A life insurance trust both owns and is the beneficiary of a life insurance policy.  Why would you need a life insurance trust?  Why, to save gobs and gobs (and more gobs) of money.  The main purpose of life insurance trusts is to avoid paying federal estate taxes and generation skipping taxes on the proceeds.

Here’s how the taxes work:

If you own a life insurance policy at your death, the proceeds are taxed in your estate for federal tax purposes (and for generation skipping tax purposes, if your designated beneficiary is of your grandchildren’s generation or younger.)

If your life insurance proceeds are taxed for federal estate tax purposes, your family could lose up to 60% of the proceeds.  That’s shocking.

What’s even more shocking is that if the life insurance proceeds are also subject to the generation skipping tax, your family could lose up to 90% of the proceeds (federal estate and generation skipping tax combined.)  That’s incredibly shocking.

However, the federal estate tax and generation skipping tax can be avoided:

Have a life insurance trust own (and be the beneficiary of) your life insurance.  If you don’t own it or have any rights to the policy, it can’t be taxed in your estate.

As a “bonus,” the trust shares you create for your beneficiaries in the life insurance trust have asset protection; this means the assets cannot be taken by divorcing spouses, bankruptcy creditors, or in other lawsuits.

Consult with a qualified estate planning attorney about a life insurance trust, as part of your comprehensive estate plan.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

If you don’t immediately qualify for MediCal to pay your nursing home bills, a qualified estate planning – elder law attorney may be able to help you to qualify, so you don’t lose all of your hard earned money and so you receive the care you need.

When Should I Plan?

MediCal pays for nursing home care for those who are both medically and financially needy.  The sooner you do planning, the more options you have and the more money you can protect.  The ideal time to do MediCal planning is at least 5 years before you need it; but it’s never too late.

What are MediCal Plans?

Common MediCal planning strategies include trusts, gifting programs, and transforming non-exempt assets into exempt assets.  These strategies are used to increase your quality of life, increase the quality of life of your spouse, and protect hard earned assets.

How will an Attorney Help Me?

A qualified estate planning – elder law attorney can help you by:

• Design of a MediCal plan, specific to your individual situation.  This includes a plan to avoid MediCal recovery.
• Implementation of your MediCal plan (i.e. getting your plan in place.)
• Preparation of MediCal application.
• Handling all communications with MediCal office, during the application process.
• Preparation of basic estate planning documents.

But, What about the Legal Fees?

If you’re like most people, you are concerned about the legal fees associated with Medi-Cal planning.  Typically, fees are about equal to what it would cost you to pay one month in a nursing home, saving you and your family thousands and thousands of dollars.

Do NOT Try this at Home

Just like you see on television, when it comes to MediCal planning and transfers, do NOT try this at home.   MediCal laws are complicated and they constantly change.

In addition, transfers, if done incorrectly, may disqualify you from receiving MediCal and may have serious tax consequences.

If you want MediCal to pay for your nursing home care, consult with a qualified estate planning – elder law attorney; the sooner, the better.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

There are minimum requirements that each estate plan must contain to cover basic needs.  This is the estate plan bottom line; it may not be all that is recommended in your individual situation, but it is the minimum that each adult needs.

The 3 Essential and Simple Estate Planning Documents

1.  Will

2.  Property/Financial Power of Attorney

3.  Health Care Power of Attorney with HIPAA Release

Your Will

Your Will does three things:  Appoints executors, appoints guardians for minor children, and distributes your assets.  If you die without a Will, the court will intervene and appoint an executor (called an “administrator”) and decide who raises your children.  California state law will dictate who gets your assets.  None of this may be what you want.

Your Property/Financial Power of Attorney

Your Property/Financial Power of Attorney does one thing:  It authorizes agents to step into your shoes to handle day-to-day personal financial affairs.  If you become disabled without a Property/Financial Power of Attorney, the court will intervene and appoint a conservator (i.e. guardian) to take over your finances; the court may appoint an attorney, not a family member.  The court has that power and this may not be what you’d want.

