Deland on Estates and Elder Law

Crummey Provisions - Solution in Search of a Problem?

Sun, 12 Feb 2012 00:00:00 GMT

This post is for people who want to reduce their estates below the Massachusetts "exemption" of $1 million, and especially for those who risk incurring the federal estate tax on estates in excess of $5 million.

You shouldn't just give the money away, for a number of reasons, one of which is that the feds, at least, are wise to this sort of thing and a gift will incurr a gift tax.

The gift tax is a federal tax (It has no equivalent at the state level in Massachusetts.) which must be paid by the donor (the person making a gift). If the gift tax is not paid at the time of the gift, the gift will essentially be counted in the federal estate for estate tax purposes, since the gift will reduce the amount the federal estate tax exemption.

But there is a way to make a gift without incurring gift tax or "burning" your federal tax exemption. This is by using the "annual exclusion." 26 U.S.C. 2503(b). The annual exclusion, however, applies only to present interests in property. So, if you leave $13,000 in trust for your grandson, who is 7 years old, and the trust instructs the trustee to distribute the property to the young man when he turns 30, you would not ordinarily be able to take advantage of the annual exclusion, because you have made a gift of a future interest. This is true even if the trust is structured so that, if your grandson dies before you do, the property will be included in his estate.

So, how do you make a future interest into a present one? By including in the trust "Crummey" demand powers.

Here is a typical "Crummey" power provision:

Notwithstanding anything herein contained to the contrary, if in any year a contribution is made to the trust estate, including the initial contribution funding the trust, the trustee shall promptly notify the beneficiaries (or, if a beneficiary is a minor or has been declared incompetent, his parent or guardian) of such contribution, and the beneficiary (or guardian or parent, as the case may be) shall have the right at any time within 30 days of receipt of such notice to withdraw from the trust an amount of such contribution up to the annual exclusion available to the individual making the contribution (and his or her spouse if he or she shall consent to being deemed to have made one half of such contribution) for United States Federal Gift Tax purposes with respect to such contribution, after taking into account any other gifts made by the settlor (and his or her spouse, if applicable) to such person in that year.

(from Margolis, ElderLaw Forms Manual (2010))
http://www.aspenpublishers.com/Product.asp?catalog_name=Aspen&product_id=0735536813&cookie_test=1

By providing that the trustee shall notify the beneficiary of any contribution to the trust, and giving the beneficiary the right to withdraw up to the contribution amount, the trust allows the donor to claim the annual exclusion, even if the beneficiary is a minor.

This is a very neat trick. It works well for insurance trusts, called ILITs, where the beneficiary knows that if he takes the money out, the insurance will not be purchased, and a much larger death benefit will be lost. It also works well for a beneficiary under 18, where the parent is either the donor himself, or in sympathy with what the donor is trying to do.

But, what if the beneficiary is over 18, and the money has not been used to purchase insurance, but is simply sitting there, properly invested, to be available, at the Trustee's discretion, for things like college, a wedding, or a first house? How well do "Crummey powers" work then?

Well, it gets a bit more complicated. Once the beneficiary turns 18, he or she must have the actual right to take the money out. That right only extends to the amount of a given year's gift, and it only has to last for a reasonable time, say, 30 days. Of course, if the beneficiary does so once, and the donor disapproves of that decision, there is no requirement that the donor make any more such gifts.

A trust with "Crummey" powers must be irrevocable, or there is no gift at all, present or future. However, each individual gift is a separate decision.

The title of this post refers to "Crummey" powers as a possible "solution in search of a problem." A trust with "Crummey" powers is an irresistibly neat trick from the lawyer's point of view, turning a future interest into a present one, and getting money out of the client's estate "for free." But, before drafting one, I would first look to see whether there was a real "problem" that crummey powers will solve. Is the client really concerned about shrinking the estate for federal tax purposes? What is the real purpose of the gift?

If the real purpose of the gift is to earmark some money for education while keeping it out of the hands of a possibly irresponsible 20-something, "Crummey" may not be the way to go.

