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A gift to your family

I came across a link a few days ago to what was described as “the most beautiful public service announcement I have ever seen.” And I must agree.  This video was both beautiful…and touching.

One of my core beliefs is that getting an estate plan is an incredible gift — to yourself, and to your family. Just like wearing a seatbelt. You wear it to protect yourself, and to make sure you’re there to take care of the family you love.

Click on the picture below to play the video.

Embrace Life

I hope you enjoy it as much as I did.

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Is your estate worth $800,000?

How much is your estate worth to you? I don’t mean how big it would be. I mean, how much is it worth to you to have your estate handled the way you want it to be?

On Friday, we learned that Bartley King’s estate was worth $800,000.

Bartley King died on July 5, 2004. He left behind a son, two daughters, and fifteen grandchildren. Four years before Bartley died, he had executed a new will. This new will named his daughter Folan as the executor and primary beneficiary.

Bartley’s son (Robert), his other daughter (Helen), and nine of his grandchildren filed a lawsuit complaining that the new will and other estate planning steps Bartley took in 2000 were invalid. Their central arguments were that Bartley lacked the mental capacity to change his will and that Folan had taken advantage of Bartley and convinced him to change his will in her favor.

The trial was held in January 2007, and Folan won. The trial judge found no credible evidence that Bartley lacked the capacity to change his estate plan. From the victory, Folan became entitled to receive Bartley’s $1.2 million estate.

But first she had to pay her lawyers.

Folan hadn’t hired just any lawyers. She had hired K&L Gates, a mega law firm with 35 offices and 1800 lawyers scattered around the globe.

A law firm like K&L Gates doesn’t come cheap. Despite the case being rather straightforward (the trial judge said it wasn’t “overly complex”), K&L Gates had a total of 18 attorneys and paralegals on the case.

The final tab for those 18 expensive professionals? $710,321.50

Throw in another $95,868.47 in costs (things like copies, legal research, and travel), and the total came to $806,189.97.

Folan spent over two-thirds of her father’s estate defending a lawsuit from her siblings, nieces, and nephews (and perhaps even her own children — that’s not clear from what I have read).

Of course, that’s not the end of the story. The trial judge originally awarded Folan $574,321.50 in attorneys fees and costs — to be paid by her brother, sister, and other relatives who had sued! This past Friday, the Massachusetts Supreme Judicial Court overturned the award and asked the trial court to reconsider.

So where is all this leading?

It’s anyone’s guess how the fees will shake out. But it doesn’t really matter what the final bill is for Folan or how much her relatives have to pay.

The tragedy has already happened. All they’re doing now is sorting out how much it will cost and who is going to pay for it.

Anyone who is thinking of treating some children or family members differently than others may be faced with the same difficulties.

There’s no right or wrong way to handle the situation. Any solution is going to be based on family history, personalities, and some judgment calls.

But there is one step you can take that will almost certainly help, creating a living trust.

In Illinois, your spouse and children must generally be given a copy of your will — even if they aren’t named as beneficiaries or are specifically disinherited. And the entire process of executing the will is played out in open court, for everyone to see.

How much you had (or didn’t have). Who got what. Anyone can go find those things out.

A trust, on the other hand, is private. You aren’t required to provide a copy of your trust to your children or anyone else who might be interested in your estate plan. No one will know anything about how your trust works except your trustee and your beneficiaries.

It’s just another one of the advantages of using a living trust over using only a will — the ability to plan your estate in privacy, and hopefully in a way that won’t ruffle anyone’s feathers.

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The power of attorney (not just) for property

With the rise of revocable living trusts for estate planning, the durable power of attorney has often been pushed into the background. But is is still a very important tool, even if most or all of your property is owned by a trust.

