The Five Steps to an Elder Law Estate Plan

Overview

Practicing elder law estate planning is one of the most enjoyable and professionally rewarding careers an attorney may choose. Imagine a practice area where your clients respect your knowledge and treat you with kindness and courtesy. They pay your fees in a timely fashion and tell their friends how much they have enjoyed working with you and your firm. At the same time, you are rarely facing the pressure of a deadline, much less an adversarial attorney on the other side of a matter trying to beat you. In most instances, you are acting in the capacity of a counselor at law (trusted advisor) rather than an attorney at law (professional representative).

We spend our days meeting with clients, discussing their lives and their families and addressing their fears and concerns. Through our knowledge, training, experience and imagination, we craft solutions, occasionally elegant ones, to the age old problem of passing assets from one generation to another as quickly and painlessly as possible. At the same time, we also seek to protect those assets from being depleted by taxes, legal fees and long-term care costs to the extent the law allows.

The end result of this process is a client who feels safe and secure in the knowledge that, in the event of death or disability, they have all their bases covered. Having achieved peace of mind that their future is well planned and in good hands, they can get on with the business of enjoying their lives. For the attorney, a happy and satisfied client has been added to the practice and another potentially lifelong and mutually rewarding relationship has begun. Let's look at the strategies and techniques we use to achieve this enviable state of affairs.

Major Issues Facing Senior Clients Today

One of the ways that we help clients is in setting up a comprehensive plan so they may avoid court proceedings upon death or in the event of disability. Trusts are used in place of wills for older persons since they do not require court proceedings to settle the estate. Trusts also avoid the foreign probate proceeding required for property owned in another state, known as ancillary probate. This saves the family time in settling the estate as well as the high costs of legal proceedings. In addition, since revocable living trusts, unlike wills, take effect during the grantor's lifetime, the client may stipulate which persons take over in the event of their disability. Planning ahead helps maintain control in the family or with trusted advisors and avoids a situation that may not be in the client's best interest. For example, in the event of a disability where no plan has been put in place, an application to the court may be required in order to have a legal guardian appointed for the disabled person. This may not be the person the client would have chosen. In such a case, assets may not be transferred to protect them from being spent down for long-term care costs without court permission, which may or may not be granted.

Another area in which we assist the client is in saving estate taxes, both state and federal for married couples by using the two-trust technique. Assets are divided as evenly as practicable between each of the spouse's trusts. While the surviving spouse has the use and enjoyment of the deceased spouse's trust, the assets of that trust bypass the estate of the surviving spouse and go directly to the named beneficiaries when the second spouse dies. The two trusts are known as “disclaimer trusts”. Tens to hundreds of thousands of dollars, or more, in potential estate taxes may be saved, depending on the size of the estate. Furthermore, the revocable living trust avoids the two probates that would occur were the clients to use wills, as the couple's estate must be settled after the death of each spouse in order to save estate taxes.

We also help to protect assets from being depleted due to long-term care costs. Medicaid Asset Protection Trusts (MAPT's) may be established, subject to a five-year look-back period for facility care for a new two and a half year look-back for home care, to protect the client's home and other assets from having to be spent down due to the high cost of long-term care. Elder law attorneys use Medicaid asset and transfer rules to protect assets in the event a client requires long-term care but has done no pre-planning. Through the use of Medicaid annuities, the “gift and loan” strategy and caregiver agreements, significant assets may be protected despite the look-back periods, even when the client may be on the nursing home doorstep.

The Five Steps

Step One: Understanding the Family Dynamics

The first step in an elder law trusts and estates matter is to gain an understanding of the client's family dynamics. If there are children, which is usually the case, we need to determine whether or not they are married. Is it a first or second marriage? Do they have any children from a previous marriage or do their spouses? What kind of work do they do, and where do they live? Do they get along with each other and with the parent clients? We are looking to determine which family members do not get along with which others and what the reasons may be. This goes a long way toward helping us decide who should make medical decisions and who should handle legal and financial affairs. Should it be one of them or more than one? How should the estate be divided? Should they be able to act separately or only together? Is the client himself in a second marriage? Which children, if any, are his, hers, or theirs? Sometimes all three instances may occur in the same couple. Here, further exploration of the family functioning will be needed as the potential for hurt feelings, conflicts of interest, and misunderstandings multiplies. In addition, great care must be taken to develop a plan for management, control, and distribution of the estate that will not only be fair to the children from a previous marriage but will be seen to be fair as well. At times, the assistance of the professional advisor in acting as trustee may be invaluable in helping to keep the peace between family members. Finally, this step will also flesh out whether there are any dependents with special needs and which family members and assets might be best suited to provide for any such children.

