February 2012 Archives

Special Needs Trusts for New York Families

February 27, 2012,

Special needs trusts are helpful legal tools that allow parents and grandparents to leave behind assets to loved ones with special needs without damaging the beneficiary's ability to receive SSI and Medicaid benefits. Our New York estate planning attorneys know that in the past the best strategy for these families was often to disinherit relatives with disabilities. Otherwise, assets might be given to the individual which would disqualify them from receive certain federal benefits. Of course this seems a perverse effect and unfair effect for those with disabilities. The special needs trust fixes that. The trust is a device that allows a resident with special needs to receive an inheritance and keep their benefits, all without the state actually receiving less than it likely would otherwise. The trust funds can be used to pay for a wide range of services for the individual like clothing, education, entertainment, household goods, and similar costs. Families have much to gain from taking advantage of this tool.

An article this weekend from Lake County News explored these trusts, distinguishing between the various types of special needs trusts. For example, testamentary trusts and stand-alone special needs trusts are compared. Testamentary trusts are those which are established at the death of the benefactor. Conversely, stand-alone trusts are created while the one passing on the assets is still alive.

One key difference between these trusts is that the stand-alone special needs trust can receive assets from different individuals. Some families may have a few parties that want to help provide for their loved one with special needs. The stand-alone trust, because it is not tied to any single parties' will or trust, allows for these multiple benefactors. In addition, accessing the funds in the trust can be somewhat easier in a stand-alone special needs trust. That is because the funds are made available to the beneficiary in the stand-alone trust instantly upon the death of the benefactor. Conversely, in a testamentary trust, the assets must first need to be transferred into the trust following the benefactor's passing.

As all estate planning attorneys will explain, an important consideration in each of these financial preparation efforts is determining if trust assets can be reached by creditors. Because the stand-alone trust usually involves assets being transferred into the trust while the benefactor is alive and solvent, those assets cannot be reached by creditors. They are essentially removed from the benefactor's estate. Conversely, is the trust is not funded until the death of the individual, then the total assets are subject to creditor claims before they are transferred into the trust.

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Avoiding Lump Sum Inheritances for Young Adults

February 23, 2012,

Parents often worry about their children--even their adult children. In many cases, no one knows about a child's strengths and weaknesses better than their parents. Local residents often take this into account when crafting New York estate plans. For those whose children may not be ready to handle a large inheritance, many parents reasonably want to know what options they have to both pass on assets to children but protect them from getting the funds before they can handle them.

In fact, this issue has been getting a bit of media coverage over the past two weeks upon the death of pop star Whitney Houston. As reported in Forbes this week, speculation abounds regarding the star's estate planning. Most suspect that the singer is likely to have left her entire fortune, reportedly worth $20 million or more, to her only daughter--18-year old Bobbi Kristina. The young girl is undoubtedly fragile at this stage in her life, especially after just losing her mother. In addition, many family members have voiced concerns that the young woman has also battled substance abuse problems over the past few years. This is leading many to question the daughter's ability to handle a lump sum payout from her mother's estate.

Early reports suggest that Ms. Houston had done some estate planning--but not much. She apparently had a will which left everything to her daughter. Because her daughter is a legal adult, under a will she will receive the money immediately. As most community members appreciate, few 18-year olds are truly ready to handle millions of dollars. However, without any other advance planning, the only option for the family is likely to go to court and try to get the teenager declared legally incompetent to manage her finances. They could then seek a conservatorship which would allow a third party to control the inheritance until such time that the court finds the daughter able to handle the responsibilities of the inheritance.

How could this have been avoided? By using a trust.

Our New York estate planning attorneys have helped many local families prepare for this possibility and plan ahead. Trusts are the ideal tool to accomplish this goal. They are private, meaning that they take place outside of the court process. This allows families to conduct much more detailed preparation with the assurance that the decision won't be changed by a judge when they are gone. One popular option is to have the trust dispense money to children at different rates throughout their life. For example, they may receive 20% at age thirty, another 40% five year later, and then the remainder at age forty. Alternatively, the payments can be set not at specific ages but times after the parent's death--20% at the parent's death, 40% five years later, and the remaining 20% ten years later, regardless of the age of the child.

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Fixed Annuities and the Benefit of Longevity Insurance

February 21, 2012,

It is a common question asked by area seniors conducting New York estate planning: How do I know if I have enough money to last the rest of my life? There are no easy answers. A lot depends on the source of income that one has when conducting their planning and exactly how those funds are being used. However, some financial planning tools exist which can provide peace of mind for those who want it, particularly in volatile market conditions. As explained this weekend by Investment News, one of the options is a deferred-income fixed annuity, often known as the main type of "longevity insurance."

