Baby boomers are at the crest of retirement. Born just after World War II, they are between 55 and 70 years old today. The Insured Retirement Institute’s annual study, “Boomer Expectations for Retirement,” found that more than half of the baby boomers surveyed think their health care costs will consume up 20% of their retirement income, or even less. But analysts predict a healthy couple in their mid-60s today, might actually need $300K–$500K just to cover the supplementary insurance, copays, prescription drugs, and other out-of-pocket health care expenses that greet the aging. According to the study, less than ten percent of baby boomers have enough saved up.
A PBS report estimated 70% of seniors will eventually require long-term care, yet only half of seniors surveyed anticipate this need. An overwhelming majority (77%) of seniors intend to live at home for the rest of their lives. This may be optimistic, considering the 70% likelihood of needing long-term care services as one ages. And—spoiler alert—Medicare does not pay for most long-term care or personal (custodial) care services. Current figures report payments of private long-term care insurance benefits at nearly $6 billion per year.
It’s important to become educated in the living care options that will be available for your future. Recognizing there’s a chance of needing long-term care, and planning for those costs, are subjects to discuss with your financial advisors and estate plan attorney. For additional information on services and advanced care planning, check out www.longtermcare.gov
Survey by the National Council on Aging, as reported by MarketWatch.
|After choosing to stay at home, assisted living communities are seniors’ next favorite choice for retirement living. Preferences for other options are depicted in the chart.|
Consider this common scenario faced by many families. An elderly woman with dementia has been living in a nursing home for the past year. Her children have been working hard to maintain her home and pay mom’s bills. Mom is quickly running out of money and the kids decide that mom needs to sell her house in order to meet her ongoing (and increasing) financial needs. The children contact a real estate agent who quickly lists the home for sale and soon after a buyer emerges to purchase the home.
The buyer hires an attorney to help ensure that the transaction goes smoothly and that proper title is transferred to her client. The attorney reaches out to a child of the elderly woman and asks, “Is your mother able to understand and sign both the purchase and sale agreement and deed?”
Mom has not previously executed a power of attorney. A power of attorney is a legal document that allows someone (typically called an “agent” or “attorney”) to make financial decisions on behalf of someone else (typically called the “principal”). If mom had previously executed a valid power of attorney, mom’s named agent (presumably one of her children) likely would have been able to sign all of the necessary paperwork in connection with the sale on mom’s behalf.
Given that there is no agent with the authority to sign on behalf of mom, the children would likely need to resort to a court proceeding in which the court would ultimately appoint an individual (most likely the same child that mom would have named as her agent under a power of attorney) to have authority to act on mom’s behalf with respect to the sale. The court proceeding (known as a conservatorship in Massachusetts) might take several months, involve multiple attorneys (further depleting mom’s limited resources), and given the delay, the buyer may go elsewhere and be unwilling to wait for the court proceeding to conclude.
As part of the estate planning process, your attorney can guide you through the considerations involved in selecting the right agent or agents to make financial decisions on your behalf. A power of attorney document can be as short as three or four pages, but if you become unable to make financial decisions on your own behalf, the ramifications of not executing this document can cost your family time and money.
Family vacation homes are emotionally tied to family holidays and gatherings, and are often owned by grandparents or parents who are covering all of the expenses of the vacation home.
Overall considerations in transferring ownership of a vacation home
The older generation should have a conversation with the younger generation to be sure that they want to keep the vacation home in the family. There will be tension among family members who live close to the vacation property and those who live farther away, and conflicts may arise with respect to how much different family members may use the property at different times in their lives.
Some of these issues may be alleviated by sufficient funding of the family vacation home ownership vehicle to cover future expenses. Also, the family must address whether to have buy-out provisions in case a family member does not want and will never use his or her “share” of the vacation home.
There are many options to consider in planning for how to hold legal title and arrange ownership and management of a family vacation home. Each family must determine what option is best for their situation and the state in which the residence is located. Options for holding title to the family vacation residence include the use of a trust, limited liability company, corporation, ownership as tenants-in-common, or joint tenancy with rights of survivorship, or some combination of these forms of ownership.
Why do some families prefer ownership to be in a trust?
The use of a trust provides the older generation the most control over the ultimate ownership of the family vacation home for the younger generation as well as over the proceeds from a possible sale of the family vacation home.
There are significant estate tax advantages of using a trust as the older generation can allocate generation-skipping transfer tax exemption(s) to the trust so that the trust will not be taxed in the estates of the younger generation family members and can pass free of estate tax down the generational lines to remote descendants.
Use of a trust makes it easier to ensure that ownership of the family vacation home will be passed on to family members who are lineal descendants and not to spouses (or divorcing spouses). Trust ownership means that the family vacation home can continue to be held for the benefit of younger generations, assuming that is the goal of the family.
