How Medicaid Countable Asset Limits are Calculated
When one member of a couple must apply to Medicaid to finance nursing home or long term care expenses in North Carolina, both members of the couple must meet certain asset restrictions. In general, the long term care applicant must not have more than $2,000 in individual countable assets when applying for Medicaid.
The spouse remaining at home is allowed to keep more assets. In North Carolina, the stay-at-home, or “community” spouse may keep a maximum of $120,900 and a minimum of $24,180 in countable assets (2017 figures) when his or her spouse is applying for Medicaid. The amount of countable assets that the community spouse may hold is called the “Community Spouse Resource Allowance,” or CSRA.
In order to calculate the exact CSRA for a particular community spouse, Medicaid performs an assessment of the applicant couple’s combined joint countable assets as of the “snapshot date.” Medicaid determines the snapshot date as the last business date of the month preceding the first period when either spouse spends 30 consecutive days in a hospital or nursing home (“continuous period of institutionalization.”)
The snapshot date stays fixed in time based on events only, and remains the same date no matter when the actual Medicaid application is filed (i.e. the Medicaid application may be filed years after the snapshot date.)
After the snapshot date is determined, the applicant couple’s total combined countable assets on the snapshot date are divided by two. I’ll use an example to explain how the at-home spouse’s final CSRA (again the amount of countable assets Medicaid will allow the at-home spouse to keep) is calculated:
Suppose a married North Carolina Medicaid applicant couple has $280,000 in combined countable assets as of the snapshot date. Total combined countable assets are divided by two as the first step in determining the CSRA, i.e. $280,000/2 = $140,000. Because the CSRA is capped at $120,900 in North Carolina, and $140,000 is greater than $120,900, the actual CSRA (again the amount of countable assets Medicaid will allow the at-home spouse to keep) equals the maximum CSRA cap of $120,900.
How a Medicaid Annuity Can Shield and Protect Assets
In the above example, because Medicaid will only allow the ill applicant spouse to keep $2,000, and the at-home spouse to keep $120,900, with the couple’s actual combined countable assets at $280,000, Medicaid will require the couple to “spend down” $280,000 – $2,000 – $120,900 = $157,100 before the ill spouse will qualify for Medicaid.
If the couple does not do any Medicaid planning with a qualified attorney, the couple (and their extended family) may effectively lose the benefit of all or part of their $157,100 in assets, because the Medicaid 5-year lookback penalty will prevent the $157,100 from being gifted to children or other family members (thus the $157,100 may have to be unnecessarily spent by the couple on “private pay” facility costs.) Since the couple will remain on a tight budget, losing the $157,100 may jeopardize the at-home spouse’s future standard of living.
A Medicaid planning attorney works with the couple to preserve as many assets as possible. Fortunately in the above case, instead of spending down and losing the benefit of the $157,100, the Medicaid planning attorney may help the applicant couple to protect and keep the $157,100 by converting it into a non-countable exempt asset (or assets.)
A “Medicaid Compliant Annuity,” or MCA, pays interest like a normal annuity, but is a non-countable, exempt Medicaid asset. As long as the above couple’s $157,100 is liquid enough to be converted to a Medicaid annuity, instead of spending down and losing the $157,100, the couple can instead keep all of that money by investing it in the MCA, making those formerly countable assets now essentially invisible to Medicaid.
The Medicaid Compliant Annuity is owned by the couple just like any other typical investment security, but it does have transfer on death (TOD) beneficiary restrictions. The State of North Carolina’s Medicaid program must be named primary TOD beneficiary, unless the following persons are named primary TOD beneficiary, in which case Medicaid is named contingent TOD beneficiary:
- The community spouse (at-home spouse);
- A child of the couple under age 21; or
- A disabled child of any age.
To get around these TOD beneficiary restrictions, elder law attorneys frequently choose an annuity with a very short term (for example, six months, or one year.) Once the ill Medicaid applicant has been qualified for Medicaid, if the at-home spouse owns the Medicaid Compliant Annuity, Medicaid no longer remains concerned about the at-home, community spouse’s asset level. Thus, when the short Medicaid Compliant Annuity term expires, the community spouse is then generally free to move the MCA funds to another type of asset, including a Medicaid countable asset, and to pick any TOD beneficiary that he or she chooses.
MCAs may be particularly useful in converting countable IRA, 401K, or other retirement account assets into Medicaid exempt assets. It is normally difficult to convert retirement account assets to other types of Medicaid exempt assets because of the need to liquidate (and incur tax penalties) the retirement account to purchase other non-security Medicaid exempt assets (such as home improvements, for example.) But because a MCA is an investment security, the assets held in a Medicaid countable retirement account may be converted to a exempt Medicaid asset without disturbing the tax deferred status of the retirement account.
Reference: Krause Financial Services
Medicare was set up by our government as a health insurance program, which helps to pay seniors’ health care costs. Because it is insurance, when a senior uses Medicare to pay for medical expenses, the senior does not have to pay Medicare back.
But if the senior will need long term care, such as nursing home care, the Medicare program only pays for 100 days of long term care, and that’s it.
Our federal government has avoided meaningful comprehensive health care planning for aging people. In North Carolina, monthly long term care, or nursing home expenses, can range from $4,500 to $10,000 per month. Because most older families cannot afford to pay long term care expenses by themselves for very long, they must rely on the Medicaid poverty program to pay long term care expenses. Medicaid now pays about 63% of the U.S. long term care bill annually.
Because Medicaid was set up as a poverty program, Medicaid keeps track of every dollar it spends on a nursing home or long-term care recipient, and expects to be paid back. In every state including North Carolina, the Medicaid Estate Recovery program aggressively goes after any assets left in a Medicaid recipient’s estate following that recipient’s death, seeking funds to pay off the Medicaid bill.
In North Carolina, since all valid bills (including the Medicaid bill) must first be paid in probate before assets are awarded to the deceased person’s beneficiaries, valuable assets such as the home may be sold (and thus lost to heirs) in order to pay the deceased person’s Medicaid and other estate bills.
A person needing to use Medicaid to pay for long term care may not have more than $2,000 in assets when he or she applies to Medicaid.
Because $2,000 is such a small amount, many people mistakenly believe that a senior, or a senior and her spouse, must first “spend down,” or “give away”, many of their assets in order to qualify for Medicaid.
Medicaid Planning is instead designed to help a senior, and a senior’s spouse, keep as many assets as possible for themselves and their families, while qualifying for Medicaid. Proper Medicaid planning may save the family from unnecessarily losing many thousands of dollars, and from losing valuable assets such as the home or family farm.
There are two types of Medicaid planning. Advance Planning, or Proactive Planning may help protect assets well in advance of needing Medicaid. Crisis Planning takes place when a family knows that Medicaid will definitely be needed soon.
In both advance and crisis planning, the elder lawyer may “shelter” countable Medicaid assets by exchanging them for exempt assets.
Medicaid Planning may involve the following 10 techniques:
- Moving assets between husband and wife. Medicaid allows the “at-home”, or “community” spouse to have many more assets than the institutionalized spouse–thus assets may be moved between spouses.
- Irrevocable trusts. Assets may be protected from Medicaid well in advance by using an irrevocable trust, such as a Medicaid Asset Protection Trust (MAPT.)
- Medicaid annuity. Assets such as retirement accounts may be moved into a special Medicaid Annuity which is exempt from Medicaid.
- Real property such as the home and family farm may be converted to exempt assets, and protected from Medicaid Estate Recovery, through medical creditor protection techniques such as JTWROS ownership.
Other ways to preserve assets include:
- Making home improvements or a new car purchase.
- Buying an exempt short-term life insurance policy.
- Purchasing a new jointly-held property with a child or non-spouse.
- Purchasing a prepaid burial policy.
- Shifting assets to a family business.
- Utilizing a type of loan called a “promissory note.”
By visiting an elder lawyer and engaging in a Medicaid planning process, seniors who need Medicaid to pay for their long-term care may frequently preserve their hard-earned savings and assets for themselves and their families.
Given time, any brain can succumb to dementia — memories fade, thoughts scatter, basic abilities wither on the vine. Brains don’t come with lifetime guarantees, but there is one major step you can take to protect yourself from Alzheimer’s or other causes of mental decline: exercise your body. Nothing protects the brain quite like regular exercise, says Jennifer Heisz, a cognitive neuroscientist at McMaster University in Ontario, Canada. Not crossword puzzles, not supplements, not prescription medications. Exercise seems to beat them all, reducing the risk of Alzheimer’s disease or cognitive decline by about 35 percent to 45 percent, according to the latest evidence. People who don’t exercise as they age are taking a gamble. In a study of more than 1,600 older adults published in January in the Journal of Alzheimer’s Disease, Heisz and colleagues found that a lack of exercise was about as risky as having certain types of genes that raise the risk of Alzheimer’s. Genes are forever, but exercise habits can change.
Exercise enhances the release of chemicals known as nerve growth factors that help brain cells function properly, according to Teresa Liu-Ambrose, director of the Aging, Mobility and Cognitive Neuroscience Laboratory at the University of British Columbia. Nerve growth factors probably also help build new brain cells, giving the brain an extra cushion against age-related losses.
Studies in rodents show that exercise encourages formation of new brain cells in the hippocampus, an organ in the medial temporal lobe of the brain that plays an important role in memory.
“It’s like investing in a retirement fund for the brain,” Liu-Ambrose says. Exercise enhances blood flow to the brain, which can help keep it healthy and nourished. Liu-Ambrose notes that exercise also helps prevent hypertension and diabetes, which are two major risk factors for dementia.
There’s no particular type of exercise that seems to be best for the brain. Heisz notes that most of the subjects in her study walked three times a week. “It could be as simple as that,” she says. About 2.5 hours of moderate to vigorous aerobic exercise every week would be a reasonable goal, she says.
“Even a 15-minute walk per day would be much better than doing nothing at all,” Liu-Ambrose says. “People just need to do it.”
National Academy of Elder Law Attorneys, (May 24, 2017).
Chris Woolston, Why exercise is the best medicine for your brain, Los Angeles Times (May 18, 2017),
A MAPT MAY PROTECT A HOME WITH A MORTGAGE FROM MEDICAID OR OTHER MEDICAL CREDITORS
It’s often essential to protect an older person’s home from potential medical creditors, particularly if the older person could eventually need Medicaid to pay for long term care. As part of an elder law “proactive planning” process, a home with a mortgage can be placed in a “Medicaid Asset Protection Trust,” or “MAPT,” to keep it out of the reach of future creditors, while still allowing the senior(s) to remain in the home and the mortgage to be paid normally.
Because the MAPT is a “grantor trust,” where the senior who sets it up still benefits from the home, under the Garn-St. Germain Depository Institutions Act of 1982, placing the home in the MAPT does not trigger the “due on sale clause” contained in most mortgages.
OTHER COMMON REAL ESTATE ASSET PROTECTION STRATEGIES WILL NOT WORK WHEN A MORTGAGE IS INVOLVED
Homes with mortgages are normally excluded from other types of elder law creditor protection strategies (such as gifting, life estate deeds, and right of survivorship deeds.) Because of the due on sale clause, and other provisions in their mortgage contract, homeowners with mortgages normally cannot give their home away, give part of their home away, or sell or transfer their home prematurely during their lifetimes while the mortgage remains in place. If they do, their entire mortgage balance may become immediately due and payable at once.
A MAPT MAY BE IDEAL FOR TRANSFERRING APPRECIATED ASSETS TO CHOSEN HEIRS
When appropriate, seniors may utilize a MAPT to create a “nest egg” of protected assets that they want safely passed down to their heirs, free from the claims of creditors following the senior’s death. The MAPT works well with assets, such as real estate, which have increased in value during the senior’s lifetime, because the senior’s chosen heirs will receive a stepped-up capital gains tax basis in any assets transferred to the chosen heirs at death.
This means that the chosen heirs will not have to pay capital gains taxes for asset appreciation during the senior’s lifetime, which saves the children or other heirs from having to pay potentially thousands of dollars in unnecessary capital gains taxes.
PROPER USE OF THE MAPT FOR PROTECTING A HOME WITH A MORTGAGE REQUIRES PROACTIVE PLANNING
Even though using a MAPT may be an excellent choice for protecting a home (or other real estate) with a mortgage from Medicaid or other medical creditors, the home should be placed in the MAPT at least 5 years in advance of needing Medicaid to pay for long term care. Using the MAPT to protect a senior’s home with a mortgage from medical creditors remains an important tool in the elder law proactive Medicaid and medical creditor planning process.
As they age, some seniors become less and less able to manage their own assets. Attorneys frequently use the phrase “incapacity planning” to indicate estate planning done for a client diagnosed with dementia, or with other mental or physical disabilities, who will require another responsible adult to eventually manage his financial (and legal) affairs.
THE FINANCIAL POWER OF ATTORNEY
The Financial Power of Attorney (FPOA), also called a Durable Power of Attorney (DPOA), allows a fiduciary, called an “agent”, to manage an impaired senior’s financial and legal affairs. The term “fiduciary” refers to a person who must act in the best interests of the principal when managing his assets. While the FPOA remains the most commonly known tool for managing an incapacitated senior’s assets, management through a Revocable Living Trust (RLT) can offer significant advantages.
HOW A REVOCABLE LIVING TRUST WORKS FOR INCAPACITY PLANNING
After a RLT is set up, the client’s assets are moved into the trust, and those assets are then managed by a fiduciary called a “trustee”. During the senior’s lifetime, and while the senior is mentally able, he serves as trustee for his own assets.
A spouse, and/or a trusted adult from a younger generation (such as the senior’s child), may also be added to the trust document as current co-trustees (along with the senior.) Then, at any time that the senior needs help managing his or her assets, a responsible co-trustee is available, and can step in immediately to help out, with no delay and with no additional legal requirements.
MANAGING FINANCIAL ASSETS THROUGH A REVOCABLE LIVING TRUST: ADVANTAGES
Using a RLT for incapacity planning conveys the following advantages:
- Higher Level of Authority. In both U.S. and European law, a trustee is generally provided a higher level of authority to manage assets than a FPOA agent, and a trustee usually receives a higher level of respect and deference;
- Clear Directions for Managing Assets. Trust documents normally give the trustee detailed directions for managing the senior’s assets. In contrast, FPOA documents typically do not provide any directions to agents regarding how the senior’s assets are to be managed or used.
- Banks Prefer Dealing With Trustees. Banks, brokerage firms, and other financial management firms greatly prefer dealing with trustees over agents, for these reasons, and with these results:
- FPOA Documents Are Frequently Associated With Fraud. FPOA documents are inexpensive, easy to obtain, and frequently forged. Seniors often sign these documents without understanding the repercussions, or are inappropriately pressured to sign these documents by unethical agents. In contrast, RLTs are more commonly drafted by attorneys, and signed in the lawyer’s office, thereby lowering the risk of fraud.
- Legal Department Review May Take a Significant Amount of Time. Because of the fraud risk associated with FPOAs, a financial institution’s legal department may take a significant time, sometimes months, to review a FPOA. When reviewing the application for a new RLT trustee, if any documents are required to be reviewed at all, a fairly straightforward review of the Certification of Trust document (a summary of trust terms), along with any required personal identification information, can be all that the financial institution needs.
- The Bank’s Own Form May Be Required. Because of the ongoing fraud risks, some financial institutions may require the use of their own FPOA forms, and not accept outside FPOA forms. If the senior has already become incapacitated, he or she will not be able to sign a new bank FPOA form. In contrast, such rules do not apply to RLTs.
