FAQs
- What is Estate Planning?
- Why is it important to establish an Estate Plan?
- What is Probate and why is it often said I want to avoid Probate?
- How can I avoid Probate?
- Aside from avoiding Probate, what are some other advantages to a Revocable Living Trust (RLT)?
- Will I lose control of my property if I establish a Revocable Living Trust (RLT)?
- What does a comprehensive estate plan consist of?
- What is a Pour-Over Will?
- What is a Durable Power of Attorney?
- What is a Massachusetts Health Care Proxy?
- What is a HIPAA Information Release?
- What is a Living Will?
- What is a Personal Property Memorandum?
- What are Memorial Instructions?
- What is the Trust Settlement/Family Transition Process?
- Should I name a Guardian for my minor or disabled children?
- What is Guardianship and Conservatorship?
- What is a Special Needs Trust?
- When should a Special Needs Trust be established?
- Can a Special Needs Trust be established even if my child doesn’t have a traditionally recognized ‘Special Need?’
- What is a Medicaid Asset Protection Trust?
- What if I didn’t plan ahead, and now my spouse (or myself) has had a serious health event?
- What is PACE?
- What is a Life Insurance Trust?
- What is a Standalone Retirement Trust (SRT), sometimes called an IRA Trust?
- What is a Gifting Trust?
- What is an Inheritor’s Trust?
What is Estate Planning?
When you go to sleep at night, are you sleeping peacefully, knowing that if something happens to you, your family will be taken care of? What words describe how you feel about your family’s future?
Estate planning is about peace of mind. It is an act of selfless love and kindness. A comprehensive estate plan is a way to protect your assets and your dignity should you become incapacitated, to protect and control your assets, to ensure an orderly transfer of assets upon your passing, and to leave as your legacy a thoughtful plan of action for when you become incapacitated or when you pass. It says you care enough about your family’s future to act now, rather than do nothing.
Doing nothing accomplishes four things: (1) the state will decide who inherits your assets when you pass away; (2) in many cases, the state will tax your estate more (called the estate tax) than if you had planned appropriately (and thus there will be less for your children or beneficiaries); (3) if you later require long-term care, your children (or beneficiaries) will have little or nothing to inherit because the cost of long-term care is often upwards to $15,000 per month; and (4) your spouse or children will be left with a lot of burdensome work trying to piece together your assets and debts, and then having to probate your estate—which is costly, burdensome, frustrating and slow-moving. How important is your peace of mind?
Why is it important to establish an Estate Plan?
There are many reasons why you want to establish an estate plan.
The first is that it creates an orderly structure (or blueprint) for the timely transfer of your assets to those you want to inherit. Without an estate plan, your death could (and likely will) cause unnecessary and avoidable levels of disorder, confusion and administrative hassles—not to mention delay in getting your assets transferred to your children or beneficiaries. Incidents of sibling rivalry and family infighting are much more likely to occur if you do not have an estate plan.
Another reason is that you can often avoid the Massachusetts estate tax (“death tax”) if you plan ahead. Would you rather pay the state $36,000, $65,000 or even $100,000 or more, or have that amount go to your children or beneficiaries instead? The Massachusetts estate tax rate goes up to 16%.
A third reason is that it leaves a legacy of love and respect. It is your way of saying to your children or beneficiaries that you do not want your death to be a burden. Lastly, it allows you to choose who will act for you when you cannot act for yourself. Who will make health related or finance-related decisions on your behalf when you can no longer make those decisions for yourself? Would it give you peace of mind knowing that you have made solid, informed plans for such a scenario?
What is Probate and why is it often said I want to avoid Probate?
Probate is a court-managed process during which the decedent’s assets are inventoried and verified; debts are paid; and then the remaining assets are distributed to the beneficiaries.
This process usually takes at least 18 months, but very often drags on longer than two years—and sometimes longer. The process is painstakingly slow, expensive, open to the public (so everybody can see what your assets were and to whom you are leaving them) and heavily supervised by the court.
One of the most common complaints about probate is the burden it imposes on the surviving loved ones. There is nothing fun or glamorous about having to identify, track down and safeguard a decedent’s many assets, comply with the probate court’s many notification requirements, deal with often-impatient beneficiaries who typically don’t understand why the process is taking so long, satisfy a myriad of court-regulations, and so forth. Would it give you peace of mind knowing that you have made a plan allowing your loved ones to avoid probate?
How can I avoid Probate?
