Articles and Blogs

Long-Term Care Planning

July 17, 2017 by Attorney Pamela Greenfield

To all of our clients who are looking to cross something off their to-do list this summer, check out this interesting read from last week’s “Your Money” Section of The New York Times. It’s never too early to start the conversation about long-term care planning! This article shows us that even people who consider themselves well-prepared financially and legally can be affected by unexpected circumstances and care costs. If you are in your 50’s or beyond, make sure you have had a conversation with one of our attorneys about for any long-term care you may require and what planning steps you may want to take now to plan for the unexpected.

July 2017

Five Facts to Know about Irrevocable Trusts

July 10, 2017 by Attorney Suzanne Sayward

In my estate planning and elder law practice, many clients express curiosity about Irrevocable Trusts, wanting to know what an Irrevocable Trust is used for and how it works. Here are five things to know about Irrevocable Trusts.

1. An Irrevocable Trust has beneficiaries who have rights to the Trust property. It is a common misconception about Irrevocable Trusts that no distributions can be made from the trust. That is not true. Very often, a parent or grandparent will create an Irrevocable Trust for the benefit of a child or grandchild. The parent or grandparent may want to make a gift but does not want the beneficiary to have unlimited access to the gifted funds. This could be because the beneficiary is young, has a disability, or simply has not demonstrated good judgment in money matters in the eyes of the grantor (the person creating the trust and making the gift). The grantor may also want the gifted assets to be protected from the beneficiary’s creditors. The grantor will specify in the trust document when and for what reasons the Trustee (think “manager”) may make distributions from the trust for the beneficiary. For example, the trust might direct the Trustee to pay the beneficiary’s education or health expenses. Alternatively, the trust may permit the Trustee to use the trust funds for the benefit of the beneficiary for whatever reason the Trustee determines to be appropriate.

2. Under some circumstances, an Irrevocable Trust can be amended. As a general rule, the person who creates an Irrevocable Trust cannot amend it. However, some Irrevocable Trusts contain a provision allowing someone else to amend the trust. For example, parents who have a child with disabilities will often create an Irrevocable Trust to ensure that the assets the parents leave for the child will not cause the child to lose eligibility for government benefits. These trusts may include a provision permitting the Trustee to amend the trust if the law changes and impacts the trust, causing the child to be ineligible for such benefits.

3. The Trust creator can retain the right to change the ultimate beneficiaries. A person who creates an Irrevocable Trust can retain the power to change how the trust property will ultimately be distributed – this is called a power of appointment. For example, say Mary creates an Irrevocable Trust that states that when she dies, the trust assets will be distributed to her three children in equal shares. After the trust is created, Mary’s son Alan becomes embroiled in a nasty divorce. Mary is worried that if she dies while the divorce is ongoing, that Alan’s one-third of the trust property could end up going to Alan’s soon-to-be-ex-spouse.

Even though Mary’s trust is irrevocable and she cannot sign an amendment changing the trust terms, Mary can change how the trust assets will be distributed at her death via her Will because she reserved a power of appointment over the trust assets. A reserved power of appointment over the ultimate distribution of the trust assets allows Mary to change the distribution so that Alan’s share of Mary’s trust assets will not be reachable by Alan’s divorcing spouse.

4. The Trust creator may still be considered the owner of the assets in the Irrevocable Trust. When you transfer assets to an Irrevocable Trust, you may or may not still be the “owner” of the assets in the trust for tax purposes. Sometimes it is advantageous to be deemed to be the owner and sometimes it is not. For example, life insurance is taxable in the insured’s estate for estate tax purposes if the policy is owned by the insured. If the policy is large and the insured has a taxable estate, this means that between 10 and 40 percent of the life insurance proceeds will be lost to estate taxes. If the insurance policy is owned by an Irrevocable Life Insurance Trust, then the life insurance policy will not be deemed to be owned by the insured and the proceeds will not be taxable in the insured’s estate. On a $1 million life insurance policy, this could save between $100,000 and $400,000 of estate tax.

On the other hand, sometimes it is desirable to be deemed to be the owner of Irrevocable Trust property for tax purposes. For example, say Harry has a total estate of $850,000. He has a house that he bought for $30,000 many years ago and that is now worth $350,000 and CDs totaling $500,000. Harry does not need to be concerned about estate taxes because his total estate is valued at less than $1 million and there is no Massachusetts estate tax on estates of less than $1 million (the federal threshold is $5,490,000). However, Harry should be concerned about capital gain tax. If he is not the “owner” of his house for tax purposes when he passes away, then when Harry dies there will be capital gain tax payable on the difference between Harry’s tax basis in the property ($30,000) and the sale price ($350,000). The capital gain tax on $320,000 ($350,000 — $30,000) would be about $64,000.

