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Wills and Estates Blog

What is a Durable Power of Attorney Anyway?

Tuesday, September 13, 2016

So many people come in to see me and are convinced that they need a Durable Power of Attorney (DPOA). When I ask them why, they don’t know. Further probing usually reveals that they aren’t quite sure what a DPOA actually is. Let me see if I can explain the idea.

Simply put, a power of attorney is a legal document where you give power to someone else (your agent) to act on your behalf. It is similar to hiring an attorney. The attorney is your representative and performs acts or conducts affairs on your behalf. Also, just like an attorney, your agent is under a duty to act for your benefit. If the power of attorney is “durable,” the power you have given continues even if you become incapacitated. However, any power you have given to an agent under a DPOA terminates upon your death.

A DPOA is one of the three legal documents in a basic estate planning package along with a Will and an Advance Medical Directive. A standard DPOA is written to give your agent the power to do anything you could do. Thus your agent can talk to the cable company, access your bank accounts, and even sell your house! It goes without saying that the choice of an agent is an important one.

The DPOA is an essential tool to protect yourself in the case of future incapacity. Let’s face it, we all know someone who has been diagnosed with Alzheimer’s or dementia. Alzheimer’s and dementia are easily the most common causes of incapacity. The conditions are incapacitating when they prevent a person from being able to handle his or her financial affairs. By creating a DPOA now, while still healthy, you can make sure that someone you trust has the power to conduct your affairs and protect you during incapacity.

The 5 Most Important Reasons to Have a Will

Tuesday, September 13, 2016

1. Avoid Intestacy Laws

If you never get around to getting a Will, don’t worry – the legislature will write one for you. If you die without a will you are “intestate” and the intestacy laws of your state govern what happens to your property. In almost all situations the legislature’s idea of what should happen to your property is very different than yours.

Let’s just take one example involving a married couple in Maryland without a will. If the husband dies and leaves a wife with a minor child, the wife and minor child split the inheritance. Contrary to popular belief, the wife would not inherit the entire estate. This leads to some absurd results like the wife now owning the house 50/50 with the baby.

If the husband dies and leaves a wife and an adult child, again the wife would not inherit the entire estate. After a small spousal allowance, the wife would once again be splitting with the adult child. The ultimate absurdity occurs when there are no children. After a small spousal allowance, the wife then ends up splitting with the husband’s parents!

2. Trust to Protect Children

Without a Will, your property will pass directly to your heirs regardless of whether they have the ability to appropriately manage the property. Most people would not want their eighteen-year-old son or daughter to inherit $100,000 in cash. Instead of a college education, your child may end up with an expensive sports car. A Will allows you to control – through a testamentary trust –assets after your death. In a Will you could put that $100,000 into a trust for the child. A trustee could be named who would be prohibited from giving the money to the child until they reach their 25th birthday. The trustee would have the discretion during the interim to pay for appropriate expenses like tuition and medical expenses. The same technique can be used for anyone who may need help in managing his or her inheritance.

3. Waiving Bond

The “bond” is actually an insurance policy insuring the creditors and heirs against improper acts by the personal representative. In Maryland, the court will require your personal representative – even if it is your spouse – to post a bond in order to be appointed personal representative. The personal representative will be required to apply to a bonding company that will typically require a background and credit check. The bond can be expensive if there are significant assets in the estate. There are also circumstances where the personal representative may not be able to be “bonded.” This could be because of criminal problems, bankruptcy, or just bad credit.

In a Will, you can waive the requirement for a bond. While courts in Maryland still require a “nominal bond,” that is usually only $100 to cover court costs. This nominal bond also does not require any type of background or credit check.

4. Choice of Personal Representative

Without a Will, there may be a contest as to the appropriate personal representative of your estate. The personal representative (also known as executor) is the person with the responsibility to administer your estate. This is the person with the court-appointed power to gather up all of your assets, re-title them, and ultimately distribute them to your heirs. Without a Will designating that person, a person whom you do not trust or more than one person may petition to the court to be appointed. Battles over the appropriate personal representative can be both time-consuming and costly. By designating in your Will the identity of the personal representative, an estate can be opened up without a court hearing, usually the same day.

