Frequently Asked Questions
WHY DO ESTATE PLANNING?
Estate planning with proven techniques is an important process that will provide peace of mind and help ensure that your wishes are carried out after your death.
There are many good reasons to do estate planning, here are several:
1. Ensuring That Your Assets Are Distributed According To Your Wishes
Estate planning allows you to specify how your assets will be distributed after your death, which can help avoid disputes among your family members and ensure that your assets are distributed in a way that aligns with your values and intentions.
2. Minimizing estate (death) taxes
Proper estate planning can help minimize the amount of estate taxes that your beneficiaries will have to pay, which can help preserve more of your assets for your loved ones. By using different techniques it is possible to minimize estate/death taxes , and also income or capital gains taxes for your loved ones.
3. Minimizing Future Income and Capital Gains Taxes
By structuring your estate plan with a view to the impact of future income taxes for yourself and your beneficiaies, you have the opportunity to save taxes that would otherwise be payable. It’s a matter of understanding how the income tax laws work and using available techiques to create the best solution.
4. Providing for your loved ones
Estate planning can ensure that your loved ones are provided for after your death, whether through direct bequests or through the creation of trusts or other arrangements, which can provide ongoing support.
5. Guardians For Minor Children
Estate planning allows you to name guardians for your minor children, which can ensure that they are cared for by people you trust and who share your values.
6. Protecting your business
If you own a business, estate planning can help ensure that it continues to operate smoothly after your death and that your family is able to maintain its ownership or sell it for a fair price.
7. Avoiding probate
Proper estate planning can help avoid probate, which can be a lengthy and expensive process that ties up your assets for months or even years, and makes your entire estate a public record.
8. Protection From Long Term Care Costs
Proper planning can help keep assets in your family even if you become physically or mentally disabled and need home health care, assisted living care, or nursing home care for a long period of time.
WHAT IS PROBATE, AND WHY WOULD I WANT TO AVOID IT?
Probate is court supervised administration of your financial affairs after your death. It involves hiring an attorney to petition the court for authority for the executor to act on your behalf, according to a Last Will and Testament, if you have made one, or according to New York’s Intestate Succession Laws if you have not. The proceeding requires the family member or friend petitioning the court to prove they are worthy of handling your affairs because they are close enough in relation to you, competent to handle financial and legal affairs, not suffering from any mental defect or addictions that might cause them to steal from your estate, and have not been convicted of a felony. Furthermore, the person who wants to handle your estate needs to formally notify your closest blood relatives (defined as “distributees” which differs based on who survives after you die) of the court proceeding. If those relatives do not consent, the person attempting to handle your affairs must then get a citation from the court and serve it on the person who does not consent, requiring them (and your attorney) to appear in court to state their objections to the estate administration going forward, which will dramatically slow down the handling of your affairs.
When the probate process is nearing its conclusion, the court will also require the executor to file a detailed legal accounting, which details all of the financial transactions that occurred in the estate.
Overall, avoiding probate can be a good thing for many reasons, but it depends on your individual circumstances and estate planning goals. It is important to work with a qualified estate planning attorney to determine the best approach for your situation.
Avoiding probate can be a good thing for several reasons:
1. Time and Cost Savings
Probate can be a lengthy and expensive process, which can tie up your assets for months or even years. By avoiding probate, your benefiaries can gain access to your assets faster and with less expense.
2. Privacy
Probate is a public process, which means that anyone can access the details of your estate and how it is being distributed. By avoiding probate, you can keep your estate details private.
3. Control
When you go through probate, a judge oversees the process of distributing your assets, which means that your beneficiaries may not have as much control over how your assets are distributed. By avoiding probate, you can ensure that your assets are distributed according to your wishes and under your own terms.
4. Simplification
Probate can be a complex process, especially if you have a large or complicated estate. By avoiding probate, you can simplify the process of distributing your assets and ensure that your beneficiaries receive what they are entitled to without undue delay or complication.
WHAT IS LONG TERM CARE, AND HOW IS IT PAID FOR?