- FPOA Forms May Become Outdated. Because of the ongoing fraud problem, some financial institutions may not accept FPOA forms which are greater than a certain number of years (5 years for example) old. If the senior has already become incapacitated, he or she will not be able to sign a new FPOA form. In contrast, however, even very old trust documents are commonly relied on.
Even where a RLT is successfully used for incapacity planning, a valid FPOA document signed together with the RLT remains useful in certain areas. The trustee provisions of the RLT only apply to the assets which are held by the trust (the trust estate.) Any of the senior’s assets not held within the trust (the probate estate) may still need to be managed through the FPOA. In addition, the FPOA may convey important authority to the agent to manage the senior’s legal affairs, in ways that may not be addressed by the RLT.
Because these subjects may be complicated, incapacity planning should be discussed directly with a licensed elder law, or estate planning, attorney.
Seniors who must use Medicaid to finance their long-term care, risk losing their home to Medicaid estate recovery following their death, or following the death of their spouse. In Medicaid estate recovery, Medicaid bills the Medicaid recipient’s estate for every dollar spent on the Medicaid recipient during life. Because such bills can reach several hundred thousand dollars in size, the senior’s home may need to be sold in probate to pay all or part of the Medicaid bill.
CAREGIVER CHILD EXCEPTION
A caregiver child who lives with the senior for two years prior to the Medicaid recipient’s institutionalization may keep the home away from Medicaid estate recovery, at least while that child remains in the home. The caregiver child must have provided care that may have delayed the recipient’s admission to a nursing home or other medical institution. Such a child who meets these conditions may continue to live in the home as long as needed free of Medicaid estate recovery. If the child moves out of the home, however, the state can then legally initiate estate recovery.
RESIDENT SIBLING EXCEPTION
A sibling who continues to reside in the senior’s home following the senior’s institutionalization may also save the home from Medicaid estate recovery. Such a sibling must have an equity interest in the home, and must have lived there for at least one year before the deceased Medicaid recipient was institutionalized. As with the caregiver child above, if the qualifying sibling moves out of the home, the state can then legally initiate estate recovery.
SPOUSE, CHILD UNDER AGE 21, AND BLIND OR PERMANENTLY DISABLED CHILD EXCEPTIONS
The home is protected, and Medicaid estate recovery is prohibited, if the deceased Medicaid recipient is survived by: 1) a spouse; 2) a child under age 21; or 3) a blind or permanently disabled child of any age. All three categories of survivors are not required to live in the home, and may do what they wish with the home following the Medicaid recipient’s death.
ELDER LAW METHODS
An elder lawyer may incorporate other methods to prevent Medicaid estate recovery of the home, including utilizing a specialized deed such as a joint with right of survivorship (JTWROS) deed or Ladybird deed.
Medicaid Treatment of the Home: Determining Eligibility and Repayment for Long-Term Care, Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services (April 1, 2005), https://aspe.hhs.gov/basic-report/medicaid-treatment-home-determining-eligibility-and-repayment-long-term-care
For obese people over age 64, the combination of aerobic exercise and weight training is better for improving physical functioning than either form of exercise alone, a new study concludes.
Each type of exercise, and a combination of the two, produced 9 percent reductions in body weight over six months. But the combination provided the best mix of protection against muscle and bone loss with improved aerobic capacity. Aerobic exercise and weight training (also known as resistance training) “have additive effects in improving your physical function,” chief author Dr. Dennis Villareal of the Baylor College of Medicine and the DeBakey VA Medical Center in Houston told Reuters Health by phone.
The findings in the New England Journal of Medicine have broad significance because one third of older adults in the United States are obese, and frequently experience all the health risks that obesity creates.
Lifestyle and Southern diet factors place a large number of North Carolina seniors at risk for obesity, and being sedentary places seniors at an even greater additional risk. Those risks, however, are mostly preventable. An improved diet, and regular exercise, can help seniors remain independent, active, healthier, happier, and in control of their business and legal affairs much longer, adding to quality and length of life.
National Academy of Elder Law Attorneys, (May 24, 2017).
Dennis Villareal, at al, Aerobic or Resistance Exercise, or Both, in Dieting Obese Older Adults, New England Journal of Medicine (May 18, 2017), http://www.nejm.org/doi/full/10.1056/NEJMoa1616338
Researchers have found a surprising connection between intelligence and autism. On May 23, scientists announced the discovery of 40 new genes linked to human intelligence, and found that many people with the genes were also on the autism spectrum. The findings could one day help shed light on the condition’s origins.
Autism, more properly known as autism spectrum disorders (ASD) – includes Asperger’s syndrome. It has long been known that some sufferers have superior abilities in areas such as mathematics and science. The neurological condition affects four to five times as many males as females, believed to be around 1.5 percent of all children. Its exact cause remains unknown, and diagnosis requires many doctors specializing in a number of different disciplines.
The 40 new genes were discovered by researchers from the Centre for Neurogenomics and Cognitive Research in Amsterdam, based on a study of 78,000 people of European descent. Most of the newly discovered gene variants linked to elevated IQ play a role in regulating cell development in the brain. Computers have made it possible to scan and compare hundreds of thousands of genomes, matching tiny variations in DNA with diseases, body types, or in this case, native smarts.
Many of the genetic variations linked with high IQ also correlated with other attributes: more years spent in school, bigger head size in infancy, tallness, and even success in kicking the tobacco habit.
People with autism may require special care, and may need some type of government assistance during their lives, including Medicaid assistance. Medicaid and similar government programs may have strict asset or income limits. Thus any will or trust bequest left to an autistic person should be directed to a special needs trust (SNT), which will leave such needed government benefits intact.
National Academy of Elder Law Attorneys, (May 24, 2017).
Shiviali Best, Autism is Linked to Intelligence: People With “Smart Genes” are More Likely to Have the Disorder, London Daily Mail (May 23, 2017),
While putting a home or other real property into a Joint With Right of Survivorship (JTWROS) deed has been effective in protecting homes and other real property from Medicaid Estate Recovery claims following the owner’s death, key members of the North Carolina Elder Law bar believe that JTWROS deeds may protect real property against claims from all other general creditors (including all medical creditors), as well.
ASSETS, INCLUDING REAL PROPERTY, NOT SET UP TO TRANSFER BY RIGHT OF SURVIVORSHIP MAY BE SUBECT TO PROBATE CREDITORS
If an asset owned by a person who dies (decedent) has not been set up to be transferred directly to an heir via Right Of Survivorship (ROS), or other appropriate method, such asset normally falls down into the decedent’s estate, and becomes an “estate asset”. Under North Carolina probate law, before the decedent’s beneficiaries can be paid according to a will (or according to state law if there is no will), all valid estate creditors (including Medicaid) must be paid first. Where assets were held in a revocable trust, such assets may still be pulled back into the estate after death to pay creditor’s claims.
MEDICAID AND OTHER MEDICAL BILLS MAY BANKRUPT AN ESTATE
For anyone who dies with large unpaid medical bills, including hospital bills, ambulance bills, physician bills, surgery bills, medical treatment bills, and unpaid care facility bills, all of these bills will likely be attached to the decedent’s estate during probate. If Medicaid has been used for nursing home care or other care, Medicaid has kept track of every dollar spent on the Medicaid recipient’s care during their life. Medicaid then constructively attaches its bill, which can be hundreds of thousands of dollars in some cases, to the Medicaid recipient’s/decedent’s estate during the county probate process. Any such large bills may bankrupt the decedent’s estate, leaving no assets for beneficiaries, and any home or real property (frequently the largest assets most people own) may be lost to medical creditors.
JTWROS DEEDS PROTECT AGAINST MEDICAID ESTATE RECOVERY
In order to protect homes, family farms, and other real property against Medicaid Estate Recovery, elder law attorneys may use a Joint with Right of Survivorship (JTWROS) deed to set up ownership of the real property just like a joint with right of survivorship bank account. When a couple holds a joint bank account with the right of survivorship, when one member of the couple dies, the ownership of the balance of that account passes immediately and directly to the survivor of the couple, in a transaction that completely avoids probate. JTWROS deeds pass real property in the same way, and can be set up to directly pass real property to children, grandchildren, other family members, or even friends.
JTWROS transfers are not subject to Medicaid’s 5-year lookback penalty (under current NC Medicaid rules), when the beneficiary who receives joint ownership pays the market value for his or her share (the beneficiary’s initial share is typically 1% or less of the entire parcel.)
JTWROS deeds have proven effective in keeping property away from probate Medicaid Estate Recovery, as Medicaid does not attempt to attach homes or other real property transferred to heirs by JTWROS deed in North Carolina.
JTWROS DEEDS MAY PROTECT AGAINST ALL CREDITORS IN ADDITION TO MEDICAID
Key members of the NC Elder Law bar believe that JTWROS deeds have even much more usefulness than protecting from Medicaid Estate Recovery alone—JTWROS may indeed protect NC real property transfers to beneficiaries against all other general creditors, including all medical creditors.
The legal case Wilson County v. Wooten 251 N.C. 667, 111 S.E.2d 875 (1960), which held that the welfare departments of Durham and Wilson counties could not attach bank account assets transferred to a beneficiary via right of survivorship, likely protects all right of survivorship transfers, including JTWROS deed real estate transfers, from the decedent’s creditors in North Carolina.
The Wilson County v. Wooten ruling follows old English joint tenancy common law going back hundreds of years, where real property held in a joint tenancy passes at death by operation of law to the survivor free and clear of claims of creditors or other heirs of the deceased joint tenant. The Executor or Personal Representative of the decedent’s estate (and the creditors of that estate), thus have no claim to such transferred property.
There are some inconsistencies to Wilson and English common law within North Carolina statutes, but influential members of the NC Elder Law bar believe that Wilson, and English joint tenancy common law precedent, remain solid, keeping JTWROS deeds a highly useful tool in protecting real property transfers to beneficiaries against potentially all creditors.
Burti, Christopher L., Statewide Title, Farmville, NC.
Rocamora, Larry, McPherson, Rocamora, Nicholson & Wilson, PLLC, Durham, NC.
Wilson County v. Wooten 251 N.C. 667, 111 S.E.2d 875 (1960)
In North Carolina, it’s best to keep car ownership in one name only for liability reasons. Although it may seem natural for couples to own a car jointly, if that vehicle is involved in an accident, the injured person’s attorney can sue both an at-fault driver and all owners of the car. When a couple instead owns their vehicles only in their own names, an at-fault driver does not imperil his spouse’s separate assets. Thus couples who own their cars separately can decrease their liability risk by up to 50% or more, depending on how financial assets are distributed between the couple.
Regarding probate, there are two main ways of keeping a car transfer out of probate court following a death, which in some cases can tie up or prevent use of the car for some time following the individual owner’s (or first-to-die of a joint owner’s) death:
- Revocable trust. Placing a car in a trust owner’s single revocable trust can keep it out of probate, because a revocable trust has its own lifetime which transcends the car owner’s death. I do not recommend placing a car into a couple’s joint revocable trust, however, because this unnecessarily expands the liability of an individual car driver so that it imperils the joint financial assets of both members of the couple.
- JTWROS. Not everyone chooses trusts as part of their estate planning. For couples or others who prefer to own their car jointly, they can own their car jointly in North Carolina with a right of survivorship (JTWROS, or JWROS), so that it will pass directly from one to the other party outside of probate at the first death.
Why is the JTWROS designation important for jointly-owned vehicles in North Carolina?
Even given the increased liability risk, some people prefer to own their car jointly. Normally in North Carolina, when a couple of any kind jointly purchases a car at a dealer and does not give the dealer specific instructions about how they want the car owned, the dealer will fill out the paperwork in a way that translates into tenancy-in-common ownership on the car title. This means that each member of the couple will own a 50% undivided interest in the car (which is, unlike land, and undividable asset) with no survivorship rights. This can produce undesirable results.
The JTWROS Title
In order for the survivor of any couple, including a married couple, to inherit a jointly owned car in North Carolina (not held in a trust) outside of probate, the joint owners must explicitly tell the dealer that they want the car owned as joint with right of survivorship, or JTWROS. They also must insure that the letters “JTWROS” or “JWROS” appear on the car title itself. Without JTWROS on the car title, there is no right of survivorship held by the surviving owner.
It is important to specifically check the car title for the JTWROS designation, because many DMV workers do not understand the JTWROS designation, or do not know that JTWROS ownership of vehicles is permitted in North Carolina.
The JTWROS designation on the car title will insure that if one of the joint car owners dies, the remaining living owner will then receive full ownership of the car (except for any portion owned by the lender) in an automatic out-of-probate transfer.
Medicaid pays for 63% of all long-term care in the United States. Long-term care, particularly memory or other specialized care, may cost in excess of $5,000.00/month. Because many seniors cannot afford such expenses over the long term, Medicaid may need to be utilized to pay the senior’s long-term care bills.
Where there is one spouse within a senior couple who needs long-term care, and where Medicaid will be required to finance these expenses, an elder law attorney may utilize Medicaid planning techniques to help the couple preserve as many assets as possible. Incorporating a Medicaid-compliant (or Medicaid-qualified) annuity may help the ill spouse to qualify for Medicaid, while preserving assets for the well (community) spouse.
WHAT IS A MEDICAID-COMPLIANT ANNUITY?
When a person purchases an annuity, he or she invests a principal amount in exchange for a stream of future payments (normally with interest) which is returned to the investor.
The most important feature of a Medicaid-compliant or Medicaid-qualified annuity is that once the principal investment is made, Medicaid no longer counts the stream of future payments received back by the investor as Medicaid “countable assets.” Thus, previously countable Medicaid assets may be shielded from Medicaid by converting them to a future income stream emanating from a Medicaid-compliant annuity.
USE OF A MEDICAID-COMPLIANT ANNUITY BY A MARRIED COUPLE IN QUALIFYING THE ILL SPOUSE FOR MEDICAID
Medicaid-qualified annuities are most useful where an ill spouse needs to qualify for a nursing home (or other long-term care facility), and the well spouse (community spouse) desires to stay at home.
Suppose an ill spouse, who cannot have more than $2,000 in assets to qualify for Medicaid, is $100,000 over resource (or has $100,000 too many liquid assets to qualify for Medicaid.)
Because the ill spouse can transfer an unlimited amount to the community (well) spouse, he transfers the $100,000 to his wife. If the $100,000 was still in excess of the wife’s Medicaid community spouse resource allowance (CSRA), the wife can purchase a $100,000 Medicaid-compliant annuity to immediately transfer the wife’s countable $100,000 asset into a stream of Medicaid-exempt income payments.
Income is counted by Medicaid only if payable to the Medicaid applicant. Income to the community spouse is specifically excluded by Medicaid, thus the community spouse is allowed to keep all income payable to the community spouse. The husband’s $100,000 countable asset has been transferred by the $100,000 Medicaid-compliant annuity into an exempt source of monthly income payments for the community spouse. Her ill husband now qualifies for Medicaid.
Once the Medicaid applicant qualifies for Medicaid, the Medicaid beneficiary must only show on an ongoing basis that he does not have $2,000 in assets. So even though the community spouse receives a monthly annuity check that could accumulate into an asset if saved, the value of the assets in the name of the community spouse is no longer a concern of Medicaid.
CHARACTERISTICS OF A MEDICAID-QUALIFIED ANNUITY
Medicaid-qualified annuities must have the following attributes:
- Category: A single-premium immediate annuity (SPIA). The premium is paid for in a lump-sum premium payment and the annuity immediately begins paying back the premium to the owner/annuitant.