If the Irrevocable Trust included provisions that caused Harry to be deemed to be the owner for tax purposes, then when the house is sold following Harry’s death, there would be no capital gain tax payable because the house would receive a “stepped-up” basis at Harry’s death. This means the tax basis in the house is equal to the fair market value at Harry’s death.

5. The person who creates the Irrevocable Trust may be the beneficiary. Clients often assume that if they transfer assets to an Irrevocable Trust they give up all rights to the assets. This is not necessarily true. A very common Irrevocable Trust used for long-term care planning is an Irrevocable Income Only Trust. In this type of trust, the grantor (the person creating the trust) receives the income generated by the assets in the trust. For example, let’s say that Jane owns a three-family rental property and is worried that if she needs long-term nursing home care, the property will be consumed by the costs of that care. She doesn’t want to give the property to her children because she is worried about her children’s creditors (divorcing spouse, bankruptcy, tax lien, etc.). In addition, Jane wants to keep receiving the rental income. Jane can transfer the property to an Irrevocable Income Only Trust and continue to receive the net rental income. After the five-year ineligibility period for gratuitous transfers has passed, the property in the Irrevocable Trust would not be deemed to be owned by Jane in the event she applies for Medicaid (MassHealth) benefits to pay for her long-term care under the current law.

These are just five facts to know about Irrevocable Trusts. If you want to know more about whether an Irrevocable Trust is right for your situation, contact an experienced estate planning to discuss your goals.

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.

July 2017

SJC Issues Favorable Decision for Irrevocable Income Only Trusts

June 1, 2017 by Attorney Pamela Greenfield

On May 30, 2017, the Supreme Judicial Court vacated the judgments of the Worcester County Superior Court companion cases, Daley and Nadeau, concluding that the right to use and occupy a residence does not make the assets contained within an irrevocable income only trust countable for MassHealth purposes. The cases, which were argued before the SJC on January 5, 2017, will undoubtedly have a significant impact on the landscape of asset protection planning for long-term care purposes as the previously unsettled case law made it difficult for seniors to effectively plan for future nursing home care costs. Irrevocable income only trusts, which were historically time-tested tools for protecting a nursing home resident’s home from a MassHealth lien, have been at the epicenter of elder law litigation since 2009. With a favorable SJC decision on these cases, elder law attorneys and their clients can breathe a sigh of relief regarding previously created trusts which allow the grantor to continue to live in the home transferred into the irrevocable trust. Going forward, elder law attorneys can feel more confident about advising their clients on the use of these protective instruments.

Click here to read the decision:

http://www.mass.gov/courts/docs/sjc/reporter-of-decisions/new-opinions/12200.pdf

Click here to read previous posts on this issue:

https://ssbllc.com/blog/masshealths-treatment-of-irrevocable-income-only-trusts-as-murky-as-ever/

https://ssbllc.com/blog/irrevocable-trust-update-favorable-decision-from-the-massachusetts-appeals-court-is-a-battle-won-but-not-the-end-of-the-war/

https://ssbllc.com/blog/time-for-the-big-leagues-irrevocable-trusts-get-called-up-to-the-sjc/

https://ssbllc.com/blog/options-to-protect-the-primary-residence-from-long-term-care-costs/

If you have specific questions about protecting your home from long-term care costs, please call our office at 781/461-1020 and schedule an appointment with one of our attorneys.

June 2017

Five Ways in which a Trust is Better than a Will

May 8, 2017 by Attorney Suzanne Sayward

Sue_144px Wills and Trusts are both estate planning documents used to pass assets on to beneficiaries at death. However, there are distinct advantages to using a Trust over a Will. Here are five ways in which a Trust is better than a Will to pass your estate to your beneficiaries.

A Trust can be used to Avoid Probate – a Will cannot. Probate is the process of changing the title on assets when someone passes away. Assets that are owned in a deceased person’s individual name and for which there is no named beneficiary are no longer accessible once the owner of the asset has died. In order for family members to gain access to accounts or other assets in the deceased’s individual name, they must file a petition with the probate court and wait for the court to approve the Will and appoint the Personal Representative. This can be a long and costly process during which bills cannot be paid and assets cannot be managed. A Trust is an excellent probate avoidance tool because assets that are owned in the name of a Trust are immediately accessible to the trust-maker’s designated successor.

