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Estate Planning

In the past, Estate Planning amounted to little more than assuring that people had a valid Last Will and Testament.  Only extremely wealthy people worried about the impact of estate taxes on the assets they would wish to pass on at their death, and few people had to worry about how they would pay for long term care in their later years.  Today that has all changed.  The increasing wealth of baby boomers (especially the value of real estate holdings) and the dramatic increase in the costs of long term nursing home care have combined to cause many people to realize that having a simple Will may not assure that their spouse and/or children will receive the largest possible bequests.

In order to deal with these and other issues, the use of a variety of trusts have become commonly used tools.  Trusts can be created that minimize the potential impact of estate taxes and/or protect estate assets from being depleted by the costs of long term nursing home care.  Trusts can also be created in order to insure that estate assets are used in accordance with the wishes of the testator.

What are Estate Taxes?

Estate taxes are a special category of taxes that the federal government (and many states) impose on estate assets after an individual dies.  Federal estate taxes can take as much as 48% of the assets of an estate above an exemption amount that is allowed to pass without any taxes being imposed.  Currently, the federal exemption amount is $1.8 million except in the case of assets left to one spouse from another.  Under current federal law, between now and 2009 the exemption amount of the tax (as a percentage) will decrease each year.  Beginning in 2011, the exemption amount and the tax rate will revert to what it was in 2001 (55% and $1.5 million).  The use of certain types of trusts can minimize the impact of estate taxes when one spouse dies while ensuring that the surviving spouse is taken care of.

What is 'Medicaid Planning' and What Does it Have to do with my Estate?

Many people are unaware that neither their health insurance nor Medicare will pay for long term nursing home care.  This means that an individual who requires long term care will either require specialized insurance that covers these expenses, pay the expenses in cash or apply for Medicaid assistance to cover the expenses.  Nursing home expenses can be very substantial and have been increasing at an average annual rate of 6% over the past decade.  Long Term Care Insurance is very expensive and often still leaves substantial costs to be paid by the patient in a long term care facility. (For more information about long term care insurance and what you should be aware of, visit this link: Long Term Care Insurance).

What often happens is that families are forced to pay for long term care out of their assets until these are exhausted at which time they are eligible to qualify for Medicaid (which is available only to people with limited income and assets).  Thus, when one spouse requires long term nursing home care for years, it can largely deplete the assets of both husband and wife, leaving little or nothing to pass on to their children.  One way of dealing with this possibility is to put some or all of your assets into a trust that will pass to your children when you die.  If this is done in a timely manner (not just before you go into a nursing home), the trust can protect the assets involved and allow you to qualify for Medicaid before your assets are used up.  In this regard, it is also important to make sure that all the assets of a husband and wife are not held jointly.  Alternative "gifting" strategies can also be used to prevent the exhaustion of most of your assets.  Whichever strategy is used it must be done carefully and with the counsel of an experienced Elder Law attorney.  There are a variety of pitfalls regarding how long before an application for Medicaid is made that transfers as gifts or transfers to a trust can be made.  Unless careful legal and financial planning is done the parties making transfers may be ruled ineligible for Medicaid support.  For more information about Medicaid Planning and Long Term Care click here

What are the Other Reasons for This Type of Estate Planning?

Typically, there are three basic reasons for employing trusts as part of your estate planning.  First, to minimize estate taxes (where possible); second, to protect some or all of a couple's assets from being depleted by long term care expenses; and third, to insure that assets you leave to beneficiaries (including charities) are used in ways that are compatible with your wishes, beliefs and philosophy.  Assets left in a trust can be distributed in accordance with virtually any variety of rules you wish to establish for the use of the income or assets that a trust contains.

Who controls a trust once it is established?

When a trust is established, it must name a person or other entity (such as a bank or investment management company) as the Trustee for the trust.  The trustee is empowered to make all the decisions associated with managing the trust.  Certain kinds of trusts allow you to name yourself as the trustee.  Other trusts require a party other than the maker of the trust to be the trustee.  However, the trustee is obligated to  make decisions that are compatible with rules or wishes that you have established when you created the trust.