Health Care Power of Attorney with HIPAA Release

Your Health Care Power of Attorney with HIPAA Release appoints an agent to make health care decisions on your behalf (when you cannot) and meets federal privacy standards.  If you don’t have a Health Care Power of Attorney with HIPAA Release and you can’t provide informed consent, you don’t get to pick who makes health care decisions on your behalf.

If you don’t have this bottom line estate plan, you need it.  Consult with a qualified estate planning attorney.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

Marriage has the tax benefit of the unlimited marital deduction, which is a deduction that allows you to give, either during your lifetime or at death, an unlimited amount of assets to your spouse.  A millionaire could give a million dollars to her spouse without being taxed and a zillionaire could give a zillion dollars to her spouse without being taxed.  The marital deduction is, indeed, unlimited.

Why You Should Use the Unlimited Marital Deduction

• Taxes are delayed
• Taxes can be minimized as your spouse can use his or her own unified credit exemption to reduce or eliminate the taxes on the assets you pass to him or her.
• You can pass assets in trust to your spouse and protect them from future creditors

Why You Should NOT Use the Unlimited Marital Deduction

• If portability laws aren’t in effect or the proper steps aren’t followed to take advantage of portability, you could be wasting your unified credit exemption and that means more taxes are paid, overall.
• Instead of using the unlimited marital deduction for all of your assets, this means that your unified credit exemption amount should go either to someone else such as to trusts for your children or to a family trust for your spouse and children.  Then give the excess to your spouse (or a trust for your spouse) to take advantage of the unlimited marital deduction.

Unlimited Marital Deduction Requirements

• Your spouse must have a right to all of the income of the assets.
• Your spouse must be the only beneficiary of the assets during his or her lifetime.
• He or she must have the right to make the assets income producing.
• Your spouse must either be an American citizen or receive the assets in a qualified domestic trust (QDOT.)
• The assets must be taxable in the estate of the surviving spouse (unless that spouse has remarried and passes assets to the new spouse.)

The unlimited marital deduction reduces the estate tax dollar or dollar; it’s an important planning tool.  Consult with a qualified estate planning attorney to determine how to make the unlimited marital deduction work for you and your family.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

We can answer this common question, “Can the nursing home take my living trust assets?” in one word.  “Yes.”  Assets titled in your own living trust (or in your name) can be taken by the nursing home.  They must be spent first, before you can qualify for MediCal to pay for your nursing home care.   This means that the assets must be spent down for living expenses, nursing home care, or exempt assets before MediCal kicks in.

Nursing Home Planning Strategies

However, there are other ways to protect your assets and the sooner you meet with an estate planning –elder law attorney, the more options you have and the more money you can protect.  Common nursing home planning strategies include long term care insurance, income only trusts, gifting programs, annuities, and the purchase of exempt assets such as a new roof for the house, a television for the room, and a lift chair as well as paying off the mortgage or car.

Are You the Beneficiary of Someone Else’s Living Trust?

On the other hand, if you know you’re someone else’s beneficiary, you may want to have a chat with him or her and ask that the assets come to you in an asset protected beneficiary trust.  If you receive assets in trust, they can’t be taken by the nursing home, divorcing spouse, or another creditor.

Conversely, if you receive an inheritance or gift outright, in your individual name, it can be taken by the nursing home, divorcing spouse, car accident creditor, bankruptcy creditor, and the like.

A Loved One Can Give You Protection You Can’t Get for Yourself

While your own revocable living trust cannot protect against your creditors such as the nursing home, someone else’s can.  Consult with a qualified estate planning attorney to determine the best way to own your assets, plan for nursing home care, and give/receive an inheritance or gift.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

As we mentioned in part one of this article, as of November 17, 2011, legislation was proposed that, if enacted, would change the federal estate tax related laws.  The proposed legislation is called of H.R. 3467, The Sensible Estate Tax Act of 2011.