5. Taxes

A Will can reduce estate taxes for married couples. The Will itself provides no tax advantages over dying without a Will (intestate). However, the Will can be used to maximize the amount married couples can pass on without paying estate taxes. The use of a bypass trust allows both a husband and spouse to use their maximum allowable exemption. Each spouse is allowed to give up to the exemption amount tax-free. In Maryland, the exemption amount is 1 million dollars. So the husband can give away 1 million dollars and so can the wife. The problem is that there is no limit on how much a spouse can give to the other spouse without estate taxes – its unlimited. This then prompts spouses to give everything to each other. And by doing that, the first spouse has now lost their 1 million dollar giveaway. When the second spouse dies, he or she only has a million to give away tax-free. The married couple should be able to give away 2 million dollars to their loved ones without tax. A bypass trust written into the Will preserves the first-spouse-to-die’s 1 million dollar exemption by putting it into a trust.

 


What Happens To My Kids If I Become Incapacitated?

Monday, June 06, 2016

One of the overriding purposes driving people to create and establish an estate plan is to ensure their minor children are cared for and will continue to be provided for in case a tragedy befalls the family and one or both parents pass away.

Benefits of a Last Will and Testament

One of the great benefits of having a Last Will and Testament is the ability to appoint guardians for your minor children. However, your Will does not have any effect during your lifetime. It only becomes effective upon your death. What if the tragedy does not result in your death but merely incapacity or inability to provide for your minor children? (e.g., as a result of a car accident you are in a coma). Who is authorized to serve as guardian for your minor children and how can you ensure the right person is appointed? Several states including Maryland have developed a statutory mechanism that allows parents to plan for this very real tragedy and that mechanism is called a “standby guardian”.

The Future Care of Your Children

A standby guardianship allows parents to plan for the future care of children without terminating their own parental rights. A standby guardianship is similar to the nomination of a guardian for minor children under your Last Will and Testament, except that the standby guardianship may become effective during your lifetime. A parent may be diagnosed with a life threatening disease or an accident may change the parent’s situation drastically in an instant. By designating a standby guardian, parents ensure that their children are cared for by an individual(s) of their choosing. The standby guardianship allows the guardian(s) to take action in advance of petitioning the court for a court ordered appointment as guardian of the minor child.

How The Process Works

In order to designate a standby guardian, the parent must only execute a written designation that is (1) signed in the presence of two witnesses and (2) signed by the designated standby guardian. The designated standby guardian is appointed when a “triggering event” occurs. The triggering event may be the incapacity, death or written consent for the guardianship to commence. Once the triggering event occurs, the standby guardian’s authority begins. Thereafter, the standby guardian must petition the court to appoint the standby guardian as guardian of the minor child within 180 days. Parents can revoke the standby guardianship at any time prior to the filing of the petition by any means that demonstrates an intent to revoke the designation.

Best practices dictate that a parent with minor children should provide for guardianship of minor children through a will and also through a standby guardianship. While it is impossible to plan for every possible occurrence in an individual’s lifetime, planning for the care of your minor children can be simplified by including a standby guardianship in your estate plan. At Berman, Sobin, Gross, Feldman & Darby, LLP we include a standby guardianship as a part of our basic estate planning package for all clients with minor children.

By Patricia Zeleznik

Owning A Joint Checking Account With Your Child: A Road To Responsibility Or A Road to Disaster?

Tuesday, May 31, 2016

It is imperative that you weigh the pros and cons before opening a joint account with your child. Particularly, you must analyze your situation and your reasons for doing so. You will find that for many of these reasons there may be other options that do not change ownership but still carry out your goals and wishes.

Pros of Having a Joint Checking Account

  1. Convenience

    Your child can assist you with paying bills and looking out for your finances should you need assistance. In addition, for parents with a minor child, a joint account allows you to closely monitor your child’s spending and teach them how to manage finances.

  2. Avoid probate

    For many, the primary concern is having money that is readily available after death. Probate delays the ability to access your account immediately. However, the accounts could be made Transferable on Death or Paid on Death, which means that the account will automatically be transferred to the named beneficiary or paid to the named beneficiary. This is an attractive alternative for parents who have more than one child because the funds will be divided amongst all of your children without any legal delay of the probate administration process.

  3. Build Trust

    Having a joint account with your child can help build trust. It can give you both ease in knowing the other person is responsible with managing money.

Cons of Having a Joint Checking Account

  1. Unfettered Access

    As a joint owner, your child can withdraw your entire account balance at any time, for his own use, and he is not required to pay it back (at least without a court order). The only time you should ever open a joint account with someone is when you have absolute trust that they won’t take advantage of you. An irresponsible child could just wait until you make a big deposit and withdraw all of the money and close the account.

  2. Account is Subject to Creditors

    When you add your child to your bank account, the money in the account is considered an asset of you both. Thus, you are at risk of taking on your child’s personal liabilities. For instance, your child may have issues with a creditor and a judgment may be levied against him or your child files bankruptcy, now the joint account could be garnished or subject to scrutiny.