Fixed annuities are essentially investment contracts with an insurance company. This means that the insurance company agrees to pay out a set income based on the value of the investment. These annuities can be either deferred or immediate. For estate planning purposes, deferred annuities often allow those thinking ahead to make investments before hand for guaranteed payouts down the road. Many different types of fixed annuities exist. Some are for a set rate of income while others take into account market conditions to some extent--blunting the effect of marketing downturns while allowing the recipient to share in some of the market booms. In this way, our New York retirement planning lawyers realize that lifetime annuities are often beneficial for those thinking about their long-term finances.

While they may be important investment tools for some, annuities are not for everyone. When compared to other investments, this type of insurance can offer lower rates of return. Many advisors suggest that the insurance is best when higher interest rates are present. This means that investors can put less money up front to get the same guaranteed income stream down the road. Often annuities are used in combination with other investment tools. Yet, many annuity plans have steep penalties for early withdrawal, which is unattractive to some.

However, where appropriate these insurance options are good ways for residents to have the peace of mind of never having to worry about "outliving" their money. In addition, this insurance can be helpful in some situations involving multigenerational trusts. For example, when a senior establishes a trust for an adult child, longevity insurance can be taken out on the adult child's life--the grandchildren are named as beneficiaries. This protects against the risk of the child living too long and using up funds that were intended for grandchildren.

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Tax Changes in the President's 2013 Budget Proposal

February 17, 2012,

Earlier this week President Obama unveiled his proposed 2013 federal budget. The mammoth document details how much money he proposes the government take in from taxes, possible changes to the tax code, and information on how that money should be spent. Considering the proposal includes various changes to what is taxed and at what rate, estate planning attorneys always pay attention to the details of the proposal. The budget applies to the federal fiscal year 2013, which actually begins on October 1, 2013.

However, each New York estate planning lawyer at our firm appreciates that this bill is simply a blueprint--a starting off point to begin discussions about the budget, not a detailed map of what will likely occur. That is especially true this year, because election years are always known for their lack of compromise and avoiding of controversial tasks. It is important to read this proposal from that perspective. That doesn't mean that the budget proposal has no value when it comes to estate planning. The ideas set forth in the proposal are indicative of at least some ideas that will likely be brought forward for consideration that may become law. For one thing, contrary to the claims made by many reformers on both sides of the political aisle, the budget does little to simplify the tax code. Instead it suggests a range of increased layers of tax complexity.

The budget would change basic income tax rates, particularly for those in higher income brackets. For example, the budget calls for an increased minimum income tax rate of 30% for those making over a million dollars. In addition, the proposal assumes that the current income tax breaks for those making over $250,000, which were first passed by President Bush, will be allowed to sunset. Without Congressional action, these income tax rates will return to higher levels at the end of this year. In addition, the estate tax would rise in the current proposal to 45% from 35%, with the exemption rate dropping to roughly $1 million from $5 million.

Business taxes would also see some changes in this proposal. Bloomberg News explained that while the President has talked of simplifying the corporate tax code, the proposal does not suggest any ways to do that. Instead of lowering the 35% tax rate, the budget would simply add more credits and deductions. The incentives would be geared toward manufacturing and "high-tech" manufacturing companies, while domestic oil and gas production interests would lose billions of dollars in current tax "preferences."



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U.S. Senate Proposal to Alter Inherited IRA Rules

February 14, 2012,

Policy changes at the state and federal levels often have implications on New York estate planning. For example, we have frequently discussed the uncertainty that exists over the estate tax. Exemption levels and tax rates may very well hinge on exactly who wins various federal elections in November. While it may dominate headlines, the estate tax is not the only policy with implications for local residents' estate planning. For example, yesterday Bloomberg Businessweek discussed the latest news regarding proposed legislation that would impact inherited IRAs.

Inherited Individual Retirement Accounts (Inherited IRAs) are accounts left to a beneficiary after the owner's death. As the name implies, these are accounts that an individual has contributed to over a lifetime in order to provide financial resources upon retirement. More often than not a spouse is named as the beneficiary. The IRA offers a variety of tax benefits depending on how the account is "cashed out." As it currently stands, a beneficiary can stretch the ultimate income tax payment over a lifetime. Because of this benefit, our New York estate planning attorneys know that IRAs often act as an important way for individuals to pass on assets to loved ones while saving on taxes.

However, some federal lawmakers are seeking to limit the tax benefits of Inherited IRAs for beneficiaries. Various proposals are being offered, but in general they all seek to prevent beneficiaries from stretching out the income tax payment over a lifetime. Instead, some legislators have proposed changing the law so that those who inherit the IRA have to distribute (cash out) the sum over five years. The practical effect of the change is that beneficiaries would be required to pay more taxes on the income from that inherited account. All versions of the change thus far would exempt spouses from this requirement.