On the other hand, if the client is really concerned about federal taxes, one needs to ask whether the client is willing, or likely, to remember to send out the required notice every year, year after year. If the administration is not done, there may be no tax benefit at all.

If the notices are not sent, it is likely that the IRS will not accept the Crummey language alone as being effective. This brings up an intriguing possibility for trusts where the donor is the trustee. The donor could make a decision whether to send out the crummey notices on a year by year basis. If the donee decided to help himself one year, the donor could go on making gifts, but not send the notices. These subsequent gifts would presumably reduce the federal estate tax exemption available to the donor's estate. But the previous gifts would be safe, outside the donor's estate.

As always, when you gifts are involved, the Medicaid gift trap should be considered. Estate tax planning is never a "do it yourself" proposition. Do you have a problem that "Crummey" trust powers would solve? Only your lawyer can help you be sure.

The picture above is from http://www.flickr.com/photos/skatzenell/274088169/. Thank you Sarah Katzenell. And my apologies to the Crummey family for the visual pun.

The case from which the term "Crummey powers" is derived can be found online here:.http://scholar.google.com/scholar_case?case=4218752419439875664&q=crummey&hl=en&as_sdt=40000003

"Double Decker" Estate Planning

Sun, 05 Feb 2012 00:00:00 GMT

The meeting was to complete the estate planning of the mother. In the room, were, shall we say, the mother "Mary" and her daughter "Jane". (Names and other details have been changed to preserve clients' privacy.) Mary had asked if Jane could be present, and I had said "yes, that would be fine."

The daughter had some views about what her mother's estate plan should say. As is typical in these cases, the issue involved furniture - tangible personal property - the least valuable, but often most emotional, portion of any estate. The mother, Mary, was giving me some detailed instructions, when Jane interrupted with a suggestion. "No," said Mary, "this is what I want to do." But Jane would not be quiet. She persisted in telling their mother what to do. It began to seem as if Mary would give in, and I would be preparing a document that did not exactly reflect her wishes.

Finally, I reminded Jane that the plan was her mother's and stated that if she persisted in trying to argue with her mother, she would be asked to leave. "Fine," said she, in that tone that means "not fine at all" and walked out of the conference room into the waiting area.

It is important, in estate planning, to make sure that the person who is signing the documents is actually making their own plan. Elders often ask me, "should my child come to the meeting?"

There is nothing wrong with having the child present. The mother and I had met alone before, and in fact, hearing this interchange helped to clarify for me what the trust needed to say about these objects. Hearing it also assured me that the mother did understand what she wanted to do and that she did mean to do it.

Jane calmed down shortly, and we found her in the waiting area when we emerged from the conference room. She spoke to me cordially before they left. She understood that my job was to ascertain her mother's wishes, not to adjudicate a family quarrel.

The picture is © Copyright Helmut Zozmann and licensed for reuse under this Creative Commons Licence.

"Sticky Note" Estate Planning

Wed, 18 Jan 2012 00:00:00 GMT

The Metrowest Daily News has published my article, "Sticky Note Estate Planning" Its about how, by "funding" as we call it, your trust, your family can avoid having to go through a court process called "probate" in order to transfer your assets. To read the full article, click here

For this process to work, you have write a good, clear, "sticky note." As you may know, trusts usually run to more words than can be fit on one of those! Also, the nature of sticky notes is that they can come "unstuck." That's what so special about them, actually. The "sticky" is very weak. If you want to make your directions stick really strongly, we recommend legal "superglue" - actually changing the legal title of your property to the name of your trust.

This makes some people nervous. They feel that they will be losing control of their property. Not to worry. The trust itself says what control you retain over the property. We recommend that at least your checking account, car and personal property should be "stuck to" your Life Trust, which says that, during your life, while you are well and able to make decisions, you have complete control.