- Sold by company or bank in the business of selling annuities.
- Irrevocable: The annuity is irrevocable and cannot be assigned to another party.
- Life expectancy payout required: The annuity payments must be completed before the end of the annuitant’s life expectancy.
- Equal Payments: The annuity payments must be equal throughout the annuity’s payment period with no deferral or balloon payments.
- Medicaid named as primary or contingent beneficiary: The State of North Carolina’s Medicaid program must be named primary beneficiary, unless the following persons are named primary beneficiary, in which case Medicaid is named contingent beneficiary:
- The community spouse (spouse at home);
- A child under 21; or
- A disabled child of any age.
When properly used, a Medicaid annuity may help a Medicaid applicant preserve valuable assets for his or her family.
Almost everyone realizes that medical care at the end of life can be incredibly expensive. Even though Medicare and private insurance may be available, the unreimbursed cost of hospital stays, medicines, and institutional care, including nursing home care, may be unaffordable for the senior or his family. Because of this, Medicaid, a federal poverty support program, remains the largest payer of long-term medical care expenses in the United States, paying 62% of the nation’s long-term medical care costs.
MEDICAID ESTATE RECOVERY
Many believe Medicaid to be another health insurance program like Medicare, but it is not. When a senior uses Medicaid to pay his care bills, Medicaid counts and records every dollar spent on the Medicaid recipient. Following the Medicaid recipient’s death, Medicare will place a lien on the recipient’s estate for every dollar Medicaid spent during life, through a program called Medicaid Estate Recovery.
The estate’s Medicaid bill can be tens of thousands of dollars. Because the home is frequently the most valuable asset left in a senior’s estate, and because the probate process requires an estate to pay all valid estate bills before distributing remaining assets to the deceased senior’s beneficiaries, the home must often be sold to pay off estate creditors. If the senior intended to pass down the home to a loved one following his death, Medicaid Estate Recovery can prevent the home from reaching that loved one.
Medicaid Estate Recovery is prohibited if the deceased Medicaid recipient is survived by a blind or disabled child of any age, a child under age 21, or is survived by a spouse. But Medicaid Estate Recovery can continue once the spouse has died.
PROTECTING THE HOME FROM MEDICAID ESTATE RECOVERY
Medicaid laws are complex. During life, a senior’s home is normally not a “countable asset” if the senior is trying to qualify for Medicaid, as long as the senior has the “intent to return” to his home even while he resides in managed care or a nursing home, or as long as his spouse or other dependent relatives live in the home. But even though the home is not a countable asset when qualifying for Medicaid, it can still be attached by Medicaid Estate Recovery after the senior dies, as discussed above.
The JTWROS Deed
At this time, the North Carolina Medicaid Estate Recovery rules provide that real property which passes directly to heirs outside of probate is not subject to being attached in a Medicaid Estate Recovery proceeding. An elder law attorney can utilize this rule by retitling the real property containing the senior’s primary residence as “joint with the right of survivorship”, or JTWROS. A small percentage of the real property (frequently 1%) is sold to a beneficiary, such as a child (with the largest percentage ownership of the real property, frequently 99%, retained by the senior) so that the real property will now be owned jointly by tenants-in-common. Real property owned by tenants-in-common is not a countable asset when qualifying for Medicaid.
To keep the now jointly-owned primary residence out of the senior’s probate estate following his death, the “right of survivorship” is added to the deed. Now, just like a jointly owned bank account with survivorship rights, the senior’s ownership percentage (99% for example) automatically transfers to the minority (1% for example) beneficiary (frequently the senior’s child/children) at his death, so that the beneficiaries now own 100%. This becomes an out-of-probate transfer directly to the senior’s beneficiaries, which currently escapes Medicaid Estate Recovery under North Carolina’s Medicaid rules. The home passes to the senior’s beneficiary(ies) without Medicaid being able to use it to repay Medicaid costs.
Another positive result is that the senior’s heirs will not have to pay taxes on any appreciation of the home during the senior’s life. Because the home will be includable in the senior’s gross estate for federal estate tax purposes, the tax basis will be reset to the market value of the property at the senior’s death, thereby potentially saving the senior’s heirs thousands of dollars in capital gains taxes.
The JTWROS procedure may not work properly if a mortgage remains on the senior’s home. If it does, the sale of a minority percentage of the property to the senior’s beneficiary(ies) may trigger the bank loan’s “due on sale” clause, making the balance of the loan immediately due. For this reason, any bank loan attached to the senior’s primary residence typically must be paid off before the elder law attorney can set up a JTWROS conveyance.
Because family relationships can be more complex than what can be captured on a JTWROS deed, in addition to the JTWROS deed, the elder lawyer may create a real estate contract to be signed by the involved family members to better clarify the results of the JTWROS transfer.
Other Real Property
The JTWROS procedure may also be used to protect other tracts of real property owned by the senior from Medicaid Estate Recovery. In addition, because other real property may be a countable asset(s) when trying to qualify for Medicaid, converting such real property from single ownership to joint tenants-in-common ownership prior to applying for Medicaid can convert the property to a non-countable asset for Medicaid qualification purposes.
Even though the JTWROS deeding procedure works now in North Carolina to keep real property away from Medicaid Estate Recovery, the Medicaid rules could be changed in the future to prevent the technique from working.
GIFT TRANSFER OF THE HOME TO HEIRS WHILE RETAINING A LIFE ESTATE
The JTWROS procedure currently works to prevent Medicaid Estate Recovery, but it does not work in North Carolina to protect the senior’s home from other types of creditors during probate.
Even if a JTWROS property has passed to heirs directly outside of probate, North Carolina probate rules will allow the real property to be pulled back into the probate proceeding to be used to pay the estate debt to such non-Medicaid creditors as hospitals and county tax assessors, particularly if there are no other estate assets left to pay off such claims.
To shield the senior’s home from all estate creditors, the senior may gift the remainder interest in his home away to his beneficiaries during life, while retaining a life estate so that he may legally remain in his home during his lifetime. This assures that no future creditors, including medical creditors such as Medicaid, will be able to place a lien on his home following the conveyance, because the home will now not be available to pull back into the senior’s probate estate to pay debts following the senior’s death.
In addition to allowing the senior to continue to use his home during his lifetime, retaining the life estate allows the senior to include the home in his gross estate for federal estate tax purposes under Internal Revenue Code Section 2036. His heirs will then receive a step up in (tax) basis, re-setting the tax basis of the property to its market value at the time of the senior’s death. Because the senior’s heirs will not have to pay capital gains taxes on the senior’s home appreciation during the senior’s lifetime, this can save the family thousands in capital gains taxes.
If the senior transfers his home to his heirs without including a life estate for himself, his heirs will have to pay capital gains taxes on all home appreciation from the time that the senior originally purchased the property forward.
The gift transfer while retaining a life estate technique is not appropriate for seniors who may need Medicaid within 5 years. If the senior attempts to qualify for Medicaid within five years of this transfer, Medicaid will require the senior to private pay (for example to a nursing home or managed care facility) the entire value of the house before Medicaid will provide any government dollars.
In some cases, the family may be able to give the house back to the senior to avoid this Medicaid problem, but family dynamics may make this an unsure result.
DO NOT WAIT TOO LONG TO CONVEY PROPERTY
The family should not wait too long to shield the senior’s home against creditors, including medical creditors. Under North Carolina law, such procedures such as the JTWROS transfer and the home gift transfer with the retention of a life estate work to protect against future creditors, but may not work to protect against current debts or creditors.
In addition, seniors could encounter sudden illness at any time which could make them mentally incompetent, and unable to sign the legal documents needed to protect their home from creditors.
It may frequently make good sense to use a JTWROS deed as insurance to shield a senior’s home from Medicaid Estate Recovery. Because a senior’s Medicaid bill can be so large, the JTWROS deed could help the family keep from losing the home to creditors in probate. Because the senior retains as much as 99% ownership in his home as part of a JTWROS conveyance, the senior retains control of his home and can use it like he always did. Thus, the JTWROS deed is a “low impact” asset preservation technique.
To guard against all future estate creditors, the senior may gift away the remainder interest in his home, and retain a life estate. This can work well when done early, but should not be done if the the senior will need Medicaid in less than five years.
The Spanish moss swayed almost unperceptively one warm morning above a coastal Carolina cemetery, where a recently widowed grandmother kneeled weeping by her husband’s headstone. Unexpectedly, a younger man approached and started comforting the woman, eventually gaining enough trust to type his telephone number into the grandmother’s cell phone, and assuring her that he would help her if she ever needed anything. Lonely and upset, the widow placed a call to the stranger before she arrived home.
Disgustingly, the above scenario was actually reported not long ago by a distraught daughter to the NC Attorney General’s office. As the reader may have guessed by now, the lurker in the graveyard was not a good Samaritan–instead, he was a “sweetheart” scammer faking love and compassion for the lonely widow in order to steal her assets. Such scams may take months to develop, as the scammer slowly gains the victim’s trust, and gains greater and greater access to her financial assets.
The NC Department of Justice, Attorney General’s Office reports that they heard from 20 NC sweetheart scam victims in 2015, reporting $3.4M in total losses. Recently, one North Carolina woman sent more than $40,000 to a sweetheart scammer she met through Facebook who claimed to be working out of state when his bank account was supposedly frozen. Another victim lost nearly $100,000 to two sweetheart scammers she met through Match.com, both whom claimed to be Americans working on construction projects in the Middle East.
In addition to the particularly odious graveyard incident reported above, attorney Caroline Farmer, Deputy Director of the Victims and Citizens Section of the NC Attorney General’s office, reports that sweetheart scammers frequently troll newspaper obituary sections, looking for suitable prospective widow or widower victims. Such victims are frequently not contacted until about six months after the death of their spouse, because, as Ms. Farmer reports, most of the family who initially comforts the widow or widower has left, and loneliness starts to peak at the six month point.
Such scammers are good at their craft, and convince the victim that they really care about and love them. In-person scammers may even develop a sexual relationship with the victim, in order to become more deeply emotionally intertwined with them. When a senior is targeted, usually by a younger con artist, it may be much easier for other family members to see the problem than the victim, who may argue with those trying to help.
Even though a person of almost any age can fall victim to a sweetheart scam, seniors are viewed by these criminals as more vulnerable. Because many seniors now use computers, most sweetheart scams are now either wholly or partially conducted online. Since seniors now frequent online dating sites, the NC Attorney General’s office reports that scammers create fake identities on sites like SeniorPeopleMeet, OurTime, ChristianMingle, Match.com, eHarmony, and Facebook to target lonely people.
Because of the threat of encountering sweetheart scammers online or in person, seniors seeking romance should remember the following guidelines:
- Watch for foreign visitors. Beware of any person who claims to be working abroad, or claims to be a wealthy citizen working abroad, or a person who wants to visit the United States–such “foreigners” are frequently scammers.
- Leaving the dating site. Watch for anyone who asks to leave a dating site and communicate personally by email.
- Meeting in person. Be careful when meeting someone you met online in person. Meet only in a public place, and better yet, bring a friend or meet with a group of friends.
- Don’t share your personal information. Don’t share any personal or financial information, including your address, phone numbers, account numbers or passwords, with anyone you meet online (or any new individual you meet in person), even if their story sounds convincing. Be suspicious if you’re asked to make online purchases or forward packages to an address outside of the country.
- Get some help. Let your friends and trusted family members help you assess any new person who wants to become a part of your life.
- Watch out for superlatives. Watch out for anyone who is consistently positive or upbeat about a new romance with you, or who quickly speaks in glowing terms about his unconditional love for you.
If either you, or someone you know, may have been targeted by a sweetheart scam, please report the matter to local law enforcement, or to the NC Attorney General’s office scam report line at 1-877-5-NO-SCAM, or online at ncdoj.gov. Because many victims are so emotionally upset and embarrassed after falling for a sweetheart scam, these crimes are greatly underreported. By reporting such crimes, you can help keep others from becoming victims of these predators.
THE SHEPHERD’S CENTER – ADVENTURES IN LEARNING SERIES
TOPIC: AVOIDING SENIOR SCAMS, FRAUD, AND FINANCIAL ABUSE
MODERATOR: VANCE PARKER, JD, MBA
October 25–Preventing Scams: The Role of Law Enforcement
Sergeant Charles Sayers, Forsyth County Sheriff’s Department
October 27–Finding Help: Low or No Cost Services for Older Adults
Becky Phelps, MSW, Senior Social Worker, NC Department of Health and Human Services, Adult Protective Services
Vera Guthrie, Certified Credit Counselor, Senior Financial Care, Financial Pathways of the Piedmont
November 1–Winning Against Elder Abuse: Successful Prosecution of Elder Crimes
Jessica Spencer, JD, Assistant District Attorney, Forsyth County District Attorney’s Office
November 3–Statewide Efforts Targeting Elder Financial Abuse
Caroline Farmer, JD, Deputy Director, North Carolina Attorney General’s Office, Victims and Citizen’s Services
Time and Location:
Programs start at 10:30 am and end at 11:45 am each day
Ardmore Baptist Church, Fellowship Hall
501 Miller Street
Winston-Salem, NC 27103
Registration for first time attendees is free. To register, contact the Shepherd’s Center at (336) 748-0217.
The LLC has become one of the most popular legal structures for shielding an owner’s personal assets from business liability risks. An LLC owned by a single person, or “member”, is considered a desirable “disregarded entity” by the IRS, which allows the LLC owner to skip filing a partnership return and instead report his LLC income directly on his personal income tax return.
In North Carolina, the personal ownership interest in an LLC, or membership, is classified as an item of personal property. Unfortunately, that classification leads to this not-commonly-known fact: when the individual owner of a single-member LLC dies, the LLC’s necessary ownership transfer to the decedent’s heirs must pass through probate.
While the LLC is passing through probate, its revenue stream flows to the decedent’s estate, not to the heirs. The LLC membership may thus be tied up in probate for months, or even a year or more. This can interrupt a family’s finances. For example, if a retired husband and wife were living on the monthly income from 10 rental properties held in the husband’s single-member LLC, the wife’s access to cash flow from the LLC may be disrupted if the husband dies and his LLC membership passes into probate.
In North Carolina, the best way to keep a single-member LLC’s ownership interest out of probate is to employ a revocable trust. The revocable living trust keeps assets held by the trust out of probate because the trust is a separate entity which transcends the trust grantor’s death.
When a grantor’s revocable trust becomes owner of the grantor’s single-member LLC, the LLC Articles of Organization and Operating Agreement are set up so that the trust owns the single membership in the LLC. Because the IRS considers a revocable trust a grantor trust, income from the single-member LLC owned by a grantor’s revocable trust is still reported on the grantor’s individual tax return, maintaining desirable pass-through taxation.
Distribution terms added to the grantor’s revocable trust direct how ownership of the LLC will be transferred to the grantor’s beneficiaries following the grantor’s death. Because trust distribution following the grantor’s death takes place privately outside of probate, the ownership transfer from the grantor’s trust to the beneficiary(ies) can take place almost immediately, keeping the LLC’s cash flow intact and uninterrupted to a needy beneficiary(ies).
When you choose beneficiaries for your IRA account, you insure out-of-probate transfers to those beneficiaries when you die.
But picking proper beneficiaries can be tricky. Here’s a list of the best and worst IRA beneficiary choices:
BEST IRA BENEFICIARIES
- Your Spouse
If you are married, it’s likely that the first person you want to benefit is your spouse. Your spouse is the only person that the Internal Revenue Service allows to “rollover” the IRA participant’s IRA to their own IRA account. The rollover will allow your spouse to then control your IRA assets, and to invest them as he or she likes.