One analyst noted that the proposal would "really change the whole playing field for retirement planning. That would make things simpler, but it would really put a crimp in the whole legacy planning people do for IRAs."

Proponents of the change suggest that it would net federal coffers roughly $4.6 billion over the next ten years. The bill's main sponsor, U.S. Senate Finance Committee Chairman Max Baucus, said that he'd like to use the funds to pay for a federal highway bill that is currently being considered. However, the bill has a long way to go before passage, and most suspect that the current proposals to change IRA rules will not become law. In fact, Senator Baucus himself has suggested that he will ease off the proposed changes for now and seek alternative revenue sources for the highway bill.

Even if the measure does not pass this year, the fact that the bill was put forward at all suggests that lawmakers are considering various legal changes that could affect retirement planning in years to come.

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Bizarre Estate Planning Strategy: Adopting A Girlfriend

February 9, 2012,

A media wildfire spread this week after word got out about a particularly exotic estate planning strategy crafted on behalf of a Florida man. According to a report yesterday in The Huffington Post, the new estate planning strategy involved the man adopting his 42-year old girlfriend. Apparently this was done in an effort to strengthen their relationship legally without marriage while ensuring she has access to resources down the road.

The situation might make a bit more sense in context. The client in this case, John Goodman, is a wealthy man, having created a trust years earlier that is now worth hundreds of millions of dollars. The trust was created for the benefit of Mr. Goodman's descendants--his children. Two years ago Mr. Goodman was involved in a particularly deadly auto accident. According to criminal charges filed against him, he was apparently driving drunk, ran a stop sign, and hit another car--killing the other driver. A civil lawsuit has been filed by the surviving family members of the car accident victim. However, because the trust was set up years before the accident, the plaintiffs in the civil case will not be able to access those trust funds regardless of the outcome of the legal matter.

Having already had one marriage end in divorce, Mr. Goodman did not want to walk down the aisle a second time. However, he was in a very serious relationship with a 42-year old woman named Heather Laruso Hutchins. He wanted to strengthen that relationship without resorting to marriage. That's when he was advised to adopt her. By adopting Ms. Hutchins, she now becomes a legal descendant of Mr. Goodman's and is therefore entitled to distributions from the trust that was created earlier for the benefit of his heirs. In addition, Mr. Goodman himself may now be able to access the trust funds indirectly via his girlfriend/adopted daughter.

However, many are questioning the legality of this particular strategy. For one thing, there was apparently a side-agreement with Ms. Hutchins whereby she agreed to give his natural born children 95% of the funds remaining in the trust when it ends. It is unclear how this side agreement could contravene the terms of an irrevocable trust.

It is not uncommon for those with considerable wealth to engage in particularly unique techniques to plan for their financial future. However, our New York estate plan lawyers appreciate that these sorts of efforts, like adopting one's adult girlfriend, are quite rare and usually not of much use for local community members. Yet, there is nothing wrong with exploring all the legal options available when deciding on the best course of conduct in these matters. The very reason that most visit an estate planning attorney is to hear about the range of legal choices that are in front of them to save on taxes, pass on inheritances, and plan for their own future well-being.

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Will Estate Tax Limbo End This Year?

February 7, 2012,

Last week we discussed the uncertain future of the estate tax. It was noted that the issue would likely hinge on the outcome of the 2012 elections. As with all legislation, action usually requires support from sufficient members of Congress and the President. Therefore, the rates and exemption levels for the estate tax would likely depend on the partisan affiliation of most members of Congress and the White House. Each New York estate planning attorney at our firm appreciates that the uncertainty over the issue presents complications for those families who are hoping to create strategies to minimize their estate tax burden. The idea of waiting for the outcome of an election is cold comfort for prudent planners who are working to provide for contingencies and bring stability to the process as soon as possible.

Some policy insiders are now suggesting that estate planning lawyers will not need to wait long after the election to see what happens next with the estate tax. According to a report in Advisor One, the consensus opinion among those most familiar with Washington thinking on the issue believe that Congress will decide what to do with the issue this year--in the lame-duck session in December.

We've previously explained how, without any action, the current tax rate (created as part of the so-called "Bush tax cuts") would expire at the end of 2012. That means that by January 1, 2013 the rate would be 55% (up from 35%) and at a $1 million exemption level (down from $5 million).

Now those who intimately follow the issue in Congress are suggesting that no matter what the outcome this November, the current tax levels are likely to be extended. Not only that, but some are suggesting that Congressional leaders have no stomach for a short-fix, and so they will push to extend the current, lower rates for at least another ten years. The President of the National Association of Insurance and Financial Advisors reported after a "Day on the Hill" that the eight members of Congress that he spoke with all suggested that the likely outcome this year was an extension of the current tax rates--either for a year or longer.