Financial Aid and "Trust Funds"

Sat, 19 Nov 2011 00:00:00 GMT

A frequent concern among grandparents is whether establishing a trust for the benefit of a grandchild will have a negative impact on the child's application for financial aid. I recently researched this question, and this is what I found out:

Most student financial aid in this country is determined based on one application process, the FAFSA: Free Application for Federal Student Aid. The application requires a complete report on the income and assets of both the student and the student's parents. The application requires that "trust funds" be included as investments owned by the student. A separate guide, "Completing the FAFSA" adds this helpful language: "you must report the present value of the trust as an asset, even if your (the beneficiary‘s) access to the trust is restricted. If the creator of a trust has voluntarily placed restrictions on the use of the trust, then you should report the trust in the same manner as if there were no restrictions." The reference to "present value" refers to a calculation to find the value, now, of money that will not be received until a later time. A Gifting trust, such as I have drafted for my clients allows the trust property to be used for health, education and maintenance of the student by either the donor as Trustee, or by another named person as Trustee. Since the assets in such a trust are available at any time, I don't think that "present value" calculations apply. I think such a trust should be reported as an asset of the student under these rules. So, yes, such a trust does "count" when a student applies for financial aid.

It does not seem to matter who the Trustee is. I have not been able to find any guidance about trust funds and FAFSA that says anything about trustees. The Department of Education identifies the trust as an asset based on who the beneficiary is. It does not seem to matter whether the trustee is the donor, the student's parent or the student him- or her-self.

Does this mean that you should not create a trust for your grandchild? Not at all. For one thing, the mere existence of a trust will not disqualify the student from obtaining financial aid. The property in the trust will simply be a factor in determining how much aid will be available. Many students, 40% according to the Department of Education, never even apply for financial aid. (http://www2.ed.gov/policy/highered/leg/hea08/simplification-transmittal.html) So, like most questions in estate planning and elder law, this decision is an individual one, with no simple answer.

Why You Should Write Your Own Obituary - And What It Should Say

Wed, 16 Nov 2011 00:00:00 GMT

Have you ever seen, in the obituary pages, a short notice that says "[name] died on [date]. Arrangements are incomplete at this time but are under the care of ...[funeral home]?" That happens because the funeral director wanted to put a notice in, and the family did not know what to write, or hadn't completed the plans for the funeral. The family winds up paying for two notices: one that says nothing; and one with the real information in it.

Your family will write your obituary. It can be a painful process, coming as it does at a time when it is hard to think. Usually the expense, like the cost of the funeral or memorial itself, is ultimately paid for by the estate of the person who died. The Metrowest Daily News, for instance, charges $4.80 a line.

Two Reasons

So, there are two reasons why you should write your own obituary: because it is something you will pay for and you might as well have it say what you want said, and because, hard as it is for you to think about it now, you will save your people a lot of pain if you can make it easier for them.

The Purpose of an Obituary

The purpose of an obituary if for people who don’t see the person every day to know who it was who died. So, what kind of information should be included in the obituary? Obviously, it needs to give your full name, and any other name you have been known by. A woman who changed her name on marriage should have her birth name in parenthesis: Jane (Brown) Smith. But, in addition, there should be included the person's important relationships. Essentially, this allows the reader to locate you in context. So the obituary should include your parent’s names (including your mother’s birth name, if it was different), your birthplace and birth date. Any siblings should be listed, and certainly any children and grandchildren. What about a “significant other?” You might ask yourself, “is this relationship important enough that it helps to identify me?"

Handling Past Relationships

But what about past relationships? Here, I think it depends. If the previous relationship was a legal one of long standing, like a marriage, I think it is only fair to mention it, because there may be people who knew you when you were married, who would want to know that you died. If you are an active member of a church or synagogue, that should also be included. I also think it is useful to include schools attended, degrees, professional licenses, and some career information. Again, this information will help to identify you. It is not necessary to include a full resume. Again, the question to ask is, "would this information help to identify me?"

What to Leave Out

What should not be in an obituary? As a general rule, if the person was a member of any fellowship that has the word "anonymous" or some variation in the title, such as "Alcoholics Anonymous", "Gamblers Anonymous" or "Al-Anon Family Groups," that information should be left out of the public obituary. Instead, you might leave instructions that specific people be contacted personally by the family, so that they can spread the word. The reason not to put this information in the newspaper can be simply abbreviated "T.M.I." - too much information. The newspaper is a very public forum, and, particularly since the obituary lists your close relatives, it is not fair to those people to publish information that might imply something they would prefer to keep private.