Clients can completely avoid probate by placing their assets into a Revocable Living Trust (RLT). A RLT is best thought of as a bucket in which you place your assets (e.g. your house, your tangible personal property, your bank accounts, your investment accounts, etc.).
When you pass away, everything in the bucket (RLT) will avoid probate; it will be distributed privately, with the assistance of an attorney in a process called trust administration, without any court involvement in most cases much faster than otherwise (probate).
Aside from avoiding Probate, what are some other advantages to a Revocable Living Trust (RLT)?
Control: when you are healthy, you manage the assets in your own bucket (i.e. you are the Trustee empowered to manage and distribute the assets in the bucket). If you become incapacitated (for a few days, a month, or indefinitely) then you will have already named the person(s) who will manage the assets in your bucket (perhaps your spouse, child or sibling). This way, you retain indirect control over your assets by stating in the RLT exactly what your backup (i.e. successor trustee) can and cannot use the assets for.
Beneficiaries: You can completely customize your beneficiaries’ distributions. If your children (or beneficiaries) are young, financially irresponsible, have creditor problems, are likely to divorce, have substance abuse or gambling problems, or have special needs, then you can protect these beneficiaries from themselves (or can protect their inheritance from others such as a divorcing spouse). Would it give you peace of mind knowing that you have made a solid, thoughtful plan for your beneficiaries, taking into account their individual circumstances?
Death Taxes: In Massachusetts, there is a death tax (i.e. estate tax) on all estates over $1M. For example, if you are a single person with a $500,000 house, $300,000 in savings, $300,000 in retirement funds and a $250,000 life insurance policy, then the Massachusetts Department of Revenue will require your estate pay approximately $55,000 in estate taxes before the money is distributed to your children or beneficiaries. In many cases, a RLT with advanced tax planning provisions will completely avoid that tax (with rates up to 16%)—meaning your children or beneficiaries will get that money instead of the government.
Will I lose control of my property if I establish a Revocable Living Trust (RLT)?
No, not at all. You will have complete and unfettered access and control over your property. Nothing changes in terms of how you live your life or manage your assets.
What does a comprehensive estate plan consist of?
It’s important to realize that an estate plan is not just the deliverables (i.e. the legal documents). An estate plan is the process of working with an experienced, knowledgeable and caring attorney to identify what is important to you. We customize your estate plan according to your unique values, wishes and objectives. Many clients are interested, for example, in designing a plan that protects children from receiving too much money too soon or for the wrong purposes. Others are interested in protecting their assets for their spouse or children in the event of a remarriage, divorce, lawsuit or bankruptcy. Some are interested in avoiding probate; or avoiding the Massachusetts estate tax. Still others are concerned about sheltering their assets from MassHealth Medicaid’s reach should they ever need nursing home care. In short, a thoughtful, comprehensive estate plan is one of the greatest gifts you can give your family to protect them during your lifetime and after you are gone.How important is your peace of mind?
With that said, most estate plans consist of the following: Revocable Living Trust; Pour-Over Will; Durable Power of Attorney; Massachusetts Health Care Proxy; HIPAA Information Release; Living Will; Personal Property Memorandum; and Memorial Instructions.
What is a Pour-Over Will?
As discussed above, a Revocable Living Trust (RLT) avoids probate—but only for those assets that are placed into (or “funded to”) the RLT. If a person dies having inadvertently forgotten to place an asset in the RLT, then that asset would need to be probated. For example, if Mary Smith passes, having forgotten to place a bank savings account into her RLT, then that bank account would need to be probated through the Probate Court. In this case, we would need to use her “Pour-Over Will” to probate the bank account. The Pour-Over Will does not distribute her bank account to her children or beneficiaries, but rather says to “pour” her bank account back into her RLT where it should have been in the first place; hence we call it a “Pour-Over” Will. Think of a Pour-Over Will as a safety valve to deal with any assets that were inadvertently left outside the RLT.
What is a Durable Power of Attorney?
A Durable Power of Attorney (POA) is a document one signs nominating another (called the “attorney-in-fact” but often mistakenly called the “power of attorney”) to step into one’s shoes and make decisions (or take actions) on behalf of that person. If Mary Smith signs a POA naming her daughter Pam Smith as attorney-in-fact, then Pam Smith would have the legal authority to do many things on behalf of her mother, such as withdraw and deposit money, deal with insurance companies, enter contracts, manage property, sell and buy things, etc.