A Trust can provide Creditor Protection for the Inheritance you Leave to Beneficiaries – a Will cannot. Many people worry that the inheritance they leave to their children will be lost to their children’s creditors such as a divorcing spouse, unpaid credit card bills, a bankruptcy, a business loss, or a lawsuit. Sadly, this is often the case when assets are distributed to beneficiaries via a Will. A Trust allows the maker to safeguard an inheritance from the reach of the beneficiaries’ creditors by keeping the assets out of the name of the beneficiary. Ownership of the assets remains in the Trust. The beneficiary will have access to the assets in accordance with the directions you leave in your Trust. You may also allow your beneficiary to serve as Trustee, allowing the beneficiary to manage her own inheritance. By leaving assets to your beneficiaries via a Trust rather than outright via your Will, you can ensure that the assets you worked so hard for will be available to your children and future generations.

A Trust can Protect Governmental Benefits for a Person with Disabilities – a Will cannot. If you have a child, grandchild or other beneficiary with disabilities, then a Trust is a must. If you leave assets to a person who receives needs-based governmental benefits via your Will, it will place your beneficiary in the difficult position of either losing those benefits, or transferring the inheritance into a Trust of which the state must be the beneficiary at the beneficiary’s death. Unless the inheritance you are leaving is so significant that the monetary and medical benefits available to the person through programs such as Social Security and Medicaid are no longer important, then making sure that those governmental benefits continue to be available is vital. Leaving assets to a person with disabilities via a Trust is the best way to ensure those governmental benefits are preserved and that the inheritance you leave will be available to pay for expenses that are not covered by these governmental benefits, which while vital to many, are limited in their scope.

Trusts can Reduce Estate Taxes – a Traditional Will cannot. Many married couples have so-called “I-love-you” Wills, which leave all assets outright to the surviving spouse upon the first death. If you have an estate of more than $1,000,000, then using “I-love-you” Wills means that money you think you are leaving to your beneficiaries will in fact be going to the Commonwealth of Massachusetts in the form of estate tax payable at the surviving spouse’s death. If you would prefer that your assets pass to your family, create Trusts to reduce estate taxes. Estate tax planning via Trusts for married couples is standard planning and permissible under both state and federal tax laws.

A Trust can Administer Assets for Minor Beneficiaries without Court Intervention – a Will cannot. Leaving money directly to a minor creates an administrative nightmare because the law provides that a minor does not have the legal capacity to receive assets. The parent of the minor also does not have the ability to act as the child’s legal representative until the court says so. As such, if you die with a Will that leaves money to minor beneficiaries, the court will need to appoint a Conservator to receive that inheritance for your children. The Conservator will be required to report annually to the court and the court will appoint an overseer (guardian ad litem) to make sure the Conservator is doing his or her job for your minor beneficiaries. This means huge costs and long delays in administering funds for minors. It also means that when the minor turns 18, he or she will be entitled to receive all of those assets and will be free to do with them as he or she wishes (think fast cars, spring break, and lots of shopping). Creating a Trust to receive assets passing to a minor, or even to a young adult beneficiary, is the best way to ensure that the court is not involved in the process, that the person you want to manage assets for the beneficiary is able to do so, and that the beneficiary can use the assets only for purposes you decide are important and/or at ages that you dictate.

These are just five ways in which a Trust is superior to a Will. If you want to know more about whether a Trust is right for your situation, contact an experienced estate planning attorney to discuss your goals.

Attorney Suzanne R. Sayward is certified as an Elder Law Attorney by the National Elder Law Foundation. She is a partner with the Dedham firm of Samuel, Sayward & Baler LLC. 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.

May 2017

Who Should You Name as the Beneficiary of Your IRA?

April 18, 2017 by Attorney Suzanne Sayward

Sue_144px For many people, their IRA (or 401K) is their largest asset, other than perhaps their home, and making sure that is protected for their beneficiaries is important. Here are some things to consider when naming beneficiaries.

