurring any gift tax liability.

Gifts to a spouse who is a U.S. citizen remain exempt from gift taxes due to the unlimited marital deduction. Gifts made to a spouse who is not a U.S. citizen will increase to $143,000, up from $139,000 in 2012.

The annual exclusion amount is the amount that can be given away by a taxpayer in any year to any person free from federal gift taxes. The IRS sets the annual exclusion amount each year. New Jersey only imposes a gift tax if the gift was made within 3 years of one’s death.

If gifts made in 2013 to any person exceed $14,000, or $143,000 for gifts made to a non-citizen spouse, the donor must report the gift to the IRS using Form 709, which is the United States Gift Tax Return. However, even if the gifts exceed the annual gift tax exclusion amount, the donor usually will not have to pay any gift taxes since every taxpayer is given a lifetime gift tax exemption that can be used to offset their taxable gifts. In 2012, the lifetime gift tax exemption is $5,120,000. In 2013, the lifetime gift tax exemption will be reduced to $1,000,000, unless Congress acts to change the law and increase the exemption.

In addition, gifts for tuition and medical expenses as defined by IRS regulations have no limitations and can be gifted each year in any amount free from federal gift taxes.

FREE November Seminars on ElderLaw & Estate Planning – 11/12 @ Springfield, NJ + 11/14 @ Mountainside, NJ

 

The Law Firm of Benjamin D. Eckman, Esq. invites you to join us for this FREE post election seminar on Elder Law, Special Needs & Disability Planning. This unique interactive seminar is designed to answer the many complicated questions regarding recent law changes that become effective January 1, 2013.

At this FREE seminar the following educational topics will be discussed:

  • What legal documents each New Jersey resident should have.
  • How a “Family Trust” can protect your hard earned assets from possible future nursing home care.
  • How to protect, arguably your biggest asset, your house, by utilizing the deed with use and occupancy planning technique.
  • How to plan your estate to minimize Federal and NJ estate and inheritance taxes.
  • How to minimize and[or avoid the probate process.
  • How a special needs trust is utilized to preserve a disabled individual’s governmental benefits.

What past attendees have said about Benjamin Eckman’s seminars:
• “Very insightful and interesting. Learned thing I did not know.”
• “Excellent speaker, extremely knowledgeable, makes one aware of reality.”
• “Very informative presentation interspersed with humor.”

 

Monday November 12, 2012 @ 7PM
Springfield Free Public Library
66 Mountain Avenue, Springfield, N.J. 07081

Question & Answer session to be included.
Seating is limited – Make your reservations early.
To RSVP please call (908) 206 1000.

Wednesday November 14, 2012 @ 2PM
Brighton Gardens of Mountainside
1350 Route 22 West,
Mountainside, N.J. 07092

Question & Answer session to be included.
Seating is limited – Make your reservations early.
To RSVP please call (908) 654-4460.