There are two important things to know about a POA. First, the attorney-in-fact’s power dies when the principal (i.e. person signing the POA) dies; so the attorney-in-fact cannot do anything with respect to the principal or her assets after the principal’s death. Second, an attorney-in-fact’s power is cut off when the principal becomes incapacitated, unless the POA is a ‘durable” POA. A Durable POA has statutorily required language indicating that the attorney-in-fact’s authority to act will not be terminated in the event the principal becomes incapacitated.
If one does not have a POA and then becomes incapacitated, then the family or friends would have to petition the Probate Court to have a conservator appointed to manage one’s assets. This should be avoided if possible by having a valid POA drafted by an estate planning attorney, and then updated every few years to avoid a bank or other institution from deeming it to be “stale.”
What is a Massachusetts Health Care Proxy?
A Massachusetts Health Care Proxy (HCP) is a document one signs nominating another (called the “health care agent”) to step into one’s shoes and make health-related decisions on one’s behalf, but only when the principal is unable to make an informed health care decision of her own.
If one does not have a HCP and then becomes incapacitated, then the family or friends would have to petition the Probate Court to have a guardian appointed to manage one’s health care. This should be avoided if possible by having a valid HCP drafted by an estate planning attorney.
What is a HIPAA Information Release?
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) is a federal law that protects one’s confidential medical information. Without a HIPAA Information Release—in which one authorizes certain persons to access one’s protected information—a hospital, doctor or other medical professional will likely refuse to speak with others about your medical condition (e.g. diagnosis, prognosis). The HIPAA Information Release is an indispensable part of anybody’s incapacity planning.
What is a Living Will?
A Living Will is a document in which one expresses her wishes for end-of-life care. This is the document in which one states her preferences for (non)treatment in case certain medical situations arise. As part of incapacity planning, this document can bring peace of mind to those who have preferences for how they will be treated.
What is a Personal Property Memorandum?
A Personal Property Memorandum is a form in which one can specify to whom one’s tangible personal property will be distributed upon one’s death. Without making one’s wishes known in writing, sibling rivalry and other family infighting can arise—souring life-long relationships. Mary Smith, for example, might write that her engagement and wedding rings are to go to her daughter; while her other jewelry will go to her only granddaughter. Further, Mary might write that her late husband’s tools and baseball card collection will go to her only grandson.
What are Memorial Instructions?
Memorial Instructions give surviving family members direction with respect to one’s wishes following death. During a period of your disability or in the event of your death, loved ones are often not able to think clearly. Some decisions must be made within hours of death. Any help you can provide will be most appreciated. You may want to include your burial or cremation wishes and a description of the kind of memorial service you would like. You may also want to express your feelings about the general amounts that should be spent for these remembrances. Or, you may have made pre-arrangements that should be described.
What is the Trust Settlement/Family Transition Process?
Following the death of a person who had a trust, trust settlement (also called trust administration) is the process of transferring assets in accordance with the directions of the trust. If the trust is fully funded with assets (i.e. if all of the person’s assets were properly placed inside the trust), court proceedings like probate are not required. The named Trustee must render her services for the best interests of the beneficiaries and must comply with state and federal laws as well as the directions set forth in the Trust. Trustees are charged with fulfilling their legal requirements, communicating with beneficiaries and creditors and ensuring that the directions in the trust are followed in the most expeditious manner possible so that stress is minimized.
Should I name a Guardian for my minor or disabled children?
Absolutely. If you have minor or disabled children, it is imperative that you name, in a Will, the person(s) whom you would want as Guardian. You should also name a back-up Guardian (i.e. if your chosen Guardian is unable or unwilling to serve, then the back-up Guardian would be nominated). If one dies without naming a Guardian, then anybody could petition the Court to be named Guardian. It goes without saying that you should be the person to make this critical decision about your child(ren).
What is Guardianship and Conservatorship?
Guardianship and Conservatorship are court processes where a court declares a person to be incapacitated; and appoints either a Guardian to manage that person’s health and other personal needs and/or a Conservator to manage that person’s assets and financial affairs. Often times, a guardianship or conservatorship can be avoided if the person had completed basic estate planning documents including a Massachusetts Health Care Proxyand a Durable Power of Attorney.
For persons who lose capacity without these documents in place, we assist family members or friends to navigate the process to have a guardian or conservator appointed and then assist with annual reporting requirements. When a guardianship or conservatorship cannot be avoided, it can ensure that an incapacitated person’s personal and health care needs are met and their assets are managed appropriately.
What is a Special Needs Trust?
When you go to sleep at night, are you sleeping peacefully, knowing that if something happens to you, your special needs child or loved one will be taken care of? What words describe how you feel about your family’s future? For many families who have a loved one with special needs, their answers include: worried, concerned, and overwhelmed.