The ability to name an agent through a power of attorney is very flexible. You can give as few or as many powers to your agent as you wish. These are some of the more useful things an agent can do for you:

  1. Apply for public benefits for you. Your agent can file on your behalf to receive SSI or Medicaid benefits. Medicaid is an important way that many people use to pay for their nursing home care — something I will be discussing more in the coming weeks.
  2. Manage property not owned by your living trust. Unless an irrevocable life insurance trust is used, people often own life insurance in their own name. Your agent can also manage your IRA accounts, 401(k) accounts, or company pension account that an incapacity trustee would not be able to help with.
  3. Sign contracts on your behalf. Your agent can sign contracts for you, such as nursing home admission papers.
  4. Hire an attorney. An agent can hire an attorney to represent you in a variety of matters — medicaid planning, filing a lawsuit, filing for bankruptcy.
  5. Make gifts for planning purposes. You can authorize your agent to make gifts on your behalf for tax planning or Medicaid planning purposes.
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Planning for Long-Term Care

Volume 3, Issue 4

Studies predict that approximately 40% (2 out of every 5) of Americans reaching age 65 will need some type of long-term care (LTC). Some of your clients would prefer to stay at home, no matter what the cost. However, without proper planning, the lack of available services and the staggering price tag for full-time home health care may leave them without that option.

A prior issue of our newsletter provided an overview of planning for Medicaid (Medi-Cal in California). This issue of our newsletter examines additional LTC planning options. Like so many others, this is an area where the planning team needs to work together to develop and implement a unified plan to accomplish each client’s LTC goals and objectives.

Medicare – Don’t Count on It for Long-Term Care

Many seniors think that Medicare will pay for LTC if they need it. That is simply not true. Medicare coverage is limited to: qualified medical expenses (80% of an approved amount for doctors, surgical services, etc.); hospitalization for 90 days per benefit period with a total deductible of $1,024.00 for the first 60 days and a co-payment of $256.00 per day for the remaining 30 days, and an additional one-time, lifetime benefit of 60 days of hospitalization, with a co-payment of $512.00 per day (for a maximum of 150 days).

Medicare only pays for a limited period of “skilled” nursing home care that begins within 30 days following a hospital stay of at least 3 days. The maximum period is 100 days per benefit period. “Skilled” care is that provided under the supervision of a doctor that requires the services of skilled professionals, such as physical therapists or registered nurses. Medicare never pays for any “custodial care,” which is basic personal care and other maintenance-level services. If the patient is eligible, Medicare will pay 100% of the costs for up to 20 days of skilled nursing home care. If the patient is eligible, from day 21 through day 100, the patient has a $128.00 per day co-payment. If a patient stops needing skilled nursing home care, the patient ceases to be eligible and Medicare stops paying. Home health care may be available in limited amounts, but only if “medically necessary.”

For all Medicare benefits there are deductibles and co-payments, which can be substantial. Lifetime limits can be reached in the case of catastrophic illness. Plus, as the cost of Medicare rises, so does the pressure on the government to make it “means tested” instead of a universal program. There are excellent private “Medigap” insurance policies available to cover the gap between Medicare coverage and actual cost.

Planning Tip:  Seniors need to understand Medicare’s limitations. It does not cover hospital costs beyond 150 days, skilled nursing home costs beyond 100 days, or any custodial nursing home or non-skilled home health care.
Planning Tip:  Those eligible for Medicare should be encouraged to buy “Medigap” insurance. However, seniors need to understand that Medigap insurance does not cover LTC that Medicare does not partially pay for.

Self-Insuring LTC Costs

Self-insuring for possible LTC expenses requires a close collaboration of financial planning and estate and tax planning professionals to ensure that there are sufficient assets available to cover possible costs for as long as needed. The collaboration requires a comprehensive look at the overall financial condition of the client, as well as a thorough understanding of the client’s health and wishes regarding care in the event of incapacity.

