Estate Planning

Most people think of probate as a legal process for changing titles on assets from the name of a deceased person to the name of the deceased person’s beneficiaries or heirs. But there is another probate court process, a “living probate.”
 
Living probate is what happens when someone is alleged to be incompetent to manage their own affairs. Someone literally sues them in a probate court, asking the judge to take away their right to make their own health care and/or business decisions and give that right to someone else. It is an expensive process in which the alleged incompetent person pays the lawyers on both sides. If the person is found to be incompetent to manage their business affairs and there are business affairs to be managed, the court will appoint a guardian or conservator to do so. Sometimes the responsibility for the physical care of a disabled person and the responsibility for the management of assets that are titled in the disabled person’s name are given to two different people: a guardian of the person (for physical care) and a conservator of the person’s assets (for financial care).
 
If there are no assets titled in the incapacitated person’s name, such as when the person’s assets have been placed in a trust, the court has no need to appoint a conservator of the incapacitated person’s assets.
 
Because the courts jealously guard everyone’s rights to manage their own personal affairs and property, living probate provides a form of protection that is anything but free. Living probate, especially when there are assets to be managed, is costly, time consuming, and cumbersome. There are annual accountings, bonds, reports, ongoing determinations of incapacity/incompetency, and fees for attorneys, accountants, doctors and guardians. All those costs are paid from the disabled person’s assets, and living probate proceedings are a public record. Once a guardianship/conservatorship is established, it will go on until the incapacitated person dies or the court determines that he or she is no longer incapacitated. That can be many years.
 
Another possible problem is that a court cannot allow an incapacitated person’s resources to be used to provide care for anyone who is not the incapacitated person’s legal responsibility. That means that adult children, parents, grandchildren and others for whom the disabled person was providing support will be on their own.
 
Living probate can be avoided with proper estate planning for disability. If your estate plan does not address disability, you should make an appointment with your estate planning attorney to discuss it.

With people living longer due to advances in medicine and changes in lifestyle, odds are that most of us will become disabled for some time before we die and may need long-term care. Unfortunately, too few plan for an event that is more likely to be a probability than a possibility—and the consequences of not planning can be disastrous for all involved.
 
When someone owns assets in his/her name and becomes unable to manage financial affairs due to mental or physical incapacity, only a court appointee can sign for the disabled person. This is true even if the person has a will, because a will can only go into effect after death. With some assets, especially real estate, all owners must sign to sell or refinance. So, for example, if a married couple owns their assets jointly, one of them becomes disabled and an asset needs to be sold or refinanced, the well spouse will have to go through the probate court in order for that to happen.
 
This is called a “living probate” because it is similar to the probate process at death but the person is still alive. It can be costly, time consuming and cumbersome with annual accountings, bonds, reports, ongoing determinations of incapacity/incompetency, and fees for attorneys, accountants, doctors and guardians. All costs are paid from the disabled person’s assets, and all assets and proceedings become part of the public probate record. A living probate usually lasts until the person recovers or dies which, depending on his/her age when the disability begins, can be years.
 
A fully funded revocable living trust avoids a living probate. When a living trust is established, the titles of assets are changed from the individual’s name to the name of the trustee. This is called “funding” the trust. If the trust has been fully funded (all titles changed) and the person becomes unable to conduct business, there is no reason for a living probate because the disabled person does not own any assets in his/her name. The successor trustee, hand-picked when the trust is created, can automatically step in without court interference and manage the disabled person’s financial affairs—selling or refinancing assets to help pay for his/her care and the care of loved ones, or keeping the owner’s business going—for as long as needed.
 
Other necessary documents include:
* Durable Limited Power of Attorney, which allows the successor trustee to transfer to the trust assets that may have been overlooked, and to manage assets (like IRAs) that cannot be put into a living trust;
* Durable Power of Attorney for Heath Care, which gives another person legal authority to make health care decisions (including life and death decisions) if you are unable to make them for yourself.
* HIPPA Affidavits, which give written consent for doctors to discuss your medical situation with others, including family members, loved ones and your successor trustee(s).
 
Planning for disability may also include disability income insurance (to help replace lost income), and long term care insurance (to help cover the costs of care that are not covered by medical insurance). Business owners may want to consider business or professional overhead insurance that will pay monthly operating expenses until they recover or the business can be sold or transferred, and buy-sell agreements in the event a co-owner becomes permanently disabled.
 
Disability before death is not always expected and it does not always happen, but it must be planned for.

A common misconception is that estate planning equates to death planning. But planning for what happens after you die is only one piece of the estate planning puzzle. It is just as important to make a plan for what happens if you become mentally incapacitated.
 
What Happens Without an Incapacity Plan?
 