  3. Gift Tax Issues

    When a joint account is held with someone other than a spouse, there is a risk that you may be subject to gift tax. According to the IRS, you can give up to $14,000, per person, per year, to a person (other than your spouse) without having to file a gift tax return. Therefore, if you open a joint account with your child and your child withdraws money for his own benefit, you have made a gift to that child for the amount withdrawn that is subject to the filing of a gift tax return.

  4. Spouse’s Access

    If you and your child are injured and you are both left disabled but your child’s spouse has power of attorney, then your son-in-law or daughter-in-law now has access and control to the joint account. In addition, if your child is separated from his spouse, his spouse is now entitled to a portion of this jointly held bank account when their assets are divided up during the divorce.

  5. Estate Implications

    If your child is a joint owner of this account and it was your intention to leave the money in this account to all of your children equally when you pass away, your wish will not be followed. The title of the account triumphs your Last Will and Testament. If the account is held jointly with rights of survivorship, the funds in this account will pass directly to the surviving joint owner—your one child, not equally amongst all of your children.

  6. Sibling Rivalry

    If you have more than one child, the addition of one child as a joint owner on your bank account may cause the other child or children to feel slighted and elder financial abuse could be alleged.

For many of the pros of opening a joint account with your child, an alternative exists that far outweighs these pros. Your alternative could be to give your child Durable Power of Attorney (See:What is a Durable Power of Attorney Anyway?). This gives them legal authority to act on your behalf. More importantly, the account remains with you and if your child abuses their authority, they can be held accountable.

By Patricia Zeleznik

Preparing For A Grand Exit!

Thursday, May 19, 2016

Are you a small business owner? If so, you may love your job so much, that retirement, death, or incapacity are the furthest thoughts from your mind. While you may not intend to exit the business in the near future, have you considered the possibility of what might happen if you have to unexpectedly retire, die, or become incapacitated? How will your company continue to exist? Who will take the reins and run the company in your absence? Depending on the level of your direct day-to-day involvement, determining who will take control of the business and/or training said individual could take quite a bit of time.

What exactly is a Business Succession Plan?

A business succession plan is a roadmap for your business in the event you retire, are incapacitated, or pass away. Think of a succession plan for your business like an extension of your personal estate plan. By creating a business succession plan, you are clearly identifying who will take over, how they transition into that role, and in what capacity. Depending on the nature and complexity of your business, a business succession plan can range from fairly simple and straight forward to quite complex and dynamic.

Similar to a personal estate plan, business succession plans are not “one size fits all.” To this end, it is highly recommended you speak with an attorney that is skilled in both business planning and estate planning to ensure that both plans work together to achieve your ultimate goals.

Why should every small business owner have a business succession plan?

A small business succession plan allows you to take a proactive approach to identify new owners of the business, address orderly transition from one owner to the next, identify procedures for transfers in ownership that are the result of unanticipated circumstances that result in challenges (i.e. death, illness or incapacity, or even partnership disagreements).

Business succession plans allow you to prepare for retirement while securing the survival of the business beyond your ownership. Further, by implementing a business succession plan you are able to address and account for various tax consequences associated with a transfer in ownership.

Consequences of not having a plan in place.

Not having a plan leaves everything up to chance. Why would you ever want to leave something you have devoted a substantial amount of your life, both physically and emotionally, up to chance?

There is potential for monetary loss due to estate, gift, and income tax issues. Additionally, not having a plan could result in huge gaps in wealth from a lack of business valuation activities and financial planning.

Lastly, without a plan in place, your business may end with you slowing down or becoming incapacitated. Due to the structure of the business and the individuals involved, not having a plan could result in the business having to dissolve and liquidate.

If you are a small business owner it is imperative you establish a succession plan to ensure that your business and your family have a smooth transition in the event you retire, become incapacitated, or die.

By Patricia Zeleznik

Are You Ready For ABLE?

Friday, February 06, 2015

As you may have heard, Congress enacted the Achieving a Better Life Experience Act of 2014 (the “ABLE Act”) on December 19, 2014. Many have deemed this a monumental step toward the betterment of the lives of individuals faced with mental and/or physical disabilities. While many experts would agree this piece of legislation is several years too late, Congress’ decision to move this legislation forward is a huge victory for those families that must deal with physical and mental disabilities of their loved ones on a daily basis.