Planning Tip:  Use a thorough fact-finding questionnaire to assemble all the information needed for the analysis. This will include client assets, current and anticipated income and expenses, and other data, such as where care will occur, the level of support available from family caregivers, and any family history of incapacity. This information will provide the foundation for the planning required to maximize the value of Social Security income, fixed pensions, dividend, interest, and other income streams, along with maximizing tax deductions for things such as medical expenses.
Planning Tip:  For LTC self insurance to work, the client needs a qualified financial planner whose investment strategies will produce asset growth and income sufficient to fund the client’s projected LTC expenses. Armed with knowledge of the client’s assets and projections for income and expenses, the client’s advisors can assess the client’s ability to implement a plan to self-insure LTC and recommend an appropriate investment strategy.

LTC Insurance

Most clients will not be able to fully self-insure for LTC, given the current and projected costs of LTC. Those who cannot but are insurable and can afford the premiums should integrate an LTC policy into their comprehensive wealth plan. Doing so can obviate the need for Medicaid planning later.

Planning Tip:  The two types of LTC policies available are cash payment and reimbursement. The former pays cash to the insured. The latter reimburses the insured for actual costs incurred.
Planning Tip:  Policy benefits to look for in an LTC insurance policy include: nursing home and home care coverage; sufficient daily payouts ($200.00/day is a good start); elimination periods (the number of days you must be in the nursing home before benefits begin, typically 0 to 100 days); duration of benefits (3 years, 5 years, lifetime); renewability (make sure it is guaranteed renewable); waiver of premiums (insured pays no premiums while receiving benefits); and inflation protection. As with life insurance, the older an applicant, the more difficult it is to obtain insurance and the higher the premium for equivalent coverage.

LTC Advanced Planning Strategies

If total LTC self and/or third-party insurance are not options, other options may be considered.

The Medicaid Trust

One currently-effective planning technique is to transfer assets into a “Medicaid” trust. In a Medicaid trust, the trust maker retains the right to all of the trust income for life while irrevocably giving up the right to receive or benefit from any of the trust principal. The assets in the trust are not available to pay for the cost of the trust maker’s LTC.

Planning Tip:  Retaining the right to receive the trust income keeps the trust assets in the trust maker’s estate for estate tax purposes, thereby giving a basis adjustment at death which wipes out any unrecognized capital gain or loss on the trust assets.

By using a Medicaid trust, a senior can preserve capital and still qualify for Medicaid, but only after expiration of the look-back period for the transfer to the trust (which can be as much as 60 months (5 years)).

Planning Tip:  The “penalty period” starts from the date the applicant applies for Medicaid and would be eligible but for the disqualifying transfer. Its length is determined by dividing the state’s average daily private pay nursing home cost into the total of the transfers made during the look-back period.
Planning Tip:  For the Medicaid trust strategy to work, insurance, an income stream, or other assets must be sufficient to pay for LTC if needed during the waiting period before applying for Medicaid.

A Medicaid trust can allow the trustee to distribute principal during the trust maker’s lifetime for the benefit of the trust maker’s spouse, children, or other designated beneficiaries, just not to or for the benefit of the trust maker. Many trust makers choose to maintain the right (called a Special Power of Appointment) to change the current or ultimate beneficiaries of the Medicaid trust by “reappointing” the assets to different family members at a later date.

Planning Tip:  Retaining a Special Power of Appointment prevents the trust maker’s contributions to the trust from being taxable completed gifts at the time of contribution. A distribution of trust principal to a beneficiary during the trust maker’s life is a completed gift.

Making Gifts

If a Medicaid trust is not desired, it is still possible to make “outright” gifts of property, wait until the look-back period expires, and then apply for Medicaid or use other planning techniques to qualify for Medicaid at the earliest possible date.

Protecting the Home

If the home is the only asset to protect, a deed to children or others with a retained life estate for the client will protect both the property and the client’s Medicaid eligibility upon expiration of either 60 months from the date of the conveyance or the applicable “penalty period.” As with other advanced planning strategies, because the penalty period begins only after the applicant has applied for Medicaid and is otherwise eligible, the client must have other LTC funding available to get past the look-back period, or someone willing and able to pick up the LTC costs during the penalty period.

