Contact:
Alison Arden Besunder
212-695-8100, ext. 289
[email protected]

What Is a Life Insurance Trust & How Does It Work?

In short, an Irrevocable Life Insurance Trust (or ILIT):

• Protects your life insurance payment from being countable in your gross estate.
• Protects the proceeds of life insurance from creditors and predators of your beneficiaries.
• Gives you more control over how the proceeds of your life insurance will be used after your death.

Many people have the incorrect impression that life insurance is “tax free.”

It is true that life insurance is income tax free, however, life insurance left to anyone other than a spouse is not exempt from estate tax.

How does an ILIT save estate taxes?
An ILIT is an estate tax savings device. The irrevocable trust owns the life insurance policies on the life of the grantor and has complete control over the policies. The policies are transferred to the trust, or the trust purchases new life insurance on the life of the grantor. Occasionally, income-producing assets are placed in the trust to pay the premiums.

Alternatively, with “whole” life insurance, the income generated by the whole life insurance policy is sufficient to pay future premiums. Another possibility is for the grantor to make annual gifts to the ILIT. Since you do not personally own the insurance policies, you do not have an “incidence of ownership” and the policies will not be included in your estate – your estate taxes, in turn, will be reduced.

The grantor, who is usually also the insured, surrenders all ownership interest and control in the policies. When the grantor dies, the trust collects the insurance proceeds free of estate tax. Since the insurance is not payable to the estate, and the grantor did not “own” the policies at the time of his or her death and relinquished all rights in the policies, the proceeds of the life insurance policy are paid free of estate and income tax.

Why do I need an ILIT if the federal exemption is $12.92 million, and there is portability between spouses?
The law can change at any time and the exemption may be reduced. New York State increased the exemption to $6.58 million but also increasing the risk that your entire estate could be subject to the tax if it is in excess of 5% over the exemption amount. Your gross estate may also increase substantially by the time you die.

Can I be my own trustee?
If your objective is to save estate taxes, you may not be your own trustee. Sometimes people name their spouse or other individuals as trustee or co-trustees. However, it is important to recognize that many people do not have the time, experience, or understanding necessary to fulfill the fiduciary obligations of a trustee. Sometimes people choose a corporate trustee (a bank or trust company) who can make sure that the trust is properly administered and the insurance premiums promptly paid.

A trust sounds complicated. Can I name someone else as the owner of my insurance policy? Why can’t I just name the nominated guardian of my kids?
If someone else such as your spouse owns your policy at your death and dies first, the cash/termination value (of a whole policy) will be in his or her taxable estate, which doesn’t solve the problem. If you and your spouse switch ownership of each other’s policies, and you both die in a simultaneous disaster, then both policies will be taxed.

More importantly, if someone else owns the policy, you have no control over those assets or how they are used. They will be taxable in that person’s estate and subject to that person’s creditors and predators, including their spouse if he or she becomes divorced. This person could change the beneficiary, take out the cash value, or even cancel the policy and leave you without any insurance. If you pick a trustee with whom you are on good terms at the time you choose them but later have a falling out, this could very well happen. You may trust the person now, but have problems later on.

An ILIT allows you reduce estate taxes while still keeping some level of control.

Goetz Fitzpatrick LLP has been offering clients insightful solutions throughout the New York Metropolitan area since 1967. The firm provides its clients with expertise in the areas of Construction and Real Estate, Trusts & Estates Administration & Litigation, Commercial Litigation, Corporate, Bankruptcy, and Labor & Employment. The firm’s office is located at One Penn Plaza, Suite 3100, New York, NY 10119, Telephone 212 695 8100, [email protected], www.goetzfitz.com. You can learn more about Goetz Fitzpatrick on: LinkedIn | X (Twitter) | Soundcloud | YouTube | Facebook | Instagram

Author

Goetz Fitzpatrick

Contact:
Alison Arden Besunder
212-695-8100, ext. 289
[email protected]

Estate Planning – Not Just for Death

I’ve said it before and I’ll say it again: there are four essential documents that EVERYONE should have – and the Wall Street Journal agrees.

This is not only about having your wishes carried out, but also about making things easier on your loved ones when they are faced with hard decisions.

