Contents:
- What is "HIPAA"?
- What is a Living Will?
- What is a Letter Testamentary?
- What is a Beneficiary Deed?
- Do I need a Trust?
- Do I need a Will?
HIPPA is an acronym for the Health Insurance Portability and Accountability Act. This is a federal law that imposes sanctions, monetary fines, and even imprisonment for the unauthorized disclosure of a patient's health information. As a result, doctors, hospitals, and health care providers will not release information about a patient's medical conditions and treatment unless there is a proper HIPAA release. This release should be set forth in any living will or trust document.
A living will is a written statement to control the health care treatment decisions that can be made on that person’s behalf. It typically sets forth your wishes regarding the use of machines and equipment including feeding tubes to be used for your medical care.
What is a Letter Testamentary?
This is a document issued by the Probate Registrar of the Superior Court that authorizes a person called a Personal Representative to collect the assets of the decedent and distribute the assets of the decedent to the devisees named in a will or to the heirs when there is no will. Frequently, financial institutions report that funds in an account cannot be released unless there are letters testamentary. Also, in order to sell or transfer real estate property to the devisees or heirs, it is necessary to probate the will unless a beneficiary deed has been prepared.
A new form of deed that allows transfers of real estate on the death of the owner to whomever the owner designates as beneficiary. Effective August 9, 2001, it takes the familiar payable on death concept used for bank and brokerage accounts and applies it to real estate. It thereby avoids the probate process often required for testamentary or post-mortem transfers of real property. It will benefit many of our clients, particularly the modest sized estates in which the residence is the primary estate asset.
The transfer of ownership does not take effect until the death of the owner. The statute allows multiple beneficiaries to take title in any recognized from (e.g., joint tenancy, tenants in common, community property). The deed must be recorded before the death of the last surviving owner to be effective. Likewise, any revocation of the deed also must be recorded before the last surviving owner’s death.
The beneficiary deed is an ideal tool for the married couple or person with a simple, modest-sized estate. Because the equity in the home will likely exceed $50,000, a probate proceeding would normally have to be commenced upon the death of the owner because the $50,000 limitation for real property affidavits has been exceeded. The good news is that the probate process can now be avoided through the use of this new deed.
The new deed will work best for an unmarried person who is the sole owner of the property or for a married couple who have no prior marriages.
There are several types of trusts and the goals of the client determine the type of trust to prepare.
A revocable trust is commonly used in order to minimize federal estate taxes that may be due upon death and to avoid the probate procedure. If the grantor wishes to retain control and management of his/her assets during lifetime but wants to avoid probate, transferring assets to a revocable trust allows the grantor full control during lifetime. After the grantor’s death, the revocable trust may dispose of property privately (without estate administration) if all of the grantor’s property is in the trust. A living trust lends itself to continuity f management for trust assets and to maintenance of an income flow to beneficiaries during the life of the trust.
The grantor of a revocable trust may serve as her own trustee for as long as she is able. When the grantor is no longer able to serve as the trustee, the successor trustee designated in the trust instrument automatically becomes the trustee.
At the grantor’s death, the revocable trust becomes irrevocable. The trust estate is allocated among any specific trusts established by the trust instrument. The assets usually are divided between a marital trust and a credit shelter trust and are administered according to the terms of each separate trust.
The nonmarital trust commonly is called the credit trust, the family trust, or the residue trust. Assets having a value equal to the federal estate tax exemption equivalent normally are allocated to the credit shelter trust and are exempt from federal estate tax. Funding a family trust with assets equal to the exemption equivalent (the unified credit) and allocating the balance of the estate to the marital deduction trust allows the decedent’s estate to maximize the unified credit and to minimize the marital deduction. The result is no federal estate tax liability at the first death between souses. Upon the death of the surviving spouse, the credit shelter trust does not become a part of the surviving souses’ estate and is not taxed a second time.
Benefits which may be provided to the surviving spouse under a family trust and which are not taxable to the spouses’ estate at his or her subsequent death include:
- All of the income during his or her lifetime;
- Amounts of principal nc3ssary for support, maintenance, welfare, and are;
- Withdrawals of principal by the spouse equal to the greater of 5% or $5,000 on a noncumulative, annual basis; and
- A special power of appointment allowing the spouse to leave the trust property to anyone except the spouse, the spouse’s estate, the spouse’s creditors, or the creditors o the souse’s estate. The decedent normally wants assurance that the family trust ultimately will be distributed to his/her children or to specific charities. With the special power of appointment, the decedent can designate what class of beneficiaries are eligible for consideration by the surviving spouse if the special power of appointment is exercised.
After the death of the surviving souse, the remaining principal and any accumulated income are distributed to designated beneficiaries chosen by the decedent, which usually are his/her children. Depending upon the terms of the family trust, children may receive their shares in one lump sum or in installments as predetermined by the decedent.
