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5 Questions about Estate Planning – A Quiz

With the abundance of information available to everyone today, including so-called ‘fake news’, it is not surprising that my clients sometimes have misconceptions about estate taxes, trusts, probate, and other estate and elder law matters.  In the spirit of the back-to-school season, here is a quiz to test your estate planning knowledge.

Q. True or False. You only need to worry about paying estate tax if your estate is worth more than $5 million.

A. False. The estate tax, sometimes referred to as the death tax, is a transfer tax.  That means that the value of the assets a person owns at death and passes on to his beneficiaries is subject to a tax.  There is a federal estate tax and many states impose their own estate tax.  To mitigate the harshness of the tax, the law permits each person to pass on a certain amount free of the estate tax (the exemption amount).  The federal estate tax exemption is $5,490,000 per person in 2017.  Given this very high amount, very few people need to be concerned about the federal estate tax.

However, Massachusetts has its own estate tax which allows for a $1 million per person exemption.  A person’s ‘estate’ for estate tax purposes includes real estate, bank accounts, investments, retirement accounts, life insurance, and all other assets. Given the high value of real estate in Massachusetts and the recent robust stock market, many people in Massachusetts have estates valued in excess of $1 million.  It is especially important for married couples to be aware of the value of their estates because they will lose one of those $1 million ‘freebies’ if they do not do any planning.  If that happens, their beneficiaries can end up paying the Commonwealth $100,000 or more of tax that could have been avoided.

Q. True or False. If you have a trust, the inheritance you leave your child will be protected from the reach of a divorcing spouse.

A. True, provided your trust contains the right provisions. Many of my clients worry that the inheritance they leave to their children will be lost if their child gets divorced following the parents’ deaths.  This is a valid concern, especially in Massachusetts where an inheritance is considered marital property unless there is a prenuptial agreement that excludes it.  Leaving a child’s inheritance to her by way of a trust is an excellent way to protect that inheritance from the reach of your child’s creditors including a divorcing spouse, lawsuit, bankruptcy, etc. provided that the trust provides for a continuing lifetime share for your child.  In these types of trusts, a child’s share stays in the name of the trust for the benefit of the child during her lifetime.  Your trust may allow your child to serve as the trustee (manager) of her share, or it may appoint someone else to manage the share for your child.  However, if the terms of your trust direct that the assets be distributed out of the trust to your child following your death, then you are not providing any creditor protection for that inheritance because those assets are now owned in your child’s individual name.   Assets owned in your child’s individual name are vulnerable to the reach of your child’s creditors.  You can incorporate asset protection for your child’s inheritance in your trust, thereby achieving three goals:  probate avoidance, estate tax savings (for married couples), and creditor protection for your child’s inheritance.

Q. True or False. If your spouse is in a nursing home, the state will place a lien on your house.

A. False, maybe. If a person over the age of 55 receives Medicaid (MassHealth) benefits, whether in the community or in a nursing home, the state may recover the cost of those benefits from the Medicaid recipient or his estate under certain circumstances.  If a Medicaid recipient owns an interest in real estate, whether in his individual name, as a co-owner with another person, or as a life estate holder, the state will place a lien against the property to secure its right to recover the amount of the Medicaid benefits it paid if the property is sold during the Medicaid recipient’s lifetime. The state will also file a claim against the estate of a Medicaid recipient to recover the amount of Medicaid benefits paid following the recipient’s death.

However, state and federal regulations provide that if the Medicaid recipient’s spouse is living in the home, then the state may not place a lien against the home. Therefore, if one spouse is receiving Medicaid, the state cannot file a lien on the property so long as the other spouse is living in the home.  But if the non-Medicaid recipient spouse dies first, the property is then at risk for a Medicaid lien.  Because of this, it is very important for individuals who have a spouse facing long term care to meet with an elder law attorney to ensure that their assets are properly titled to avoid a lien or post-death recovery.

Q. True or False. If you have a trust you don’t need a durable Power of Attorney.

A. False. A trust is often created for probate avoidance purposes. The way this works is that during the trust-maker’s lifetime, she re-titles her assets such as real estate, bank accounts and investment accounts into the name of her trust.  For example, Mary Jones’ bank account would no longer be in Mary’s individual name; instead the name on her account would be, ‘Mary Jones, Trustee of the Mary Jones Trust.’  If Mary becomes incapacitated, then the person she named as the successor trustee of her trust would be able to manage the trust assets for Mary’s benefit.  However, retirement assets (IRAs, 401Ks, 403bs, etc.), for example, cannot be retitled in the name of a trust; they must be owned in the individual’s name.  The Trustee of Mary’s trust will not have any legal authority over the retirement accounts.  As such, Mary needs to create a Durable Power of Attorney in which she appoints someone to manage non-trust assets for her should she become incapacitated.  In addition to dealing with non-trust assets, the person appointed in the Power of Attorney would also undertake tasks such as filing Mary’s income tax returns, applying for long-term care benefits, dealing with insurance matters, etc.

Q. True or False. Probate is not necessary if you have a Will.

A. False. Whether or not an asset needs to be probated is solely a function of how that asset is owned by the deceased.   For example, if I have a bank account in my name alone when I die, the bank will not simply give the money to my husband or my children.  The Personal Representative (formerly called Executor) of my estate is the only person who has the authority to access the funds in the account, or any other asset I may own in my individual name and which does not have a beneficiary designated to receive that asset at my death.  Further, it is not sufficient for the person who I have named as my Personal Representative in my Will to show up at the bank with my Will in hand and demand access to my account.  My Personal Representative must file for probate and obtain Letters of Authority from the court which will prove that he has the authority to access the account.

If you answered all of the questions correctly, does that mean I recommend that you create your own estate plan?  Of course not!  In my experience, everyone’s situation is different and has its own unique ‘twists’ which are usually not adequately addressed by ‘canned’ estate plan documents that can be found on the internet.   If you have questions about probate, Wills, Trusts or estate tax planning, call us to schedule an appointment and you can ‘quiz’ us!

Attorney Suzanne R. Sayward is a partner with the Dedham firm of Samuel, Sayward & Baler LLC which focuses on advising its clients in the areas of estate planning, estate settlement and elder law matters. She is certified as an Elder Law Attorney by the National Elder Law Foundation, a private organization whose standards for certification are not regulated by the Commonwealth of Massachusetts.  This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit www.ssbllc.com or call 781/461-1020. 

September 2017

© 2017 Samuel, Sayward & Baler LLC