The future of the Federal Estate Tax remains clouded.

We have been keeping our ear to the ground (actually we have been calling people and searching the Web for clues) to help our advisors predict what will happen with the Estate Tax.

As most of you know, under the 2001 Economic Growth and Tax Reconciliation Act, the Estate Tax is scheduled to be repealed. There will be no tax in 2010, and if lawmakers do nothing (please, no jokes), the Estate Tax would be back with a higher rate of 55 percent and an exemption of $1 million.

Rep. Earl Pomeroy (D – N.D.) , a senior member of the House Ways and Means Committee, was quoted on TheHill.com as saying it’s time to end the “hokey-pokey” Estate Tax code and provide continuity for planning.

When we die or become incapacitated, the strategic planning we’ve put in place to provide for loved ones goes to work. The important things will be taken care of.

Our bills continue to get paid, out investments continue to grow for future generations, and any minor children are cared for by loving guardians.
It seems like we’ve thought of everything, but some of us risk forgetting about our very dependant four-legged family members.

What Happens to Fluffy and Spot?

Some pet owners never consider who will care for their furry companions after they die or if they become disabled or seriously ill. Many assume a relative or good friend will step up to the task.

That’s an unwise assumption on the owner’s part and one I’m sure Fluffy and Spot might especially take issue with.

Every year, the Society for the Prevention of Cruelty to Animals (SPCA) takes in a number of animals whose owners passed away. Usually a family member or neighbor drops the animals off. Most apologize and say that their loved one or friend made no plans.

Once cared for and loved, these animals have no home. Many will likely be euthanized.

Even Pedigrees Won’t Protect Them

Here’s one vivid example from an SPCA brochure that illustrates the need to make better plans:

One day a group of seven pedigreed dogs were dropped off at an SPCA: two Whippets, two Irish Setters, two Toy Fox Terriers and a Chihuahua. They came with AKC papers, newspaper clippings from when they were purchased, complete family trees and a thick file of medical records.
It was obvious their owner loved and treasured them, but when she was diagnosed with cancer she did not make plans for their care after her death. There was no chance that all these dogs that were raised together would be adopted to the same home.

A little planning today can help your pets avoid a similar fate.

Making Better Plans for Pets

Here’s a checklist to help you plan for your pets:

• Identify and designate someone (and at least one alternative) to assume ownership for the pets.
• Keep in touch with this person to ensure they are still willing, especially if a pet has special needs.
• Carry a “pet alert” wallet card listing names and phone numbers of the pet’s emergency caregivers.
• Authorize payments to provide food, veterinary care, grooming, exercise, socialization, etc.
• Use language in any documents that refers to “pets” rather than names to ensure no newly added pets will be left out and there is no need to update documents.
• Name a Trust Protector to oversee a pet’s new owner and any funds set aside for the pet’s care.
• Ask an attorney how to include language that will protect the pet in estate planning documents.

There are additional considerations to make, including deciding the criteria to be used to determine when it’s time to euthanize a sick pet, who will make the difficult decision and how that pet’s remains should be disposed.

I hope this article helps you and your family. As always, if you have any concerns or a specific case you’d like to discuss, call our office.

This year, I provided you with a kind of “cheat sheet” that explained some basic Trust terminology, followed by a second article that defined an Irrevocable Life Insurance Trust (ILIT), a Qualified Terminable Interest Trust (QTIP), and an Intentionally Defective Grantor Trust (IDGT).

This is the third installment in our series on basic trust terminology.

The goal is help you better understand estate planning and asset protection and without feeling tripped up by complicated legal words or phrases.

Complex by Design, but Easy to Understand

There are many different kinds of trusts in the marketplace that can accomplish everything from shielding your  heirs from creditors and divorce to protecting a special needs child long after his parents are gone.

As complex as their functions can be, these Trusts are not difficult to understand.

Here are definitions for some of the most common Trusts you may have heard about:

1. Lifetime Protective Trust: When a client leaves an inheritance to a child outright, it can be subject to the child’s creditors, former spouses, addiction problems, inability to manage money and a Federal Estate Tax on the child’s estate.
   Leaving an inheritance in a protective trust will shield these assets from such predators. They can be designed to become dynasty trusts, which can provide protection for generations.
2. Testamentary Trust: This trust is contained in someone’s will. It comes into existence upon a Trustmaker’s death and is subject to probate proceedings.
3. Special Needs Trust: This is established to benefit a child with disabilities and who is entitled to government assistance, such as Social Security disability payments. An inheritance held within a special needs trust will not disqualify the child from receiving the assistance. Distributions are made at the discretion of the Trustee for the child’s special needs. The trust can be stand-alone or be a sub-trust of a revocable living trust.
4. Asset Protection Trust: When a Trustmaker puts assets into a revocable trust, the assets are not protected from claims by the Trustmaker’s creditors or lawsuits. Several states now permit Domestic Asset Protection Trusts (DAPT), which allow a Trustmaker to transfer property into an irrevocable trust of which he is the beneficiary.