1. A Will: If You Don’t Have One, Decisions Will Be Left Up to the Courts.

And given that you don’t have a personal relationship with the courts, the likelihood they’ll allocate things the way you would have liked is probably slim. If you have a canned will from an online source, beware – small details can invalidate a will.

2. A Durable Power of Attorney: Someone Needs to Manage Your Money If You Can’t. 

If you become incapacitated, the person you name as your durable power of attorney is appointed to make legal decisions for you – and financial ones. Make sure you base your choice on reason and not just emotion, because your estate is at stake.

3. A Medical Power of Attorney: Someone Needs to Make Major Medical Decisions If You’re Incapacitated.

Consider somebody who will be able to stay calm and make rational decisions. Preferably someone you have had honest discussions with about your wishes.

4. An Advanced Directive or Living Will:Dictate Your Life or Death Decisions Before Someone Else Has to Choose. 

If something were to happen to you, would you want to be resuscitated? Kept alive through artificial breathing or feeding? This decision may differ depending on whether you are ill or perfectly healthy, but either way, it isn’t fair to leave those choices in the hands of your loved ones when they are facing a tragedy. Make your decisions–and then make sure your loved ones and doctors know about them.

Goetz Fitzpatrick LLP has been offering clients insightful solutions throughout the New York Metropolitan area since 1967. The firm provides its clients with expertise in the areas of Construction and Real Estate, Trusts & Estates Administration & Litigation, Commercial Litigation, Corporate, Bankruptcy, and Labor & Employment. The firm’s office is located at One Penn Plaza, Suite 3100, New York, NY 10119, Telephone 212 695 8100, [email protected], www.goetzfitz.com. You can learn more about Goetz Fitzpatrick on: LinkedIn | X (Twitter) | Soundcloud | YouTube | Facebook | Instagram

Author

Alison Arden Besunder

Alison Arden Besunder, Esq. is Chair of the Trusts & Estates Planning and Fiduciary Litigation group at Goetz Fitzpatrick. She has extensive experience and focuses her practice in the areas of Trusts & Estate Planning, Guardianship, Estate Litigation, Commercial Litigation, Elder Law, and Business Succession Planning.

LEARN MORE >

Contact:
Alison Arden Besunder
212-695-8100, ext. 289
[email protected]

5 Important Steps in Planning for Your Digital Afterlife

Q. I have a variety of social media accounts – Facebook, Twitter, Instagram, Pinterest, not to mention my blog, website, and other various sign ins! What happens to my digital accounts if I die?

We live in a digital age. Most of our lives are on line. Even the least tech-savvy among us has some degree of digital assets. Digital assets include any online account requiring a username and password; any file or other intangible work stored electronically, whether on a computer, CD ROM, flash drive, or in the cloud. It has been said that there is more data and information created since 2003 than in all of civilization put together.

Planning for your “digital afterlife” is important for two reasons. One, the identities of 2.5 million deceased Americans are stolen annually. Two, preserving your stories and memories is important. Your heirs will likely want to have access to your digital content – not just on Facebook and Instagram but also your pictures, videos, and documents or emails.

Many of us have more than one e-mail account, from Gmail to Google to Outlook to me.com. In the course of a single day, you leave a wide swath of digital footprints. You check Facebook when you wake up, then you do some online banking. You place an order on your iPad for fresh direct and diapers.com. Your electric and gas bills are paid automatically. Your photos and videos are stored on a cloud server. These moderate online activities add up to a significant digital presence. They also leave little if any paper trail.

The number of passwords required to access this digital media is dizzying, impossible for each of us to keep up with our own methodology for setting arcane combinations of lower and upper case letters, numbers and symbols. There is little, if any, paper trail, for obvious reasons. To write down passwords is to invite thieves or other unauthorized access. Yet, those very same requirements designed to prevent identity theft and hacking are the very same insurmountable hurdles. When you die, that information dies with you. This impedes family members from accessing accounts in the event of incapacity or death. The Terms of Use (TOU) of most online companies rarely if ever allow for the immediate or automatic transfer of the account data to the personal representative of an estate. Many of them actually provide for deletion of an online account within a certain amount of time after a user’s death. This can jeopardize the ability to recover information, marshal assets, and otherwise administrate your affairs. For example, without access to a decedent’s bank and investment accounts, a fiduciary will encounter difficulty in obtaining the necessary information to distribute a person’s estate. This also risks overlooking an asset or account. Importantly, anyone with a Pay Pal account may have a balance left in that account that needs to be transferred.