We continue; in addition to changes in the federal estate tax, gift tax, portability benefit, and pick-up tax, the proposed legislation would make the following changes:

Valuation Discounts and Minority Interest Discounts

Under current law, family limited partnerships are used to provide asset protection and to compress the value of underlying assets.

The new law would eliminate the use of valuation discounts as to non-business assets; and, there would be no valuation discounts for minority interests, if the other owners are family members.

Grantor Retained Annuity Trusts

The new law would require grantor retained annuity trusts to have a minimum 10 year terms and the annuity cannot be reduced during the term.  Furthermore, the remainder interest (at the time assets are transferred into the trust) must be greater than $0.

Generation-Skipping Trusts

Some generation-skipping trusts are used to avoid the federal estate tax and generation-skipping tax for generations (or even, forever, if sited in a state that has abolished the rule against perpetuities.)

The new law would end trusts when they attain have been in existence for 90 years.

There is no guaranteed that this new proposed law will actually become law.  In fact, there a competing law was introduced in March 2011, The Bipartisan Death Tax Repeal Permanency Act.  That proposed law would totally eliminate the federal estate tax and set the gift tax exemption at $5 million with a 35% top gift tax rate.

There is sure to be much discussion and the future of the federal estate tax related laws is unclear.  The only thing that is clear is that the current law is extremely conducive to the transfer of and protection of wealth.  Now is the best time to consult with a qualified estate planning attorney to take advantage of current law before it’s too late.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

As of November 17, 2011, legislation has been proposed that, if enacted, would change the federal estate tax related laws.  The proposed legislation is called of H.R. 3467, The Sensible Estate Tax Act of 2011.

In a nutshell, the proposed legislation would make the following changes:

• Federal Estate Tax and Gift Tax Exemption and Rates

The federal estate tax and gift tax are unified; they have one exemption that can be used during lifetime or at death.  The exemptions are the same and the tax rates are the same, regardless of whether assets would be transferred during lifetime or at death.

The federal estate tax (and gift tax) exemption, now $5 million in 2011, is indexed for inflation and is set to increase to $5.12 million on January 1, 2012.  The current tax rate is 35%.

The new law would reduce the federal estate tax exemption (and gift tax) to $1 million on January 1, 2012.   Then, beginning January 1, 2013, the exemption would be indexed for inflation (starting from the year 2000.)

The new law provides for the estate tax rate (and gift tax) to be increased to 55% on January 1, 2012.

• Portability of Federal Estate Tax Exemption

For 2011 and 2012, portability is in place.  Portability means that if certain conditions are met, that married couples do not need AB trust planning and don’t need to be concerned about how their assets are owned to qualify for a double exemption.

The new law would continue portability (which would otherwise end January 1, 2013.)

• State Credit for Federal Estate Taxes Paid

Currently, California (and other states) doesn’t have a “pick-up tax.”  A pick-up tax provides a state credit for federal estate taxes paid, allowing California to share in the federal estate tax revenues.

The new law would reinstate the pick-up tax.

Please continue reading at Part 2 of 2, Will there be Changes in the Federal Estate Tax Law??  In part two, we will explore how the proposed law would change valuation discounts, minority interest discounts, grantor annuity trusts, and generation skipping tax planning.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

You’ll like the answer to this one; you maintain control over all of the assets you put in your revocable living trust.  Unless you specify otherwise, you remain in full control as both the trustee and beneficiary of your trust.

You decide which assets are funded into the trust; you decide how your trust assets are managed; and, you decide how your trust assets are invested.  You can take assets out of the trust and you can put assets into the trust.  You maintain full control and can make these changes, so long as you are alive and well.

Should you become incapacitated or die, you maintain control by leaving explicit instructions as to when you will be deemed to be incapacitated, who is to step into your shoes, and what they are supposed to do.  If you’re married or in a domestic partnership, you may choose to name your significant other as a co-trustee and co-beneficiary.