By funding the trust with cash, the older generation can also ensure that there will be sufficient funds available for eventual capital improvements to the property such as a new roof or furnace, as well as funding part or all of the annual operating expenses.
Why do some families prefer ownership in a Limited Liability Company?
Some families use a limited liability company (LLC) to hold legal title to the family vacation home. The LLC can be used alone as the owner with individuals as the members, or the LLC can hold legal title with the trust as the sole member of the LLC.
Ownership through an LLC provides creditor protection and flexibility in ownership. If membership interests in the LLC are owned directly by the children (as the first younger generation), however, then each child’s share of the family vacation home will be subject to estate tax in that child’s estate. Depending on the value of the vacation home, this could create an estate tax problem for each child, which would need to be addressed by life insurance or other sources of liquidity (such as the ability of other family members to buy that child out).
These are complex issues and the family dynamics that come into play can make drafting the LLC Operating Agreement more complicated.
Management of the vacation home
In order to help ensure family harmony, it is very important that the ownership vehicle provide rules which govern the use of the property and how expenses will be paid. This is somewhat dependent on how much liquidity there is in the ownership vehicle. If ownership is in an LLC, the agreement should address what happens if a member cannot cover his/her shared expenses.
It is also critical that there is sufficient property insurance in place to protect the family’s interest in case of a fire or slip and fall by a visitor or renter. If it will be necessary for the younger generation to rent the property for some portion of the year in order to cover operating expenses, then it is advisable for an LLC to hold legal title to the vacation home.
The days immediately following the death of a loved one are a difficult time often accompanied by having to make big decisions, including decisions regarding funeral arrangements and disposition of remains. The burden of this can be eased by planning in advance for your funeral and burial arrangements. Advance planning can also reduce disagreements among family members if some have a traditional perspective while others take a contemporary approach.
Leaving wishes regarding your funeral and disposition can be done informally through family conversations where everyone is present or more formally through a contract with a funeral home or written instructions. In Massachusetts, a contract can be entered into with a funeral home making arrangements in advance for funeral and burial services and arranging with a bank or insurance company for payment of funeral and burial costs. Payment is made to the funeral home at the time services are actually rendered. Another option is to leave a signed and witnessed written document leaving instructions regarding the nature of funeral services and disposition of remains.
In Massachusetts, first priority is given to the contract with the funeral home. In the absence of a contract, a written document signed and witnessed will control. In the absence of either of those, a funeral home must follow the instructions of the deceased person’s next of kin in the following order of priority:
1. the surviving spouse of the deceased
2. the surviving adult children of the deceased
3. the surviving parent(s) of the deceased
4. the surviving brother(s) or sister(s) of the deceased
5. the guardian of the person of the deceased at the time of his or her death
6. any other person authorized or obligated by law to dispose of the remains of the deceased
If there is disagreement among the members of any of the above groups, a majority rules, and if a majority cannot be reached, a court decides. This may be important to keep in mind if you are not survived by a spouse but are survived by children or siblings who may not agree among themselves about funeral arrangements and disposition.
A little pre-planning with respect to funeral arrangements and disposition can alleviate potential family conflict as well as allow you to make your own decisions about your funeral and disposition. Just as you would plan for your finances after death, exercising the ability to leave assets how and to whom you wish, you can also do the same for your funeral.
When creating an estate plan, the primary emphasis is typically on the disposition of assets and the related tax concerns; however, one of the most crucial planning decisions you can make is choosing who will serve as guardian of your minor children.
The choice of guardian will not only set the course for the rest of several people’s lives, but also will contribute to the essence of who the minor children become. Furthermore, the failure to designate a guardian in your estate plan can put the lives of your children in the hands of the court system.
The guardian you designate will become a new parental figure for your children in the event that you are no longer able to care for them. Most importantly, the guardian will be charged with the responsibility of helping your children transition to life without one or both of their parents, and for passing on life skills, instilling values, and raising your children. Thus, it is paramount to select a guardian who understands the responsibilities accompanying the guardianship designation, and who has the time and interest to raise your children.
Choosing a guardian is no easy task, and involves objective and subjective assessments distinct from selecting other fiduciaries in your estate planning.
The first threshold to choosing a guardian involves finding someone who is willing to take on such an important job. The decision to serve as guardian for someone else’s minor children should be thoughtfully considered, as stepping into the role as surrogate parent will change the rest of the guardian’s life. A guardian without the proper understanding of the role he or she is to play for your children can result in significant legal and emotional problems for all interested parties, including your children and the guardian.