Name your spouse. As a general rule of thumb, if you are married you should name your spouse as the beneficiary of your qualified retirement accounts. The tax laws include favorable provisions for treatment of IRAs which pass to a surviving spouse. For example, a surviving spouse can rollover the IRA and make it her own which will allow her to take withdrawals over her life expectancy. Situations where it may not be appropriate to name your spouse include:
- A second marriage where the IRA owner wants to make sure the balance of his IRA passes to his children at the death of the spouse
- The spouse is not able to manage assets
- The spouse is likely to need long-term care

Consider the Stretch Out. The tax laws presently permit a designated beneficiary of an IRA to take withdrawals from the IRA over the life-expectancy of the beneficiary. This is advantageous because the amount that does not need to be withdrawn grows tax-free. Here’s an example. Mom has a $600,000 IRA. She names her 60-year old son (Sam) and her 30-year old granddaughter (Gina) as the equal beneficiaries of the IRA. According to the IRS, Sam has a life expectancy of 25.2 years and Gina has a life expectancy of 53.3 years. Sam would be required to withdraw about 4% of his share ($11,900), the first year, while Gina could take out less than 2% (about $5,600). Remember, the funds which do not need to be withdrawn continue to grow income tax free.

Consider the Beneficiary. While the tax laws permit a beneficiary of an IRA to take withdrawals based on the beneficiary’s age, the beneficiary is not required to do so. A beneficiary of an inherited IRA may withdraw as much as he wants, at any age, without penalty. However, the withdrawals are 100% taxable income to the recipient which could result in a large tax liability and a significantly reduced balance. For example, if the beneficiary of a $500,000 IRA takes all of the money out in one year, the income tax liability on that liquidation could be close to $200,000. Further, the interest and dividends earned on the remaining balance of $300,000 will be reduced by income taxes every year. If you have a large IRA that you plan to leave to beneficiaries whom you believe will ‘take the money and run’ you may want to re-consider your options.

Never name a minor. Knowing that an IRA beneficiary can stretch out withdrawals based on life expectancy leads some people to name minor children or grandchildren as beneficiaries. Don’t do it!! When a minor is the beneficiary of an IRA the only way to gain access to the IRA is to have someone, usually a parent, petition the probate court to be appointed as the child’s conservator. This is an expensive and time consuming process. But it gets worse! Once appointed, the conservator will be required to file annual accountings with the probate court reporting on the activity in the account. And even worse! In Massachusetts the courts require that the conservator (or her attorney) appear in court once per year to present the annual accounting to a judge for approval. The costs involved could easily run many thousands of dollars.

Consider naming a Trust as the beneficiary but be careful. Naming a Trust as the beneficiary of an IRA addresses many of the issues raised above. A Trust can:
- Allow minor children to be the beneficiaries without the need for a conservatorship.
- Ensure that the funds are withdrawn over the lifetime of the beneficiary rather than all at once.
- Provide creditor protection for inherited IRAs.

The IRS has very strict rules for Trusts which receive qualified retirement funds. If the Trust terms do not comply with those requirements it will not qualify as a designated beneficiary. The consequence is that the payout cannot be made over the life expectancy of the trust beneficiary and instead, all of the funds will have to be paid out of the IRA within five years of the IRA owner’s death and the tax paid.

Planning for the ultimate distribution of a large IRA is an important aspect of planning your estate. This is money you worked all your life to accumulate. Take the time to consult with a knowledgeable estate planning attorney who can help you understand your options and make the best choice for your family.

April 2017

Five Ways to Make Sure Health Care Wishes are Carried Out

April 1, 2017 by Attorney Maria Baler

Maria_144px Estate planning attorneys have the opportunity to speak to people at all stages of life. Some of the most profound conversations we have are with clients who have serious illnesses or are close to death. They often have great clarity about life and what is important. Many of them also have definite thoughts about how they wish to be cared for at the end of their lives, and care deeply that their wishes are heard and carried out.

We all have the right to make our wishes known about the type of end-of-life care we want. Making your wishes known while you are well is important as an accident or an unexpected illness may cause you to lose the ability to express your care preferences. This April marks the 10^th anniversary of National Healthcare Decisions Day. Here are five ways you can ensure your care preferences are clearly documented and honored:

Create a Health Care Proxy. If you are over the age of 18, make sure you have signed a Health Care Proxy that designates a person you choose (your Health Care Agent) to make health care decisions for you if you become unable to make or communicate your own health care decisions. Give your doctor and your Health Care Agent a copy of your Proxy. Then, have a conversation with your Health Care Agent about your feelings about health care and the type of care you would want in certain situations. See No. 5 below for some resources to get you started. If you are hospitalized, remember to bring your Health Care Proxy with you to the hospital. This will ensure you are not asked to sign another Proxy that will revoke the Proxy you currently have in place and that may not be as comprehensive.