When a child or other loved one has a special need, they will often qualify for generous governmental assistance (e.g. SSI, which is essentially a monthly payment; Medicaid, which is free health care; as well as other benefits). To qualify for most of these benefits, the special needs person cannot have personal assets of more than $2,000.
If this special needs person inherits (or otherwise is gifted) money from anybody (such as a parent or grandparent), then her assets will rise above $2,000—in which case she will no longer be eligible for governmental benefits. She will be faced with the possibility of having to spenddown this inheritance, and will again be eligible to apply for benefits once her assets are below $2,000. For a variety of reasons, this scenario would be devastating to the special needs loved one’s continuity of care.
To avoid this result, parents or loved ones of a special needs child/adult should establish a Special Needs Trust (SNT). One’s inheritance would then be distributed not directly to the special needs person (thus jeopardizing her governmental benefits)—but to the SNT. This way, your special needs loved one will maintain her benefits.
The SNT is essentially a bucket of assets that can be managed and used for the benefit of the special needs loved one without risking her governmental benefits. The SNT is a roadmap to provide a system for fiscal management, administration and disbursement, advocacy, care, and social and emotional guidance for the beneficiary. It is an indispensable part of Special Needs Planning that needs to be established before the special needs person’s parents or caretakers pass away. Taking a chance by delaying this critical step is like playing Russian roulette with one’s child’s future. It simply needs to be done as soon as one learns that he/she has a child or other loved one with a special need. How important is your peace of mind?
When should a Special Needs Trust be established?
As written above, an SNT is an indispensable part of Special Needs Planning that needs to be established before the special needs person’s parents or caretakers pass away. Taking a chance by delaying this critical step is like playing Russian roulette with one’s child’s future. It simply needs to be done as soon as one learns that he/she has a child or other loved one with a special need. How important is your peace of mind?
Can a Special Needs Trust be established even if my child doesn’t have a traditionally recognized ‘Special Need?’
Yes. If your child is emotionally disabled, financially irresponsible or if she suffers from a substance abuse problem, then a customized SNT would allow the trust assets to be available for her care without giving her control over the assets. This has proven to be a powerful, beneficial solution for those who have children or loved ones who cannot be left with an outright inheritance.
What is a Medicaid Asset Protection Trust?
As part of a retiree’s routine estate planning, a Medicaid Trust can be a powerful estate planning tool. If you should need long-term care in the future (and there is a 70% chance that you will need some form of long-term care in your life), here is one staggering fact to consider: the average Massachusetts nursing home costs upwards of $15,000 per month. If you do not have long-term care insurance (and 95% of the population does not), then you will be expected to pay this $15,000 per month out-of-pocket. Medicare does not pay for long-term care costs. When you have spent down your life savings, you may qualify for Medicaid to pay for these services.
If, however, you transfer your assets (your home and perhaps other assets) into a properly drafted Medicaid Trust, then those assets would be safe from nursing home spend down after five years. For those who have experienced the pain and anguish of seeing a relative, friend or neighbor lose everything to a nursing home, a Medicaid Trust may make a lot of sense—particularly for those who want to leave behind a legacy (their life savings) to their children. A Medicaid Trust is a highly-customizable, complicated trust that can protect a family’s wealth for the next generation. How important is your peace of mind?
What if I didn’t plan ahead, and now my spouse (or myself) has had a serious health event?
There are two kinds of Medicaid Planning: (1) preplanning; and (2) crisis planning.
Preplanning is when you establish a Medicaid Asset Protection Trust (see above), which after five years fully protects the assets placed into it. Crisis Planning is for those who did not preplan, but now find themselves in a situation where one (or both) spouse is facing the need for long-term care.
For example, John and Mary Smith never did long-term care planning; they essentially chose to risk their life savings on the hope that neither would need long-term care. Now, John suffers a stroke, and is recuperating in a rehabilitation facility. John’s Medicare will pay up to 100 days for rehab. After two months in rehab, the doctors decide that John is not well enough to go home—and that he needs long-term care in a nursing home.
John and Mary own a $475,000 house, $175,000 in cash savings, and $500,000 in combined IRAs. They do not have long-term care insurance; and they didn’t do Medicaid preplanning. So, they must private pay (out-of-pocket) the nursing home at the rate of $14,000 per month, every month, until their collective assets (excluding temporarily the equity in their home—which may be liened by Medicaid to recoup the money spent on their care) are below $125,000. Their assets at risk total $675,000 ($175,000 in cash savings, and $500,000 in combined IRAs). Thus, they technically must now pay $14,000 per month ($168,000 per year) until their $675,000 gets down to $125,000—then they can apply for MassHealth Medicaid to pick up the nursing home costs.