In addition to finding a person who is willing and able to take on the role of guardian, it is of utmost importance to choose someone who already has an established warm and loving relationship with your child. This type of existing relationship can be immensely valuable in such an emotionally trying transition for your children, as they cope with the trauma or sudden death of one or both of their parents.
Most people instinctively think that the “right” guardian for their minor children is a relative; however, in some circumstances, a non-family member may be a better fit. Choosing a family member as guardian may be the obvious choice, but if your children are uncomfortable, have never met, or rarely spend time with the family member, it may not be the right choice to name him or her as guardian. Rather, it may be the case that a close friend or neighbor who is present in your children’s lives and better understands your values in raising your children may be the “right” choice. Ultimately, the choice of whether or not to name a family member versus a non-family member is specific to your family dynamic and lifestyle.
Another important factor to consider when choosing a guardian is the individual’s job situation and financial stability, as adding surrogate children into their life will raise his or her living costs exponentially. You must balance the person’s willingness to take on the significant responsibility of raising your children with their ability to support your children financially in their future endeavors. Ultimately, if you think someone is the “right” guardian but are worried about the stress added children will have on their finances, you may consider designating them as beneficiaries in other areas of your estate plan to ensure they have enough money to raise your children according to your values.
Finally, you may be tempted to choose a couple as the co-guardians of your minor children in hopes that they will be raised in a traditional nuclear family setting. Unfortunately, designating a couple as co-guardians may be problematic in the event that they divorce or the preferred guardian in the couple dies or is otherwise no longer able to serve in the role. As a result, it is often preferable to name one or more alternates in case the first choice for guardian is unavailable to ensure your wishes can be carried out and your children’s lives are not at the discretion of a judge.
Once you have carefully considered the foregoing factors and designated a guardian in your estate plan, it is just as important to remember to revisit your choice as circumstances change to adapt to the needs of your children and abilities of your selected guardians. These choices should be revisited at least every five years to confirm that your chosen guardian is still the “right” choice for your children.
Some of the most problematic work we do is for families who are caring for an incompetent person. Many would benefit from being moved to an institutional setting, but cannot assent to be moved and do not have a health care proxy or durable power of attorney in place.
In some cases, the situation is also complicated because of the way the person’s assets are held. For example, complexities can arise if the individual owns real estate but is not competent to sign a deed to sell it, or if the individual has a solely owned financial account that holds the funds needed to pay for care but is not competent to write checks.
What incapacity planning can one do?
In so many cases, situations like the ones mentioned above can be avoided. If the incapacitated person had transferred assets into a trust with proper trustee provisions, named an agent in a durable power of attorney, and named a health care proxy, the medical, financial, and legal aspects of care would be far less burdensome.
What happens when there is not incapacity planning?
If a person has become incompetent due to dementia, other incapacity, or an accident, the person’s care needs can be staggering. If the person’s financial assets cannot be easily reached by a trustee or agent under a durable power of attorney to pay for the care, and if the person has not named a health care proxy to make medical and living decisions, the only recourse may be a guardianship or conservatorship action in the Probate Court.
Court proceedings are slow and expensive. Additionally, state law may require that the court appoint a lawyer for the incapacitated person or an independent lawyer to serve in the role of an advisor to the court. These professionals are generally paid with assets of the incapacitated person, causing another drain on family finances.
The lawyer for the incapacitated person may not see eye-to-eye with the family about the kind of care that should be provided to the person or who should pay the care bills, causing additional emotional stress. In addition to the sadness and stress of caring for an incapacitated family member, the family may suffer additional emotional and financial stress arising from the court proceedings.
A distributee is your legal heir that will inherit your estate, by law, if you do not have a valid will. A distributee may also be referred to as an “heir-at-law” or “next-of-kin.”
In New York, distributees are defined under EPTL § 4-1.1 to be (1) your spouse and/or children, (2) your parents, (3) your siblings/nieces and nephews/grandnieces and grandnephews, (4) your grandparents/aunts and uncles/first cousins or (5) your first cousins once-removed.
In New York, when you probate a will, you are required to give notice to a decedent’s distributees. Since distributees are the “natural” heirs of a decedent’s estate, this notice gives them an opportunity to dispute the validity of your will, if they believe there was any wrongdoing.
There could be many reasons why you choose to not leave your estate to your distributees —perhaps your closest living relative is someone whom you have never met, maybe you don’t get along with your family or maybe you simply want to contribute your estate to charity upon your death. Whatever the reason, it is important to speak with an estate planning attorney to make sure your wishes are documented and the proper steps are taken now, to avoid time delays and expenses after death.