If your spouse does not need the IRA funds immediately, he or she can keep them growing tax-deferred until April 1 following the year he or she reaches age 70 1/2. At that time, annual taxable Required Minimum Distributions (RMD) will begin. The remainder of the account not required to be distributed can continue tax-deferred growth.
- Your Children, Grandchildren, or Younger Individuals
With the exception of your spouse, choosing an individual (or individuals) as your IRA beneficiary allows that beneficiary (following your death) to receive the money as an inherited IRA.
With the inherited IRA, Required Minimum Distributions (RMDs) will begin in the year following the original account owner’s death. These RMDs are calculated based on the beneficiary’s age-based actuarial life expectancy. The IRS provides a worksheet for calculating RMDs at https://www.irs.gov/publications/p590b/index.html
The younger beneficiary can pull out more funds than the annual RMD requires if needed, but the additional withdrawals will also be taxed.
If the younger beneficiary can afford to let the IRA principal continue to grow tax-deferred, the younger beneficiary’s longer life expectancy can lower the annual RMD, and stretch the IRA’s tax-deferred growth over a longer lifetime. Intentionally using this strategy to grow the IRA’s tax-deferred principal from one generation to the next is called the “stretch IRA” concept.
When used properly, growing your IRA by leaving it to a younger individual(s) who can afford to stretch out the inherited IRA’s tax-deferred growth can provide significant returns to the beneficiary. Assuming a 7% return with only the annual RMD withdrawn, a $100,000 IRA left to a 20 year old child or grandchild can provide $1,765,731 in income over that child’s expected 63 year lifetime. Please see the chart below:
|TOTAL INCOME FROM IRA OVER BENEFICIARY’S LIFETIME
||Value of IRA When Inherited by Beneficiary
- A See-Through Trust
A trust which qualifies as a “see-through” trust under IRS regulations can be an appropriate beneficiary for your IRA. There may be many practical reasons to employ a trust instead of giving IRA assets directly to a beneficiary. For example, a father wanting to leave a $250,000 IRA account to his 14 and 16 year old children would be wise to protect the proceeds with a trust instead of directing the funds to his children directly.
In general, leaving an IRA to a non-human entity like an estate or a trust ruins “stretch IRA” optimization, because such beneficiaries must withdraw all funds within five years (instead of 63 years for a 20 year-old individual, for example.)
But under IRS regulations, the “see-through” trust is able to “see through” the trust entity to the individual life expectancy of the oldest beneficiary of the trust.
To qualify as a see-through trust, the trust must meet the following IRS rules:
- The trust must be valid under state law;
- The trust must be irrevocable following the IRA participant’s death;
- Trust beneficiaries must be identifiable;
- The IRA plan administrator must be provided with proper documentation regarding the trust beneficiaries and/or the trust by October 31 of the year following the participant’s death;
- All trust beneficiaries must be individuals.
Typical testamentary trusts (found in wills) or revocable living trusts become irrevocable after the death of the will testator or trust grantor. If properly drafted, and with proper beneficiaries, such trusts may qualify as see-through trusts under the above IRS rules.
- A Charity
A tax-deferred account may be appropriate to give to a charity, if none of your human beneficiaries need the funds. You can transfer the full tax-deferred IRA value to the charity because the charity will pay no income taxes when it receives the money, and the account will not be included in your taxable estate when you die (reducing the amount that your family will have to pay in estate taxes, if applicable.)
WORST IRA BENEFICIARIES
- Your Estate
Naming your estate as your IRA beneficiary is a bad idea. This insures that the IRA funds must now go through probate, increasing the time, complexity, and expense of your probate estate. The IRA’s creditor protection will be lost, making your IRA funds newly eligible to pay estate debts. Your intended beneficiaries will no longer be able to stretch out their Required Minimum Distributions over their lifetimes (and save tax dollars) because the IRA funds will now be required to be fully withdrawn (and taxes paid on the withdrawals) within five years.
- An Individual and an Entity
In order for tax-saving stretch IRA provisions to be available to your human beneficiaries, all of your IRA assets must go to human beneficiaries following your death.
For example, you may intend for your two children to be able to stretch out their Required Minimum Distributions over their lifetimes, leaving 95% of your IRA to them and 5% of your IRA to your church. But even this small bequest of your IRA funds to your church will trigger the five-year IRA distribution rule for your children. Having to fully distribute all of your IRA proceeds (and pay the associated taxes) over a short five-year period can greatly reduce the stretch IRA tax savings available to your children.
- A Person who has Problems Managing Money or who is in Debt
A person who cannot manage money would withdraw the inherited IRA funds very rapidly, with income tax having to be paid on every withdrawal, negating the potential stretch IRA tax savings of an inherited IRA.
In addition, unlike with a traditional IRA, a 2014 U.S. Supreme Court decision held that the proceeds from an inherited IRA are fully available to creditors. Thus if you leave your IRA outright to someone in debt, they may lose all of that money to creditors in a short amount of time.
To protect your IRA assets directed to a beneficiary with money management problems, or with creditor or debt problems, consider setting up a see-through discretionary trust for the beneficiary. You could then choose another responsible family member to serve as trustee to manage the IRA funds, and to make the spending decisions on behalf of the encumbered beneficiary.
- An Older Individual
Leaving an IRA to an older person frequently insures that the Required Minimum Distributions will be accelerated, leading to increased taxes. If the beneficiary really needs the funds, however, and there are no alternative assets to transfer, the increased taxation rate may be less important than taking care of the beneficiary.
Daniel A. Timins, Who Should You (Not) Leave Your IRA To, Kiplinger (August 2016), http://www.nasdaq.com/article/who-should-you-not-leave-your-ira-to-cm660234
Understanding the Stretch IRA Strategy: Preserving Assets for Your Heirs, T Rowe Price Investor (March 2011), https://individual.troweprice.com/staticFiles/Retail/Shared/PDFs/StretchIRA.pdf
Natalie B. Choate, Life and Death Planning for Retirement Benefits, (7th ed. 2011).
Understanding Who Should Be Beneficiary of Your IRA, Estate Planning.com, https://www.estateplanning.com/Beneficiary-of-Your-IRA/
Click here to download a PDF of this article.
This article originally published in the Winston-Salem Journal
Identity theft is scary. Charlie, a 72-year-old retiree, hears the first ring while heating up the spaghetti sauce for dinner. He thought about letting the phone go, but something about the ring telegraphed urgency.
The caller sounded excited, as he spoke in a Hispanic accent: “Congratulations! You have won the lottery!” “What lottery?” Charlie asks. The caller explained further: In order to improve its economy, Portugal, in 2011, established an international lottery, and you are one of the 2016 winners. “Congratulations Charlie, you have won $383,000.00!”
Charlie has not won much in his life, and has grown a bit tired of living on a fixed income. He is just the type of target that the swindler was hoping for–the type of mark willing to believe that big money might drop into his lap one day, just like that, money for nothing!
The Forsyth County Sheriff’s Department reports that the swindlers who conduct such telephone scams understand human nature, mostly targeting seniors who may have more difficulty recognizing predators, and who may be receptive to receiving a promise of money. Calls are intentionally made at busy times of day, such as dinner time, because it is easier for crooks to swindle people when they are distracted.
Such come-ons as the one above are like money in the bank for crooks–they set up “boiler rooms” with lots of experienced callers in both foreign countries and the U.S. Connecting with every few calls, their schemes work reliably and predictably, day in and day out. And, just like portrayed in the movie “The Sting,” the swindlers close up shop and move elsewhere every few days, which makes them incredibly hard for the authorities to catch.
As reported by the Forsyth County Sheriff’s Department, telephone scams such as the one above frequently lead to identity theft. The swindler’s call may continue like this:
The caller explains to Charlie that nothing will be required of him to receive his $383,000.00, except filling out a few forms. The caller asks for Charlie’s address, which Charlie gives him, so that Charlie can fill out a 7-page Acceptance Document which will be Federal Expressed to him. The caller promises Charlie that once he fills out the form and sends it back, his $383,000.00 will be on its way!
The next day, Charlie receives the 7-page document as promised. The document contains blanks for Charlie to fill in the following type of information:
- Charlie’s full name;
- Charlie’s wife’s full name, and her maiden name (if Charlie is married);
- The last 3 addresses where Charlie has lived;
- Information about Charlie’s current and previous automobiles, and where they were financed;
- Detailed name and contact information about Charlie and his wife’s physicians.
The cover letter accompanying the 7-page document that Charlie received explains that he will be receiving his $383,000.00 prize money via wire transfer, thus the Lottery Prize board will need Charlie to fill in the following information so that they can wire him the money:
- Charlie’s Social Security number;
- Charlie’s bank account numbers and accompanying passwords.
Of course, once Charlie returns the form, his and his wife’s identities have been stolen.
As an estate planning attorney, one of my jobs is to assist seniors and others with keeping their money, so they will have enough during life, and pass it down to their beneficiaries as they wish. It’s important for seniors and their caregivers to understand the risk of such telephone scams, because such telephone identity theft schemes are prevalent in the Piedmont Triad, and they keep working. A public educator for the Forsyth County Sheriff’s Department reports that when he warns seniors in his talks about the above identity theft telephone scam, he frequently meets Forsyth County seniors who have already become victims.
The Forsyth County Sheriff’s Department shares the following advice with seniors regarding telephone calls from strangers:
- Remember what Mama told you: Nobody ever gives you something for nothing;
- Never promise or agree to give money to anybody over the telephone;
- Never give out any personal information over the telephone;
- If a caller’s story seems too good to be true, it is not true;
- The best defense to a telephone scam is to hang up the telephone, quickly!
Click here to download a PDF of this article.
Modern marriage can be a minefield for both estate planners and their clients. In 2016, a majority of marriages end in divorce, second, third, or fourth marriages are common, and blended families represent the norm. Frequently, the estate planner advises families where the husband brings in children from a prior marriage, the wife brings in kids from a prior marriage, and (if industrious enough) the new couple adds new kids of their own to the mix. And, unfortunately, divorce lawyers are more litigious and aggressive than ever.
Growing up in South Texas, I learned a saying about the rugged Texas landscape which sticks in my mind: “Everything in Texas either bites, stings, sticks, or breaks your heart.” Although funny at first, that statement conveys honesty. Despite their best intentions, I know that many of my clients approaching marriage will have their hearts broken by their partner one day.
Thus, here is my financial advice to star-crossed lovers contemplating marriage in 2016: A) It is both highly ethical and appropriate to protect your separate assets against an unanticipated divorce when entering a new marriage; B) It is conversely both ethical and appropriate to take care of your spouse, provide him or her with a home, and reward the spouse who stuck with you, with part or all of your assets, when you die.
Here are 10 ways to financially and legally prepare for a new marriage:
- Keep your individual assets separate. If you want to preserve assets which you bring to a marriage, keep those assets separate. If you commingle your separate funds with funds that come from your spouse, or with your and your spouse’s joint funds, it’s easy for an opposing attorney to argue later that the whole pot has now become divisible marital funds because of the commingling.
- Keep gifts separate. If you receive financial gifts from your family or anyone else during your marriage, that property will be considered separate property unless those assets are commingled with your spouse’s funds or marital funds. You should keep such gifts in a separate account, or if you have an individual revocable living trust, have such gifts made directly to your revocable trust.
- Keep inheritance separate. If you receive financial assets from an inheritance, these assets are normally considered separate property within a marriage, unless these assets are commingled with marital property, or with your spouse’s separate funds. So keep such inheritance assets in a separate account, and keep separate financial records for your inheritance assets. If you have an individual revocable living trust, it makes sense to have inheritance bequests made directly to your individual trust.
- Keep your real estate separate. If you bring separate real estate into a marriage, keep that real estate separate, and do not add your spouse’s name to the deed. No matter what the purpose, if you add your spouse’s name to the deed, an opposing divorce lawyer can later successfully argue that by adding your spouse to the deed, you intended him or her to own up to 50% of your real property.
If you want your spouse to later have your home or other separate real property when you die, it is best to will it to her in your will, or distribute it to her from your trust document after your death.
- Get your business valued shortly before marriage. If you bring a business into the marriage, and if your spouse later divorces you, a court may later award your spouse up to 50% of the value that your non-marital business appreciated during your marriage.
Thus you should have your business professionally valued shortly before marriage. That way, you may be able to subtract the value of your business that you brought into the marriage from any portion that a court divides with your divorcing spouse.
A proper premarital agreement (see below) may help to keep such business assets separate.
- Maintain separate property with non-marital funds. When maintaining a home or other separate property brought into the marriage, maintain the property only with your separate funds. If you use your spouse’s or your marital property to maintain your separate property, you will be commingling these assets so that your spouse’s attorney may be able to get a portion of them upon divorce.
- Keep retirement account records as of the date of your marriage. Upon divorce, individual retirement accounts such as 401Ks, IRAs, and pension accounts may be considered marital property subject to division. If you keep the statements close to your marriage date for these retirement accounts that you bring into the marriage, a court may later let you subtract those amounts from the marital retirement assets that are divided.
- Place your assets into a revocable living trust before marriage. An individual revocable living trust may provide valuable prenuptial protection for separate property added to that trust before marriage. Because a trust is an individual stand-alone legal entity (like a corporation), individual property becomes trust property when properly added to the trust. It is then much harder for an opposing lawyer to later successfully argue that such trust property should be divided with the opposing spouse.
- Use separate revocable living trusts (RLTs) during marriage, not a joint trust. Most estate planning attorneys now utilize separate revocable living trusts (one for the husband and one for the wife) for estate planning, because they provide better protection against spousal creditor or spousal liability events, and more easily allow spouses from blended families to pass down their assets differently. Such separate revocable living trusts are also much better at not commingling marital or spousal assets.
Couples (and their estate planning attorneys) may, however, choose to use a joint RLT to hold a couple’s assets for estate planning purposes. Even though some joint RLTs purport to separately identify individual assets within the joint trust and keep them separate, in reality an opposing divorce attorney can later argue that any property placed into a joint trust was intended to become joint property.
- Use a prenuptial agreement. A prenuptial agreement may provide an important tool for defining and protecting separate property during the marriage, and in providing for how property will be divided in case of divorce. Even though couples may consider a prenup highly unromantic, later divorce is completely unromantic. The couple may prevent later agony by defining their rights in advance.
North Carolina case law provides that a prenuptial agreement may be more enforceable if: A) both parties disclose their premarital assets to each other in writing; B) each party is advised by their own attorney; C) there is no pressure or coercion used on either party before signing the agreement.
Rebecca Zung, 5 Ways to Protect Your Money Without a Prenup (May 10, 2015) Credit.com/ABC News, http://abcnews.go.com/Business/ways-protect-money-prenup/story?id=30908390 .
VANCE PARKER, JD, MBA (with guest speakers to be determined)
AVOIDING SCAMS, FRAUD, AND FINANCIAL ABUSE – FOUR DAY SEMINAR
October 25 & 27 and November 1 & 3, 2016
Ardmore Baptist Church, 501 Miller Street, Winston-Salem, NC 27103
VANCE PARKER, JD, MBA with Sgt. C.P. Sayers, Community Educator, Forsyth County Sheriff’s Department
July 14, 2016 – 10:30 am, Bermuda Village
August 3, 2016 – 7:00 am, Rotary Club of Clemmons
August 19, 2016 – 2:00 pm, The Shepherd’s Center
The federal Achieving a Better Life Experience (ABLE) Act of 2014 authorized a savings account designed for Special Needs Beneficiaries. With similarities to the popular 529 education savings accounts, 529 ABLE accounts have already been rolled out in Ohio, Nebraska, and Florida, with active development taking place in most other states including North Carolina.