Without a comprehensive incapacity plan, a judge can appoint an agent (known as a guardian or a conservator) to take control of your assets and make all personal and medical decisions for you under a court-supervised guardianship or conservatorship. The guardian or conservator must report all financial transactions to the court either on an annual basis or at least every few years. The guardian or conservator is also typically required to obtain court permission before entering into certain types of financial transactions (such as mortgaging or selling your real estate) or making life-sustaining or life-ending medical decisions. The court-supervised guardianship or conservatorship will then continue until you either regain capacity or die. Creating an incapacity plan can help you order to avoid a court-supervised guardianship or conservatorship.
 
Who Should You Choose as Your Financial Agent and Health Care Agent?
 
Rather than having a judge decide, your incapacity plan will have you appoint one or more agents to carry out your wishes. There are two very important decisions you must make when putting together your plan:

• Who will be in charge of managing your finances if you become incapacitated (your financial agent); and
• Who will be in charge of making medical decisions on your behalf if you become incapacitated (your health care agent).

Factors to consider when deciding who to name as your financial agent and health care agent (who do not have to be the same people) include:

• Where does the agent live? With modern technology, the distance between you and your agent should not matter. Nonetheless, someone who lives nearby may be a better choice than someone who lives in another state or country.
• How organized is the agent? The agent will need to be well organized to manage your health care needs, keep track of your assets, pay your bills, and balance your checkbook, in addition to being able to manage their own finances and family obligations.
• How busy is the agent? If the agent has a demanding job or travels frequently for work, then the agent may not have the time required to take care of your finances and medical needs.
• Does the agent have expertise in managing finances or the health care field? An agent with work experience in finances or medicine may be a better choice than an agent without it.

What Should You Do?
 
If you choose the wrong person to serve as your financial agent or health care agent, your incapacity plan is likely to fail and land you and your assets in a court-supervised guardianship or conservatorship.
 
In order to create an incapacity plan that will work the way you expect it to work, you need to carefully consider who to choose as your agent and then discuss your decision with that person to confirm that they will in fact be willing and able to serve.
 
My firm is ready to answer your questions about incapacity planning and assist you with choosing the right agents for your plan.

Comprehensive estate planning is about more than your legacy after death, avoiding probate, and saving on taxes. It must also be about having a plan in place to manage your affairs if you become mentally incapacitated during your life.
 
What Happens Without an Incapacity Plan?
 
Without a comprehensive incapacity plan in place, a judge can appoint a guardian or conservator to take control of your assets and health care decisions. This guardian or conservator will make all personal and medical decisions on your behalf as part of a court-supervised guardianship or conservatorship. Until you regain capacity or die, you and your loved ones will be faced with an expensive and time-consuming guardianship or conservatorship proceeding.
 
What Happens to Your Finances During Incapacity?
 
If you are legally incapacitated, you are legally unable to make financial, investment, or tax decisions for yourself. Of course, bills still need to be paid, tax returns still need to be filed, and an investment strategy still needs to be managed.
 
So, you must have these two essential legal documents for managing finances in place prior to becoming incapacitated:
 
1. Financial Power of Attorney. This legal document gives your agent the authority to pay bills, make financial decisions, manage investments, file tax returns, mortgage and sell real estate, and address other financial matters that are described in the document. Financial Powers of Attorney come in two forms: “Durable” and “Springing.” A Durable Power of Attorney goes into effect as soon as it is signed, while a Springing Power of Attorney only goes into effect after you have been declared mentally incapacitated.
 
2. Revocable Living Trust. This legal document has three parties to it: The person who creates the trust (you might see this written as “Trustmaker” or “Grantor” or “Settlor” – they all mean the same thing); the person who manages the assets transferred into the trust (the “Trustee”); and the person who benefits from the assets transferred into the trust (the “Beneficiary”). In the typical situation you will be the Trustmaker, the Trustee, and the Beneficiary of your own revocable living trust, but if you ever become incapacitated, then your designated Successor Trustee will step in to manage the trust assets for your benefit.
 
Health Care Decisions Must Be Made Too
 
If you become legally incapacitated, you won’t be able to make health care decisions for yourself. Because of patient privacy laws, your loved ones may even be denied access to medical information during a crisis situation and end up in court fighting over what medical treatment you should, or should not, receive (like Terri Schiavo’s husband and parents did, for 15 years).
 
So, you should have these three essential legal documents for making health care decisions in place prior to becoming incapacitated:
 
1. Medical Power of Attorney. This legal document, also called an Advance Directive or Medical or Health Care Proxy, gives your agent the authority to make health care decisions if you become incapacitated.
 
2. Living Will. This legal document gives your agent the authority to make life sustaining or life ending decisions if you become incapacitated.
 