A Charitable Lead Trust (“CLT”) can be established during your life (“inter vivos”) or after your death (“testamentary”). In both types of CLTs, charitable gifts are made out of the trust for a period of years, then, at the end of that period, assets pass to designated family members or others.
A CLT with terms that provide for annuity payments (a fixed percentage of the fair market value of the property transferred to the trust as of the date of the transfer) is known as a charitable lead annuity trust (“CLAT”). A CLT with terms that provide for a unitrust amount (a fixed percentage of the fair market value of the trust property as that value is re-determined annually during the lead term) is known as a charitable lead unitrust (“CLUT”).
Charitable Lead Trusts established during lifetime
At the time the grantor transfers property to the CLT, the grantor is treated as having made a charitable gift equal to the present value of the stream of the annuity or unitrust payments to be paid to the charity. The present value of this stream is determined by applying a discount rate (equal to 120% of the federal AFR mid-term rate in effect for the month during which the grantor makes the transfer) to the aggregate payments to be made to the charity. The lower the AFR rate, the lower the discount rate, and the higher the present value of the revenue stream to be paid to charity. Additionally, at the time the grantor transfers property to the CLT, the grantor is treated also as having made a noncharitable gift to the remainder beneficiaries. The higher the present value of the revenue stream to be paid to charity, the lower the present value—and therefore the gift tax value—of the property transferred to the remainder beneficiaries.
If you establish an inter vivos CLT during your lifetime, you, as the grantor of the trust, are not entitled to a charitable income tax deduction for funding the trust unless it is treated as a grantor trust and therefore you are responsible for paying all of the CLT’s income taxes during the term of the trust. If the CLT is treated as a non-grantor trust, you are not entitled to a charitable income tax deduction but you are entitled to a gift tax charitable deduction for the value of the charitable lead interest.
Charitable Lead Trusts established at death
A testamentary CLAT, established at death, is typically used as a way of accomplishing not only a charitable giving goal but also the goal of passing assets on to next generation family members at a lower estate tax cost. The Grantor’s estate would be entitled to an estate tax charitable deduction for the value of the charitable lead interest. Since the property is included in the grantor’s estate, it would result in there being a stepped-up basis in the property contributed to the trust, which would eventually pass to the non-charitable beneficiaries. It is possible to establish a sufficiently long charitable lead interest so that the estate tax charitable deduction is equal to the full value of the trust corpus, thereby totally eliminating estate tax with respect to the trust corpus. This is called a “zeroed out” CLAT. In the case of a zeroed out CLAT, the remainder noncharitable beneficiaries receive is the upside of the economic performance of the trust assets over and above the AFR rate on an estate tax free basis. When interest rates are low, the likelihood that the trust assets will outperform the AFR rate and the remainder beneficiaries will receive excess trust property gift tax free at the end of the lead term increases. This is more difficult to accomplish when interest rates are higher.
When Tom Petty died at the age of 66 from an accidental overdose, he had been considered a “success story” in the realm of celebrity estate planning as he had a full estate plan in place at his death.
For example, he apparently had a trust that disposed of his artistic property upon his passing through instructions to the successor trustee (his wife from a second marriage) to form a California limited liability company (“LLC”) to hold and deal with such property. As he had children from a first marriage, his trust apparently further provided that they should “participate equally” in the management of such LLC.
While such provisions seem to be well-meaning, they have apparently been the source of disagreement between Petty’s wife and children and have unsurprisingly resulted in recent litigation. From an estate planning perspective, they also call into question the extent to which family dynamics may have been taken into account in the planning process, especially when it is reported that Petty’s wife and children may have had a strained relationship during his life.
What can be done to avoid a family dynamics issue?
Regardless of a person’s celebrity, it is important that his or her estate plan take into account family dynamics as they may be when he or she is alive and in good health, as well as upon his or her death or in the event of a serious, long-term illness.
In particular, attention should be paid to family dynamics in the case of “blended” families where there is frequently tension between the spouse from a subsequent marriage and children of a first marriage. However, equal attention should be paid to all other types of family situations, such as adult children of the same marriage, as there is frequently tension in these situations too.
It is important to have an honest and open discussion with your estate planning attorney about how family members have traditionally gotten along and how you think they would get along when you are no longer there. It may be helpful also to discuss how family members have handled stress or grief, about how they have traditionally handled finances and whether you think that they are actually up for handling additional responsibilities, such as taking care of you or managing your finances. You should also think about whether it would be better for a few family members to work together or one family member to be in charge.
Finally, you should inform your estate planning attorney of any significant relationship or marital issues between family members, of any mental illness or of any substance abuse issues, so that your estate planning attorney may tailor his or her recommendations to achieve your estate planning goals and hopefully provide your loved ones with a more harmonious structure upon your incapacity or passing.