North Carolina parents and caregivers will soon be able to create a new “529 ABLE” savings account in the individual name of their disabled child or adult to save for that child’s future disability-related expenses. Primary benefits include tax-deferred savings for the disabled individual, without affecting eligibility for Medicaid, SSI, or other governmental disability programs. These unique features will allow caregivers to start planning and saving for disabled individuals immediately, with these funds allowed to be used as a supplement to governmental assistance.
In order to establish a 529 ABLE account, the disabled individual must be entitled to benefits under the federal SSI (Social Security Income) or SSDI (Social Security Disability Insurance) program, and must have been disabled before age 26. Because caregivers will be able to set up this account for the beneficiary right away and it can be accessed right away, there is no waiting period (such as with testamentary special needs trusts which do not become active until the death of the parent.) Note, however, that unlike properly designed special needs trust assets, funds remaining in a 529 ABLE account after the beneficiary’s death may be tapped to help repay state Medicaid costs.
The 529 ABLE account will not impact eligibility for government assistance programs, with the first $100,000 in such an account exempt from being counted toward the SSI program’s $2,000 resource limit. The account has a yearly contribution limit of $14,000, with any yearly contributions over that amount subject to a 6% penalty. Total lifetime contributions are limited to $394,000. The disability-related expenses paid for by account funds must be for the benefit of the individual with the disability, and must be related to the disability.
Allowable disability expenses are defined fairly broadly. In addition to medical expenses, allowable disability expenses may include housing, transportation, education, legal fees, and additional categories. To track 529 ABLE development progress in North Carolina, and for more information, click here.
It’s a fact that crooks and swindlers have known for years: Seniors are often easier targets for financial predators. Modern science and Neuroscience now tells us why.
A new neurological study from the Georgia Institute of Technology indicates that older people have weaker “clutter control” in their brains. Brain EEG studies indicate that the brain space where seniors go to recall memories becomes very cluttered over time, containing both relevant and irrelevant information. Seniors have more trouble than younger people with brain “clutter control,” or sorting out what is important in their brains from what is not important. This clutter leads to a loss of confidence about memories.
Cluttering of the brain, and the resulting loss of confidence about selecting the correct memories, is a significant reason why older people are more susceptible to manipulation by predators.
Other scientific studies reported by the National Institutes of Health tell us that as brains age, they undergo physiological changes that diminish older people’s ability to assess the trustworthiness of potential predators.
Older people are also more susceptible to dementias, such as Alzheimer’s disease, which impair judgment, making them more vulnerable to the predators who may either be strangers to them, or who can lurk within their own close network of family and caregivers.
This new scientific information should help inform professionals, policymakers, and families that senior vulnerability represents an inevitable scientific fact. Many of our seniors need aggressive, consistent, and effective help protecting them from the in-person, telephone, and computer crooks, swindlers, and predators who target them daily. Sadly, the crime of Elder Financial Abuse has grown to a multibillion dollar industry in our country, and will only grow worse without everyone’s focused action.
Neuroscience Explains Why Seniors are More Vulnerable to Predators
James T, Strunk J. Arndt J, Duarte A. Age-related deficits in selective attention during encoding increase demands on episodic reconstruction during context retrieval: An ERP study. Neuropsychologia. 2016 Jun: 86:66-79. doi: 10.1016/j.neuropsychologia.2016.04.009. Epub 2016 Apr. 16.
Even though Prince, the master showman and electric guitar virtuoso, appreciated the big stage, he probably would not have liked the drama following his death becoming a stadium spectacle. Following his tragic death, hundreds of claimants, including his own half-siblings, their smiling lawyers, lovers that no one ever knew about, and love children of lovers that no one ever knew about, have come forth, seeking a part of Prince’s potential $500 million estate. The claims have gotten so out-of-hand in Minnesota that a judge has ordered Prince’s blood to be genetically sequenced, in order for the courts to start eliminating some of the false heirs.
A half-billion dollar payoff will bring out a lot of lottery contestants. So why did Prince, who was very comfortable using lawyers to protect his recording assets and his professional image, neglect to complete his estate planning? The answer may be pretty mundane. One of Prince’s lawyers, who had worked with him for many years, remarked: “I really don’t think that Prince thought that he was going to die just yet.”
Like many of us, it seems that Prince may have simply looked away from something fundamental to his life here on Earth: even The Artist (Formerly Known as Prince) would pass.
Prince remains in good company, however: many wealthy celebrities have been caught short, dying without wills.
Pioneering African-American professional quarterback Steve McNair, of the Tennessee Titans, was unexpectedly murdered in his Nashville hotel room at age 36, leaving a $90M estate and no will. When Sonny Bono died without a will after hitting a tree while snow skiing, a man claiming to be his illegitimate son later showed up, making a claim on his estate. Rock guitarist Jimi Hendrix died without a will, leaving an estate battle that burned on for over 30 years. The legendary reggae singer Bob Marley died in 1981 with a $30M estate and no will, with dozens of claimants arguing for possession. And artist Pablo Picasso died without a will in 1973, leaving 45,000 works of art, and an estate now several billion dollars in size, but not completely settled.
Prince was known to be both philanthropic and generous. But he may lose over half of his estate to government estate taxes. Assuming a $500M estate (which music intellectual property experts have estimated), the 2016 federal estate tax individual exemption amount at $5.43M, and the 2016 federal estate tax rate at 40%, Prince may lose approximately $198M to the federal government. And with Minnesota’s estate tax exemption amount at $1.6M, and with its upper estate tax rate at 16%, Prince’s estate may lose an additional $80M to Minnesota estate taxes, for a total $278M in funds lost to the government.
For a lesson in estate planning, it’s too bad that Prince did not model another celebrity, Hillary Clinton. Clinton, a lawyer by training, and her husband Bill, have shielded millions of dollars of personal assets within the Clinton Foundation, in a way that has magnified their influence and shielded these funds from estate taxes.
If Prince had established his own large charitable foundation, that organization could have additionally benefitted the people in his home state of Minnesota so greatly that they surely would have added the color purple to their state flag.
Those with smaller estates can learn from the Prince case, because without a will, the same behavior may repeat on a smaller scale. In 2015, I was attending a family business event, when a father I met there told me a story about how important a will could have been to his family. The father told me that his oldest son did very well in school, and eventually came to work in Washington, DC. While in DC, his son was successful enough to purchase a home in the prestigious Georgetown area. But his son then died young, without a will.
After that, unwelcome family members emerged from three different states, trying to get a piece of the son’s Georgetown real estate. The matter had to be litigated over a several year period, at a great cost, and causing significant stress to the son’s close family.
Planning ahead by enacting proper estate documents remains the best way to prevent such family disasters.
It’s common for aging parents to need some help with their business and legal affairs. Adult children frequently reach this conclusion at the beginning of a new year, after they have spent time with their parents over the holidays.
PROBLEMS WITH JOINT BANK ACCOUNTS
Many adult children choose to assist their parents by opening joint bank accounts with them. However, this is not the best option, because it can result in unwanted legal problems that can later become intractable. Joint accounts are normally set up with “survivorship” rights, so that if the parent dies, the remaining child on the account is legally entitled to the remaining assets. If that child has siblings, this child’s inheritance of the account assets outside the will may be in direct conflict with how the parent’s inheritance is divided in the parent’s will document.
Even if the parent does not have a will, N.C. laws of intestate succession, which govern inheritance for people without a will, may directly conflict with the adult child’s receipt of the remaining joint account proceeds following the parent’s death. Either problem may be difficult to fix, and can create unpleasant disagreements that lead formerly congenial family members to litigate against each other.
THE DURABLE POWER OF ATTORNEY
The best solution is to use a durable power of attorney (also called a financial power of attorney or a general power of attorney; durable POA in short) which offers the most economical and legally straightforward method to assist aging parents with their business and legal affairs.
HOW IT WORKS
The person who signs the durable POA document, called the principal, grants significant powers to an agent or agents, allowing them to manage the principal’s business and legal affairs. In order for this document to be legally valid, the principal must be mentally competent, or have “capacity” (the mental ability to comprehend both the nature and consequences of one’s acts) when he or she signs the document. Before the document may be used by the selected agent(s), it must be properly recorded in the appropriate county Register of Deeds office.
LIVE AT EXECUTION
It is a frequent misconception that durable POA documents are designed only to allow the agent to assist an aging parent following his or her incapacity (mental incompetence.) Most become “live” when the principal signs and executes the document. Thus, these documents allow the agent(s) to start helping the principal right away, without waiting for the principal’s incapacity. If used correctly, this type of durable POA provides the most flexibility to both parent and child.
BE CAREFUL IF YOU DO IT YOURSELF
Banks and other financial institutions are very familiar with durable POA documents and accept those that are properly and professionally prepared.
Beware of versions of durable POA documents available on the Internet. Legal fees to an estate planning attorney or elder law attorney for properly prepared, executed, and filed durable POA documents are normally very modest. Unless you are a legal professional, you can’t judge the quality of a form that you download from the Internet.
When a bank receives a POA document, it is carefully reviewed by the bank’s legal professionals, who will only accept a document that is proper in every way. If the bank rejects your Internet durable POA when your family needs it, and your parent is no longer competent, the family may then be forced to resort to a much more expensive and complicated guardianship proceeding before a family member is able to legally take care of the impaired parent’s business and legal affairs.
Estate planning attorneys and elder law attorneys normally try to screen out improper family members from serving as agents or “fiduciaries” on behalf of their clients. (For example, I have had to remove a family member addicted to hard street drugs from serving as a fiduciary for a client.) A durable POA becomes highly dangerous in the wrong hands–it can give away the principal’s keys to his entire financial portfolio. It is essential to keep the durable POA in the hands of only honest and proper agents.
AN ADDITIONAL ALTERNATIVE
Another alternative is to create revocable living trusts, with children serving as co-trustees with the parents. This type of estate planning is more expensive and complicated and should only be conducted with the assistance of an experienced estate planning or elder law attorney.
As an attorney who frequently works with seniors in preparing wills and estate plans, I too often hear of cases in which my clients have been swindled in some way.
While spring brings out the welcome return of robins and daffodils, it also, unfortunately, brings out unwelcome human spring visitors. As the weather gets warmer, con artists targeting homeowners — particularly seniors — become more active, according to local law enforcement.The Forsyth County Sheriff’s Office warns that seniors and others should watch out for these top 5 con artists:
1. The fake tree trimmer: Law enforcement officials report that most legitimate tree services have enough work to make selling door-to-door unnecessary. Be particularly aware of someone purporting to be from a tree service who knocks at the door without any vehicle parked in front of your house. Or, if there is a pickup truck parked outside, beware if it does not have any tree service signage on it, or if it is not carrying any chain saws or tree equipment. Fake tree trimmers will frequently try to get part of the money for a tree job up front, then will run off with your money, never to be seen again. Or they will use the conversation with you to case both you and your house for later robbery.
2. The rancid meat seller: Believe it or not, one of the most successful cons is to sell meat from an ice chest door-to-door. After the purchase, the buyer will find out that the meat he purchased is rancid, and the seller is long gone.
3. The fake roof-repair guy: The fake roof repair con artist will knock at your door, then explain that there is something wrong with your roof that he will be happy to fix. He usually asks for some money up front, will crawl up on the roof, lie around for awhile, then get off and leave with your money. Or he will use the opportunity to case your house, which he will burglarize later.
4. The vacuum-cleaner salesman: This con is pretty old, but remains popular among con artists. Most of us over 50 can remember Lucille Ball selling vacuum cleaners on “I Love Lucy.” A vacuum cleaner salesman will come to your home, demonstrate a good working vacuum cleaner to you, then offer to sell you a model just like he is using if you will pay in advance. The con artist then leaves with your money, and you never receive that vacuum cleaner that you ordered.
5. Young children selling magazines: Have you ever seen those young children with ID cards around their necks knocking at your door selling magazines? They always have a compelling story about why they are selling the magazines, and the fact that they are kids makes seniors more likely to buy from them.
But the ID cards are usually fake (almost anyone with a computer can fake ID cards) and the stories are normally false as well. Law enforcement officials report that most of these children do not even live in our area — many are driven in from the Midwest in vans by crooked adults. Seniors and others who buy magazines from them find out later that their money is gone and that they will never receive those magazines.
Tips for protecting yourself from con artists:
Don’t open your door to strangers.
If you do open the door, do not leave it open or allow the stranger to look inside. A crook who knocks at your door is often using the occasion to evaluate your valuables inside so he can steal them later.
Do not tell a stranger at your door any personal information whatsoever. Crooks target older people because they are more vulnerable, so if you are a widow and tell a crooked stranger that you have lost your husband, that may lead the crook to see you as an easy target for a robbery.
Watch out for visitors between 5 p.m. and 7 p.m. This is a popular time for con artists, because they know that you are likely to be home and likely to be preparing dinner. If a crook can reach you when you are more distracted, it makes his job easier.
And finally, if you see con artists in your neighborhood, make sure that you call local law enforcement. It may take everyone working together to put a stop to these crooks.
Married couples in North Carolina contemplating adding a living trust to their estate plan may have a choice: one joint trust or two separate trusts? In most cases, I recommend a separate trust for each spouse, for the following 6 reasons:
- NORTH CAROLINA IS A COMMON LAW PROPERTY STATE. North Carolina is a “common law, ” or “separate property” state. In general, separate trusts are preferred by planners and attorneys in common law property states like North Carolina, and joint trusts are used more frequently in community property states like California.
- SEPARATE PROPERTY STAYS SEPARATE. Many married clients enter into the estate planning process owning a significant amount of separate property. They may own assets that they acquired before the marriage, they may have inherited family farmland, and they may expect to inherit assets or receive gifts from their parents or grandparents in the future. Using a separate trust for each spouse more cleanly keeps their separate assets separate, so that they will be more easily characterized as separate at death or in case of divorce.
- JOINT TRUSTS MAY COMMINGLE SEPARATE PROPERTY. Where separate property (which has not been properly identified and tracked as separate property) is combined by both spouses in a joint trust, it may become “commingled.” Where such property has been commingled, or has become jointly titled in a joint trust, it may be considered by our court system as having been converted from the contributing spouse’s “separate property” to “marital property.” The spouse who contributed the separate property to the joint trust may lose the ability to control it as separate property in case of divorce, or the spouse’s fiduciaries or beneficiaries may lose access to that property following the spouse’s death.
- SEPARATE TRUSTS WORK BEST WITH BLENDED FAMILIES OR WHERE SPOUSES HAVE DIFFERENT TRUST BENEFICIARIES. It is common for spouses to have separate sets of children from prior marriages. Separate trusts allow couples with blended families to each select different primary or secondary trust beneficiaries.
- CONSUMER DEBT PROTECTION. With a joint trust, all of the assets of both spouses may be endangered by the debts of just one spouse. But if separate trusts are used, the separate assets of the uninvolved spouse may be protected from the creditors of the indebted spouse. This protection may be limited in certain cases however– if the debt involves certain “necessities” such as food or medical care, the North Carolina “necessities doctrine” provides that both spouses may be responsible for the debt.
- LIABILITY PROTECTION. Where separate trusts are used, if one member of a couple is involved in a car wreck which creates liability, the uninvolved separate assets of the other spouse within the other spouse’s separate trust may be protected against that liability.