Long-term care expenses are the costs associated with ongoing medical and personal care for individuals who are no longer able to care for themselves due to age, illness, or disability. These expenses can be significant and include things like nursing home care, in-home care, assisted living facilities, and medical equipment and supplies. Your health care insurance will not pay for long term care, except under very limited circumstances, and even then only for very short durations.
It’s important to discuss your options with a qualified estate planning attorney to determine the best approach for your situation. By planning ahead, you can help ensure that you are prepared for any long-term care expenses that may arise and protect your financial well-being and that of your loved ones.
There are several ways to avoid or mitigate long-term care expenses:
1. Long-Term Care Insurance
This type of insurance can help cover the cost of long-term care expenses and provide financial protection for you and your family.
2. Self-Insuring
If you have sufficient assets and income, you may be able to pay for long-term care expenses out of pocket.
3. Medicaid Planning
Medicaid can help cover long-term care expenses for those who meet certain eligibility requirements. However, there are strict income and asset limits, so it’s important to plan ahead to ensure that you qualify for Medicaid if you need it.
4. Veterans Benefits
If you or your spouse are a veteran, you may be eligible for certain benefits that can help cover long-term care expenses.
5. Planning Ahead
One of the best ways to avoid long-term care expenses is to plan ahead by maintaining good health, living an active lifestyle, and taking steps to prevent chronic conditions and disabilities.
WHAT IS MEDICAID PLANNING, AND HOW DOES IT HELP WITH PAYING FOR LONG TERM CARE?
Medicaid planning is a legal and financial strategy used to protect assets and plan for long-term care expenses while still qualifying for Medicaid benefits. Medicaid is a government-funded healthcare program that provides coverage for medical expenses for individuals with low income or limited financial resources. Medicaid planning is particularly relevant for elderly or disabled individuals who may require long-term care in a nursing home or assisted living facility.
Medicaid planning involves structuring one’s finances and assets in a way that meets the eligibility requirements for Medicaid while still protecting as much wealth as possible. The process typically involves a comprehensive review of a person’s assets, income, and expenses, followed by the creation of a plan that maximizes Medicaid eligibility and minimizes the financial impact of long-term care.
There are various strategies that can be employed in Medicaid planning, including the use of trusts, the transfer of assets, and the creation of annuities. These strategies must be carefully executed to ensure that they are legal and effective.
It’s important to note that Medicaid planning can be a complex and challenging process, and it’s important to seek the advice of an experienced attorney who concentrates in this area to ensure that your plan is legal and effective. Additionally, it’s important to plan ahead and start the process early. There are limits on how much can be transferred or protected in a short amount of time before becoming eligible for Medicaid benefits.
HOW DOES MEDICAID PLANNING WITH A TRUST WORK?
Medicaid planning with a trust is a common strategy used to protect assets while still qualifying for Medicaid benefits. A trust is a legal entity that holds assets for the benefit of the trust beneficiaries, which can include the creator of the trust (also known as the grantor) and his or her family members.
The goal of Medicaid planning with a trust is to transfer assets into the trust so that they are no longer considered to be owned by the Medicaid applicant (the grantor). By doing so, the assets can be protected from being used to pay for long-term care expenses and allow the applicant to qualify for Medicaid benefits to pay those expenses.
There are two main types of trusts used in estate planning:
Irrevocable Trusts
An irrevocable trust is a type of trust that (generally) cannot be changed or revoked by the grantor once it has been created. When assets are transferred into an irrevocable trust, they are no longer considered to be owned by the grantor and after 60 months, are protected from Medicaid eligibility rules. The grantor can still receive income from the trust, but cannot access the principal assets. If the plan is structured correctly, the family still has flexibility to access principal for emergencies or change how the trust works later on, while keeping the assets out of the grantor’s personal ownership. An irrevocable trust that is designed towards Medicaid planning is a Medicaid Asset Protection Trust (MAPT), and while irrevocable trusts generally cannot be revoked or amended, there are still substantial changes you can make to this kind of trust while still having it qualify as “irrevocable” under Medicaid law. Other kinds of irrevocable trusts may also assist you to qualify for Medicaid, but are much more restrictive in the changes you can make, and are better suited to folks that have significant income or estate tax concerns.