Assemble a Care Committee. For those who have very definite ideas about where and how they wish to be cared for, consider assembling a Care Committee to ensure your care wishes will be carried out, particularly if you have a chronic illness. This group may consist of your Health Care Agent, a professional care manager, your attorney, your physician, the person you have named to make financial decisions for you if you are incapacitated, and perhaps your financial advisor. Choose the participants, have discussions with them about your care preferences, and develop a plan that is financially realistic. Have a discussion with your Care Committee periodically to modify the plan as your needs and wishes change. Think of your Care Committee as a team that can help your Health Care Agent carry out your wishes as necessary.

Sign a Living Will. There are many advance directives that can be used by clients to express care preferences. A Living Will typically expresses a general preference that no extraordinary measures be used at the end of life. In Massachusetts, Living Wills are not legally binding, and your physicians will not act based upon your Living Will (only at the direction of your Health Care Agent). However, a Living Will can serve as evidence of your wishes that will guide your Health Care Agent in making decisions about end-of-life care.

Advance Medical Directives. A Medical Directive can be used to express care preferences in specific medical situations. Do Not Resuscitate or Do Not Intubate orders are medical orders that a doctor will put in place at a patient or Health Care Agent’s direction in appropriate circumstances. In Massachusetts, a MOLST (Medical Orders for Life Sustaining Treatment) form is a useful document created by patient and doctor together that includes medical orders for care preferences, including resuscitation, ventilation, intubation, dialysis, artificial nutrition and hydration, and whether or not you should be transferred to a hospital. This initiative is known as POLST (Physician Orders for Life Sustaining Treatment) on a national level.

Use the Available Tools. There are many Massachusetts and national organizations working to increase awareness of the value of advance care planning and to encourage people to express their care preferences. The Massachusetts Coalition for Serious Illness Care and related organizations have designated April as Massachusetts Healthcare Decisions Month, and has tools and resources on its website. Honoring Choices is another Massachusetts organization bringing information about health care decision-making and outreach to many local communities, as well as helping people to create a Health Care Proxy and express their health care preferences. The Conversation Project is dedicated to making it easier for people to talk about their wishes for end-of-life care. Both Honoring Choices and The Conversation Project have starter kits on their websites that make it easy to get started.

As part of Healthcare Decisions Month, several Boston-area organizations will also be hosting Before I Die, a global public art project that invites people to share their personal aspirations in public, reflect on what’s most important to them in life and how they contemplate death. Use whatever tool or inspiration works for you, and find a way to express your wishes about end-of-life care to the people who will make those decisions for you.

April 2017

Your Real Estate and Owner’s Title Insurance

March 15, 2017 by Attorney Abigail V. Poole

Abby_144px The most valuable asset many clients own is their primary residence and/or vacation home. One “tool” in the estate planner’s toolbox to effectively avoid the time-consuming and expensive probate process at an owner’s death is to transfer or “convey” real estate into a Trust. However, such a conveyance should be completed with caution to ensure that you are protected in the event a problem with the property’s title is encountered in the future.

One form of protection is title insurance. Title insurance provides coverage in the event title defects, such as a fraudulent conveyance or an unknown easement or lien, are discovered after you have purchased your property. These title defects typically come to light when you are in the process of selling or refinancing the property. If you obtained a mortgage when you purchased your property, it is likely that “lender’s title insurance” was purchased at the time on behalf of the mortgage company. As the buyer of the property you had the option to purchase “owner’s title insurance.” Owner’s title insurance is purchased by paying a one-time premium as part of the closing costs. If purchased, you should have received an owner’s title insurance policy. The purpose of title insurance is to provide you, as opposed to the mortgage company, with financial coverage if title defects are later discovered.

Some detective work on your part may be necessary to determine if: (1) you obtained owner’s title insurance when you purchased your property, and (2) if your coverage will continue after the property is conveyed into Trust, depending on the terms of the policy.

If you have an owner’s title insurance policy, the company should be contacted to confirm in writing that coverage will continue upon conveyance. If coverage will not continue under the terms of the policy, an endorsement (or amendment) to the policy should be obtained that will add the Trust to which the property is being conveyed as an additional “insured” on the title policy, thereby continuing the title insurance coverage after the conveyance. Title insurance companies sometimes charge fees of $100-$300 to issue an endorsement to the policy.

Be sure to take the time to determine if you have owner’s title insurance, and if your coverage will continue prior to conveying your property into Trust – it will be well worth the time and effort involved. Ensuring your coverage will not be inadvertently terminated will save you, the Trustee of your Trust, or the Personal Representative of your estate significant aggravation and expense when the property is sold in the future in the event a title defect is discovered.