Overview of the ABLE Act

The purpose behind this Act is two-fold: (1) assistand provide families and individuals with disabilities certain private savings funds designed to support health, independence, and quality of life; and (2) provide secure funds that are designed to supplement, but not supplant, benefits provided through private insurance, Supplemental Security Income (SSI) and Medicaid, the beneficiary’s employment, and other sources of income.

People that have a disability tend to depend on a multitude of public benefits for assistance with health care, food, housing, education, etc. To maintain eligibility for these public benefits, certain resource and income thresholds must bemet. Generally, an individual cannot have cash savings, retirement funds, etc. in excess of $2,000. This maximum amount is very small when compared to the additional costs of living that are not covered by governmental programs.

Prior to the enactment of the ABLE Act, generally, the only means of assisting disabled individuals was through the use of Special Needs Trusts (Special Needs Trust). For many families, the complexities and costs associated with creating and administering a Special Needs Trust might seem to outweigh the benefit of using a Special Needs Trust. The ABLE Act provides a new tool to allow families to provide a better quality of life for their loved one.

An individual with a disability may now continue to qualify for public benefits while owning assets held in an ABLE account.

These funds held in an ABLE Account do not have any of the restrictions commonly placed on assets held in trusts (i.e. the funds cannot be used to pay for housing or food). Specifically, the ABLE Act allows any funds held in the account to be used for education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, and expenses for oversight and monitoring, funeral and burial expenses.

An ABLE account is disregarded for eligibility determination purposes for means-tested federal programs. However, individuals receiving SSI will have their benefits reduced/suspended for distributions attributable to housing expenses. Also, if the account balance exceeds $100,000, the SSI payments will be suspendedfor the period in which the assets exceed the threshold. However, an account with assets in excess of $100,000 does not suspend or affect Medicaid eligibility of such person.

Requirements for Establishing an ABLE Account

To qualify for the ABLE Account program, the individual must have “significant disabilities” that began before the individual’s 26thbirthday. If the person meets this age requirement and is already receiving government benefits (SSI and/or SSDI) he or she is automatically eligible to establishan ABLE Account. (Disability Evaluation). Even if the individualis not receiving SSI or SSDI, he or she may be able to qualify for an ABLE Account through a certification process if the SSI criteria regarding significant functional limitations are met.

The age requirement only applies to the onset date of the disability, so those individuals that are over 26 may still qualify for an ABLE Account so long as the onset date of the disability was prior to the individual’s 26th birthday.

When Can an ABLE Account be Established?

Even though Congress passed the ABLE Act, it will be several months before ABLE Accounts are fully functional. Congress has instructed the Department of the Treasury to create regulations specific to ABLE Accounts to make sure proper procedures and oversight are in place. Once these regulations are provided, the states will then have the ability to establish ABLE Accounts and ensure the accounts are in compliance with the governing regulations.

Limitations on the ABLE Accounts

By statute, ABLE Accounts are a type 529 Plan. The statutorily created 529 College Savings Plans (see http://www.collegesavingsmd.org/ for information on Maryland specific 529 Plans) are established by each state in accordance with federal mandates. Just like the traditional 529 Plans, states most likely will take a similar approach in establishing ABLE Accounts. We can expect that states will place limits on the maximum account balances and will place limits on annual contributions to the accounts. For instance, several states have set maximum 529 Plan account balances at around $300,000 per plan. The state also may limit the Annual contribution limit, generally this limit is set in accordance with the annual Gift Tax exemption (currently$14,000). Thus, an individual could make a maximum contribution to the 529 Plan of $14,000. Any contribution over the $14,000 limit may disqualify the 529 Plan and create potential negative tax consequences.

Specific to ABLE Accounts, this “new” 529 Plan will also include limits discussed in the overview section to maintain the account as a disregarded asset.

Unfortunately, any funds remaining in an ABLE account after the beneficiary dies must first be paid back to Medicaid for all services provided during the individual’s lifetime prior to distribution of the funds to others. After Medicaid expenses are satisfied, any remaining funds would then be distributed by the individual’s established beneficiary designations, Last Will and Testament, or intestacy law.

Final Thoughts

While traditional models for planning and providing for disabled individuals (i.e. Special Needs Trusts) will remain a key fixture for many families, the ABLE Act has provided a unique mechanism that can supplement and fill-in the gaps where families are concerned with the costs and expenses associated with those traditional planning alternatives.

By Jeffrey K. Gordon

Transfers To Minors: Where Do I Start? What Should I Consider?