If the statutory requirements are met, then the assets within are protected from predators, usually after a certain time period has passed.

Online Estate Planning Dictionaries

Here are some great resources for Trust term definitions:

NOLO.com’s online wills and estate planning dictionary http://tinyurl.com/cuflru.

FindLaw.com’s online estate planning and probate dictionary http://tinyurl.com/ch7t5o.

I hope this article helps you and your family. If you have suggestions for other terms you’d like to see defined, please forward them. As always, if you have a question or concern about a specific case, please contact our office.

IIf you are a business owner, then you understand the importance of earning a client’s trust. They want a sense of your integrity and experience level. They want to know your motives are not just about making a buck and that you will look out for their best interests.

When you create a Revocable Living Trust, you must choose someone to assume the role of Trustee after you die or if you were to become incapacitated. Of course, this decision is not as simple as picking a favorite uncle or your eldest child. Choosing can be difficult.

What advice can I give you to help you pick an after-death or disability Trustee?

Roles and Responsibilities of a Trustee

First, understand the fiduciary duties of the Trustee. The Trustee manages the assets in the Trust in the best interests of the beneficiaries and makes decisions regarding how assets are invested or released.

You need assurances that your chosen Trustee is a responsible person who will carry out your wishes, make sound judgments and seek out professional advice when necessary.

Typically, this role is assigned to a spouse, relative, close friend, business associate, professional advisor, a corporate fiduciary. Sometimes, co-trustees are chosen from a combination of these candidates.

You Can Keep It in the Family

A relative can be a good choice as Trustee if he or she:

1. Is competent to handle the finances and will follow the Trust’s instructions
2. Has adequate time and a genuine interest to take on the role.
3. Will avoid family conflicts by being unbiased and unemotional when making decisions.

Corporate Fiduciaries as Trustee

Some Trusts are complex or may be designed to benefit heirs for many, many years to come. Banks and trust companies are regulated by the government and can manage Trusts for decades. Their advantages include:

1. They don’t die or become incapacitated.
2. They act objectively in following a Trust’s instructions.
3. They keep good records and have estate administration, tax and investment expertise.

Considering a Professional Advisor

Sometimes a family member, friend or a trust company will not be the right choice for you. They might be unavailable, unreliable or simply too expensive.

This can make choosing a professional familiar with your plans a good choice, providing there is no conflict of interest. The Trustee could be a financial advisor, an estate planning attorney, a tax professional, or a combination of these professionals.

Regardless of who you choose, the basic qualities of a good Trustee are the same: integrity, good judgment, and objectivity.

I hope this article has helped you and your family. As always, if you have a specific concern or case, please contact our offices. We are happy to help.

One of the greatest challenges many of my clients face is how to protect their families from the rising cost of long term care – both for themselves when they reach retirement and for elderly parents.

For example, the average cost of staying in a Florida nursing home is between $5,000 to $6,500 per month, or about $60,000 to $78,000 per year. Since the average length of stay in a nursing home is three years, this quickly totals nearly a quarter million dollars. A family with a loved one in a nursing home would need about $3 million in income-producing assets to avoid drawing on the principal.

That’s why it is important to start strategizing now to determine how you plan to pay for long term care.

Three Ways to Pay

Typically, there are three ways to pay for long term care:

1. Self Pay – The patient will pay for the expenses out of pocket.
2. Long Term Care Insurance – This is essentially a wager between you and an insurance company. You pay premiums and betting that you will eventually need nursing home care. The insurance company is betting you won’t need the coverage and that it can keep all the premiums.
3. Medicaid – This government entitlement program assists low-income seniors who need nursing care. However, medical costs have risen so dramatically that even middle class patients can’t afford to pay. About seven out of ten nursing home patients receive Medicaid benefits.

Not Poor, Not Rich Either

If you are more likely to choose Option 3, then you should understand how Medicaid eligibility works. The rules are strict, but they are not impossible to meet.

Income limits are an issue, as well. This varies from state to state, but typically the limit is about $2,000 per month. In addition, Medicaid reviews an applicant’s financial records for the five years previous to their application. The government searches for uncompensated transfers – money or assets given away for free.

What if you earn $2,500 per month or $3,500, or $4,500? These amounts are not enough to pay for care but will disqualify someone from eligibility.

State by state, there are strategies that can help you with the dilemma of having too much income to qualify for Medicaid but not enough to pay for care. Sometimes these are called a Qualified Income Trust or a Miller Trust.

There are a variety of tools available for preplanning to cover the costs of long term care, and I encourage you to act now rather than wait.

I hope this article helps you and your family. As always, should you have a question or concern about a specific case, contact our office.