Joint trusts may still be appropriate for married couples in some cases, but for the above 6 reasons, separate trusts are the most flexible choice for married couples in North Carolina, and allow each spouse to have better control over their separate assets.
Probate, the court-associated process where your estate debts are paid, your estate is settled, and your assets are distributed to your heirs or beneficiaries, can be costly and lengthy. In addition, probate is a public process where you estate assets may be viewed by anyone.
It’s a good idea to keep as many assets out of probate as possible. Here are 5 ways to accomplish this:
1 – Set Up Your Financial Accounts to Transfer to Your Beneficiaries at Your Death.
Your bank, brokerage, retirement, and life insurance accounts can normally be set up to either “pay” or “transfer” to your selected beneficiaries on death. Assets which are transferred this way avoid the probate process completely.
2 – Establish Joint Real Property Ownership With Right of Survivorship Where It Makes Sense.
It often makes sense for married spouses to own real property jointly. Where the property will pass to the other spouse when a spouse dies, that “right of survivorship” will keep the transfer out of probate court. In North Carolina, both ownership as” joint tenancy with the right of survivorship” and “tenancy by the entirety” provide real property survivorship rights to married couples.
3 – Donate or Gift Away Property
Property that you gift away before your death does not go through probate court. In some circumstances, it may make sense to give away some assets to charity, or to selected beneficiaries, to get these funds out of your estate before you die. But if your estate is large enough, you should consult an attorney about the potential tax consequences of such gifts.
4 – Utilize the Small Estates Laws
If the size of a deceased person’s estate is small enough, North Carolina provides expedited procedures for settling the estate, greatly shortening and simplifying the probate process.
5 – Create a Revocable Living Trust, Where Appropriate
If your estate size is large enough, or for other reasons, it may make sense to establish a revocable living trust. Assets which are properly added to a trust normally escape the probate process after the death of the grantor. In addition, assets placed in trust typically stay private, away from the public eye.
James Salter, 5 Smart Estate-Planning Steps to Avoid Probate, Nerdwallet (Feb.10, 2016), https://www.nerdwallet.com/blog/finance/5-smart-estate-planning-steps-to-avoid-probate/.
Singles must plan carefully for retirement, because they do not typically have another income-earner in the family who can help out.
Here Are 5 Retirement Savings Tips For Singles
- Complete Your Estate Plan. Even if you do not have a family to inherit your assets, completing your estate plan is critically important. Your estate plan includes advance directive documents where you set up agents to make your medical decisions, take care of your finances, and take care of your legal affairs should illness render you unable to help yourself.
- Set Up An Emergency Reserve Fund. Married families typically include an additional breadwinner to fall back on financially in case of emergencies, but a single adult typically does not have such a backup. You should keep at least 6 months normal household expenses reserved in a liquid savings account. You can start with 1 month’s reserve savings at first, then build up to six months as your savings habits improve.
- Build Up Your Credit Score. A single adult typically faces more difficulty purchasing large-ticket items like a home or a car on credit than a married person who may have more income streams to rely on. So it is important to build up your credit score.Credit rating agencies like Equifax typically sell FICO (Fair Issac Corporation) and other monitoring products which can help you learn to improve your credit scores. To improve your score, reduce your credit card accounts to no more than 5, keep your credit card balances as low as possible, pay your bills on time, and try to keep your overall debt as low as possible.
- Purchase Disability Insurance. If you are single, particularly if you have no children or do not plan to have children, becoming disabled or acquiring serious long term health problems in your later years can decimate you financially. You need to make up for your lack of a family safety net should you become seriously ill.It is easier to acquire essential disability insurance or long-term care insurance while you are young and healthy. Talk to a trusted insurance provider about finding a disability insurance policy to meet your needs.
- Continually Save For Retirement. Particularly because as a single you have no other financial backup, start early and give as much as you can afford every paycheck to your 401(k), IRA, or other retirement savings account.
SOURCE: Grant Webster, Saving for Retirement Tips for Singles, USA Today (December 26, 2015), http://www.usatoday.com/story/money/personalfinance/2015/12/26/adviceiq-retirement-tips/77853804/
As Amazon.com gains market share each holiday season, we keep observing the Internet offering faster, better, and cheaper solutions for the goods and services that we purchase.
But some Internet purchases remain unwise. Consumers who purchase wills, trusts, and other estate documents online in an attempt to save money frequently risk their life savings to inferior products.
Why are online estate document services inferior? See the following three reasons below:
- Legal Advice is Prohibited. Because there is no state licensed attorney involved, Internet legal sites are prohibited from providing legal advice. When you are trying to protect your life savings with a will or trust, the first thing required is legal advice tailored to your particular needs and circumstances. But by law, the Internet legal sites are prohibited from giving you the personal legal advice that you need.
- Only Form Documents are Provided. The Internet legal services are known merely as “document assistants,” which primarily only let the customer fill out generic form documents. Such forms are frequently not tailored to the customer’s individual needs or circumstances.
- Your Internet Forms May Not Work. Consumers seeking a will and or trust need documents that will properly distribute a lifetime of savings to chosen beneficiaries. Unfortunately, most consumers only get one chance to get their will right.
Internet forms do not even promise to work when needed. They may not be in compliance with state law, and they may include significant mistakes or oversights. Because no legal advice is given, the Internet legal companies cannot promise a particular legal result, or even that your documents will work.
If wills, trusts, or other estate documents are not drafted properly, lawyers will need to be hired later to clean up the mess, at great expense to your estate and your family. In addition, improperly drafted estate documents may lead to family arguments, which in turn may lead to expensive litigation. It is almost always more cost effective to use a licensed attorney to draft estate documents properly in the beginning, than to clean up a mess later resulting from improper Internet form estate documents.
If you have a toothache, you will probably turn to your dentist, and not the Internet for dental work, right? It makes just as much sense to use a licensed estate planning attorney to develop your critical estate documents, instead of placing your trust in generic form documents from the Internet that might not work when needed.
Source: David Hiersekorn, Can You Trust Your Trust? Why an Online Will or Trust Could Be the Dumbest Mistake You Ever Make, EstatePlanning.com (May 15, 2012), https://www.estateplanning.com/Should-You-Trust-Online-Legal-Document-Services/.
A new online calculator developed by the federal Consumer Financial Protection Bureau helps consumers determine the best time to start receiving retirement benefits, and what those benefits will be.
To use the calculator, a consumer merely types in his or her birthday, and maximum yearly salary received during his or her work career, and the calculator does the rest.
The basis in your home is its value for tax purposes. It can be increased by changes such as home improvements.
When your home is sold, the capital gain on the sale is calculated as the difference between the sale price and the home’s basis. If you have been in the home for many years and the home has appreciated, the capital gain could be large, and subject to a large capital gains tax.
Fortunately, where the primary residence is sold and it was the principal residence for two of the last five years before the sale, individuals may typically exempt up to $250,000 in federal capital gains taxes. Couples may typically exempt up to $500,000 in capital gains taxes under these conditions.
If you want to give your home to another, it is typically much better to leave the home to an heir in a will bequest than to gift the home to the recipient during life.
When your home is passed down to a beneficiary in a will, the beneficiary frequently benefits from a “step up in basis,” where your basis in the asset is updated to the current market value of the home. If the home has appreciated since its original purchase, this “step up in basis” may save the beneficiary thousands of dollars in capital gains taxes.
This rule may be more complicated in cases where the bequest is made to a spouse, and where the home is held jointly with right of survivorship.
Avoid Taxes on Your Home Sale Legally, THE HUFFINGTON POST (October 20, 2015), http://www.huffingtonpost.com/moneytips/avoid-taxes-on-your-home-_b_8307234.html.
Higher net worth individuals and families are increasingly looking to family private foundations to both advance their charitable goals, and to avoid estate taxes.
A private foundation is a freestanding legal entity which can be 100% controlled by the donor. The donor, and anyone he chooses to advise him, fully decide how the money is invested.
Private foundations may own almost any type of asset, including real estate, jewelry, closely held stock, stock options, art, insurance policies, and other variables. Founders can donate highly appreciated stock to the foundation to avoid capital gains taxes so that the full market value of the stock grows tax free, ultimately benefitting the charities to be funded by the foundation.
A private foundation may be established quickly, with an investment of $250,000.00 or less. In fact, 67% of all private foundations have less than $1 million in assets. Establishing the private foundation may take as little as three days, with set up cost being often very affordable.
The following types of charitable gifts are available to private foundations:
- Funding 501(c)(3) public charities
- Funding tax-exempt organizations that are not 501(c)(3) entities
- Making grants directly to individuals and families facing hardship, emergencies, or medical distress
- Supporting charitable organizations based outside of the U.S.
- Making loans, loan guarantees, and equity investments
- Providing funding to for-profit businesses that support the foundation’s charitable mission
- Setting up and running Scholarship and award programs
- Running their own charitable programs.
Robert Chartener, Financial Planning, http://www.financial-planning.com/blogs/wealth-ideas/this-may-be-the-best-bet-for-charity-minded-clients-2694760-1.html?utm_medium=email&ET=financialplanning:e5499154:4512791a:&utm_source=newsletter&utm_campaign=Nov%209%202015-am_retirement_scan&st=email , November 9, 2015.
Often, elder law disputes involve close family members and can involve emotions such as jealousy and greed. When such emotions are present, long and costly litigation can also permanently destroy family relationships.
Mediation can serve as a much better technique for resolving such emotional family disputes, and can often better preserve family peace, privacy, and can frequently result in a settlement in much less time and using much less money.
The parties in an elder law dispute may all voluntarily agree to use mediation as a means to seek a mutually accepted settlement of their dispute. But, where the opposing party remains contentious about using the mediation process, it may be more effective to use a “carrot and stick” approach to frame mediation as the most reasonable alternative. For example, an attorney may file a lawsuit or a motion with a court, then offer mediation to the opposing side as a more reasonable dispute resolution alternative than litigation. Or, in cases where competency may be an issue, an attorney may file a petition for guardianship of the elder, then offer to mediate after the guardianship application has been filed.
Because of the specialized subject matter involved in elder law, the mediator should be carefully selected to make sure that he or she has sufficient specialized experience in settling elder law disputes, and a good reputation among his or her peers.
Because mediation is private, and because a mediator may shuttle between parties during a mediation rather than having parties face each other in the same room, the environment may be much less threatening than in a courtroom, and may be used to to find more creative solutions for resolving disputes than is possible in a courtroom.
According to Shirley Berger Whitenack, President of the National Academy of Elder Law Attorneys and a professional elder law mediator, mediation of elder law disputes may be appropriate and successful under the following circumstances:
- The parties have or had an ongoing personal relationship and have communication problems,
- The primary barriers to settlement are personal or emotional,
- The parties want creative solutions to fit their particular needs,
- There is an incentive to settle because of the time or cost of litigation,
- The parties want a confidential forum to resolve their dispute.
Source: Shirley Whitenack, Mediation: A Possible Option for the Dispute Involving Your Client, NAELA News Jul/Aug/Sept 2015,
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The legal landscape for LGBT civil rights is changing, but the LGBT community still needs careful and timely estate planning to ensure protection for the ones they love.
Married LGBT Couples
As North Carolina LGBT adults are aware, on October 10, 2014, the United States District Court for the Western District of North Carolina issued an order that struck down the ban on same sex marriage in North Carolina. The ruling allows LGBT couples to seek the rights and privileges of marriage in North Carolina. Legal LGBT marriage has improved estate rights in two areas.
Legal LGBT Marriage — Two Estate Rights Improvements
Second Parent Adoptions – Although North Carolina adoption law is still evolving, both spouses in a LGBT marriage should now be able to legally adopt the same child. Legal “second parent” adoption for married LGBT couples will solidify the rights of both LGBT spouses to care for and raise the children should something happen to one spouse. Because legal LGBT marriage is still so new in NC, adoption laws remain tricky and untested. When adopting in NC, it is important for the married LGBT couple to consult with an North Carolina family lawyer familiar with LGBT family issues.
Intestate Succession – Better Protection for Surviving Married LGBT Spouses When There is No Will
When an adult in North Carolina dies without a will (called dying intestate), the probate court will look to a complex set of North Carolina laws called the NC intestate succession statutes. Generally, only spouses, legally adopted children and genetic or “blood” relatives inherit under these statutes when there is no will. Unmarried partners, friends, and charities get nothing.
Because LGBT marriage is now legal in NC, if one spouse dies without a will, the surviving spouse should inherit as allowed by the NC intestate succession statutes.
Despite the above two improved estate law protections, married LGBT spouses should still create valid wills in order to pass down their property according to their wishes after death. A proper will also allows a married LGBT couple to name their choice of guardians for their children, which is normally upheld by the courts.
Unmarried LGBT Domestic Partners
North Carolina law provides no statewide protections for domestic relationships related to sexual orientation, gender identity, or gender expression that are not within marriage. Proper estate planning is absolutely critical for unmarried LGBT domestic partners.
As discussed above, if an unmarried LGBT domestic partner in NC dies without a will, a court will look to the NC intestate succession statutes to determine who will receive inheritance. NC’s intestate succession statutes provide the strongest inheritance rights to married spouses, genetic or legally adopted children, and close “blood” or genetic relatives. Without a valid will, an unmarried LGBT domestic partner will likely inherit nothing from the deceased partner.
North Carolina law does, however, allow people to select whomever they wish as “beneficiaries” and “fiduciaries” in their estate documents. Through a proper will, an LGBT partner can “will” or “bequeath” property to the other domestic partner.
LGBT domestic partners who do not plan properly may not be able to care for each other should one partner become seriously ill. If an LGBT domestic partner becomes mentally incapacitated, hospitals or courts may look first to blood relatives to make health care decisions for the incapacitated partner, instead of to the other domestic partner.
To ensure that they will be making each other’s health care decisions in cases of serious illness, LGBT domestic partners must execute proper Health Care Power of Attorney documents listing each other as the highest priority agents for making each other’s health care decisions in case of incapacity.
In response to the great need for partner security in North Carolina, we have prepared the following advice for the North Carolina LGBT community
- Do not let the courts make your critical estate planning decisions for you after you are gone. Obtain a valid will so that YOU decide:
- who is considered part of your family;
- the guardian for your children;
- the terms of a family trust to provide for your family;
- what happens to your pets; and
- what happens to your property.
- Help keep the peace even after you pass. Obtain a well-drafted will so that your friends and family are certain of your wishes and no one fights or litigates over differing interpretations of your intentions.
- Complete a valid will as soon as possible. If your family or your wishes change, you can update your will.
- Complete both your Health Care Power of Attorney and your Living Will documents so that the partner you trust will be able to maintain control of your healthcare if you become medically incapacitated.
- Obtain a Durable Power of Attorney document to select an agent to take care of your business and legal affairs when you are unable to care for those yourself. Make sure a licensed attorney prepares this document; otherwise, banks and other institutions may refuse to recognize the document when it is needed.
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Estate planning documents are designed to protect clients’ wishes both during life and after death. In a durable power of attorney document, a client may pick an agent to help him manage his finances and legal affairs should he become mentally incapacitated during life. And in both will and trust documents, the client may determine how he wants his assets used or distributed after death.
But in the Internet age, it can be difficult to separate certain assets such as financial accounts from the computers, websites, and software used to operate, manage, manipulate, and convey information about those accounts. Thus without proper estate planning incorporating the client’s digital assets, it is a mistake to assume that client fiduciaries such as agents, guardians, executors, and trustees will have the tools they need to perform their obligations.