Step Two: Reviewing Existing Estate Planning Documents

The second step in an elder law trusts and estates matter is to review any prior estate planning documents the client may have, such as a will, trust, power of attorney, health care proxy and living will, to determine whether they are legally sufficient and reflect the client's current wishes or whether they are outdated. Some basic elder law estate planning questions are also addressed at this time such as:

1. Is the client a US citizen? This may impinge on the client's ability to save estate taxes.
2. Is the client expecting to receive an inheritance? This knowledge helps in preparing a plan that will address not only the assets that the client has now but what they may have in the future.
3. Does the client have long-term care insurance? If so, the attorney will want to review the policy and determine whether it provides an adequate benefit considering the client's other assets and income, whether it takes inflation into account, and whether it is upgradable. This will allow the practitioner to decide whether other asset protection strategies may be needed now or later.
4. Does the client need financial planning? Many clients that come into the attorney's office have never had professional financial advice or are dissatisfied with their current advisors. They may need help understanding the assets they have or with organizing and consolidating them for ease of administration. They may also be concerned with not having enough income to last for the rest of their lives. The elder law estate planning attorney will typically know a number of capable financial planners who are experienced with the needs and wishes of the senior client, including (1) secure investments with protection of principal, and (2) assets that tend to maximize income.

Step Three: Reviewing the Client's Assets

The third step is to obtain a complete list of the client's assets, including how they are titled, their value, whether they are qualified investments, such as IRA's and 401(k)'s and, if they have beneficiary designations, who those beneficiaries are. Armed with this information, the counsellor is in a position to determine whether the estate will be subject to estate taxes, both state and federal, and may begin to formulate a strategy to reduce or eliminate those taxes to the extent the law allows. This will often lead to shifting assets between spouses and their trusts, changing beneficiary designations, and, with discretion, sometimes trying to determine which spouse might pass away first so as to effect the greatest possible tax savings. Ideally, the attorney should have the client fill out a confidential financial questionnaire prior to the initial consultation.

Step Four: Developing the Elder Law Estate Plan

The fourth step is to determine, with input from the client, who should make medical decisions for the client if they are unable to and who should be appointed to handle legal and financial affairs through the power of attorney in the event of the client's incapacity. Next, we will consider what type of trust, if any, should be used, whether a simple will would suffice, who should be the trustees (for a trust) or executors (for a will), and what the plan of distribution should be. In order to avoid a conflict, the trustees who are chosen in lieu of the grantor should be the same persons named on the power of attorney. At this point, great care should also be taken to ensure that the feelings of the heirs will not be hurt. Good estate planning looks at the client's estate from the heirs' point of view as well as the client's. For example, if there are three children, it may be preferable that one be named as trustee or executor, as three are usually too cumbersome and if the client chooses only two, then they are leaving one out. If there are four or five children, we prefer to see two trustees or executors chosen. This way, the pressure will be reduced on just the one having to answer to all the others. More importantly, the others will feel more secure with two siblings jointly looking after their interests.

If the distribution is to be unequal, it may need to be discussed with the affected children ahead of time to forestall any ill will or even litigation after the parents have died. By considering the relative ages of the children, where they live, and their relationships amongst each other and with their parents, the advisor will generally find a way to craft a plan that accommodates the needs and desires of all parties concerned. Some of the techniques we find useful in this context are to offer a delayed distribution, such as twenty percent upon the death of the grantor, one-half of the remaining balance after five years, and the remainder after ten years. These same percentages may also be used at stated ages, such as thirty, thirty-five, and forty. Also, when leaving percentages of the estate, unless it is simply to the children in equal shares, it is often useful to determine the monetary value of those percentages in the client's current estate. This will allow the client to see whether the amount is truly what they wish to bequeath. Percentage bequests to charities should be avoided so that the family may avoid the possibility of having to account to the charity for the expenses of administering the estate.