Enter digital estate planning. Digital estate planning is the creation of a plan where a person chosen by you can access your digital assets and implement your wishes. Some practical sense and a minimal amount of effort can ease a potential burden on you and your loved ones. For the average user, this includes anything stored on a laptop or computer server, like business and financial documents, personal photos and stories, or recipes, or even purchased e-books and music. Some but not all TOUs grant a purchaser a non-transferable license to use these works during the purchaser’s lifetime. For some people, usually creative, digital assets can have significant monetary value. For example, Stieg Larson (the author of The Girl With the Dragon Tattoo) left behind a laptop computer. His girlfriend, who had possession of the computer when he died, claimed that his last close-to-finished novel resided on the hard drive of that computer, giving rise to questions as to whether she had authority to sell the material and whether she owned it. Consider also that when the renowned composer and conductor Leonard Bernstein died in 1990, he left an electronic, password-protected draft of his memoir titled Blue Ink. The password was so strong that apparently no one has yet cracked the code!

Of course, with every dilemma arises a budding industry. There are businesses that service people looking to pass on their online presence. For a fee, you can upload all your passwords into an online account. In the event of disability or death, the designated individuals are notified and can access the information. Other sites like AssetLock (formerly YouDeparted.com) provides an online vault to store important documents and passwords. The account can be unlocked once a number of people set by the owner sign in and confirm the owner’s death. Last Pass is also a great solution.

The best practice is to take steps to do digital estate planning rather than letting the uncertainty of law in this area and the policies of individual online companies dictate a result. Here are 5 steps you can take on your own:

1. Inventory your digital assets: This can be done just as you would inventory your household items for insurance purposes (also a good idea for estate planning purposes!). You can keep a separate worksheet in an Excel spreadsheet for this purpose.
2. Create a List: using the same spreadsheet, create a list of all your devices, accounts, usernames, passwords, and the answers to the “secret questions.” This is good practice not only for your agents but to jog your own memory when you change and update passwords! If desired, you can password protect this list with an easy-to-remember PIN that your spouse or trusted family member / friend will know.
3. Leave instructions: Leave information – either in the spreadsheet or a separate document – that includes instructions on how to access mobile devices, computers, email accounts, and other online subscriptions. This Letter of Instruction can be kept in a safe place with your Will and advance directives. This Letter would convey information that an agent or executor needs such as logins and passwords.
4. Grant authority: Some online sites – like NY Saves for 529 accounts – allow you to designate a limited power of attorney to access an account on your behalf. You can also include language in your Power of Attorney to allow your agent to handle your digital assets. You can bifurcate the powers granted to an agent, so that one person is designated as a “digital assets” representative.
5. Identify Your Wishes: You should specify your wishes as to each online asset. Do you want your social media shut down, or continued after your death and for what purpose? Do you want your computers and all of its data given to a particular person, and for what purpose? For example, you might want your writings to be compiled in a memoir, or your digital photographs compiled in albums. You might not want those assets to be made public or posted anywhere, or you may want them disseminated openly and often. Make those wishes known, either in your Will or a personal property memorandum referenced in the Will. You can also appoint a “Digital Executor” to deal solely with these digital issues.

Facebook recently enabled an option to allow users to add a “legacy contact” to manage their account after they die, or elect to have the account terminated and deleted. This can easily be designated in the member profile area. The Legacy Contact has no authority to edit material that was posted during the decedent’s lifetime. Google has allowed a similar option since 2013.

As of now, there is no federal legislation addressing the issues relating to digital property. However, nine states (including New York) have legislation addressing access to digital assets. Delaware grants an Executor complete access to digital assets in its Fiduciary Access to Digital Access Act. However, many ISP’s are in California, which lacks digital asset legislation.

Our reliance on digital information will grow, and so too will the value of digital estate planning. The law is slow to evolve to keep up with modern developments. In the meantime, taking the time to organize this information will, in the long run, ease any burden on your loved ones, avoid confusion, protect priceless memories, and avoid any unnecessary conflict and the resulting legal cost.