Planning Tip:  If the home is sold while the client is receiving LTC under Medicaid, a portion of the sale proceeds equivalent to the value of the life estate (using Medicaid tables that give a higher value than an IRS life expectancy table) will have to be paid to the nursing home unless protected using other Medicaid planning strategies.

Crisis LTC Planning

Even if the need for LTC is imminent or immediate, sophisticated Medicaid planning opportunities can be employed to protect a substantial portion of the client’s assets. Carefully working within the Medicaid transfer rules can allow clients to provide security for themselves and a legacy to their families, while ensuring that they will remain eligible to receive LTC under Medicaid when necessary. For example, by combining the gifting of assets with the structuring of other asset transfers as an exchange for a secured interest (much like a loan) through the use of a promissory note, private annuity, or Grantor Retained Annuity Trust (GRAT), clients can pay for expenses during the waiting period that begins upon making the gifts. This allows them to channel assets to a trust, or to children and grandchildren, while receiving sufficient income through the note or annuity payments to pay for their care until they become Medicaid eligible.

If the client can live at home with the assistance of home health care, one can transfer assets and qualify for Medicaid immediately to cover home care costs in some jurisdictions. The planning team must exercise caution, however, because home health care may be appropriate initially, but if the client’s condition deteriorates to the point where he or she cannot safely stay at home, nursing home placement may be required. If the client requires this higher level of LTC, he or she must file a new application, and the Medicaid transfer rules will then apply. Thus, when planning for home care, the client and planning team must evaluate the possible need for institutional LTC services before making transfers.

Planning Tip:  Moving in with a relative or family member may be another option for seniors. It may also be advisable for the client to put in place a caregiver agreement and/or personal service contract to make a transfer to a family member as compensation for their providing home care services.


Counseling clients on their LTC options, including the availability of LTC insurance, is an integral part of comprehensive wealth planning. By working together, the planning team can ensure that assets are available as needed to meet each client’s unique LTC planning goals and objectives.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Planning for Unmarried Couples

Volume 3, Issue 3

The 2000 census counted nearly 5.5 million U.S. unmarried couples sharing the same household, almost 8 times the number counted in 1970 and nearly 10% of the 60 million U.S. couple households counted. Of these, many are widows and widowers who choose not to marry for various reasons, and approximately 1% of these unmarried couples are same-gender partners.

Because U.S. and most state laws afford special benefits for those married to a person of the opposite gender, many common planning techniques that take advantage of those benefits simply do not work for unmarried or same-gender couples. As a consequence, the planning needs of the unmarried or same-gender couple is often far greater than that for a married opposite-gender couple with equivalent assets. This issue of our newsletter examines many of the unique planning needs of unmarried and same-gender couples and the opportunities that exist for all members of the planning team in working with these clients.

Unmarried and Same-Gender Couples

Some couples choose not to marry, for example, because of the risk to one partner’s assets if the other needs long-term care, the loss of alimony, or the loss of Military retiree health and other benefits.

Other couples cannot legally marry under the law of their domicile, particularly same-gender couples. While some states (e.g., Massachusetts) and foreign countries (e.g., Canada) recognize and legalize such same-gender unions, U.S. federal law and the laws of many states do not recognize these unions. The federal Defense of Marriage Act (“DOMA”), signed into law in 1996, provides that, for purposes of federal law, marriage is “a legal union between one man and one woman as husband-and-wife” and a “spouse” is defined as referring “only to a person of the opposite sex who is a husband or wife.”

State and Federal Law Considerations

Many state and federal laws clearly favor and provide special priority or benefit to the opposite-gender spouse and blood relatives. Those who are outside those categories have neither rights nor recognition under these laws. Therefore, unmarried and same-gender couples are very unlikely to accomplish their planning goals without knowledgeable professional assistance and counseling. Examples of where state law generally will produce an undesired result in the absence of planning are:

  • Who will be able to make health-care decisions in the event of incapacity?
  • Who will be chosen as a partner’s guardian if one should be needed?
  • Who may take custody of the deceased partner’s body?
  • Who may direct the burial or cremation and disposition of remains?
  • Who will receive the deceased partner’s assets?
  • Who will get what assets in the event of the dissolution of the partnership?