As the jagged ripple of our economic situation continues to influence every aspect of our lives, a recent Wall Street Journal article on Gift Annuities caught my eye.

The article, “Donors Find Gift Annuities Can Stop Giving,” reviews how the market’s turmoil has sapped some charities’ ability to pay out promised yields.

This is an issue that many anticipated coming the surface, and the article does a great job explaining just how quickly and powerfully the current economic climate is affecting charitable giving.

Charities Have Portfolios, Too

Larger charities that are capable of doing gift annuities usually have some form of endowment. Consequently, this puts them in a similar position of a commercial for-profit insurance company. The charities may feel the squeeze as their portfolios drop, but their commitment to provide stays the same.

The financial pressure on them is obvious.

Gift Annuities are typically backed by the charities. Donors make tax-deductable contributions to the charity. In exchange, they receive regular payments for the rest of their lives. Generally, about half of the initial gift remains with the charity when a donor dies.

A souring economy has prompted charities to turn to insurance companies to back up their obligations after they saw their reserve funds wither.

Are All Charities in Trouble?

No. It really depends on the charity. The National Heritage Foundation, which was featured in the WSJ article, could be an example of a charity that is clearly in trouble. It declared bankruptcy in January and stopped making payments to many donors.

Just because a charity has a heart and a loving mission that does not mean it will always be there to make regular payments to your client.

Due diligence is the critical component.

One of the reasons we often recommend clients consider a Charitable Remainder Trust (CRT) is to keep them in control of the investment and the income during life.

While a CRT can be more complicated than a Gift Annuity, we know the money will be there when you need it.

Questions to Ask Any Charity Offering Gift Annuities:

• How much of my gift will go toward charitable work?
• How will the charity invest the gifts?
• Has the charity ever had trouble making annuity payments?
• What is the state of the charity’s reserve fund?
• Does the charity “reinsure” annuity contracts with insurance companies?

I hope this article helps you and your family. As always, if you have a question or concern about a specific case, please contact our office.

On behalf of the nation’s community of lawyers, allow me to apologize for all the cryptic acronyms we’ve developed for various kinds of Trusts.

I recently provided you with a kind of “cheat sheet” that explained some basic Trust terminology. This entry is the second installment in that series.

The goal is for you to be able to talk with others about estate planning and asset protection with confidence and without feeling tripped up by complicated legal words or phrases.

The ABCs of QTIPs, ILITs & IDGTs

Lawyers have developed a multitude of trusts to accomplish everything from tax sheltering and gifting to asset protection and passing along family businesses. As complex as their functions can be, these Trusts also carry some pretty complicated names.

Here are the definitions for some of the most common Trusts you might have heard about:

1. Qualified Terminable Interest Property (QTIP) – This is a common planning tool that is often used during second marriages to prevent accidental disinheritance of children from a first marriage. A QTIP allows your surviving spouse to benefit from assets held within the Trust, such as continuing to live in your home after you die and receiving income from the assets held in the Trust. No estate taxes are assessed until after your surviving spouse dies. The QTIP postpones estate taxes, but it does not eliminate them. After the death of the surviving spouse, assets in the Trust are distributed according to the Trustmaker’s wishes (i.e. given to a your children).
2. Irrevocable Life Insurance Trust (ILIT) – In this kind of planning, a Trust owns the Trustmaker’s life insurance policy. If properly funded, the ILIT protects the policy’s proceeds from the Trustmaker’s Federal Estate Tax burden. These proceeds can be used to pay those taxes or support the beneficiary, usually a spouse or child.
3. Intentionally Defective Grantor Trust (IDGT) – This kind of Trust has a really bad name, but it’s a pretty effective way to transfer wealth by which you gift an asset’s appreciation but retain the responsibility to pay tax on its income. Many people use IDGTs as a succession planning tool for a family business. The asset, its appreciation and its accumulating income, without reduction for income taxes, will be passed along to your beneficiaries. You will pay the income tax. The advantage to this Trust is that the asset is removed from your estate and not subject to the Estate Tax. There also is creditor protection for the asset in the trust.

Online Estate Planning Dictionaries

Here are some great resources for Trust term definitions:

• NOLO.com’s online wills and estate planning dictionary.
• FindLaw.com’s online estate planning and probate dictionary.

I hope this article helps you and your family. If you have suggestions for other terms you’d like to see defined, please forward them. As always, if you have a question or concern about a specific case, please contact our office.

One of the most awkward things in life to admit is:  “I don’t know what that word means.”

This can be especially true when meeting with an attorney – a professional you are now paying to explain basic terms when you’d rather be paying him or her to accomplish important goals for your family.

Before you step into a lawyer’s office to discuss estate planning and asset protection, you want to understand core concepts so that you don’t feel like you’re starting at point A when you’d rather have reached points D or E.