3. HIPAA Authorization. Federal and state laws dictate who can receive medical information without the written consent of the patient. This legal document gives your doctor authority to disclose medical information to an agent selected by you.
 
Is Your Incapacity Plan Up to Date?
 
Once you get all of these legal documents for your incapacity plan in place, you cannot simply stick them in a drawer and forget about them. Instead, your incapacity plan must be reviewed and updated periodically and if certain life events occur – such as moving to a new state or going through a divorce. If you keep your incapacity plan up to date, it should work the way you expect it to if it’s ever needed.

The Obama administration recently released its budget proposal for the 2016 fiscal year. As in past years, this budget proposes changes to the laws governing federal estate, gift and generation-skipping transfer (GST) taxes. Several of these changes would raise revenue by limiting the tax benefits achieved by using certain estate planning techniques, while others would decrease exemptions and increase rates. In addition, the fifth proposal discussed below is a brand new one that has raised some eyebrows:
 
1. Restore the Estate, Gift, and Generation-Skipping Transfer (GST) Tax Parameters in Effect in 2009. The 2016 budget calls for the estate and GST tax exemptions to decrease from $5.43 million to $3.5 million, the lifetime gift tax exemption to decrease from $5.43 million to $1 million, and the top estate, gift and GST tax rate to increase from 40% to 45%. While portability of the estate and gift tax exemptions between married couples would remain in effect, the exemptions would not be indexed for inflation. If President Obama’s budget is enacted as proposed, these changes would go into effect on January 1, 2016.
 
2. Modify Transfer Tax Rules for Grantor Retained Annuity Trusts (GRATs). A GRAT is a sophisticated estate planning tool that can be used to reduce or eliminate the estate tax’s impact on your estate. The 2016 budget calls for GRATs to have a minimum term of ten years and a maximum term equal to the life expectancy of the annuitant plus ten years. In addition, the remainder interest in a GRAT would be required to have a minimum value equal to the greater of 25% percent of the value of the assets contributed to the GRAT or $500,000 (but not more than the value of the assets contributed). Finally, any decrease in the annuity during the term of the GRAT and tax-free exchanges of assets held in the GRAT would be prohibited. These changes would apply to GRATs created after the date of enactment.
 
3. Limit Duration of Generation-Skipping Transfer (GST) Tax Exemption. The 2016 budget calls for limiting the time period that multi-generational, dynasty trusts would remain estate and GST tax free to 90 years. This limitation would apply to trusts created after the date of enactment and to the portion of a pre-existing trust attributable to additions to the trust made after that date (subject to rules substantially similar to the grandfather rules currently in effect for additions to trusts created prior to the effective date of the GST tax).
 
4. Simplify Gift Tax Exclusion for Annual Gifts. The 2016 budget calls for the elimination of the so-called present interest requirement for gifts that qualify for the annual gift tax exclusion (which is currently $14,000 per donee). Instead, a new category of transfers would be created, and an annual limit of $50,000 per donor would be imposed on the donor’s transfers of such property. This new category would not require the existence of any “Crummey” withdrawal or put rights. This new category would include transfers in trust, transfers of interests in pass-through entities, transfers of interests subject to a prohibition on sale, and other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, cannot immediately be liquidated by the donee. These changes would go into effect for gifts made after the year of enactment. If enacted, this would significantly change the way that gifts to family members would need to be planned.
 
5. Reform the Taxation of Capital Income. The 2016 budget calls for the highest long-term capital gains and qualified dividend tax rate to increase from 20% to 24.2%. This would increase the maximum capital gains and dividend tax rate when including net investment income tax to 28%. In general most transfers of appreciated property would be treated as a sale of the property, including when an appreciated asset is gifted during lifetime or bequeathed at death. Certain exemptions and exclusions would apply. These changes would go into effect for capital gains realized, dividends received, gifts made, and deaths occurring after December 31, 2015.
 
Where Do We Go From Here?
 
The federal government is in constant need of more revenue. The proposed changes to gift and death tax laws in the Obama 2016 budget will only affect a limited number of taxpayers but would result in billions of dollars in new tax dollars. Therefore, it is important to monitor these revenue-generating proposals to avoid missing a change that will affect your estate planning goals. In addition, if you have been on the fence about creating a GRAT or implementing another type of gifting strategy, then now is the time to move forward before the benefits of these techniques might disappear.
 
Constant change seems to be the rule in Washington and the last few years have seen significant change to laws affecting your estate plan. If your estate plan hasn’t been professionally reviewed recently, you should schedule a meeting with your attorney to review it.

Age, marital status, and wealth do not really matter. If you own titled assets and want your loved ones (spouse, children or parents) to avoid court interference at your death or incapacity, you should probably have a living trust. You may also want to encourage other family members to have a living trust to avoid having to deal with the courts at their incapacity or death.