Goetz Fitzpatrick LLP has been offering clients insightful solutions throughout the New York Metropolitan area since 1967. The firm provides its clients with expertise in the areas of Construction and Real Estate, Trusts & Estates Administration & Litigation, Commercial Litigation, Corporate, Bankruptcy, and Labor & Employment. The firm’s office is located at One Penn Plaza, Suite 3100, New York, NY 10119, Telephone 212 695 8100, [email protected], www.goetzfitz.com. You can learn more about Goetz Fitzpatrick on: LinkedIn | X (Twitter) | Soundcloud | YouTube | Facebook | Instagram

Author

Alison Arden Besunder

Alison Arden Besunder, Esq. is Chair of the Trusts & Estates Planning and Fiduciary Litigation group at Goetz Fitzpatrick. She has extensive experience and focuses her practice in the areas of Trusts & Estate Planning, Guardianship, Estate Litigation, Commercial Litigation, Elder Law, and Business Succession Planning.

LEARN MORE >

Contact:
Alison Arden Besunder
212-695-8100, ext. 289
[email protected]

9 Tips to Consider When Drawing Up Your Power of Attorney

A Power of Attorney (POA) gives another person the authority to act on your behalf when it comes to your legal and financial matters. Speaking with an estate planning attorney is highly advisable when putting together your POA, but as you ponder who you want to give control of your money to, here are 9 guidelines to consider.

1. Don’t Let Anybody Pressure or Coerce You. Assigning a Power of Attorney is a big choice–this person could potentially be managing your finances, and even with the best of intentions some may not do it well. We are all for having your paperwork in order, but this should be a well-thought-through decision.
2. Select Someone Who Understands Your Goals and Objectives. Selecting a like-minded individual when it comes to finances–someone who approaches money and investments the same way you do–is a good rule of thumb. At the very least, make sure they are clear on your approach, and are willing to follow your lead. This job requires nothing less than 100% trust.
3. Be Specific About What Kind of Power You Are Granting. A POA can limit investment activity or give the agent total control. You can specify accounts and asset types that the POA covers,  exclude the authority to change beneficiaries, or put a time limit on the POA. To maintain integrity, try not to end a section or paragraph of your POA at the end of the page–that would make it easy for pages to be added.
4. Make It Durable. A durable POA stays in effect if you are incapacitated and cannot manage your own finances, whereas one that is not durable is revoked if you are found mentally incapacitated, and a court may appoint someone to act for you. Note that as soon as you sign a POA it is in effect. You can opt for a springing POA, which goes into effect at a certain age or if you are deemed mentally incapacitated.
5. Check Your State’s Requirements. POA laws vary by where you live and where you hold investment accounts. Most states will recognize a notarized document from another state, but check your state’s website to be clear.
6. Find Out if Your Financial Institution Requires Its Own Paper for Your POA. In our previous blog, “Is Your Durable Power of Attorney Good Enough for Your Bank,”we discussed the new trend of financial institutions requiring POAs to be written up on their own paper. Yours will likely work in the long run, but you may have to go to court to prove it.
7. Check in On Your Finances. In today’s landscape of fraudsters, auditing your finances regularly is advisable anyway. Once you have granted someone the power to access your finances, it becomes even moreso. You can request that your institution notify you if they receive a POA document that relates to your accounts. Financial institutions are generally on the lookout for bad actors, so you may want to sign extra copies of your POA for your agent, as most will want originals.
8. Know How to Change or Revoke Your POA. As long as you are mentally sound, you can revoke or change a POA for any reason. Make sure you inform your investment broker, attorney, and financial institutions as soon as you make this decision, though, because there is a notarized piece of paper already out there. States have different requirements on how to change or revoke a POA, so visit your state’s website.
9. Have a Backup Plan. Having an alternate or successor agent is advisable in the event your agent can’t act on your behalf. You can also assign a POA monitor who will be copied on statements and withdrawals.