Revocable Trusts
A revocable trust is a type of trust that can be changed or revoked by the grantor at any time. When assets are transferred into a revocable trust, they are still considered to be owned by the grantor and are not protected from Medicaid eligibility rules. However, a revocable trust can be useful in certain circumstances, such avoiding probate. It can also help avoid a Medicaid lien on an estate. Because a revocable trust avoids probate by its very nature, a Medicaid lien will not impact the assets held in a revocable trust, unless that lien is filed while you are still alive. New York law only allows this with some kinds of Medicaid liens, and the rest are considered an automatic lien against your probate estate and can be avoided with a revocable trust.
It’s important to note that Medicaid eligibility rules regarding trusts can be complex and vary by state. Additionally, there are some considerations on which assets can be transferred into a trust and when it may make sense to keep certain assets out of a trust. Therefore, it’s important to consult with an experienced attorney who concentrates in Medicaid planning to determine the best strategy for your individual situation.
WHAT ARE ADVANCE DIRECTIVES?
Advanced directives are legal documents that allows a person (the “principal”) to appoint someone else (the “agent”) to make financial and/or healthcare decisions on the principal’s behalf in the event that they become incapacitated or unable to make decisions for themselves, and gives instructions about how the principal wants those decisions to be carried out.
Three important advanced directives are:
1. Durable Power of Attorney (PoA)
This type of directive authorizes the agent to make financial decisions on behalf of the principal, such as paying bills, managing investments, and accessing bank accounts.
A durable power of attorney is “durable” because it remains in effect even if the principal becomes incapacitated or unable to make decisions for themselves. This is different from a regular power of attorney, which becomes invalid if the principal becomes incapacitated.
There are different levels of authority that can be granted in a PoA. A Statutory Short Form Power of Attorney is called such because it meets the minimum requirements under New York’s General Obligation’s Law setting out what constitutes a Short Form. The benefits of meeting the minimum requirements are that third parties are required to accept the document unless they have direct evidence that it was procured under undue influence, false pretense, or for some other reason is known to them to be defective.
If a third party (such as a bank or investment company) fails to reasonably comply with the instructions of a Power of Attorney agent in handing the financial affairs of a principal, the third party can be sued to force them to comply, and in a fairly recent change of New York Law, the third party will have to pay for the cost of the lawsuit if their denial of the PoA was unreasonable!
It’s important to choose a trusted and reliable person to serve as the agent under a durable power of attorney, as they will have significant authority to make decisions on behalf of the principal. It’s also important to ensure that the document is properly executed and meets the legal requirements of the state in which it is created.
2. Health Care Proxy
This type of directive authorizes the agent to make healthcare decisions on behalf of the principal, such as consenting to medical treatment, selecting healthcare providers, and making end-of-life decisions. A well thought out New York State Health Care Proxy should contain language that will allow it to be used in other states that do not call it a “Health Care Proxy.”
*In some states Health Care Proxy may be called a Healthcare Power of Attorney or Healthcare Surrogate Appointment
3. A Living Will
This directive outlines a person’s wishes regarding medical treatment in the event that they become unable to make decisions for themselves. A Living Will typically specifies what types of medical treatments the person would like to receive or not receive, such as life-sustaining treatments including artificial respiration or feeding tubes.
A Living Will is designed to provide guidance to healthcare providers and family members in situations where the person is unable to communicate their wishes due to a serious illness, injury, or incapacity. It can also help to avoid disputes among family members or healthcare providers regarding the person’s medical care. It is important to note that a Living Will does not give someone else the authority to make healthcare decisions on behalf of the person. For that, a Health Care Proxy is needed.
Together, a Living Will and Health Care Proxy can help to ensure that a person’s wishes regarding medical treatment are respected and followed, even if they are unable to communicate or make decisions for themselves. It’s important to discuss these documents with family members and healthcare providers to ensure that everyone understands the person’s wishes and how to follow them.
