Who should own your life insurance policy?

If you own life insurance policies at your death, the proceeds will be included in your taxable estate. Ownership is usually determined by several factors, including who has the right to name the beneficiaries of the proceeds. The way around this problem is to not own the policies when you die. However, don’t automatically rule out your ownership either.

And it’s important to keep in mind the current uncertain future of the estate tax. If the estate tax is repealed (or if someone doesn’t have a large enough estate that estate taxes are a concern), then the inclusion of your policy in your estate is a nonissue. However, there may be nontax reasons for not owning the policy yourself.

Plus and minuses of different owners

To choose the best owner, consider why you want the insurance. Do you want to replace income? Provide liquidity? Or transfer wealth to your heirs? And how important are tax implications, flexibility, control, and cost and ease of administration? Let’s take a closer look at four types of owners:

  1. You or your spouse. There are several nontax benefits to your ownership, primarily relating to flexibility and control. The biggest drawback is estate tax risk. Ownership by you or your spouse generally works best when your combined assets, including insurance, won’t place either of your estates into a taxable situation.
  2. Your children. Ownership by your children works best when your primary goal is to pass wealth to them. On the plus side, proceeds aren’t subject to estate tax on your or your spouse’s death, and your children receive all of the proceeds tax-free. On the minus side, policy proceeds are paid to your children outright. This may not be in accordance with your estate plan objectives and may be especially problematic if a child has creditor problems.
  3. Your business. Company ownership or sponsorship of insurance on your life can work well when you have cash flow concerns related to paying premiums. Company sponsorship can allow premiums to be paid in part or in whole by the business under a split-dollar arrangement. But if you’re the controlling shareholder of the company and the proceeds are payable to a beneficiary other than the business, the proceeds could be included in your estate for estate tax purposes.
  4. An ILIT. A properly structured irrevocable life insurance trust (ILIT) could save you estate taxes on any insurance proceeds. The trust owns the policy and pays the premiums. When you die, the proceeds pass into the trust and aren’t included in your estate. The trust can be structured to provide benefits to your surviving spouse and/or other beneficiaries.

Contact us with any questions.

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Have you properly funded your revocable trust?

If your estate plan includes a revocable trust — also known as a “living” trust  or a “revocable living trust”— it’s critical to ensure that the trust is properly funded. Revocable trusts offer significant benefits, including asset management (in the event you become incapacitated) and probate avoidance. But these benefits aren’t available if you don’t fund the trust.

We consistently see clients who come to our practice with nice, shiny, thick binders containing their revocable living trusts and other estate plannings, and our usual first question is “what do you have titled in the trust?”  The blank stares coming from the clients can be disconcerting.   They have spent considerable time and money developing the documents, yet nothing has been moved into the trusts.  By failing to move assets into the trust, the administration of the estate will be more costly and less time efficient–this is because probate would generally be necessary to transfer title to your assets.

The basics

A revocable trust acts as a will substitute, although you’ll still need to have a short will, often referred to as a “pour over” will. The trust holds assets for your benefit during your lifetime.

You can serve as trustee or select someone else. If you choose to be the trustee, you must name a successor trustee to take over as trustee upon your death, serving in a role similar to that of an executor.  The successor trustee will manage the administration of your estate after your death ensuring that your bills would be paid and your assets are distributed according to the terms of your trust.

Essentially, you retain the same control you had before you established the trust. Whether or not you serve as trustee, you retain the right to revoke the trust and appoint and remove trustees. If you name a professional trustee to manage trust assets, you can require the trustee to consult with you before buying or selling assets.

The trust doesn’t need to file an income tax return until after you die.  Instead, you pay the tax on any income the trust earns as if you had never created the trust.  The trust will use your Social Security Number to set up accounts while you are alive instead of obtaining a separate tax identification number.

Asset ownership transfer

Funding your trust is simply a matter of transferring ownership of assets to the trust. Assets you should transfer include real estate, bank accounts, certificates of deposit, stocks and other investments, partnership and business interests, vehicles, and personal property (such as furniture and collectibles).