March 2017

Five Facts to Know about Life Estates

March 7, 2017 by Attorney Suzanne Sayward

Sue_144px Using a life estate deed as a way to protect real estate from long-term care costs has been a common planning technique for decades. A life estate deed typically works like this: parents sign a deed transferring their home to their children for nominal consideration (i.e. $1.00). The deed includes a provision stating that the parents “retain the right to use and occupy the property during their lifetimes,” a so-called “life estate” in the property. Upon the death of the parents, the life estate ceases to exist and the children own the property free and clear of any lien for long-term care costs.

There are some downsides to using a life estate deed which can be eliminated if the parent conveys the property to an irrevocable trust. This has made irrevocable trust planning very popular in the last several years. However, the recent attacks on the use of irrevocable trusts by MassHealth, the agency that administers the Medicaid program in Massachusetts, have caused elder law attorneys to revisit the use of the simple life estate deed.

Here are five consequences to be aware of when considering the transfer of your real estate with a retained life estate.

Five-year ineligibility period: The transfer is a gift under the Medicaid (MassHealth) rules and the parents will be ineligible for Medicaid benefits to pay for their long-term nursing home care costs for five years following the transfer. Under the current Medicaid rules, once the five-year ineligibility period has passed, the parents would be eligible for Medicaid benefits to pay for the cost of their care, assuming they otherwise meet the eligibility criteria.

The property will be subject to a lien for the life estate Medicaid benefits. It is important to understand that if the parent receives Medicaid benefits, whether in a nursing home or in the community, the Commonwealth will place a lien against the parent’s property. However, if the parent owns a life estate in the property, the Medicaid rules prevent the state from forcing the parent/life estate holder to sell the property during the parent’s lifetime. Upon the death of a Medicaid beneficiary, the state can collect the amount it paid out on behalf of the person from his probate estate. A person’s probate estate consists of assets in his individual name. Because the retained life estate disappears upon the death of the parent, it is not a probate asset and therefore the state cannot enforce its lien against the property under current law. It is important to understand that if the property is sold during the parent’s lifetime, the lien will have to be satisfied from the parent’s share of the sale proceeds.

Children’s creditors. If you transfer your home to your children, they will be the owners of the property even if you retain a life estate. That means your children’s creditors may be able to place a lien against your home for your children’s debts. However, when the parents have retained a life estate, the creditors of a child cannot force the sale of the property to satisfy a child’s debt. That is because a child’s creditors are not in any better position than the child. Since the child could not sell the property and force the parents out of the property, neither could a child’s creditor. The creditor will have to wait to enforce its claim until after the parents die. Having said that, parents need to know that a recent bankruptcy case resulted in the court ordering the sale of property owned by the debtor child, in which the still-living parent had a life estate. When the house was sold, the father received his share of the proceeds. However, since the value of a life estate is calculated based on the life expectancy of the life estate holder at the time of the sale, the value of the parent’s life estate decreases with every birthday. The end result of this case was that dad received a little bit of money when the house was sold, but had no place to live.

Stepped up basis/estate tax inclusion. A big advantage of retaining a life estate in property that is transferred: The full value of the property is taxable in the estate of the life estate holder at death for estate tax purposes. While it may seem counterintuitive to want assets to be included in the taxable estate, for Massachusetts estates valued at $1 million or less, this is actually a benefit. Under current law, assets that are included in a taxable estate receive a “stepped-up” basis at the owner’s death equal to the fair market value of the asset. For example, if I bought my house for $50,000 many years ago and it is now worth $300,000, upon the sale of the house during my lifetime there would be capital gain of $250,000 ($300,000 – $50,000). I would not have to pay any capital gain tax because there is a rule in the tax law that allows a person who has owned and occupied a home for two out of the five years preceding the sale to exclude $250,000 of capital gain on the sale. If I gave my house to my children outright, without retaining a life estate, when my children sell the property they will be have to pay capital gain tax on $250,000 because the home is not their primary residence. But, if I retain a life estate in my home when I transfer it to my children, my house will be included in my taxable estate at my death and my children’s tax basis in the property will be the then current fair market value of the property. So if the property is worth $300,000 at my death, and my children sell it for $300,000, there will not be any gain, so no tax will be due. In this example, that means about $50,000 of tax savings.