It is also important to choose a trusted and reliable person to serve as the agent under a Health Care Proxy, as they will have significant authority to make decisions on behalf of the principal, including literal decisions regarding life and death. It’s also important to ensure that the document is properly executed and meets the legal requirements of the state in which it is created, and to consider a Health Care Proxy which exceeds the requirements of New York State, so that it can also be recognized (and therefore honored by healthcare providers) if you have a health crisis while in another state.
4. Veterans Benefits
If you or your spouse are a veteran, you may be eligible for certain benefits that can help cover long-term care expenses.
5. Planning Ahead
One of the best ways to avoid long-term care expenses is to plan ahead by maintaining good health, living an active lifestyle, and taking steps to prevent chronic conditions and disabilities.
It’s important to discuss your options with a qualified estate planning attorney to determine the best approach for your situation. By planning ahead, you can help ensure that you are prepared for any long-term care expenses that may arise and protect your financial well-being and that of your loved ones.
WHAT ARE DEATH TAXES?
“Death taxes” is a colloquial term used to refer to the estate tax and the inheritance tax.
The estate tax is a federal tax that is imposed on the transfer of assets from a deceased person’s estate to their beneficiaries. The tax is calculated based on the value of the estate, after accounting for any applicable deductions and exemptions. The estate tax is only imposed on estates that exceed a certain value, which is determined by the federal government.
New York also imposes an estate tax on estates that exceed a certain value, however this value is different from the one imposed federally. It is also important to note that the New York estate tax has different deductions and exemptions, and is generally stricter than the federal estate tax in terms of using the exemptions for the first spouse to die. If your estate is subject to New York Estate taxes and due to an improperly developed estate plan, you lose the exemption for the first spouse to die, the cost is literally hundreds of thousands of dollars.
The inheritance tax is a state tax that is imposed on the transfer of assets from a deceased person to their beneficiaries. The tax is calculated based on the value of the assets transferred and the relationship between the deceased person and the beneficiary. Some states have inheritance taxes, while others do not. New York does not currently have an inheritance tax.
It’s important to note that both the estate tax and the inheritance tax only apply to a small percentage of estates and are designed to target the wealthiest individuals in society. The vast majority of people do not have to worry about paying these taxes, as their estates fall below the threshold for taxation. If your family is not subject to estate taxes, this opens up other valuable tax planning opportunities, most notably the “step-up in cost basis,” the adjustment of capital gains taxable basis to the date of death value of an asset when its owner dies. For families below the estate tax exemptions, this can result in the savings for the beneficiaries of tens of thousands of dollars in capital gains tax when they later sell inherited assets.
It’s also important to consult with an experienced attorney to understand the tax implications of estate planning strategies and how to minimize taxes on the transfer of assets to beneficiaries.
WHAT IS A TRUST?
A trust can be established under a Will, called a “Testamentary Trust,” which is still subject to probate and court supervision. Trusts established for beneficiaries are typically done because a beneficiary is under a certain age and it would not be appropriate for him or her to inherit large sums of money, (Trusts for Minors), to protect against the creditors of a beneficiary (a “Spend Thrift Trust”), or because a person may have a disability (a “Special Needs Trust”). Creditors are a broad legal group of people that include divorced spouses, people who secure a judgement against a beneficiary because of an accident (judgement creditors), or financial creditors (lenders) if your beneficiary is involved in business enterprises that may have large financial or physical risks.
Alternatively, a trust can be established while you are still alive. This is called a “Living Trust.” A Living Trust document will name trustees, successor trustees, and will continue to operate after your death without the need for court supervision. Depending on how it is drafted, a trust can also confer extra benefits, such as Medicaid Asset protection in case you need long term care later in life, or other benefits for your beneficiaries, all without court supervision. Court supervision for probate continues for the entire term of any testamentary trust, so a living trust can be a real benefit for your family if you want any of the ongoing trusts mentioned above!
WHAT IS AN IRREVOCABLE TRUST?
An irrevocable trust is a type of living trust that generally cannot be changed or revoked by the person who created it (the “grantor” or “settlor”). Once the assets are transferred into the trust, they are owned by the trust and not the grantor. The trust is managed by a trustee, who has a fiduciary duty to manage the assets in the best interests of the beneficiaries.