In terms of the type of trust, we are generally looking at several options for most clients. It is important to determine whether there should be one trust or two. In order to avoid or reduce estate taxes, there should be two trusts for spouses whose estates exceed or may at a later date exceed the state and/or federal estate tax threshold.  Should the trust be revocable or irrevocable? The latter is important for protecting assets from nursing home expenses subject to the five-year look-back period for facility care and the new two and a half year look-back for home care. Primary features of the irrevocable Medicaid Asset Protection Trust (MAPT) are that neither the grantor nor the grantor's spouse may be the trustee and that these trusts are income-only trusts. Most people choose one or more of their adult children to act as trustees of the MAPT. Since principal is not available to the grantor, the client will not want to put all of their assets into such a trust. Assets that should be left out are IRA's, 401(k)'s, 403(b)'s, etc. The principal of these qualified assets are generally exempt from Medicaid and should not be placed into a trust, as this would create a taxable event requiring income taxes to be paid on all of the IRA. If the institutionalized client has a spouse in the community, up to about one hundred and thirty thousand dollars may also be exempted. Notwithstanding that the home, at least up to about nine hundred thousand in equity, is exempt if the community spouse is living there, it is generally a good idea to protect the home now rather than to wait until the first spouse has passed, due to the look-back periods. It should be noted that the look-back means that from the time assets are transferred to the MAPT, it takes five years before they are exempt, or protected from being required to be spent down on the ill person's care in a nursing facility before they qualify for Medicaid benefits. What if the client does not make the five years? Imagine that the client must go into the nursing home four years after the trust has been established. In such a case, by privately paying the nursing facility for the one year remaining, the family will be eligible for Medicaid after just the remaining year of the five-year penalty period has expired.

Although the MAPT is termed irrevocable, the home may still be sold or other trust assets traded. The trust itself, through the actions of the trustees, may sell the house and purchase a condominium in the name of the trust so that the asset is still protected. The trust may sell one stock and buy another. For those clients who may wish to continue trading on their own, the adult child trustee may sign a third party authorization with the brokerage firm authorizing the parent to continue trading on the account. Sometimes this is simply done online with the parent using the PIN on the account. The trust continues to pay all income (i.e., interest and dividends) to the parent grantor. As such, the irrevocable trust payments should not affect the client's lifestyle when added to any pensions, social security, and IRA distributions the client continues receiving from outside the trust. Homeowners insurance should be modified to add the trustees, who are now on the deed, as additional insureds.

If there is a special needs child, consideration will be given to creating a Special Needs Trust, which will pay over and above what the child may be receiving in government benefits, especially social security income and Medicaid, so that the inheritance will not disqualify them from those benefits.

With the size of estates having grown today to where middle class families are leaving substantial bequests to their children (depending, of course, on how many children they have), the trend is toward establishing trusts for the children to keep the inheritance in the bloodline. Variously termed Inheritance Protection Trusts, heritage trusts, or dynasty trusts, these trusts may contain additional features, such as protecting the inheritance from a child's divorce, lawsuits and creditors during their lifetimes, and estate taxes when they die. The primary feature of all of these trusts for the heirs, however, is to provide that when the child dies, in most cases many years after the parent, the hard-earned assets of the family will not pass to an in-law who may get remarried and eventually share those assets with a stranger, but rather to the grantor's grandchildren. On the other hand, if the client wishes to favor the son-in-law or daughter-in-law, they may choose to provide that the trust, or a portion of it, continue as an “income only” trust for their adult child's surviving spouse for their lifetime, and only thereafter to the grantor's grandchildren.

Other key areas for discussion in developing the elder law estate plan, are second marriage planning, planning for singles and couples without children, protecting assets for spendthrift children, and planning for same sex couples.

Step Five: Executing and Maintaining the Plan

At the meeting to execute the elder law estate plan, the documents are reviewed with the client, explanations are given and questions are answered. Many practitioners favor sending the documents ahead of time for their clients' review. While there are advantages to this practice, we have found the clients are often overwhelmed by the legal documents and prefer to limit the practice to those instances where it is specifically requested.

After execution, including signing new deeds transferring real property into the trust, the client is advised how to transfer title of their investments and bank accounts to the trust. Similarly, beneficiary designations on annuities, life insurance policies and sometimes on IRA's are often changed to the client's trust or to the children's Inheritance Protection Trusts. In the event there is more than one trust being executed, which assets are left to which trust, and why, are explained to the client as part of the process of funding the trusts.

Finally, the elder law estate plan is reviewed every three years for changes in the law as well as changes in the lives of the clients and their families. Inherent in the plan is the ability of the “hybrid” elder law estate planning firm to address Medicaid asset protection issues, either by planning ahead due to advancing years or, in the event of an “immediate need”, when a crisis arises and the family has failed to take action in advance. Medicaid strategies, key tools in the elder law estate planning attorney's toolbox.

At our firm, we believe not only reviewing the plan every three years, but also in building the attorney-client relationship. To that end, we send our client a weekly article on some interesting or important estate planning elder law topic. This way, the elder law estate plan is far more likely to address their situation when they may need to use it in the future. Indeed, by providing ongoing information and reviewing the client's matter tri-annually, the elder law estate plan is designed to work when the client needs it, not when they wrote it, perhaps decades earlier.