Capital gain exclusion on sale of primary residence. As a general rule, you should not transfer your home to your children if you are planning on selling the property. However, times change and sometimes property that was transferred to children needs to be sold during the parents’ lifetimes. It is important to understand that if this happens, there may be capital gain tax on the sale that would have been avoided if no transfer of the property to the children had been made. That is because the tax laws permit an individual to exclude up to $250,000 of capital gain on the sale of her primary residence, provided she has owned and occupied the property for two out of the five years preceding the sale. For a married couple, the exclusion is $500,000. However, if your children own an interest in your home and if they do not occupy the home as their principal residence, they will not be able to exclude the gain on their portion of the sale.

Another consequence to be aware of is that if the property is sold during the parent’s lifetime, the parent will be entitled to some (not all) of the proceeds. This is not necessarily a bad result, but if the parent is in a nursing home or about to go into a nursing home when the property is sold, a portion of the sale proceeds will be countable assets of the parent. The value of the parent’s life estate interest is calculated based on the age of the life estate holder and an interest rate mandated by the IRS. For example, in March 2017 the current value of a life estate held by a parent who is 80 years old is about 17.4% of the value of the property. If the property is sold for $400,000, the parent will receive 17.4% of the proceeds, or $69,600. If the parent is residing in a nursing home with Medicaid paying for the cost of care, then the receipt of $69,600 from the sale of his former home will cause him to become ineligible for Medicaid until those proceeds are spent down.

While transferring property with a retained life estate can be an excellent long-term care planning tool, there are significant consequences that property owners should understand before undertaking this planning. If you are wondering whether this type of planning would be good for your family, consult with an experienced elder law attorney to make sure you do not end up facing one or more unexpected outcomes.

March 2017

Options to Protect the Primary Residence from Long-Term Care Costs

February 15, 2017 by Attorney Pamela Greenfield

Pam_144px If you are following along with the irrevocable trust saga, you know that on January 5, 2017, the Supreme Judicial Court heard oral argument on two irrevocable income only trusts where the MassHealth applicant placed his or her primary residence into the trust prior to applying for nursing home benefits. It was incredible to watch the attorneys argue their opposing sides before the panel of elite judges at One Pemberton Square. One of my clients lovingly called the hearing “the Superbowl of Elder Law” (but I think he was making fun of me). With the fate of irrevocable trusts literally hanging in the balance, what other options do we as elder law attorneys have to advise our clients on how to protect their primary residence from the placement and collection of a MassHealth lien? Since the home is often our clients’ most valuable asset, preserving the home from a MassHealth lien often feels like the million dollar question. Here are some options:

Consider purchasing long-term care insurance before it’s too late and too expensive. Under the MassHealth regulations, a policy which meets minimum requirements of $125/ day of nursing home care coverage for a period of two years will prohibit MassHealth from placing a lien on the applicant’s non-countable Massachusetts primary residence. An added benefit—often these policies are absolutely crucial in allowing seniors to age in place with private-duty home care services or pay for assisted living care where there are minimal public benefits available.
Consider the pros and cons of a life estate deed. The actual concept of a life estate deed is simple to explain and even simpler to execute, however the devil lies in the details which is why it is critical to be fully versed in all of the ramifications of executing a deed with a retained life estate before giving away a substantial interest in your most important asset. In a typical life estate deed arrangement, the grantor-parent transfers the property to the children but reserves the right to reside in the property for his or her lifetime. MassHealth may still place a lien on the home should the life tenant ever apply for MassHealth benefits, however, MassHealth releases its claim at the death of the parent and the lien is extinguished. The end result is that the property passes to the children without any encumbrance or need to go through probate. However, some unintended consequences of life estate deeds may include capital gains tax issues, difficulty in mortgaging/refinancing the property, creditor claims and even uncooperative or self-interested children (and spouses of children). While life estate deeds may seem like a terrific substitute for irrevocable income only trusts, there are many issues to consider before jumping into this option.
Consider an outright transfer of the property. Sometimes a simple “get all of the assets out of mom’s name and into the kids’ name” approach seems tempting. However, this is usually not the best strategy for our clients. The above-mentioned issues with life estate deeds are present here in an even worse way. There are capital gains tax consequences, potential creditor issues, and of course, the ever present evil child syndrome. But perhaps the most important concern is more of an intangible one—financial independence and autonomy of our clients. It is important to remember that actions taken to “protect the primary residence” do not benefit the parent directly. Such actions allow parents to take some comfort in knowing that if they ever need nursing home care something has been done to increase the chance that some inheritance will pass to their children. However, our focus had always been on helping our clients achieve their most important goals which often means staying in their homes. With many more options for care coming to the marketplace each day—most of which are not covered by MassHealth—giving away assets to achieve Medicaid eligibility to pay for long-term care is often not in keeping with the goal of remaining at home. Don’t get me wrong, as elder law attorneys, it pains us to see elders spend their life savings on nursing home care when there were viable options for preserving assets. However, giving away assets to achieve future Medicaid eligibility is sometimes contrary to our clients’ goals for themselves and we focus first on those goals before recommending a plan that deprives our clients of their interest in the primary residence.