Irrevocable trusts are often used for estate planning purposes, as they can help to minimize estate taxes, protect assets from creditors, and ensure that assets are distributed according to the grantor’s wishes.
There are many types of irrevocable trusts, each with its own specific purpose. Here are a few examples:
1. Medicaid Asset Protection Trust (MAPT)
The kind of trust most families seek our advice and counsel for is the Medicaid Asset Protection Trust (MAPT). This is a type of irrevocable trust that is designed to protect a person’s assets from being counted as resources for Medicaid eligibility purposes. Medicaid is a government program that provides healthcare coverage for individuals with low income and limited resources. To qualify for Medicaid, an individual must meet certain income and asset requirements.
A MAPT is typically created by an individual who is concerned about the high cost of long-term care and wants to protect their assets from being depleted to pay for care. By transferring assets into a MAPT, the assets are no longer considered part of the individual’s resources for Medicaid eligibility purposes, as long as the transfer occurs at least 60 months before the individual applies for Medicaid.
The assets in the MAPT are managed by a trustee, who has a fiduciary duty to manage the assets in the best interests of the beneficiaries. The grantor can still receive income from the trust, but cannot access the principal of the trust. It’s important to note that creating a MAPT is a complex process and requires careful consideration and planning.
It is also important to note that the trust will protect families from the costs long term care, but the trust does not protect against other general creditors of the grantor. If established correctly, it can protect against creditors of beneficiaries during the lifetime of the grantors, and if required we can also create further trust provisions to continue to protect against creditors of beneficiaries after the grantor has died.
Case laws have established various ways that MAPTs can potentially still be amended or possibly even revoked, while still qualifying as “irrevocable” for the purposes of Medicaid. So, even though this type of trust is considered irrevocable under Medicaid case law, we draft these kinds of trusts with significant flexibility for families to change them later on.
The following are some further examples of irrevocable trusts, whose primary purposes are more tuned to estate and income tax planning. Because income and estate taxes are very complex, these kinds of estate planning techniques necessarily are more complex to change later on, and apply to fewer clients. However, when they do apply, we are comfortable explaining how they work and the benefits they can offer families.
2. Grantor Retained Annuity Trust (GRAT)
A trust that allows the grantor to transfer assets to beneficiaries while retaining an income stream for a set period of time. If the value of the assets increase over a certain amount during the time the GRAT is paying, the excess value is transferred to your beneficiaries free of any estate or gift tax.
3. Irrevocable Life Insurance Trust (ILIT)
A trust that is designed to hold life insurance policies outside of the grantor’s estate, which can help to minimize estate taxes. The amount of premiums for the policy, if below the annual gift tax exclusion amount, will not reduce your lifetime exemption, but if the ILIT is structured correctly then when it pays out to your beneficiaries it will also not be subject to estate or gift taxes. Over time, this can transfer a considerable amount of wealth and assist in paying estate taxes without requiring your beneficiaries to sell items that may be difficult to market.
4. Qualified Personal Residence Trust (QPRT)
A trust that allows the grantor to transfer ownership of a personal residence to beneficiaries while retaining the right to live in the residence for a set period of time. One very interesting feature of a QPRT is that after the period of time where you live rent-free, you are then required to pay rent to the QPRT. This is actually a very good benefit for your beneficiaries, because the value of the assets that will transfer to them from the QPRT goes up, but the rent payments will not reduce your lifetime exemption for estate or gift taxes (i.e. more is transferred without being subject to these very high taxes)!
5. Charitable Remainder Trust (CRT)
A trust that allows the grantor to donate assets to a charity while retaining an income stream for a set period of time. Any income beneficiary of the CRT will not have to pay income taxes on the sources of income from the trust, and the charitable beneficiary will get to enjoy the remainder of the trust’s value when those income beneficiaries die. For those that are already charitably inclined, this can be a very good way of giving an income stream to beneficiaries that may not be good with handling money, while still achieving your charitable goals.
It’s important to consult with an experienced attorney to understand the benefits and limitations of irrevocable trusts and to determine whether they are appropriate for your specific estate planning needs. Once assets are transferred to an irrevocable trust, they cannot be taken back or changed, so careful consideration and planning is necessary before creating an irrevocable trust.