Certain assets shouldn’t, however, be transferred to a revocable trust. For example, moving an IRA or qualified retirement plan, such as a 401(k) plan, to a revocable trust can trigger undesirable tax consequences. And it may be advisable to hold a life insurance policy in an irrevocable life insurance trust to shield the proceeds from estate taxes.  This does not mean, however, that sub-trusts under the revocable trust cannot be named as beneficiary of your qualified retirement plans or life insurance proceeds.  To the contrary, such trusts can be named as the beneficiary; note, however, that special language is required in the trust to ensure the most favorable tax treatment when it comes to qualified retirement plans.  A qualified estate planning attorney should generally be engaged to make sure that proper drafting is achieved–most “self help” websites and software will not properly cover this issue.

Don’t forget to transfer new assets to the trust

Most people are diligent about funding a trust at the time they sign the trust documents. But trouble can arise when they acquire new assets after the trust is established. Unless you transfer new assets to your trust, they won’t enjoy the trust’s benefits.

To make the most of a revocable trust, be sure that, each time you acquire a significant asset, you take steps to transfer it to the trust. If you have additional questions regarding your revocable trust, we’d be happy to answer them.

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Powers of attorney: Springing vs. nonspringing

Estate planning typically focuses on what happens to your assets when you die. But it’s equally important (some might say more important) to have a plan for making critical financial and medical decisions if you’re unable to make those decisions yourself.

That’s where the power of attorney (POA) comes in. A POA appoints a trusted representative (the “agent”) who can make medical or financial decisions on your behalf in the event an accident or illness renders you unconscious or mentally incapacitated. Typically, separate POAs are executed for health care and property–this is the case in Georgia. Without them, your loved ones would have to petition a court for guardianship or conservatorship, a costly process that can delay urgent decisions. (Depending on the state you live in, the health care POA document may also be known as a “medical power of attorney” or “health care proxy.”  In Georgia, these documents are called the “Advance Directive for Health Care”.)

A question that people often struggle with is whether a POA should be springing or nonspringing.

To spring or not to spring

A springing POA is effective on the occurrence of specified conditions; a nonspringing, or “durable,” POA is effective immediately. Typically, springing powers would take effect if you were to become mentally incapacitated, comatose or otherwise unable to act for yourself.

A nonspringing POA offers two advantages:

It allows your agent to act on your behalf for your convenience, not just when you’re incapacitated. For example, if you’re traveling out of the country for an extended period of time, your POA for property agent could pay bills and handle other financial matters for you in your absence.

It avoids the need for a determination that you’ve become incapacitated, which can result in delays, disputes or even litigation. This allows your agent to act quickly in an emergency, making critical medical decisions or handling urgent financial matters without having to wait, for example, for one or more treating physicians to examine you and certify that you’re incapacitated.

A potential disadvantage to a nonspringing POA — and a common reason people opt for a springing POA — is the concern that the agent may be tempted to commit fraud or otherwise abuse his or her authority. But consider this: If you don’t trust your agent enough to give him or her a POA that takes effect immediately, how does delaying its effect until you’re incapacitated solve the problem? Arguably, the risk of fraud or abuse would be even greater at that time because you’d be unable to monitor what the agent is doing.

What to do?

Given the advantages of a nonspringing POA, and the potential delays associated with a springing POA, a nonspringing POA is generally preferable–however, this should be carefully analyzed with your estate planning attorney on a case by case basis. Just make sure the person you name as agent is someone you trust unconditionally.

Contact us with any questions regarding POAs.

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Beware the GST tax when transferring assets to grandchildren

As you plan your estate, don’t overlook the generation-skipping transfer (GST) tax. Despite a generous $5.49 million GST tax exemption, complexities surrounding its allocation can create several tax traps for the unwary.

GST basics

The GST tax is a flat, 40% tax on transfers to “skip persons,” including grandchildren, other family members more than a generation below you, nonfamily members more than 37½ years younger than you and certain trusts (if all of their beneficiaries are skip persons). If your child predeceases his or her children, however, they’re no longer considered skip persons.