If they consult Morana Law, however, there may be some 11th hour strategies for saving some of their assets and getting John on MassHealth Medicaid quicker than otherwise. This is called crisis planning. Aren’t you glad you did Medicaid preplanning?
What is PACE?
PACE (a Program of All-Inclusive Care for the Elderly) is a national model of care supported and regulated by the Centers for Medicare and Medicaid Services (CMS) and state administering agencies.
It is a program designed to keep an ill person, who otherwise would qualify medically for a nursing home, in her home (or in an assisted living facility). It provides an entire team dedicated to helping you maintain—and improve—your health and well-being. It is available to those, age 55 and older, who meet certain medical and financial criteria (and who live in a PACE service area). The most important financial criteria are a $2,000 asset limit and a monthly income limit of about $2,200. Certain exceptions apply, and those who may be interested are urged to seek advice from an experienced Elder Law attorney at Morana Law.
What is a Life Insurance Trust?
An Irrevocable Life Insurance Trust (ILIT) is a trust with a very specific objective—to avoid paying the estate tax. By placing a life insurance policy into an ILIT, you can substantially reduce the value of your “gross estate,” thus effectively reducing or altogether avoiding the estate tax.
For example, Mary Smith is widowed. She owns a $400,000 house, $50,000 in savings, a $150,000 IRA, and a $2,000,000 life insurance policy. When Mary dies, her estate must pay $146,800 in estate taxes. If Mary had instead placed her $2,000,000 life insurance policy into an ILIT, her estate tax would have been zero; for a savings of $146,800!
What is a Standalone Retirement Trust (SRT), sometimes called an IRA Trust?
Many people choose to customize their children’s and grandchildren’s inheritances so that the beneficiary receives the assets at staggered ages. For example, John and Mary Smith decided that their two children, ages 16 and 20, should inherit as follows: each child’s inheritance will be placed in trust. Each child’s trust would pay for that child’s health, education, maintenance and support (HEMS); when each child reaches 25 years old, she will receive a check equal to 1/3 of the amount in her trust; then another 1/3 at age 28, and the final disbursement at age 32.
This distribution scheme cannot be used, however, with the Smiths’ qualified retirement assets unless they establish a SRT. Without a SRT, the two children will have the option to take their inherited qualified money in a lump sum or over five years.
A SRT, sometimes called an IRA Trust, achieves three important objectives. First, it mandates that the trust’s Trustee stretch the IRAs’ required minimum distributions over the life expectancy of each child—effectively preventing either child from electing to take the entire account balance out at one time (which would result in a very large tax—upwards to 40%). Next, it restricts the children’s inheritance (with respect to the IRA money) to the distribution scheme above (HEMS, with 1/3 distributions at ages 25, 28, and 32). And third, it protects the IRA money from all creditors.
What is a Gifting Trust?
A gifting trust is an ideal way to get money out of one’s gross estate (thus substantially reducing one’s estate tax at one’s death) by placing the money in a trust. Aside from the obvious advantage of reducing or even eliminating one’s estate tax, a gift tax can accomplish two objectives. First, it delays the actual transfer of your assets to your children (or other beneficiaries) until you decide it’s time to transfer the assets; so you maintain control of the timing of the gifting. Second, you can place restrictions on the distribution of the gifts. For example, you can mandate that it be distributed to your children over time, or at staggered ages. There are many options for you to customize your gifts, including how and when they will be made. How important is your peace of mind?
What is an Inheritor’s Trust?
John and Mary Smith have acquired an impressive amount of wealth as business owners. They are worth over $3,000,000. They want their three daughters to inherit at least $1,000,000 each, but they are (understandably) concerned about their daughters’ husbands taking a significant portion should either daughter ever get divorced. In Massachusetts, divorcing spouses are often entitled to one-half of the marital assets, which would almost inevitably include the Smiths’ daughters’ inheritances.
An inheritor’s trust is a sophisticated planning tool designed to protect an inheritor’s (here, the three daughters) inheritance from a divorcing spouse—or from any creditor whatsoever. The Smiths will establish the three trusts (one for each inheritor, or daughter) and then direct their assets to the three trusts upon their deaths. Once the trusts are established and funded, the three daughters can exercise control over the trust assets but yet still not be considered the owners of the trust assets so that they won’t be vulnerable to any creditors—including a divorcing spouse.