Wednesday, September 03, 2014

Two of the most commonly used methods of transferring money and assets to minors are a Uniform Transfer to Minors Act (UTMA) Account or a Trust. A UTMA Account is relatively simple to create and fairly inexpensive, but you cannot exercise any control over the assets. While a trust allows you to maintain a level of control, the expense may be substantial. Below are several pros and cons of each to consider before making your decision. Both mechanisms can be implemented during a parent’s lifetime or upon their death. If you want to provide a gift to a minor child or some other beneficiary that has not yet reached adulthood, depending on your personal goals for the gift a UTMA Account or Trust may be the perfect mechanism to achieve the desired result.

UTMA Account

Whether you are a parent, grandparent, aunt, uncle, or friend, you can use a UTMA Account to make a gift to a minor child. If you decide to use a UTMA Account, you will need to appoint a Custodian to manage the account. Once the account is opened, you can transfer whatever assets you like into the account. Once the assets are transferred, the child becomes the owner of the property. Your child will not be able to gain control of the property until he or she is 18 or 21 depending on the law in your state. Once your child reaches the specified age, he or she gains complete access and control of all assets that remain in the account without limitation. Prior to reaching the specified age, the custodian may use or expend the funds for the child’s benefit. For example, if you contribute $100,000 into a UTMA Account, the Custodian can expend the money for the child’s benefit for legitimate expenses prior to the child reaching the specified age or the Custodian can leave the money in the account until the child turns 18 or 21 and, at that moment, your child is entitled to the entire balance of the account. In each state, the rights and responsibilities of the custodian are specifically outlined by statute. A breach of these responsibilities (also known as “fiduciary duties”) will subject the custodian to personal liability for any mismanagement of the UTMA Account proceeds. Some states create additional duties such as providing an annual accounting, right of inspection, and other unique duties that a custodian must abide by.[1]

Pros

  • Simple and easy to set up. Similar to setting up an individual bank account, only requires that an adult be named as custodian until the child reaches the age of majority in your state (18 or 21).
  • The custodian’s powers are governed by statute and are very broad.
  • Generally, a custodian may make withdrawals from the account for the child’s benefit, so long as the expenses are legitimate. The custodian has a high degree of discretion for the use and expending of property for the child’s benefit without court approval.
  • The income earned in the UTMA Account is generally taxed at the child’s tax rate not your individual rate.

Cons

  • Once your child reaches the age of majority, the funds are legally his/hers.
  • Once the UTMA Custodianship terminates, your child will have immediate unfettered access to the assets and can expend the assets however he or she wishes. They can use the assets for ANY purpose (e.g., vacations, Ferrari’s).
  • As ownership transfers at the time of contribution, financing higher education can be negatively impacted as the assets in the UTMA will be considered during the financial aid analysis formula.
  • Once you have contributed money or assets, there is no getting them back.
  • Your child will have to file an annual tax return if the income generated from the account meets certain thresholds. Depending on the amount of income, the “kiddie tax”[2] may also apply.
  • The custodian has a high degree of discretion regarding use and expending property. Limitations on the use of the property is almost nonexistent. An irresponsible Custodian may exhaust the funds prior to your child reaching age 18 or 21.

Trust for a Minor

Trusts can be tailored to meet your specific needs. The trust may be intended to provide funds for your child during childhood, or simply a means of protecting the assets until your child reaches adulthood. Some trusts are used for specific purposes, such as education or medical expenses. The trust is created by a legally operative document (i.e. a will or a specific trust document). A Trustee will need to be appointed to manage and distribute assets of the trust in accordance with the trust document.

Generally, the trustee manages the assets for your child until some specified age or event triggers the trust to terminate and the trustee then distributes all of the assets. A single trust can have multiple beneficiaries.

By using a trust, you can dictate specific uses of the contributed property, specific events that entitle your child to distributions, and various other conditions as you see fit. The use of a trust allows you to make substantial contributions of assets to minor children without the fear that the funds will be mismanaged by your minor child due to immaturity. For instance, if you wanted to leave your child $100,000, you can limit how that money is distributed to your child or when your child can gain unfettered access to the money. The trustee has similar fiduciary responsibilities to that of the custodian. By using a trust, you can create a Trust Protector. The Trust Protector oversees the trustee’s actions of the trustee and ensure the trust funds are not mishandled. If the Trustee performs any action not authorized under the trust, the Trust Protector may remove the Trustee and appoint a successor. If any harm has resulted as a result of some unauthorized transaction, the Trust Protector or the beneficiaries of the Trust may file a lawsuit seeking court intervention.