Following these simple rules, you should be able to put together some guidelines for your people that will make a difficult job easier.

For more about obituaries, visit the fascinating online magazine, Obit at http://www.obit-mag.com/. The picture at the head of this entry came from this site. Many thanks to them.

Fun and Games with Gift Tax

Wed, 02 Nov 2011 00:00:00 GMT

As my colleague Scott Zucker explains in a recent post, gift taxes are "tax exclusive" - the tax is paid by the donor in addition to the gift. This means that if you make a gift (with some exceptions) you don't have to pay estate tax again on that gift, and the tax (assuming you do not choose to use the lifetime gift tax exemption), which was paid in addition to the gift, does not count again either. In contrast, if you keep the asset in your estate, the estate tax comes out of the estate. Since the estate tax is 35% of assets over the $5 million exclusion, it may be worth it, even to pay gift tax at the same rate, because the amount of tax you pay does not get taxed. For this reason, some people choose to pay the gift tax, rather than "burning" any of the generous $5 million federal gift tax exclusion.

Here in Massachusetts, there is no additional state gift tax. If your estate is under the federal exclusion of $5 million, and you live in Massachusetts, your estate will pay no federal estate or gift tax at all. But, let's assume that you are under the federal exclusion, but but over the Massachusetts filing limit of $1 million. If you are far enough under the federal limit, you can use gifts to move assets out of your estate to bring it under the Massachusetts limit. Your trustee will still have to report these gifts to Massachusetts, but the gifts will not trigger a tax.

As always with gifts, you need to have a solid plan for long-term care before you start thinking about them. If you do not have long term care insurance, and you gift your house out of your estate, you may jump out of the tax kettle into the Medicaid fire. It is important to consider all the possible consequences of a gift. For this reason, making a gift as part of your estate plan is something you should discuss with your estate planning and elder law attorney.

What You Should Take with You When There's a Fire or Flood

Sun, 28 Aug 2011 00:00:00 GMT

There is a picture, from the New Orleans/Hurricane Katrina floods, of a man wading in chin-high water, holding a bunch of papers over his head. If you have worked with me, you have spent a lot of time putting your instructions for your people down on paper. So, if there's a fire or a flood, should you take the "Big Red Book" with you?

Yes, you should, if you're driving and you can fit it in, bring it. But if you are scrambling to get out with what you can carry, leave the "Big Red Book" behind.

If you have LegalVault, your medical instructions - Health Care Proxy, Living Will, and so forth, will be available online. Some people upload their powers of attorney and trusts as well. If you didn't, don't worry.

Your first call (after family) when the disaster is over and you are ready to pick up the pieces, should be to your estate planning attorney. I can help you by working with your insurance professional make sure that you collect your insurance proceeds. We will make an appointment for you to sign new documents. Your trust can go on operating based on a copy. If you are in the Maintenance Program, I will have a photocopy of your trust in my files. Your bank will also probably have a copy. In any event, your trustees remain empowered, because they are named as such on your bank and brokerage accounts. Your deed, which is on file with the registry, confirms your trustees' power over your real estate.

So the message is, you will really be all right. Don't panic.

That said, there are some things you can do to make "picking up the legal pieces" easier. Make sure your successor trustees have updated photocopies of the trust. (Keep a record of who has these copies, though, and make sure, when you update, to send them out the new ones.) You may also want to consider having us upload your will, trust and powers to Legalvault. Only you (and your estate planning attorney) will have access to that part of LegalVault. (The PIN on your wallet care only allows a medical professional to download your health care directives).

Some clients place their documents in a fire-proof safe at home. This is not a bad solution, though, of course, you want to make sure that your successor Trustees have the combination, or know where to find it. A bank safe deposit box is not a good place for your will and trust, although it may be fine for other important documents, such as insurance policies and bonds. I will discuss the weaknesses of bank safe deposit boxes in another entry.