Existing Laws Do Not Provide Automatic Fiduciary Access To Digital Accounts And Digital Information
In North Carolina, statutory law does not support automatic fiduciary access to digital accounts and digital assets. An NC proposal addressing estate planning and digital accounts was removed from the statute S.L. 2013-91 (N.C. Gen. Stat. 30-3.1) before the Governor signed on March 12, 2013. A few other states have passed digital assets legislation.
Without clear direction from NC state law, controlling law is still mostly dictated by two 1986 Federal statutes which predate the commercial Internet. Although these Federal statutes are outdated, they still guide court decisions.
The overriding purpose of both the 1986 Stored Communications Act (SCA) and the Computer Fraud and Abuse Act (CFAA) is to protect the computer user’s privacy and to prevent unauthorized access to the user’s digital assets. As a result, the computer service providers subject to the SCA and CFAA maintain service agreements that include only one user, and strictly prohibit “unauthorized access.” Some service agreements also state that the individual user’s rights are “nontransferable.” Thus, when a user becomes mentally incompetent or dies, fiduciaries may have difficulty getting access to his online accounts.
In addition, many online services will refuse to release the password information from a deceased user, even in the face of a judicial order or civil lawsuit.
Best Practices Require Both Authorization And Transfer Of Log-on Data Including Passwords
In the absence of a modern statute controlling fiduciary access to digital assets, best estate planning practices require both 1) clear authorization from the principal, grantor, or testator in the estate documents authorizing the fiduciary to access the digital accounts; 2) the actual transfer of account information including log-on information and passwords.
Although these preparations may not work forever and may not work with every digital account, these steps may be the best that NC estate planners can do until controlling laws are modernized. Some digital providers have revised their rules to permit fiduciaries to access online accounts when the proper authorization is included in the primary user’s estate planning documents.
Authorization Language and Definition
Estate planner Jean Gordon Carter and colleagues provide sample authorization language, which may be included in a will:
“Digital Assets. My executor shall have the power to access, handle, distribute and dispose of my digital assets.”
They also advocate including a broad definition of “Digital Assets” in the will.
Proper authorization to use digital assets language should additionally be included in the durable power of attorney document, in order for the agent to be fully able to conduct an incapacitated grantor’s business and legal affairs.
Transfer of Account Administrative Information
In addition to the digital assets authorization language needed in the estate documents, the grantor must also physically transfer to the proper fiduciaries the administrative information required for using the digital assets. This includes account information, log-on information, and passwords.
Randy Siller, a registered representative of Lincoln Financial Advisors Corporation, shares the following seven best practices for clients transferring digital access information to fiduciaries as part of an estate plan:
- Digital Hardware. List all digital hardware, including desktops, laptops, smartphones, iPads, USB flash drives, and external hard drives.
- Financial Software. List all financial-related software programs used, such as Quicken, QuickBooks, and Turbo Tax, which may include important tax and business information, as well as passwords.
- File Organization/Passwords. Provide an outline of the file organization on digital devices so fiduciaries will know where to find important files, as well as any passwords they may need to gain file access.
- Social Media. List all social media accounts, such as Facebook, LinkedIn, Twitter, and Cloud websites, as well as the information needed to access each one.
- Online Accounts. Prepare a list of all online accounts including bank accounts, investment accounts, retirement accounts, e-commerce accounts (Amazon, PayPal), credit card accounts, and insurance accounts. It is critical for fiduciaries to have access to these providers.
- Subscriptions. Ensure that a list of online subscriptions such as Netflix, Norton Anti-Virus, credit reporting/protection subscriptions, and streaming music subscription services are documented so fiduciaries can access or cancel those services.
- Email. List all personal and business-related email accounts, and how to access them.
It is easy for estate planners to focus on protecting monetary assets. But the control of a client’s “digital legacy” on social media may also be important.
Geoffrey Fowler, writing for the Wall Street Journal, has noted: “The digital era adds a new complexity to the human test of dealing with death. Loved ones once may have memorialized the departed with private rituals and a notice in the newspaper. Today, as family and friends gather publicly to write and share photos online, the obituary may never be complete.”
To deal with the desire for users to allow their loved ones to memorialize them through their Facebook accounts at death, Facebook recently decided to allow members to designate a “legacy contact” to manage parts of their accounts posthumously. Members may now also choose to have their presence deleted entirely at death.
On The Horizon
Likely the most complete proposal addressing the need of clients to effectively give fiduciaries access to their digital estate has been written under the auspices of the Uniform Law Commission. The Uniform Law Commission approved the recent Uniform Fiduciary Access to Digital Assets Act (UFADAA) on July 16, 2014 in Seattle, WA.
The Commission states:
The UFADAA gives people the power to plan for the management and disposition of their digital assets in the same way they can make plans for their tangible property: by providing instructions in a will, trust, or power of attorney. If a person fails to plan, the same court-appointed fiduciary that manages the person’s tangible assets can manage the person’s digital assets, distributing those assets to heirs or disposing of them as appropriate.
Until such reforms become law, the best strategy for passing down digital assets to fiduciaries requires both including proper fiduciary authorization language in the estate documents, and the physical transfer of digital asset user information to fiduciaries.
Computer Fraud and Abuse Act 18 U.S.C. § 1030 (1986).
Geoffrey Fowler, Facebook Heir? Time to Choose Who Manages Your Account When You Die, The Wall Street Journal, Feb. 12, 2015.
Geoffrey Fowler, Life and Death Online: Who Controls a Digital Legacy?,
The Wall Street Journal, Jan. 5, 2013.
Jean Carter, Sample Will and Power of Attorney Language for Digital Assets, The Digital Beyond, http://www.thedigitalbeyond.com/sample-language/
N.C. Gen. Stat. 30-3.1.
Randy Siller, Seven Tips for Managing Your Digital Estate, WealthManagement.com, (Nov. 25, 2014), http://wealthmanagement.com/estate-planning/seven-tips-managing-your-digital-estate#slide-0-field_images-715801
Stored Communications Act 18 U.S.C. Chapter 121 (1986).
Uniform Law Commission, Uniform Fiduciary Access to Digital Assets Act Approved (July 16, 2014), http://www.uniformlaws.org/NewsDetail.aspx?title=Uniform+Fiduciary+Access+to+Digital+Assets+Act+Approved
Uniform Law Commission, The Uniform Fiduciary Access to Digital Access Act–A Summary, http://www.uniformlaws.org/shared/docs/Fiduciary%20Access%20to%20Digital%20Assets/UFADAA%20-%20Summary%20-%20August%202014.pdf
William Bisset & David Kauffman, Understanding Proposed Legislation for Digital Assets, Journal of Financial Planning, http://www.onefpa.org/journal/Pages/APR14-Understanding-Proposed-Legislation-for-Digital-Assets.aspx
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NFL Tennessee Titans quarterback Steve McNair, age 36, was unexpectedly found murdered in a Nashville, TN hotel room on July 4, 2009. McNair had earned about $90 million during his NFL career, yet he died without a will, or intestate. Because he had done no estate planning, his family lost millions of dollars to taxes and legal fees.
Estate planners strongly recommend that every adult who owns property or who has minor children should maintain valid estate planning documents, including a will. Yet every year thousands of North Carolina adults die intestate.
In certain groups, the numbers of adults without a will are remarkably high. 68% of African-American adults and 74 percent of Hispanic adults do not have one. And strikingly, 92% of adults under the age of 35 (prime parenting age) do not have a will.
NC Intestate Succession Laws
In North Carolina, when the probate court addresses an estate where the property owner died intestate, the court looks to the North Carolina intestate succession laws to help the court divide up the deceased person’s property. Unfortunately, the probate court often will make different decisions than the deceased would have made had he or she made a will while living.
Under North Carolina intestate succession law, typically only spouses and genetic relatives inherit. Unmarried partners, friends, and charities get nothing.
Dying without a will may create many problems not addressed by the probate court applying NC’s intestate succession statutes.
Fighting and Expensive Lawsuits
If the deceased person’s (decedent’s) intent was never expressed in a will, potential heirs and others seeking part of the estate often argue about what the deceased really intended. Those disputes may lead to expensive litigation.
Because the intestate succession statutes deal mainly in percentages and do not address individual items of personal property, family members may fight over who gets certain family heirlooms or individual items of value.
Where infighting leads to litigation, the potential heirs may spend many times more in legal fees than what a proper will (which could have prevented the arguments) would have cost the decedent.
A Court Decides Who Gets The Children
Parents who plan use a will to name their choices of guardians for their children. Courts normally uphold the parents’ choices for their children’s guardians in a will. But where there is no will and both parents die intestate, guardians will be appointed for the children by a court. This is a result that no parent intended.
Higher Fees, Taxes and Legal Costs
Proper estate planning helps minimize probate fees, taxes, and legal costs. The goal of all legal planning should be to prevent problems. Preventing problems is always less expensive than paying to clean up a mess later, and is more predictable and less harrowing for the family.
Please contact us with any questions and to learn how we can help with your estate planning in North Carolina.
A.L. Kennedy, Statistics on Last Wills & Testaments, Demand Media
A Look at Last Wills & Testaments, The Virtual Attorney
Clark Wilson LLP, 10 Problems with Dying Intestate
Legal Consequences of Dying Without a Will, Lawyers.com
Mary Randolph, J.D., How an Estate is Settled if There’s No Will: Intestate Succession, Nolo
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The differences between federal gift taxes and federal estate taxes confuse many. Taking a step-by-step approach helps to clarify these concepts.
Types of Gifts
U.S. tax laws recognize two principal categories of gifts. A gift made during one’s lifetime is called an inter vivos gift. A gift made after death (normally through a will or some other instrument like a trust) is called a testamentary gift.
Gift taxes are normally concerned with gifts made during life, or inter vivos gifts. Estate taxes are normally concerned with gifts made after death, or testamentary gifts.
The gift tax and estate tax are the only “wealth taxes” prescribed by the federal government.
States may levy another “wealth tax” called an inheritance tax in addition to, or in substitution for, a state estate tax. The federal government does not levy inheritance taxes. Most states, including North Carolina, have repealed their inheritance and estate taxes. And very few states still levy a gift tax.
History And Purpose
The first U.S. federal estate tax was enacted in 1916 in order to gain revenue from wealthy individuals at death in addition to their income taxes collected during life.
The gift tax was first enacted in 1924, so that the government could reduce the avoidance of estate taxes through giving inter vivos gifts.
Without the gift tax, a wealthy citizen could reduce his or her family’s estate tax burden at death by making gifts to others while alive, which would reduce the size of his or her taxable estate at death. The gift tax serves as a “backstop” to the estate tax by also taxing the gifts made during life, making it more difficult for a wealthy citizen to escape federal wealth taxes.
Unification, The Lifetime Gift Tax Exclusion, The Annual Gift Tax Exclusion, And The Estate Tax Exemption
There are several similarities between the federal gift tax and the federal estate tax which invite confusion. In 1976, the federal gift tax was “unified” with the federal estate tax, which created a common tax rate schedule for both types of taxes.
Recent updates have equalized the lifetime gift tax exclusion and the estate tax exemption, so that they are now the same number. For example, in 2014, no gift tax is owed to the IRS until the giver exceeds the 2014 lifetime gift tax exclusion of $5.34 million for all gifts made during the giver’s lifetime in excess of the annual gift tax exclusion amount (discussed below). And the 2014 federal estate tax exemption allows the individual “testator,” or giver, in a will to leave his heirs up to $5.34 million free of estate tax. The $5.34 million gift tax exclusion and estate tax exemption are indexed annually for inflation. In 2015, both the federal individual gift tax exclusion and estate tax exemption will rise to $5.43 million.
Unification dictates that if some of an individual’s 2014 $5.34 million lifetime gift tax exclusion is used up by making a taxable gift during life, the estate tax exemption used to shield testamentary bequests (transfers of property by will or trusts at death) will be reduced accordingly.
In addition to the lifetime gift tax exclusion, it is important to understand its annual counterpart, the annual gift tax exclusion. In 2014, the annual gift tax exclusion allows a taxpayer to give away up to $14,000 each to as many individuals as he wishes without those gifts counting against his or her 2014 $5.34 million lifetime gift tax exclusion.
Married spouses, acting in concert, could give $28,000 in 2014 to each of an unlimited number of recipients without gift tax consequences.
Suppose Laura, who is single, makes a $1 million gift to her nephew Ken in 2011, then dies in 2014. How much federal estate tax exemption would be available to her estate at death?
First, we must determine how much the lifetime gift tax exclusion has been reduced by Laura’s 2011 gift. To calculate this, we subtract the 2011 annual gift tax exclusion amount, which was $13,000 in 2011, from the amount of the gift, as follows: $1,000,000 – $ 13,000 = $987,000.
Because of unification, the amount of the total $5.34 million federal estate tax exemption available to Laura’s estate at her death in 2014 would be reduced by the countable portion of her gifts during life, or $5,340,000 – $987,000 = $ 4,353,000 estate tax exemption available to Laura’s estate at death to shield her assets from estate taxes.
Even though Laura would not have had to pay gift taxes in 2011 on the amount of her gift, $987,000, in excess of the $13,000 2011 annual gift tax exclusion amount, she does have to report any gifts in excess of the annual gift tax exclusion amount to the IRS so the IRS can keep track of the lifetime total.
Note that Ken, the 2011 recipient of the $1 million gift, does not have to pay any tax on the gift, because gifts are not included as taxable income to the recipient.
The Unlimited Marital Deduction And Portability
The federal unlimited marital deduction provides that an individual may transfer an unlimited amount of assets to his or her spouse at any time, in life or at death, free from any tax (including gift and estate tax).
The concept of estate tax exemption portability allows a surviving spouse to use a deceased spouse’s unused estate tax exemption (up to $5.34 million in 2014).
In marriages, the unlimited marital deduction and estate tax exemption portability may be used in tandem to protect marital assets from estate taxes.
For example, suppose Henry and Anne are married. Henry dies in 2013 (when the estate tax exemption was $5.25 million), leaving all of his assets to Anne. Because of the unlimited marital deduction, Henry’s 2013 testamentary bequest to Anne is tax-free for both parties; neither Henry’s estate nor Anne are taxed on this bequest at all in 2013.
If Anne then dies in 2014, federal estate tax portability rules provide that both spouses’ combined estate tax exemptions may be used, so that $5.25 million (2013 federal estate tax exemption amount for Henry) + 5.34 million (2014 federal estate tax exemption amount for Anne) = $10.59 million total combined estate tax exemption could be utilized by the couple’s estate, which would shield $10.59 million of Anne’s bequest to her heirs from estate taxes at Anne’s death.
In order to take advantage of portability, a federal estate tax return must be filed at the first spouse’s death, even if not otherwise required.
Estate planning for large estates typically takes full advantage of both spouses’ estate tax exemptions. In addition to portability, this could also be done, for example, by funding a Family Trust at the first death using the estate tax exemption amount of the first-to-die spouse, then utilizing the unlimited marital deduction to protect the transfer of the remaining assets to the surviving spouse. The Family Trust, which may benefit the surviving spouse, can pass to the heirs without tax at the death of the surviving spouse.
In addition to the annual gift tax exclusion, the following types of gifts are tax-exempt. The taxpayer may make unlimited gifts of any amount to these categories without any gift tax or estate tax consequences, and without having to file gift tax returns:
- Gifts to IRS-approved charities
- Gifts to a spouse (if the spouse is a U.S. citizen)
- Gifts made to cover another person’s medical expenses (must be made directly to the medical service providers)
- Gifts covering another person’s tuition expenses (must be made directly to the educational institution).