That’s why I’m going to share some basic definitions for Trusts, the differing kinds, and some related terms. I hope to create this as part of a series of entries that will become a reference for you when you have basic questions about estate planning and asset protection.

Let’s start with some essential concepts:

Trustmaker – This is you. You created the Trust and brought it into existence with your signature. You placed assets into the Trust for either your benefit and/or the benefit of your loved ones. This role is sometimes called a Grantor, Settler or Trustor. To keep it simple, my advice is call yourself the Trustmaker.

Revocable Living Trust (RLT) – This is a legal document that outlines the plans the Trustmaker made for his assets and family. The Trustmaker can amend or revoke this kind of Trust.

Irrevocable Trust – When a Trustmaker dies, his RLT automatically becomes an Irrevocable Trust, meaning its directives generally cannot be changed or revoked. A Trustmaker also can create an Irrevocable Trust during his life for many purposes, including reducing taxes, for gifting or asset protection.

Trustee – This person (or persons) manages the Trust and watches over the assets within it. Typically with a RLT, the Trustmaker appoints himself as Trustee. Upon the Trustmaker’s death, a Successor Trustee steps in and assumes management of the Trust.

Beneficiary – This person receives income or assets from the Trust. During the Trustmaker’s life, he can simultaneously be Trustmaker, Trustee and Beneficiary. After his death, the Beneficiary becomes whoever the Trustmaker named as such. Usually this will be a spouse or child, but it can also be a non-relative or charitable organization.

Lifetime Protective Trust – An inheritance left outright to a child in a Will can be attacked by creditors or lost through a divorce or personal lawsuits. Parents can place assets into this kind of Trust to prevent them from being seized or later subjected to the Federal Estate Tax on the child’s estate. This inheritance can be protected for successive generations.

A quick resource for Trust term definitions is  FindLaw.com’s estate planning dictionary.

I hope this entry has helped you and your family. If there are other terms you’d like to see defined or explained, let me know. As always, if you have a question or concern about a specific case, please contact our office.

The Wall Street Journal has published an excellent analysis of the effectiveness of Intentionally Defective Grantor Trusts during an economic recession. Unusual Trusts Gain Appeal in Unusual Time – WSJ.com.

While these trusts carry risks and are often scrutinized by the IRS, estate planning lawyers are seeing an increased interest in them this year. With proper structure, an IDGT can yield better returns for heirs than other strategies.

I recently wrote about IDGTs as part of a series of wealth protection articles I published for my firm’s clients last year.

When most of you bought your first home, you probably signed a deed as a joint tenant next to your spouse’s signature. That’s the way your parents and grandparents did it, and the real estate agent told you it would to protect the surviving spouse from probate court after one of you dies.

It’s not unusual for the surviving spouse to assume that, because joint tenancy worked well to avoid probate the first time, it will work just as well twice. In thinking this way, the surviving spouse adds an adult child to the deed.

But there’s a trap in joint ownership with a child that you might not know.

Dad’s Dutiful Daughter

Here’s a hypothetical to consider:

Five years ago, Edward became a widower and sole owner of a home and three rental properties he bought with his wife. Edward has two adult daughters, Gwen and Stacy. Stacy has three minor children.

Edward is disabled. Gwen visits daily to do light housekeeping and processes his bills and the bookkeeping for the rental properties. Edward assigns her as joint tenant on deeds to his home and co-owner of the rental properties. Stacy lives in another state and isn’t involved in the upkeep of the properties.

Edward’s will indicates he wants both daughters to benefit equally from his estate and for a portion of its value to be set aside for his grandchildren. Despite this, Gwen will legally own the properties upon his death. The joint tenancy could cause Edward’s other daughter and grandchildren to be unintentionally disinherited.

Disaster Strikes, Estate Targeted

However, while Edward is still alive Gwen causes an automobile crash. She is unable to pay her medical bills and her debt goes into collections. The other driver in the crash was seriously injured and sues Gwen for damages. In the midst of this lawsuit, Gwen’s husband files for divorce, seeking half of his wife’s assets.

Any property she owns, including assets she shares with her father, is in jeopardy of being seized.

The Joint Tenancy Trap

Wanting to protect his estate, Edward decides to remove Gwen from the joint tenancy and then sell the properties. However, Gwen refuses, saying she deserves half the assets as payment for her caretaker duties. Edward must seek a court order to remove her from the deeds.

Even if Gwen had never faced debt problems, a nasty divorce or lawsuits, Edward’s final wishes for his estate might still have remained in jeopardy.

As you can see from this extreme example, the downsides of joint tenancy far outweigh any upsides. I urge you to consider these risks carefully before holding property in joint tenancy with an adult child.

I hope this information helps you and your family. As always, if you have a question or concern about a specific case or issue, contact our office.