So the message is, be careful, but make sure your information is backed up! And call your lawyer as soon as the sky clears.

The Stray House

Tue, 07 Jun 2011 00:00:00 GMT

This little house at 5 West Street in Medway was new once. Someone bought it and lived there. He painted the walls, swept the floors and mowed the lawn. When something was broken, he fixed it, because he lived there. And because the owner took care of it, the house took care of the owner, keeping him warm and safe and dry. It was a nice little house.

Then something happened to the owner, something unexpected. Perhaps the owner ran into financial trouble, or got sick. Whatever happened, the owner couldn’t take care of the little house anymore.

Maybe this was like the story that my grandmother told me, about the house next door to hers that was inherited by 5 brothers, who were too busy squabbling to fix the roof. The floor rotted and the furniture all fell into the cellar.

Without an owner, the little house couldn’t repair itself. The windows broke and the rain came in, the floor warped and the roof leaked. The poor little house can’t do anything about any of it. Now it looks so sad, so wet and miserable and dirty, that its very unlikely that anyone will buy the poor little house and fix it up again. It just needs too much work.

All day, people drive by the poor little house and shake their heads. “Too bad” they say to themselves. Nobody should let that happen to a nice little house. Then they go home to their own houses where they paint the walls, sweep the floors, and mow the lawns, not thinking about who will do these things for their houses if something happens to them.

Do You Need a Financial Planner?

Sun, 15 May 2011 00:00:00 GMT

A potential client will often say to me that he or she needs a financial planner. I usually suggest that we get started on the estate plan first.

Does that mean you should do a complete estate plan first, and then a financial plan? Not quite. Just as the design of a house should take into account where the pipes and wires need to go, the design of your estate should take your financial goals into account. It is really all one plan, but putting it together means working with different experts on different aspects of the plan.

If you are going to open a new financial account, it helps to have your trust already in place. Also, some aspects of estate planning, like health care planning, do not involve financial decisions at all.

But some aspects of estate planning have a definite financial element. Will your spouse be financially comfortable if you die first? What about if one of you has a to go into a nursing home? Should you buy long-term care insurance? Should you place property into an irrevocable trust? What about planning for children's college tuition? These are issues that you will discuss with both your estate planner and a financial expert.

To have a well-planned estate, you should have both kinds of advisers: financial and legal, working together to help you design your estate.

Case of the lost policy

Sat, 30 Apr 2011 00:00:00 GMT

Life insurance is a contract between the owner of the policy, who is usually also the person insured, and the life insurance company. The owner promises to pay the premium. The company promises to pay the claim.

But, the company's promise to pay the claim is usually contingent, not just on the death of the insured, but also on the filing of a claim. Insurance companies have been known to pretend ignorance of the death of the insured. Oddly enough, on annuities, where the death means that the insurance company stops paying money, they are quick to learn of the death. But if the death means that the company has to start paying money, they don't know anything about it until a beneficiary files a claim.

Some states have taken advantage of this setup. Have they pursued to the insurance companies to insist that claims be paid soon after the insured dies?

No, these state governments have thought it was much more in the public interest to require the insurance companies to turn over the proceeds of such policies to the state's own unclaimed property fund. To that end, 35 states have supposedly entered into arrangements with an auditing company to audit the insurers' books. The auditing company, Verus Financial, LLC, will collect a cut of every unpaid policy that is taken over as lost property. Life Insurers Skimp on Payouts: States, W.S.J., Apr. 28, 2011.

What if the beneficiary does not know about the policy? Tough. If no claim is filed, either the company gets to keep the money, or it winds up as lost property, claimed by the state.

How can you keep that from happening to your policy? Simple, name a beneficiary. The safest thing is to name your trust as a beneficiary, because the trust will always be there, no matter what happens. Most importantly, make sure your trustee knows about the policy. We recommend that you include the original policy, and proof of named beneficiaries, in your big red book - your estate planning portfolio.