GST tax applies to gifts or bequests directly to a skip person and to certain transfers by trusts to skip persons. Gifts that fall within the annual gift tax exclusion (currently, $14,000 per recipient; $28,000 for gifts split by married couples) are also shielded from GST tax.

Allocation traps

To take full advantage of the GST tax exemption, you (or your estate’s representative) must properly allocate it to specific gifts and bequests (on a timely filed gift or estate tax return). Allocating the exemption wisely can provide substantial tax benefits.

Suppose, for example, that you contribute $2 million to a trust for the benefit of your grandchildren. If you allocate $2 million of your GST exemption to the trust, it will be shielded from GST taxes, even if it grows to $10 million. If you don’t allocate the exemption, you could trigger a seven-figure GST tax bill.

To help prevent costly mistakes like this from happening, the tax code and regulations provide for automatic allocation under certain circumstances. Your exemption is automatically allocated to direct skips as well as to contributions to “GST trusts.” These are trusts that could produce a generation-skipping transfer, subject to several exceptions.

Often, the automatic allocation rules work well, ensuring that GST exemptions are allocated in the most tax-advantageous manner. But in some cases, automatic allocation can lead to undesirable results.

Suppose you establish a trust for your children, with the remainder passing to your grandchildren. You assume the automatic allocation rules will shield the trust from GST tax. But the trust gives one of your children a general power of appointment over 50% of the trust assets, disqualifying it from GST trust status. Unless you affirmatively allocate your exemption to the trust, distributions or other transfers to your grandchildren will be subject to GST taxes.

Handle with care

If you plan to make gifts to skip persons, or to trusts that may benefit skip persons, consider your potential GST tax exposure. Also, keep in mind that repeal of the GST tax, along with the gift and estate tax, has been proposed. We’ll keep you abreast of any tax law changes that affect estate planning, and we can answer your questions regarding the GST tax.

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ABLE accounts can benefit loved ones with special needs

For families with disabled loved ones who are potentially eligible for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI), estate planning can be a challenge. On the one hand, you want to provide the most comfortable life possible for your family member. On the other hand, you don’t want to jeopardize his or her eligibility for needed government benefits.

For many years, the most effective solution to this problem has been to set up a special needs trust (SNT). But beginning in 2014, the Achieving a Better Life Experience (ABLE) Act created Internal Revenue Code Section 529A, which authorizes the states to offer tax-advantaged savings accounts for the blind and severely disabled, similar to Sec. 529 college savings plans.

Effective June 14, 2017, Georgia has launched its own ABLE account program, which will be called the Georgia STABLE accounts.

How ABLE accounts work

The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount (currently, $14,000). To qualify, a beneficiary must have become blind or disabled before age 26.

The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.

An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.

Comparison with SNTs

Here’s a quick review of a few of the relative advantages and disadvantages of ABLE accounts and SNTs:

Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Also, as previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age restriction for SNTs.

Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.

Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.

Contact us with additional questions you may have regarding ABLE accounts.

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I love everything DIY (or Do-It-Yourself, for the uninitiated). Give me can of spray paint and a Pinterest DIY Board or blog post, and I’ll be entertained for hours. However, some tasks just don’t lend themselves to DIY. In terms of home repairs, electrical work comes to mind: as accomplished as I feel fixing up our home, it’s probably not worth violating building codes or burning down the house. Needless to say, my husband would not be pleased.

Unfortunately, I have a number of clients come see me when DIY long-term care planning goes awry. Even estate planning attorneys, who prepare wills, trusts, powers of attorney, etc., feel appropriately nervous ‘dabbling’ in areas such as Medicaid and VA Pension planning. It is so important to work with someone who has a solid understanding of the effect any care planning will have on a person’s eligibility for Veterans or Medicaid benefits, as well as the tax, legal, insurance, and practical implications.