Understanding how the federal government treats gift and estate taxes should allow the taxpayer to make better gift planning and estate planning choices.
Please contact us with any questions and to learn how we can help with your estate planning in Winston-Salem, North Carolina.
Estes and Estes, Estate and Gift Taxation, http://www.estesandestes.com/Estate_and_Gift_ Taxation.html
Internal Revenue Service, Gift Tax, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Gift-Tax
Investopedia, Unlimited Marital Deduction, http://www.investopedia.com/terms/u/unlimited-marital-deduction.asp
David Joulfaian, U.S. Department of the Treasury, Tax Topics: Federal Estate and Gift Tax, Urban Institute and Brookings Institution Tax Policy Center, http://www.taxpolicycenter.org/publications/url.cfm?ID=1000526
Arleen Richards, The Difference Between Estate Taxes and Gift Taxes, The Epoch Times (Jan. 29, 2013), http://www.theepochtimes.com/n2/life/the-difference-between-estate-taxes-and-gift-taxes-334217.html
U.S. Trust, Portability of a Deceased Spouse’s Unused Exclusion Amount, http://www.ustrust.com/Publish/Content/application/pdf/GWMOL/UST-WSR-Portability-of-estate-tax-exemption.pdf
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One Family’s Tragic Story
Katsu and Charles Bradley of Tacoma, Washington, owned their own home and enjoyed ample savings for their retirement. Later, when they could no longer live on their own because of advanced dementia, the family hired Norma Cheesman to be a live-in caregiver.
The Bradleys’ daughter, Caroline Moye of Seattle, reported that Cheesman “took everything” her parents had worked and saved for their entire lives. “In a matter of 10 months, she made my parents homeless and penniless.”
The prosecutor in King County, Washington, reported that Cheesman convinced 86-year-old Charles Bradley to give her power of attorney, name her as the beneficiary of his estate, disinherit his wife, and purchase the house Cheesman was living in for her. Cheesman also orchestrated a reverse mortgage on the Bradleys’ home and used that to fill the Bradleys’ bank accounts with several hundred thousand dollars in cash, which she stole. (Source: NBC News 2014)
The Crime of the 21st Century
Atlanta attorney Kristen M. Lewis names it “The Crime of the 21st Century.” And it has already earned its own acronym: Elder Financial Abuse (EFA). The money involved is enough to run a small country: estimated annual losses to U.S. older citizens run $2.9 billion annually.
As Ms. Lewis reports, one out of every six adults over age 65 has been a victim of EFA, with women twice as likely as men to be victims. Financial exploitation accounts for up to 50 percent of all forms of elder abuse, and is the third most frequent type of elder abuse following neglect and emotional or psychological abuse.
The elderly are vulnerable to this crime for many reasons. Alzheimer’s disease and other dementias that impair judgment increase significantly with age. The National Institutes of Health has determined that increasing age causes physiological changes to the brain that diminish older people’s ability to assess the trustworthiness of potential predators. Because localized multi-generational families are no longer common in our mobile American society, elders are becoming socially isolated, with almost one-third of non-institutionalized elders living alone. Unfortunately, this means that there are fewer people in an elder’s life who can reliably detect EFA.
According to Ms. Lewis, perpetrators of EFA include:
- Both strangers and people that the elder knows;
- family, friends, and neighbors;
- in-home caregivers;
- people acting as agents under powers of attorney or as guardians or conservators;
- business, professional, and financial service providers.
Ms. Lewis notes that in their estate planning work with elders, attorneys must guard against one of the most insidious forms of EFA—financial abuse from people that the elder knows personally, or from people within the elder’s own family. Elders report financial abuse from strangers much more often than financial abuse by people they know, because of the shame that an elder commonly feels when he or she is victimized by someone familiar. In addition, the elder may not report EFA from a family member because she does not want her family member to go to jail or face public embarrassment. She may believe that admitting she is vulnerable will result in being placed in a nursing home.
Estate Planning Approaches to Combat EFA
According to Ms. Lewis, preventative “legal” approaches that address the problem of EFA within estates include 1) using more than one agent, or co-agents, in the durable power of attorney for property document designed to take care of an incapacitated elder client’s business and legal affairs; 2) requiring annual accountings of estate financial records; 3) placing most of the elder’s assets in a Revocable Living Trust (RLT) and having the trustee that takes care of the medical and personal needs of the client also control the funds within the living trust; 4) utilizing a detached, non-family, third party trustee, such as a trustee from a bank, to serve as the RLT trustee. This trustee may also serve with another professional co-trustee, such as an attorney with duties to act in the best interests of the client.
Although any of the legal approaches that Ms. Lewis outlines may be important, attorneys must not overlook a more fundamental approach to preventing EFA, related to requiring annual estate accountings but more expansive.
Borrowing From the Corporate Sector: Incorporating Financial Transparency Into the Elder’s Private Estate
Abusers of all types, including financial abusers, are like vampires— they cannot survive the light of day. Our free market corporate financial system has understood this for a long time. The business term “financial transparency,” according to the Securities and Exchange Commission (SEC) definition, “means timely, meaningful and reliable disclosures about a company’s financial performance.” It is a crucial requirement for informed investment in companies. It is also necessary for exposing, and therefore preventing, fraud and other forms of corruption.
The alert estate planning attorney does not always have to reinvent the wheel when developing effective techniques to guard against EFA. Borrowing from tested concepts fundamental to our financial system, estate planning attorneys should strive to develop greater financial transparency in their elder clients’ private estates to help guard against EFA. In the case of private estates, greater financial transparency will not result from disclosure of financial records to the public, but will instead result from periodic disclosure to, and monitoring of the records by, a CPA firm, disclosure to the elder’s estate planning attorney, and disclosure to appropriate stakeholders within the family who may be pre-selected by the elder client.
Estate planning attorneys understand that the most effective tools needed to assist their clients are not always legal tools. In helping elder clients, the estate planning attorney should strongly consider working with the client’s CPA firm (or helping the client to find an appropriate CPA firm) to ensure that a fundamental, appropriate filing and bookkeeping system is installed or maintained in the client’s home, or where the elder’s financial records are kept. This is an essential first step to bringing financial transparency, and its ability to prevent theft of assets, to the elder client’s private estate. But fortunately, installing a more professional recordkeeping, filing, and bookkeeping system in an elder’s home need not be difficult.
As communication and computer technologies have progressed, more professionals are working flexibly out of home offices and are willing to visit clients where they live. As a result, professionals such as secretaries, bookkeepers, and even CPAs who are willing to help reliably manage and maintain home finances on site are available for reasonable fees.
A typical arrangement would include a lower-cost secretary or bookkeeper (with a solid résumé and good references) helping the elder get his financial records and files in order, then setting up the accounting on a computer accounting program such as QuickBooks ®. The information keyed into the accounting program can be shared with a CPA firm at a pre-set interval, such as monthly or quarterly, where an off-site accountant or CPA looks over the figures and makes any accounting adjustments necessary.
Professionals and families should not avoid this approach, thinking that it is too expensive. The secretary or clerical worker needed to manage files and input data often costs less monthly than the expense of a housekeeper. Accounting firms can typically deal efficiently with QuickBooks data from home accounts, and keeping the records and accounting accurate on an ongoing basis may make year-end accounting and tax preparation much simpler and less expensive.
In this way, getting unbiased outside third parties into the elder’s home to keep the books, monitored by a CPA who must follow a strict code of ethics and who is trained to spot financial irregularities, can provide a strong deterrent to the type of financial crimes plaguing elders. Having this type of oversight is like installing an alarm system in a home—most criminals, when confronted with the signage and warnings of an alarm system, will look for easier pickings. Likewise, it is only a more hardened—and rarer—criminal that would risk taking funds from an elder’s estate that is being tracked by a bookkeeper and monitored by a CPA.
An attorney who desires even greater financial oversight of his client’s estate may utilize other existing financial tools. For mid-size or larger estates, the attorney may require in the estate documents that a CPA perform a reasonably priced annual “compilation,” where the CPA prepares financial statements from the client’s financial records to help ensure financial transparency. For larger estates, an attorney could draft into the estate documents a requirement that a CPA firm prepare annual “reviewed” financial statements which require greater CPA inquiry into the client’s accounts and records, but which also may cost significantly more. Annual audits may not be needed except in very large or complex estates, as they may come with a significant price tag.
Any annual financial reports required by the estate planning documents should be evaluated by other professionals in addition to those at the CPA firm, such as the estate planning attorney, any involved outside trust officers, and key stakeholders within the family pre-selected by the client. With all of these trained or interested eyes watching the elder’s estate, opportunities for EFA may be significantly limited.
Ongoing professional maintenance of the estate may even convey additional benefits. Sarah Chisholm, a Texas CPA and corporate chief financial officer with both public company audit experience and private estate experience, states, “Ongoing maintenance of a private estate’s accounts by an unbiased licensed professional such as a CPA or estate attorney allows for an accurate valuation and location of all of the estate’s assets during the estate’s existence, and at the time of estate settlement.”
Attorneys who work with elders should recognize that a holistic approach may meet their clients’ needs best. In addition to drafting appropriate estate planning documents, estate planning attorneys should recognize that theirs is a “peace of mind” profession which may require additional client support after the documents are drafted. Estate planning attorneys are in an excellent position to work with other professional colleagues such as CPAs to ensure that their elder clients will not become victims of EFA. Elders should select an estate planning attorney who will employ a broad level of understanding to meet their needs.
Please contact us with any questions and to learn how we can help with your estate planning in Winston-Salem, North Carolina.
Kristen Lewis, The Crime of the 21st Century: Elder Financial Abuse, American Bar Association Probate & Property Magazine. Vol 28, No. 04. July-August 2014
Financial Abuse Costs Elderly Billions, NBC News (2014), http://www.nbcnews.com/id/41992299/ns/business-consumer_news/t/financialabuse-costs-elderly-billions/#.VBhufEhjDAY
Telephone Interview With Sarah Chisholm, Chief Financial Officer, Kolkhorst Petroleum Company (September 15, 2014)
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Estate Planning is not just for wealthy people with lots of assets. Individualized, professional estate planning may provide the following 10 benefits to anyone:
- Assures that your hard-won savings and assets will be passed down correctly to the loved ones that you designate, while shielding as many assets as possible from taxes, court costs, and unnecessary legal fees (Will, Trust, Living Trust)
- Provides for the care and well being of any loved ones left behind (Will, Trust)
- Allows you to choose a guardian to care for your children in your absence, and to choose a responsible adult to take care of their legal and business affairs (Will, Trust)
- Provides for family members with special needs without disrupting their government benefits (Will, Trust, Special Needs Trust)
- Provides for the transfer of your business at your retirement, disability, or death (Will, Trust, Business Succession Plan)
- Allows you to choose a trusted adult to make your medical decisions for you in case you become seriously ill (Durable Power of Attorney for Healthcare)
- Allows you to choose a trusted adult to take care of your legal and business affairs in case you become seriously ill (Durable Power of Attorney)
- Provides that physicians will share important information about your medical conditions with the individuals whom you have selected to make your health care, business, and legal decisions for you (HIPAA Document)
- Allows you to choose how you will be treated by healthcare facilities at the end of life, and what actions may or may not be taken to extend your life (Living Will)
- Allows you to designate how you want your body to be treated after you are gone, and what funeral or memorial arrangements you may or may not want (Will, Letter of Personal Instruction)
No adult should leave these essential rights and benefits to chance. Life is uncertain — the best time for estate planning is now.
Please contact us with any questions and to learn how we can help with your estate planning in Winston-Salem, North Carolina.
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Why every adult needs a living will and a health care power of attorney
Terri Schiavo collapsed in her St. Petersburg, Florida home after a massive heart attack on February 25, 1990. Because of a lack of oxygen, she suffered extensive brain damage and after two and one half months in a coma physicians ruled that she was nonresponsive and in a vegetative state.
Unfortunately, Ms. Schiavo had not previously conducted any formal estate planning and had neither a Health Care Power of Attorney nor a Living Will. Because her actual wishes were unclear, Ms. Schiavo was kept alive in a persistent vegetative state (PVS), while never improving, for 15 additional years despite formidable legal attempts by her husband to allow her to die a natural death.
Nightmare Government Involvement
For any citizen who cringes at the thought of government intervention into private life, this case remains an absolute nightmare. The courts eventually involved included all levels of the Florida courts up to the Florida Supreme Court and the Federal Appeals Courts, and they entertained challenges from a host of entities claiming to represent Terri’s interests, including the Florida legislature, Florida Governor Jeb Bush, various disability rights groups, the U.S. Congress, and President George Bush.
What exactly went wrong here?
Terri’s Husband, Michael Schiavo, who claimed that he knew that Terri would not want to live for an extended period in a persistent vegetative state, tried to serve as Terri’s sole legal representative determining Terri’s wishes. But because Terri had not executed a Health Care Power of Attorney formally giving Michael sole authority to make Terri’s health care decisions if she became incompetent, the courts ruled at various times that other parties, including Terri’s parents, could also represent Terri’s wishes. Indeed Terri’s parents maintained that their Catholic Church beliefs were also Terri’s beliefs, and that Terri would not want to violate the Church’s teachings against euthanasia (intentionally ending a life in order to relieve pain and suffering.)
Terri Schiavo still could have made her own wishes formally known in a way protected by the Florida courts if she would have executed a proper Living Will. Indeed, in 1990, the Florida Supreme Court had ruled in Guardianship of Estelle Browning that because elderly Estelle Browning had expressed in a Living Will her wish not to be kept alive by artificial means including a feeding tube, that Browning had “the constitutional right to choose or refuse medical treatment, and that right extends to all relevant decisions concerning one’s health.”
Good Lawyering Cannot Undo Bad Planning
Michael Schiavo hired the same noted Florida attorney who had argued the 1990 Guardianship of Estelle Browning case before the Florida Supreme Court, George Felos. Felos argued to a January, 2000 Pinellas (Florida) County Court that Terri Schiavo would not want to be kept alive artificially when her chance of recovery was miniscule. Felos won the initial case, but, even with the prior Browning decision, because Terri Schiavo had not executed a formal Living Will document expressing her actual wishes, Michael Schiavo’s attorneys could not successfully stave off the multitude of court challenges seeking to keep Terri Schiavo on life support for almost five more years.
The goal of all legal planning should be to prevent problems. Preventing problems is always less expensive than fighting a battle in court, and is much more predictable and much less harrowing for the client.
If, because of poor legal planning, one of the parents in a family is kept alive beyond her actual wishes, what would the cost of the additional medical expenses and additional legal bills do to a typical family? These costs could be devastating, and could quickly wipe out an estate as well as wipe out the plans that the parent intended.
North Carolina Recognizes the Living Will and the Health Care Power of Attorney
North Carolina law provides two methods for an adult to make his or her health care wishes known in advance–the Living Will and the Health Care Power of Attorney.
An adult may use a Living Will to communicate to her doctors that she does not want to be kept alive by extraordinary medical treatment or by artificial nutrition or hydration if she is terminally ill or in a persistent vegetative state. An adult may use a Health Care Power of Attorney to appoint someone to make his medical decisions if he is unable to make them himself. Because each of these documents has a different purpose, the best estate planning practices include both the Living Will and the Health Care Power of Attorney to be used in tandem. All North Carolina adults should utilize the Living Will and the Health Care Power of Attorney as part of a comprehensive estate planning process.
Please contact us with any questions and to learn how we can help with your estate planning in Winston-Salem, North Carolina.