Living with a trust is so easy, you may forget that you have one.  You file your normal 1040 income tax return, using your own social security number.  You sign your checks and pay bills just as you always have.  The only reminder you have is when you receive a bank or financial statement and see that it’s addressed to you as a trustee, not an individual.

Because the trust is so easy to live with, remember to keep your assets titled in the name of your trust, including new assets. For example, if you open a new investment account, title it in the name of your trust.  If you refinance your house, be sure the house gets re-funded into the trust.  Your estate planning attorney will draft the appropriate deeds.

If you have any questions about staying in control or creating a living trust, consult with a qualified estate planning attorney.  You’ll like what you hear; having a trust actually gives you more control than if you don’t have one.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

The costs of maintaining a basic estate plan are minimal.  There are no separate tax returns needed, just because you have a will or a living trust.  The only costs would be for professional review and whatever updates are necessary; a professional review is recommended every three to five years.  Your estate planning attorney will explain the fees (in writing and verbally) ahead of time and won’t do any work without your permission.

These legal fees tend to reduce the costs incurred upon disability or death.  Planning ahead with a comprehensive up-to-date estate planning can avoid the cost (and loss of control, hassle, and time delay) of court interference during the conservatorship process (upon disability) and the probate process (upon death.)

More good news is that any legal fees associated with tax planning or asset management planning that protects and conserves income-producing property is tax deductible.  Your attorney will give you a detailed receipt, indicating tax deductibility.

If you have advanced estate planning that includes life insurance trusts, charitable trusts, and other tax savings trusts, these trusts would have annual tax returns and might have professional trustee fees.  You should know about these costs up front, but a qualified estate planning attorney will only recommend this type of planning if it’s a good fit for you.  Typically, the money spent on maintenance pales in comparison to the monies saved through good planning.

It’s important to note that while a professional review is recommended only three to five years, you should have your estate plan reviewed sooner, under certain conditions.  Examples would be a move to a new state, marriage, divorce, new child, significant change in assets, significant health change, change in goals, and the death or disability of a trusted helper (successor trustee, executor, guardian, or power of attorney agent.)

To understand the specific costs of maintaining your individual estate plan, consult with a qualified estate planning attorney.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.

Because your estate plan, specifically, your living trust, will only work if loved ones and trusted helpers know about it, you do need to tell them that you have a living trust.  Let your loved ones and trusted helpers know that you’ve engaged in the estate planning process and show them where you keep your living trust and other estate planning documents.  In addition, it’s a good idea to give copies of your estate planning documents to the appropriate trusted helpers.

You may be wondering, “Who are my trusted helpers?”  “Trusted helpers” is a term that encompasses all those professionals or loved ones who assist you.  For example, your successor trustees of your living trust, agents named under both financial and health care powers of attorney, guardians to raise minor children, and the executor named in your will are all trusted helpers.

Be sure to discuss the role of successor trustee (and other trusted helper positions) with those you’d like to name in your living trust and other estate planning documents.  Explain the duties, responsibilities, and time commitment of the job; your estate planning attorney can provide assistance if you need it.  Be certain your potential trusted helper understands and is willing and able to take on the responsibilities.

Then, show your successor trustee (and other trusted helpers) where you keep your estate planning documents and provide them with a copy.  Each time you update your estate plan, be sure that the trusted helpers receive the update.

In addition, your banker, financial advisor, and insurance professional should know that you have a living trust so that your assets are properly funded.  In general, non-retirement assets (i.e. non-qualified assets) should have the title changed from your name to the name of your trust; beneficiary designation assets should have the beneficiary changed to the name of your living trust.  Consult with a qualified estate planning attorney to determine the specific funding pattern that should be executed in your individual situation.

Legacy APC, A Trusts & Estates Law Firm is a member of the American Academy of Estate Planning Attorneys.