Source: Financial Industry Regulatory Authority (FINRA)

Goetz Fitzpatrick LLP has been offering clients insightful solutions throughout the New York Metropolitan area since 1967. The firm provides its clients with expertise in the areas of Construction and Real Estate, Trusts & Estates Administration & Litigation, Commercial Litigation, Corporate, Bankruptcy, and Labor & Employment. The firm’s office is located at One Penn Plaza, Suite 3100, New York, NY 10119, Telephone 212 695 8100, [email protected], www.goetzfitz.com. You can learn more about Goetz Fitzpatrick on: LinkedIn | X (Twitter) | Soundcloud | YouTube | Facebook | Instagram

Author

Alison Arden Besunder

Alison Arden Besunder, Esq. is Chair of the Trusts & Estates Planning and Fiduciary Litigation group at Goetz Fitzpatrick. She has extensive experience and focuses her practice in the areas of Trusts & Estate Planning, Guardianship, Estate Litigation, Commercial Litigation, Elder Law, and Business Succession Planning.

LEARN MORE >

Contact:
Alison Arden Besunder
212-695-8100, ext. 289
[email protected]

What to Expect When Meeting with an Estate Planner

If you have made the decision to meet with an estate planner, congratulations. You will thank yourself in the future. Now, before your meeting, there are some questions you should be prepared to answer. These are some of the major points you will want to consider regarding your estate.

Guardians and Alternate Guardians of Minor Children Who do you want to serve as guardian should something happen to you? Who do you want to appoint as successor guardian if the primary guardian is unable, unwilling, or unavailable to serve? Do you want the guardian’s spouse or another individual to serve as co-guardian? Do you want a different guardian to be appointed for different children? Should a bond be required? Where do you want your minor children to live? Do you want your children to live in their guardian’s home, or would you like your guardian and their family to move into your home? In either case, will there be a need for capital to make improvements to accommodate or house the expanded family unit?

Trustee(s) and Successor Trustee(s) for Minors’ Trust Minors’ Trustees are effectively guardians of the property of your minor children. They oversee the money left to your children if they are still minors (usually when both spouses predecease). The Trustee does not need to be the same person as the guardian, and there are certain merits to keeping them separate, i.e., ensuring checks and balances on the money and distributions, and ensuring that both sides of a family are in contact after the parents are deceased. The guardian is usually someone who you feel can impart the most important values to your children, while the Trustee is someone who can handle money, will be responsible, and have a long-term view of preserving principal while balanced against providing for the minor children.

Age at Which Minor Children Receive Money If both spouses pass away, you need to specify at what age your children will receive distributions of remaining principal. While the Trustee usually has the discretion to distribute both income and principal for the health, education, maintenance, and support for the minors (a fairly broad standard), you need to state at which age the minor children will receive what is left. One common setup is to allow for 100% of the remainder (or their share) at the age of 21, 25, 30, or 35. Another is to allow for one third each at age 25, 30, and 35. Another is to allow for half at age of 25 and the other half at 30 if the child graduates from an (accredited) college or graduate school, otherwise at 30 and 35.

Executors Spouses are usually named executors for the other’s will, as well as successors. An exception can be in second marriages where there are children of the first marriage and the Testator wants to ensure that the assets pass to the children of the first marriage after the death of the second spouse. Things to consider: Do you want your executor to be compensated? Do you want to impose a limitation on the amount of compensation they should receive? Keep in mind that being an Executor (or Trustee) can entail a lot of work – it is essentially managing the aspects of your personal life that you manage now, such as balancing bank accounts and maintaining oversight over assets and satisfying liabilities. Should your Executor be required to post a bond? (i.e., insurance if the Executor loses or absconds with money).

Wills and Credit Shelter Trusts Each spouse can establish a Credit Shelter Trust in his or her will up to the maximum amount that can be exempt from federal or state estate taxes.  For New York State, that amount is $6.58 million in 2023 and adjusted annually for inflation.  A Credit Shelter Trust can also help save on state estate taxes. This Trust is typically funded at death.  The surviving spouse can but need not be named the co-Trustee. Each spouse must choose a co-Trustee that the other will feel comfortable serving with. As with any fiduciary, you should choose someone who is responsible and a “prudent” investor, but who will also make distributions to provide for the spouse. You want to choose a “friendly” Trustee that will cooperate, so that if your spouse needs access to principal for a reasonable purpose, the Trustee will not deny that distribution.