The decedent may give his or her entire estate to the surviving spouse, which would pass free of federal estate tax under the unlimited marital deduction. Depending upon the size of the estate, however, this could create an unnecessary tax burden on the surviving spouse’ s estate. To minimize the tax burden between the two estates, the credit trust or family trust should be funded with the exemption equivalent when the first souse dies.
All assets allocated to the marital and/or QTIP trusts must qualify as marital deduction property. Property owned jointly between a decedent and his spouse qualifies for the marital deduction, as do assets owned solely by the decedent. However, assets owned jointly among the decedent, the decedent’s spouse, and a third party do not qualify as marital deduction property. Life insurance proceeds paid to an individual other than the spouse or the decedent’s trust likewise do not qualify as marital deduction property.
The marital trust must grant all of the net income to the surviving souse at least annually, as well as grant the right to control and dispose of the trust property either during life or by will through a power of appointment. If the spouse does not use all of the trust property during life and does not dispose of it by will through the power of appointment, the remaining trust property is distributed according to the grantor decedent’s directions. (Generally, the balance is administered under the terms of the decedent’s family trust or credit trust.) At the death of the surviving spouse, the value of the remaining assets in the marital trust are included in the spouse’s estate and are subject to federal estate taxes.
The QTIP trust is a useful planning tool for a second marriage when the grantor has children from a prior marriage who are the ultimate beneficiaries The grantor is able to safeguard the children’s interests, while preserving the marital deduction and allowing the spouse to receive the income during life. At least annually, all income must be paid to the surviving spouse; and at the spouse’s death, any accrued income must be paid to the spouse’s estate. Because qualified terminable interest property (QTIP) qualifies for the marital deduction, the value of the assets are included in the estate of the surviving spouse even though the spouse has no control over the assets of the trust.
For trust assets to be regarded as QTIP assets, the personal representative makes the election on the federal estate tax return. The personal representative may select a percentage of the marital deduction property as QTIP assets and may allocate the remaining assets to a regular marital trust and/or a family trust. In some instances, the personal representative may elect to have all marital deduction property treated as QTIP assets. Once the QTIP election is made and the federal estate tax return is filed with the Internal Revenue Service, the election is irrevocable.
A sprinkle trust, also called a spray trust, is a discretionary trust. Its purpose it to provide the trustee with uncontrolled discretion to distribute as much income or principal to a beneficiary for care and education as the trustee thinks best. The trustee becomes the parent substitute for children who are beneficiaries. If there is a surviving parent, the trustee typically will rely upon the parent’s suggestions for distributing funds among the beneficiaries. However, when there is no surviving parent, the trustee is extremely cautious about making uneven (sprinkling) distributions to beneficiaries. Among the advantages of a sprinkling trust are:
- It provides spendthrift protection, since the beneficiaries do not have any right to income until it is allocated to them.
- Estate tax savings are achieved when the spouse is also a beneficiary and receives only needed income rather than unnecessary increases in the value for the souse’s estate.
- Savings n family income tax are achieved when income is distributed to a low-bracket beneficiary.
- Funds are allocated among beneficiaries according to need.
The disadvantage of a sprinkling trust is that it places complete control in the trustee.
A spendthrift provision in a trust allows a grantor to transfer assets for the benefit of a beneficiary and to protect those assets from creditors. The beneficiary cannot transfer his right to any future distributions, and his creditors cannot attach a claim to any future distribution. Protection against creditors depends upon the amount of discretion granted to the trustee. If the beneficiary receives income or principal at the complete discretion of the trustee, the trust is more creditor-proof. Spendthrift provisions are placed in trusts not only to address the problem of minors receiving sums of money but also to assist adults who lack the capacity to manage money and assets prudently.
The protection offered by a spendthrift trust is not ironclad. Not all states limit creditors’ reach on the assets to the same extent. Thee have been cases where the trustee has been forced to make discretionary distributions to a beneficiary. In addition, spendthrift provisions are never effective against a federal tax lien.
My recommendation is that every one needs a will. A primary benefit of preparing a will is to name the Personal Representative who will be in charge of your assets after your death. This person--and an alternate thereto--can be named and the requirements of posting bond or security can be waived by the decedent in the Will. Another primary advantage of preparing a will is to name the guardian for minor children. Even assuming that your assets were payable to beneficiaries and you had a beneficiary deed for your real estate so there was probate avoidance--these two benefits are very significant and benefiting from one--or both of them if you have minor children-is by itself significant enough that the basic will document should be prepared. More complex wills can be prepared which create trusts upon death and are called testamentary trusts. Frequently, parents will want to structure the payout of funds to their children at ages greater than 18 so a testamentary trust can be helpful to accomplish the security of knowing that the children will not receive their share outright at age 18 but will receive payment at older ages such as 25 and 30 years.