In addition, unmarried couples without children may have different contingent beneficiaries, which also may necessitate more complex planning.

Planning Tip:  Proactive planning is essential to accomplish even the most basic goals of unmarried and same-gender couples because the law’s default provisions generally do not recognize their relationship.

Joint Tenants with Right of Survivorship

Many unmarried and same-gender couples want to leave everything to the surviving partner. Without competent advice, many opt for the apparent simplicity of titling assets in Joint Tenancy with Right of Survivorship (JTROS) to accomplish their objective. JTROS also provides the satisfaction of being similar to ownership by a heterosexual married couple. But, for the unmarried and same-gender couple, titling assets in JTROS has significant pitfalls, risks, and disadvantages.

First, there are the estate tax problems. The law treats a heterosexual married couple as owning JTROS assets 50/50 for purposes of estate taxes, such that only 50% of the value of a JTROS asset is included in the estate of the first spouse to die. In stark contrast, when an unmarried couple own property as JTROS, the law puts 100% of each JTROS asset’s value in the estate of the first to die; the survivor has the burden of proving his or her contribution to the equity of the asset. Not only that, unless the partners’ deaths are within a few years of each other, all of the property will be subject to estate tax, and at full value, in both partners’ estates!

Gift taxes, too, may present a problem. Depending upon the type of property and the applicable state law, changing how property is held may be deemed to be a gift subject to federal and state gift taxes.

Planning Tip:  Unmarried and same-gender couples can create significant federal and state estate and gift tax liability inadvertently by adding a partner to an asset as joint tenant with rights of survivorship.

No Marital Deduction or Marital Gift Tax Exemption

Using the federal marital estate tax deduction, a married person can transfer an unlimited amount of property to his or her spouse upon death. This is the common “A/B” planning used to delay imposition of federal estate tax until the death of the surviving spouse. Such planning is not available for unmarried couples because there is no spouse. With a same-gender couple, DOMA bars even those who are legally married from using this planning technique. Therefore, unmarried and same-gender couples must plan to avoid imposition of estate tax upon the death of the first partner to die.

Likewise there is also no unlimited gift tax exemption for lifetime transfers to anyone but an opposite-gender spouse. Unmarried and same-gender couples cannot transfer assets between themselves to equalize their estates like heterosexual married couples can, because transfers in excess of the annual gift exemption ($12,000 per person per year in 2008) are subject to federal gift tax and must be reported to the IRS. Gift splitting is also unavailable to unmarried and same-gender couples.

Retirement Benefits & Social Security

A surviving partner has no survivor benefit under the deceased unmarried or same-gender partner’s social security. Further, most private retirement plans will not allow a joint retirement annuity with anyone other than an opposite-gender spouse and many will only allow participants to name an opposite-gender spouse or blood relative as a beneficiary. And only surviving spouses can “roll over” an IRA or qualified plan to their own non-inherited IRA.

Planning Tip:  It is critical that the advisor review the retirement plans of each partner’s employer to determine the options available to the partners. This information is necessary to ensure an accurate determination as to not only the planning options available, but also the capital needs of the survivor. Life insurance can replace retirement benefits and social security that are unavailable to a surviving unmarried or same-gender partner.

Generation-Skipping Transfer (GST) Tax Issues

The GST tax is an onerous tax that applies at the maximum federal estate tax rate (currently 45%). If one partner is more than 37 1/2 years younger than the other, that younger partner is a GST “skip” person relative to the older. That means that transfers from the older to the younger partner during lifetime and at death in excess of the annual exclusion will result in the automatic allocation of GST exemption unless an appropriate option exercise is made on the older partner’s gift or estate tax return. Transfers in excess of the exemption and exclusion will be subject to the GST tax. In addition, one partner’s children who are more than 37 1/2 years younger than the other partner are GST “skip” persons for gifts and bequests from that other partner.