WHAT IS A SPECIAL NEEDS TRUST?
Special needs trusts, also known as supplemental needs trusts, are trusts that are designed to provide financial support for individuals with disabilities while allowing them to maintain eligibility for government benefits, such as Medicaid and Supplemental Security Income (SSI).
When a person with a disability receives an inheritance or a settlement from a lawsuit, it can disqualify them from receiving government benefits because they are considered to have too many assets. A special needs trust can help to prevent this from happening by allowing the assets to be held in the trust and managed by a trustee for the benefit of the disabled person.
There are two types of special needs trusts:
1. Third-party special needs trust
This type of trust is funded with assets that do not belong to the disabled person, such as an inheritance from a family member. The trust can be established by anyone, including a family member or a friend, and can be used to supplement the disabled person’s government benefits.
2. First-party special needs trust
This type of trust is funded with assets that belong to the disabled person, such as a settlement from a lawsuit. The trust must be established by a parent, grandparent, or legal guardian, and must include a payback provision that requires any remaining funds in the trust after the disabled person’s death be used to reimburse the government for any benefits that were received by the disabled person.
The assets in a special needs trust can be used to pay for a wide range of expenses not covered by government benefits, such as education, transportation, and entertainment. However, the trustee must be careful to avoid using the trust funds for expenses that are already covered by government benefits, as this could jeopardize the person’s eligibility for those benefits.
Special needs trusts can also be established under the terms of a Will, or in the document that establishes where and how a Living Trust is distributed when the grantor dies (typically a Power of Appointment). There is a greater amount of flexibility that can be drafted in a special needs trust under a living trust. Broader discretion can be given to your trustee on the various circumstances to distribute funds, or authority to distribute funds to other beneficiaries when it makes sense, all of which will not require ongoing supervision from a Court.
WHY WORK WITH AN ATTORNEY TO PLAN AN ESTATE?
There are several reasons why it is advisable to use an attorney to do estate planning instead of doing it yourself:
1. Knowledge and Expertise
Estate planning is a complex area of law that requires knowledge and expertise to navigate. An experienced estate planning attorney can provide you with valuable guidance and advice on the best way to structure your estate plan to meet your needs and achieve your goals. Trying to learn all of the things you should consider to effectively make an estate plan work property is incredibly time consuming, and you will likely find conflicting information that can be difficult for you to reconcile. Many things written about the law are written in jargon that is learned in law school or from experience and can also be confusing to the unexperienced.
2. Customization
An attorney can help you create a customized estate plan that considers your unique circumstances, goals, and preferences. This can include establishing trusts, a will, or powers of attorney.
3. Avoiding Mistakes
A trust that is designed to hold life insurance policies outside of the grantor’s estate, which can help to minimize estate taxes. The amount of premiums for the policy, if below the annual gift tax exclusion amount, will not reduce your lifetime exemption, but if the ILIT is structured correctly then when it pays out to your beneficiaries it will also not be subject to estate or gift taxes. Over time, this can transfer a considerable amount of wealth and assist in paying estate taxes without requiring your beneficiaries to sell items that may be difficult to market.
4. Minimizing Taxes
An experienced attorney with a tax focus can help you structure your estate plan in a way that minimizes your tax liability and maximizes the value of your estate.
5. Changing Laws
Estate planning laws are constantly changing, and an experienced attorney can help you stay up-to-date on these changes and adjust your estate plan accordingly. Estate planning is a profession with significant ongoing education to keep up with the many changes in tax law, Medicaid law, estate and trust obligations as they continue to evolve, investment law related to prudent investing, how special needs persons are cared for, and many other areas.
Overall, while it may be tempting to do estate planning yourself to save money, the potential risks and pitfalls of doing so can far outweigh any potential savings. An experienced estate planning attorney can provide you with the guidance and expertise you need to ensure that your estate plan is properly structured, executed, and maintained over time. And it can be a significant relief for your loved ones after you pass away, because they have an experienced professional they can rely on to help carry out your wishes, and who can help communicate to them the best ways to do so while continuing to avoid the pitfalls mentioned above.