Families rarely realize that their plans for an aging relative – which make perfect practical sense – could have a negative impact on the relative’s eligibility for government benefits down the road. Often, the problems are not highlighted until the person’s assets are running low and these benefits become increasingly important.

The bottom line? If you are doing any planning for the care of an elderly or disabled relative, especially, if such care involves the management and/or transfer of assets, consult a knowledgeable elder law attorney first. But if you want to spray paint some vintage furniture? Grab your can of spray paint and DIY-away!

Image © cobracz

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I love this story!

Many of my clients are seniors, and some suffer from loneliness and depression. They’ve often lost loved ones, and difficulty getting around results in physical and emotional isolation. I am always wondering what changes can be made, top to bottom, to address the problem. This is a great example!

Read the full story here on People Magazine Online:

Preschool Opens Inside Retirement Home Causing Elderly Residents to ‘Come Alive’

I am intrigued by this concept and can’t wait to see the documentary!

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On January 23, 2015, the Department of Veterans Affairs (the “VA”) proposed new rules for its pension program (including the Aid & Attendance program) that include:

– Penalties on asset transfers within three years of an application for benefits

– Adjustment of the net worth limit to $117,240 (specifically, to match the Medicaid community spouse resource allowance, adjusted annually for cost of living)

– Inclusion of an applicant’s income as part of the net worth analysis

…and a number of other changes.

Under one of the most significant proposals, Veterans (and surviving spouses of Veterans) would no longer be able to transfer assets (outright or in trust) in order to be eligible for the VA Pension, at least not in the three years before application.

The rules are unclear on whether they would apply to prior transfers, that is, those made before the implementation of the rules in final form. Further, as drafted, the transfer rules would penalize the surviving spouse of the Veteran more than the Veteran.  Many practitioners are up in arms about these and other problems with the proposed rules.

Needless to say, it will be interesting to see how this all plays out.

Image © maticsandra

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Last night, Julianne Moore took home the Academy Award for Best Actress in a Leading Role for her portrayal of a woman suffering from early-onset Alzheimer’s Disease in the 2014 film Still Alice, based on the best-selling novel by Lisa Genova.

While I haven’t seen the movie (yet!) I read the book several years ago and was incredibly moved. I help families dealing with dementia all the time. It is hard to imagine what these caregivers are going through on a daily basis, and even harder to imagine what the patient is experiencing. I have been told by many caregivers, through their tears, that it is the most difficult thing they’ve ever had to do.

It must be terrifying to know that your mind, and your memories, are slipping away and there is no treatment or cure that can help. This novel allowed me imagine for a moment how that might feel.

In her acceptance speech, Julianne Moore said that Alzheimer’s Disease and dementia are not a ‘normal part of aging.’ Today, I heard a physician say the same thing – that dementia may be widespread among the elderly, but it is not ‘normal’ and deserves special attention. While it seems a bit trite to say that I hope this movie helps spread awareness about this terrible disease, I hope it does just that.

Learn more about Alzheimer’s Disease:

Alzheimer’s Association

National Institute on Aging

Mayo Clinic

Image © Danilo Rizzuti – Fotolia.com

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Watching CBS Sunday Morning yesterday, I was so excited to see the residents of Park Springs, a Continuing Care Retirement Community (“CCRC”) located in Stone Mountain, Georgia, being featured! See the video here:

http://www.cbsnews.com/news/golden-oldies-a-lip-synching-extravaganza/

I am a huge fan of these communities – CCRCs – in large part because I have had many clients from Park Springs speak so highly of the sense of community and friendship they’ve established living there. I have learned that while aging can be an incredibly isolating experience, these communities combat that. They also allow residents to grow older in one place, as they contain various levels of care on the same property, from single-family homes, to condominiums, to assisted living and even skilled nursing care.  This also keeps spouses and partners together if one has higher care needs than the other. (Learn more about CCRCs by clicking the link above.)

Kudos to the residents at Park Springs for an exceptional performance!

Image © Win Nondakowit – Fotolia.com

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