Pros

  • You, as the creator of the trust, control how the assets are to be handled. Thus you can be creative regarding how the funds are distributed. For example, you can limit the child to receiving distributions of 1/3 the principal and interest at age 25, 30, and 35 or limiting a portion of the distribution to be contingent upon graduation from college, graduate school or professional school. Recall that when using the UTMA Account, your only option for distribution is age 18 or 21.
  • Depending on your wishes, a trust allows you to dictate what actions a Trustee can and cannot take regarding the use of assets and distributions to the beneficiaries.
  • Depending on the size of your family, you can create several trusts (one for each child) or a single trust that allows the trustee to manage and distribute funds based on the individual needs of each child.
  • The assets can be protected from threats of bankruptcy, future lawsuits, and divorce.

Cons

  • The creation of the trust requires very specific language and should be drafted by an attorney.
  • The creation and maintenance can involve substantial legal fees.
  • Trustee must file an annual tax return for the trust. If the trust generates income and the trustee does not distribute the income to the beneficiaries, the Trust could be taxed at the highest rate of 39.6% depending on the amount of income generated.[3]
  • The trustee may have to produce the trust document or will to banks and other institutions before the bank will allow the trustee to take action.
  • Absent the inclusion of a Trust Protector, the beneficiaries of the trust must bring a lawsuit against the trustee in the event he or she mishandles the trust funds.

Final Thoughts

In deciding which option is best for your situation, you should take note of not only the initial costs but also what you wish to achieve. If you intend to provide your child with a substantial amount of money and assets, a UTMA Account may not be the best option as the child will have unfettered access once he or she reaches the specified age (usually 18 or 21). On the other hand, if you simply wish to provide your child with a small transfer of assets (down payment on a car or starter home), a trust may not be the best option as the administrative costs may outweigh the benefit.

By Jeffrey K. Gordon

Revocable Living Trusts: Are They Worth The Hype?

Wednesday, July 30, 2014

In many states, the use of a Revocable Living Trust has become increasingly popular as a viable estate planning option. But in Maryland, the ease of the probate process, among many other reasons, makes this option usually not worth the hype, money or time.

A Revocable Living Trust is a written document that contains provisions of how to hold, manage, and distribute property during your life and after your death. It is revocable, meaning that even though assets are transferred (or re-titled) to the living trust, the person who creates the trust, the grantor, can get his or her property back by revoking the Trust during his or her lifetime. The persons who manages the assets in the Trust is the Trustee and this is almost always the grantor during his or her lifetime. The primary purpose of a Revocable Living Trust is to avoid probate. It is most popular in states with probate systems which are expensive and time consuming.

In Maryland, the advantages of having a Revocable Living Trust are typically outweighed by other estate planning alternatives and the ease of the Maryland probate system. After a person’s death and once the probate documents are filed in Maryland, a personal representative can be appointed within days and the Letters of Administration can be used to access funds and manage probate assets. In addition, the costs associated with probating an estate are modest with probate fees depending on the size of the probate estate. For example, an estate of $200,000 would have a probate fee of$400.00. Unless there is some complicating matter, many estates can be closed after 6 months which is the period that creditors have to make claims against the estate.

Despite the ease of the Maryland probate process, many who have heard of the evils of probate will still insist on a Revocable Living Trust, and for them, the following information should assist them with making an informed decision.

Pros

  • Avoiding Probate

    Upon your death, assets that were titled in the Revocable Living Trust pass directly to the Trust without going through probate. This is particularly important if you own real estate in more than one state because without a trust, your loved ones would have to open a probate estate in each state real property is located. In addition, a Revocable Living Trust allows immediate access to bank accounts titled in the Trust after your passing, instead of waiting for the documentation from the probate estate to gain access to the account(s). Lastly, the decedent’s affairs could theoretically be finalized in weeks or months as there is no 6 month creditor claims period. Note that this may in fact also be construed as a disadvantage because creditors may have three years to file a claim against assets that were in the trust.

  • Management of Assets

    Should you become ill or incapacitated, some argue that it is easier to manage Trust accounts versus accounts in your individual name. If your assets are held in a trust account and you become incapacitated, the Trust document outlines the Trustee’s power with regard to managing your assets. Financial institutions will require your trustee to provide a copy of the Trust Agreement.

    For accounts held in your individual name, a properly executed Power of Attorney will allow your agent to control those assets. Although recent changes in the Maryland law regarding Powers of Attorney should make it easier to use a Power of Attorney, some may still find it difficult to use POAs with certain financial institutions.