Insurance Trust The insurance trust, or irrevocable life insurance trust (ILIT), is often used to set aside cash proceeds that can be used to pay estate taxes, as the life insurance policy should be exempt from the taxable estate of the decedent. Once placed in the trust, the insured person no longer owns the policy, and it will be managed by the Trustee on behalf of the policy beneficiaries when the insured person dies. Again, as with choosing any fiduciary for a living or testamentary trust, you should pick a Trustee that is prudent but not unreasonable, and that the surviving spouse can work with after you die.

Advance Directives (also called Power of Attorney, Health Care Proxy) These are documents that are effective during your lifetime. Spouses usually name each other to make decisions for them, with successor agents to act in the event that the spouse is unable. While you can name one or more co-agents on the Power of Attorney, only one person can act at a time under a Health Care Proxy in New York. Successor agents are critical and should be identified, together with their appropriate contact information.

Living Will A living will is a directive authorizing your agent to withhold certain life-sustaining measures (such as artificial respiration, CPR, resuscitation) in the event that you are suffering from a condition from which you will not recover. Absence of a Living Will does not mean that the agent cannot make those decisions, however, the Living Will gives the health care agent the comfort, assurance, and authority to make those decisions in the event of a dispute with another family member or the hospital or health care professionals.

Special Bequests You should identify any specific items such as art, valuable books, collections, jewelry, heirlooms, or outright monetary bequests that you want to be given to certain individuals, and specify them in your will. New York does not recognize personal property memoranda that are outside the will. It is at the discretion of the Executor whether to honor them, but are non-binding.

Taker of Last Resort and Common Disaster Clause If both spouses and children pass away, where will the money go? Typically it goes to parents, siblings, nieces, and nephews. However, consider the situation of those people – leaving money to your parents could disrupt their own long-term planning needs and any Medicaid or other government benefits they might be receiving.

Goetz Fitzpatrick LLP has been offering clients insightful solutions throughout the New York Metropolitan area since 1967. The firm provides its clients with expertise in the areas of Construction and Real Estate, Trusts & Estates Administration & Litigation, Commercial Litigation, Corporate, Bankruptcy, and Labor & Employment. The firm’s office is located at One Penn Plaza, Suite 3100, New York, NY 10119, Telephone 212 695 8100, [email protected], www.goetzfitz.com. You can learn more about Goetz Fitzpatrick on: LinkedIn | X (Twitter) | Soundcloud | YouTube | Facebook | Instagram

Author

Alison Arden Besunder

Alison Arden Besunder, Esq. is Chair of the Trusts & Estates Planning and Fiduciary Litigation group at Goetz Fitzpatrick. She has extensive experience and focuses her practice in the areas of Trusts & Estate Planning, Guardianship, Estate Litigation, Commercial Litigation, Elder Law, and Business Succession Planning.

LEARN MORE >

Contact:
Alison Arden Besunder
212-695-8100, ext. 289
[email protected]

How Do I Start the Process of Making an Estate Plan?

First, evaluate and inventory your assets. Assets include but are not limited to your residence, real estate or business interests, stocks, bonds, annuities, retirement savings, and insurance policies. This list is not exclusive. It can include art work, jewelry, collections, antique furniture — whatever is of some monetary value. You then need to ask yourself the following questions:

• Who would you want to make medical decisions on your behalf if you were unable to do so?
• Who would you want to handle your financial affairs if you were to become incapacitated?
• Who would you want to wrap up and distribute your estate upon your death?
• Upon your death, how would you want your estate divided?

Once you have reviewed your assets and have considered these questions, you should meet with an Estate Planning Attorney to discuss a plan conformed to your needs. (Note: you do not need to definitively answer these questions; an Estate Planning attorney can help you work through these questions and help you make a decision). Your attorney may also want to include your financial planner and/or accountant in the planning.

Goetz Fitzpatrick LLP has been offering clients insightful solutions throughout the New York Metropolitan area since 1967. The firm provides its clients with expertise in the areas of Construction and Real Estate, Trusts & Estates Administration & Litigation, Commercial Litigation, Corporate, Bankruptcy, and Labor & Employment. The firm’s office is located at One Penn Plaza, Suite 3100, New York, NY 10119, Telephone 212 695 8100, [email protected], www.goetzfitz.com. You can learn more about Goetz Fitzpatrick on: LinkedIn | X (Twitter) | Soundcloud | YouTube | Facebook | Instagram

Author

Alison Arden Besunder

Alison Arden Besunder, Esq. is Chair of the Trusts & Estates Planning and Fiduciary Litigation group at Goetz Fitzpatrick. She has extensive experience and focuses her practice in the areas of Trusts & Estate Planning, Guardianship, Estate Litigation, Commercial Litigation, Elder Law, and Business Succession Planning.