If you have specific questions about protecting your home from long-term care costs, please call me at 781/461-1020.

February 2017

Five Reasons to Call an Estate Planning Attorney

February 1, 2017 by Attorney Maria Baler

Maria_144px Estate planning attorneys work with clients every day to ensure their wishes are carried out in the event of illness or death. While it’s not pleasant to think about, planning ahead will make it easier for your loved ones during difficult times. An estate planning attorney can help you create documents (such as a Will and/or Trust) that provide instructions about distribution of your assets at death, minimize probate expenses and estate taxes, name guardians for minor children, and manage inherited assets for your beneficiaries. An estate planning attorney can also help you plan for incapacity by creating powers of attorney and health care documents that allow individuals you choose to make financial and health care decisions on your behalf.

Some estate planning firms advise clients on elder law matters — how to plan for long-term care (both pre-planning and addressing a crisis situation when the need for care is imminent), how to pay for that care (including whether you are eligible for public benefits such as Medicaid benefits), and whether advance planning is appropriate.

Here are five reasons you should call an estate planning attorney.

You are a parent. If you are the parent of a minor child (defined as under the age of 18 in Massachusetts) you should have a Will that names a legal guardian for your child. Parents of minor children and young adults should also consider creating a Trust that will hold and manage assets for your child’s benefit, to ensure your child does not receive control of inherited assets at age 18, and to designate a trusted individual to manage those assets for your child until your child reaches an age that you deem is appropriate. If an adult child has substance abuse, gambling, or creditor problems, or is in a bad marriage, it may be appropriate to hold assets in trust to protect the assets and ensure they will be available for the child’s benefit in the future.

You (or your spouse) receive a serious medical diagnosis. If you have a serious illness, sitting down with your estate planning attorney may not be at the top of your list. However, it is important to plan while you are competent to make decisions about your future. If you or your spouse need long-term care or anticipate the need for care in the future because of physical or mental decline, an estate planning attorney with knowledge of elder law can advise you about estate plan documents you should have in place and about your options for care and payment. Make it a priority to become educated about your options and work with an attorney to make a plan for the future.

You are getting married or divorced. Marriage and divorce both impact your existing estate plan and necessitate changes to your documents. If you do not have an estate plan in place, these events provide a good reason to plan. An attorney can also help you review asset ownership and beneficiary designations to ensure a new (or ex-) spouse is provided for (or not) as appropriate. Prior to marriage, an estate planning attorney will help you determine whether a prenuptial agreement is appropriate. These agreements can protect assets owned prior to marriage (such as an interest in a family business or vacation home) or assets that are inherited during the marriage in the event of death or divorce. Prenuptial agreements are also important in second marriages to protect assets for children from a prior marriage.

You have a spouse, child, grandchild or other beneficiary who has a disability. If you wish to leave assets to a disabled individual you need to take special care with your estate plan documents. Leaving an inheritance to a disabled beneficiary may cause a loss of benefits, including medical benefits. Leaving an inheritance in a properly drafted Trust can preserve eligibility for benefits and protect assets for the benefit of the disabled beneficiary.

You have not reviewed your plan in a while. If you have a Will, Trust or other estate plan documents, it is important to keep your plan current. If it has been more than five years since you have met with an attorney to review your plan, take the time to do so. A few simple amendments to your documents may be all you need to bring your plan up to date. Even if more significant changes are needed, make those changes to ensure your plan will work as you intend, save time and expense, and minimize taxes — both for your benefit and for the beneficiaries of your estate.

You can find more information about these topics, including many articles on estate planning and elder law at www.ssbllc.com.

Attorney Maria Baler is an estate planning and elder law attorney and a partner with the Dedham law firm of Samuel, Sayward & Baler LLC. She is also a former director of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA). For more information, visit www.ssbllc.com or call (781) 461-1020. 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.