  • Privacy

    Unlike a Last Will and Testament, upon your death a Revocable Living Trust is not public record. Therefore, information as to what you owned and how you dispose of those assets are private. Thus, your beneficiaries and the amounts they receive are not available for public scrutiny.

  • Avoiding Multi State Probate

    The most compelling reason for a Revocable Living Trust is to avoid probate in multiple states if you own real estate outside of your home state. In this instance, your Last Will and Testament must generally be probated in your home state and the state for which you own real property, a process which is called “Ancillary Probate.” If your real property is titled in your Living Trust, this will not be necessary. Your real property can be distributed by your Trustee, upon death, no matter where it is located.

Cons

  • A Last Will and Testament is Necessary

    Invariably, not all of the assets will have been re-titled in the name of the Revocable Living Trust before death. There will be a bank account or vehicle that was still in the decedent’s name at the time of death. Thus, a Will is still necessary. Most attorneys will draft a special type of Last Will and Testament called a Pour Over Will to ensure that any unfunded assets (assets not re-titled) will “pour” into your trust. To do this, your Pour Over Will must also be probated, and such assets may then be distributed according to the instructions in the Trust.

  • Initial Expense is High

    It is more expensive to create a Revocable Living Trust than a Last Will and Testament. Preliminarily, there is the initial cost of drafting a Trust Agreement, which is usually more than the price for drafting a Will. There is also the expense of “funding” the Revocable Living Trust. This is the process of transferring the ownership of every eligible asset into the name of the Trust. In addition to just the time spent on this process there may be costs associated with retitling assets. For example, real property can only be assigned to a trust by deed, which must be recorded at the applicable office of land records for a fee. This fee includes the time and cost for the attorney or titling company to draft the deed and the fees to record the deed.

  • Funding a Trust Takes Time and Effort

    Once your Revocable Living Trust becomes effective, you must fund the Trust by contacting financial institutions, life insurance companies, and transfer agents to change account ownership and beneficiary designations; retitle vehicles, and sign and record new deeds for real estate. There is a significant cost – in terms of time – to accomplish this. If you fail to re-title, even one asset of any significance, your trustee, upon your death, would have to open an estate to administer such assets. This would defeat the purpose of the Living Trust.

  • Cannot Avoid Tax

    Although assets that are retitled to the Trust avoid probate, they are still subject to income and estate taxes. This is because the IRS still considers that all the assets in the Revocable Living Trust are still yours. This should not be surprising as you are the trustee of the trust, the beneficiary of the trust, and can revoke it at any time. Because it is still considered your money, you and/or your estate are still responsible for income, estate, and inheritance taxes. There is simply no tax advantage to having a Revocable Living Trust over a Last Will and Testament.

The next time you hear someone tell you that a Revocable Living Trust is a must, please consider all of the pros and cons as they specifically apply to your situation. While there are cases where a Revocable Living Trust can be beneficial, for most Maryland residents there are other legal avenues to accomplish your goals without the cost and effort of a Revocable Living Trust.

By Nicole Slaughter

Death Of A Loved One: Practical And Legal Guidance

Tuesday, May 21, 2013

Dealing with the death of a loved one both before and after death are the two most difficult situations in our lives. In addition to the emotional toll, there are also innumerable details, practical and legal, surrounding a loved one’s death. Most people are not aware of the steps that need to be taken in preparation or after death. And even if they are aware, most people have a difficult time focusing on these tasks in such a fragile emotional state. In an attempt to help during this difficult time I wrote a manual of sorts. Death of a Loved One contains checklists to assist both before and after death. You can download a free copy of the booklet here.

By David Galinis

What Is So “Special” About A Special Needs Trust?

Thursday, November 29, 2012

The Problem. You have a disabled child who is currently receiving need-based public assistance such as Supplemental Security Income (SSI) and Medicaid. Your child is receiving those benefits because he or she is disabled and because he or she does not havesufficient income and resources. As a parent, you want to make sure that your child is provided for after your death. This is especially true in the case of a disabled child. Your plan to provide for your disabled child probably includes a life insurance policy in addition to assets you have accumulated over your life time. But what happens to your child’s eligibility for SSI and Medicaid if they suddenly receive a significant amount of money in the form of inheritance and life insurance proceeds. The answer is that your child will lose the monthly SSI check and, more importantly, health insurance coverage through Medicaid. Is there a way to provide for your disabled child after your death without endangering their public disability benefits?

The Solution. The Special Needs Trust (SNT) is the answer. If your Will and beneficiary designations direct the assets into a properly drafted SNT, your disabled child will continue to receive their SSI and Medicaid coverage.