Other Considerations

Unlike an opposite-gender surviving spouse, a surviving unmarried or same-gender partner cannot disclaim assets into a trust for his or her benefit. Therefore, an unmarried or same-gender couple must be very careful in planning for the possible use of disclaimers. Also, unlike in divorce, there is no tax-free transfer of asset interests upon the dissolution of the relationship between unmarried and same-gender couples.

Planning Tip:  Disability insurance is often a critical component of any plan for unmarried or same-gender partners because of the statutory bias against those who are not opposite-gender spouses.

How to Plan for Unmarried Couples

Revocable Trusts

Revocable trusts are an excellent tool when planning for unmarried and same-gender couples because these trusts can solve many of the planning dilemmas discussed above. If the trust maker funds his or her assets to the trust during lifetime, those assets are available to care for the trust maker and/or the partner, as the trust specifies, upon the trust maker’s disability during his or her lifetime.

If drafted correctly using a support or “HEMS” (Health, Education, Maintenance and Support) provision, upon the trust maker’s death the surviving partner can access the trust’s assets without subjecting them to additional estate tax at his or her death. Also, the trust maker can determine the ultimate distribution of the trust assets following the death of the surviving partner and even revoke the trust if there is a change in planning goals and objectives. A revocable trust also provides the added benefit of privacy as to the trust maker’s beneficiaries.

Living trusts also avoid automatic court involvement during disability and death. This is important because, as discussed above, there are statutory preferences in any court proceeding for blood relatives, whether or not they share the unmarried couple’s views of their relationship. Moreover, a judge may be biased against unmarried and same-gender couples. A will-based plan opens the couple to court involvement in their affairs, for instance to appoint a guardian or conservator for an incapacitated partner, and typically it is the non-incapacitated partner who has to start the court proceedings. With living trusts, on the other hand, the non-incapacitated partner can be the successor trustee, and the burden will then be on the incapacitated partner’s family to bear the costs and expenses if they want to challenge the incapacitated partner’s planning and trust documents.

Planning Tip:  Properly drafted revocable trusts can ensure that unmarried and same-gender partners’ goals and objectives are met, both in case of disability and after death. With revocable trusts, the burden is on disgruntled blood relatives of the trust maker to sue to set aside the trust, which is usually a difficult and expensive undertaking.
Planning Tip:  A will-based plan virtually guarantees the involvement of the courts, where personal prejudices and statutory preferences may disadvantage the surviving or non-incapacitated partner vis-a-vis the disabled/deceased partner’s blood relatives. Often, a will-based plan will require that the surviving or non-incapacitated partner be the one who begins the court case.

Life Insurance

Life insurance is a particularly useful and often critically important planning tool for unmarried and same-gender couples. In addition to providing income replacement and even wealth creation for the surviving partner, life insurance can provide the liquidity necessary to pay estate taxes, including those that result from there being no marital deduction for such a couple.

If a partner has children, life insurance also can provide funds for distributions to them without diminishing the desired asset transfer to the surviving partner, such as the deceased partner’s interest in the couple’s home. Life insurance can also be used to make sure that the survivor has the cash needed to pay off any liens against those assets.

Planning Tip:  State law determines whether one unmarried or same-gender partner has an insurable interest in the other, but most jurisdictions now recognize an insurable interest with these types of relationships.
Planning Tip:  Life insurance, particularly if owned by an Irrevocable Trust, can help preserve confidentiality by giving blood relatives neither the right nor the opportunity to learn of the existence of the insurance or the amount of policy proceeds received.


Due to the numerous statutory provisions favoring opposite-gender spouses and blood relatives, the planning needs of unmarried and same-gender couples are often far greater than the needs of similar married opposite-gender couples. By working together, the planning team can ensure that unmarried and same-gender couples achieve their unique goals and objectives, both during lifetime and after death.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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