However, all local residents thinking about their New York estate plans should temper their faith in these pronouncements. As recently as the "State of the Union" address last month, the President noted that he'd like to see the current rate revert back to pre-Bush levels. He said, "Right now, we're poised to spend nearly $1 trillion more on what was supposed to be a temporary tax break for the wealthiest 2% of Americans...Do we want to keep these tax cuts for the wealthiest Americans?" The estate tax was certainly part of those temporary tax breaks. The President believes that the former rates and exemption levels are more appropriate. However, it remains unclear how much a priority he places on that issue and whether he would be willing to compromise on the estate tax disagreement in order to gain support for his preferred policies in other arenas.

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Like Groundhog Day: Mistakes Retirees Make Over and Over

February 3, 2012,

Yesterday was Groundhog Day--that storied time when a prognosticating animal is supposed to tell us how many more weeks of winter we have left this season. According to most reports, yesterday the nation's most famous groundhog, Punxsutawney Phil, saw his shadow and scurried back out of the cold. Apparently this is a sign of many more weeks of winter to come. Punxsutawney Phil was made a national celebrity in the early 1990s after being spotlighted in the popular Bill Murray movie titled "Groundhog Day." The film has gained legendary status among some, as it chronicles the exploits of Murray who wakes up in Punxsutawney every single morning on February second, forced to relive Groundhog Day over and over.

Our New York estate planning lawyers know a few things about repetition. That is because when it comes to planning for one's financial future, many local families seem to make the same mistakes over and over again. Yesterday CBS News published a Groundhog Day special report listing seven money mistakes that retirees consistently make. Many of the items on the list are quite familiar to the New York retirement attorneys at our firm.

For example, the first mistake is putting off estate planning altogether. The story's author noted that "failing to create a financial or estate plan isn't just a matter of missing out on investment opportunities or tax advantages. It can get you in trouble later in retirement when you're no longer at the top of your game mentally." It is always comforting to push off thinking about potential mental challenges in the future, but failure to account for it only leads to heartache for one's family. Nearly 50% of the nation's population over eighty years old suffers from some sort of cognitive impairment. A host of challenges are created if planning is not done before the problems set in.

Another big mistake that is repeated over and over by retirees is paying too much in taxes. It is vital to learn how withdrawals from retirement accounts, volunteer work, and other issues affect one's taxes. Many seniors fail to create a plan of gradual withdrawals from retirement accounts to minimize tax burdens. In addition, many seniors who do regular volunteer work do not use tax deductions for things like mileage and out-of-pocket expenses.

Far too many seniors fail to take full advantage of the planning tools available under the law to put themselves and their family in better financial shape. All local residents should take the time to visit with a professional to ensure that they do not make the same mistakes that so many others continue to make day in and day out.

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Four Possible Estate Tax Scenarios

February 1, 2012,

Uncertainty is almost always attached to discussions about the estate tax. As our New York estate planning attorneys have often shared, it is vital for those of certain income levels to pay close attention to the prevailing political winds to understand if estate tax changes might apply in their situation. When a New York estate plan is crafted it will take into account the current estate tax scenario. However, what is true now may not be true in the future. It is for this reason that estate planners must remain in close contact with clients to ensure modifications to a plan are made if necessary.

When it comes to the estate tax, many prognosticators make various predictions about what we can expect in the future. For example, a story this week at Producer's Web suggested that the future of the federal estate tax depends almost entirely on what will happen in the upcoming November elections. The author suggests that there are four possible scenarios.

1) If Congressional gridlocked continues after the election then the new law may be allowed to sunset. This means that that there will be a $1 million estate tax exemption and a 55 percent tax rate. This would take effect January 1, 2013.

2) If the legislature remains split between the parties, then there is also a chance that Congress could extend the current law. Under this scenario the exemption would remain near $5 million (though slightly higher after adjusting for inflation) with a top tax rate of 35 percent.

3) Some argue that the political winds are shifting in favor of the Democrats. If the party gains control of the House and retrains power in the Senate (and the Presidency), there may be more room to make widespread changes. While this might lead to a range of possibilities, the preference of the Democrats is likely to craft a plan close to the previous law, with exemption levels near $1 million and rates closer to 55 percent.

4) Conversely, if Republicans take control of Congress then there is a chance that the federal estate tax could be repealed altogether.

It will be interesting to see if any of these predictions actually materialize. In the meantime, it might be helpful to listen to what candidates--Presidential and Congressional--have to say about the estate tax while on the campaign trail. That is likely the best indicator of what might happen if either party gains control of the legislative process and is able to muster enough votes to make changes to the current plan.

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