To understand how this works, first we need to discuss trusts in general. A trust is just an agreement between a grantor (the one with the money or property) and a trustee in which the trustee agrees to accept and hold money (or other property) for the benefit of someone else. Commonly parents, instead of giving assets to a minor, will give assets to a trustee who will hold the property or money for the minor until the minor reaches an appropriate age. Until the child reaches that age, the trustee will be tasked with using the money for the minor’s benefit. (See Avoid Naming Your Minor Children As Beneficiaries )

A SNT is a special type of trust created by statute. 42 U.S.C. §1396p(d)(4). If the requirements of the statute are followed, any money (or other property) put into the SNT will not be considered an available resource to a disabled beneficiary. Thus, the trust property will not cause the disabled beneficiary to lose their SSI and Medicaid.

Key Features of a Special Needs Trust

  1. Beneficiary has no right to demand assets

    The disabled beneficiary can have no right to demand any income or principal from the trust. This is the key feature. If the disabled beneficiary could demand payment, then the money in the trust would beavailableto the disabled beneficiary and thus the entire amount of the trust would be used to disqualify the person for SSI and Medicaid.

    Thus in a SNT, the trustee must have complete discretion to use the money as they see fit. The disabled beneficiary can ask for whatever they want but the trustee has the ultimate authority whether not to expend the trust income or principal.

  2. Trust funds cannot be used for basic necessities

    The second key feature of a SNT is that the trustee cannot use the trust assets to pay for services being provided for by public assistance. The monthly SSI check is for the basic necessities of clothing, food and shelter. Thus the trust cannot be used for clothing, food or shelter. Then what can we do with the trust? The answer is everything else. The trust could be used to pay for a car, a computer, a vacation, etc. Think of the trust as a tool to enhance the quality of the disabled beneficiary’s life. It is not a mechanism to pay for their basic needs which are, theoretically, being taken care of by SSI and Medicaid.

Different Types of Special Needs Trusts

  1. Self Settled

    A self settled SNT is one in which the disabled person’s own money (or money to which the disabled person is entitled) is being used to fund the trust. Examples of self settled SNTs are where the trust is funded with:

    • a recovery in a personal injury lawsuit,
    • a settlement of a workers’ compensation claim, or
    • an inheritance.

    In each of these examples, the disabled person is entitled to the funds being used to create the trust.

    There are two disadvantages to this type of SNT. First, it typically will require approval. In Maryland, the trust has to be approved by the State Attorney General and, most likely, a circuit court. This is expensive and time consuming. The second disadvantage occurs at the death of the disabled beneficiary. If the disabled beneficiary had used Medicaid at any point during their life, Medicaid will have to be paid back out of the remaining trust assets before any money can be distributed to heirs. This is referred to as a payback provision.

    Unfortunately, the self settled SNT is the only real option for personal injury recoveries and workers’ compensation settlements. This is not the case with inheritances. If the parent (or any other person) plans ahead, they can create a third party SNT prior to death and avoid both the approval process and payback.

  2. Third Party

    In contrast with a self settled trust, a third party trust is funded with money coming from somebody else – not the disabled person. The most common third party SNT is when a parent creates a SNT for their disabled child. They money is the parent’s money, not the child’s money. The third party SNT is preferred over a self settled SNT for two reasons. First, approval is not required. So, for instance, a parent could draft a SNT into their Will and it never has to be approved by anyone. Second, there is no payback required. The terms of the SNT will determine who gets the remaining trust assets at the disabled beneficiary’s death.

  3. Pooled

    In a pooled SNT, a non profit organization (NPO) has already drafted a SNT and had it approved by the appropriate state officials. Disabled persons can then join the SNT. The NPO keeps a separate account for each beneficiary but pools the money together for investment purposes. The NPO serves as the trustee. The pooled SNT has some distinct advantages. First, there is no need to get the trust approved. This can save significant time and expense. Second, the NPO handles all of the investment and generally earns a better rate of return because the assets are pooled. Third, the NPO’s trustees are well versed in SNT law and understand what types of expenses can and cannot be paid to ensure that the disabled person remains on SSI and Medicaid.

In conclusion, any parent of a disabled child should seriously consider creating an SNT to protect your child’s right to future public assistance. Once the SNT is established you would then just make sure that all assets go to the SNT at your death instead of to your disabled child directly. So in your Will, you need to direct your assets to the SNT, not the disabled child. For all the non probate assets (life insurance, 401ks, etc), you need to remove your disabled child as the beneficiary and instead designate the SNT.

By David Galinis

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