LEARN MORE >

Contact:
Alison Arden Besunder
212-695-8100, ext. 289
[email protected]

Trusts: The Basics

What is a Trust?

A living trust is one that you create during your lifetime (as opposed to a testamentary trust which is created in your last will and testament) and provides for management of your assets during your life and disposition of your assets at your death. When you create a trust, you are essentially signing an agreement between yourself as the Grantor and the Trustee, the individual that will manage your assets.

A trust can be Revocable or Irrevocable. Upon your death, the assets held in either of these Trusts would be distributed to your beneficiaries. If your Trust is properly funded, it could enable your loved ones to avoid the probate process altogether.

Should you later become incapacitated after establishing either type of trust, they both can provide for a seamless transition in the management of your financial affairs. Thus, either Trust would help avoid the need for the court appointment of a Guardian to manage your property.

Why Do a Trust?

A few musings on how a trust can be helpful for a certain type of individual who is looking to minimize risk.

While you can’t eliminate risk entirely, you can use estate planning techniques to minimize the risk or impact to your assets or the assets you intend to pass down to your children.

For most every client, they have a “number” — an amount of money they would need to reach to feel comfortable. The number is a personal thing.

I heard someone say once: “You’re nobody until someone sues you.” It’s funny but also sadly true. Whether you have $500,000 or $5 million, your hard-earned money is worthy of protection from creditors and predators. Trusts can be structured to allow you to enjoy your assets while protecting them from potential future creditors. Who would those creditors be? Maybe your 16-year old takes the family car out and gets into a car accident. The damages to the other passengers exceed your automobile and home owner’s insurance policies. Or maybe you didn’t have an umbrella policy. If they succeed at trial, any assets held in your individual name (as opposed to a trust) are subject to collection on that judgment. That usually means your house and any investment accounts.

A trust can also protect assets from predators. Who would “predators” be? Maybe that same (or a different) 16-year old calls you from Thailand and says she’s getting married to someone she’s just met. Assets in trust for her, or assets structured to be left to her in trust, give added protection that those assets will not become “marital property” and subject to distribution to the new son-in-law (or future son-outlaw) if and when they get divorced.

These are just some of the benefits that can warrant setting up a trust.

What is a Revocable Trust?

A Revocable Trust is designed to give the grantor flexibility and, sometimes, to avoid probate. Although it may initially cost more to create a Revocable Trust than it does to execute a Will, a Revocable Trust may ultimately save attorney’s fees and time delays for your beneficiaries since there is no court supervision over the distribution of the assets.

In addition, since you may act as your own Trustee, you can maintain your autonomy and independence. If you are acting as your own Trustee, you will maintain control over those assets you chose to transfer to the Revocable Trust. You can transfer assets into and out of the Trust, amend or revoke the Trust at any time, and make all decisions with reference to the Trust as absolute owner.

If you should become incapacitated, a Revocable Trust can provide for a seamless transition in the management of your affairs. The person(s) you have selected as successor or co-Trustee, will simply take over the management of your assets and affairs. This will avoid the need for the appointment of a Guardian and a potentially costly and acrimonious guardianship proceeding.

A Revocable Trust will not change your lifestyle or the way you handle your day-to-day affairs. It is important to note, however, that despite some notions to the contrary, there is no income tax or estate tax savings when using a revocable trust.

If you have a simple estate, do not own out of state property and you are not disinheriting your spouse or your children, then the probate process can be very simple. However, if your wish is to disinherit a child, children, or spouse, you may be opening your estate up to a probate battle. The problem is further exacerbated if you have no spouse or children, and missing heirs as they would need to be located and the cost can be enormous. Additionally, if you have out of state real estate your executor will most likely have to bring an ancillary proceeding in the state where the property is located. In any of these mentioned situations, a living trust might be a good alternative.

What is an Irrevocable Trust?

By contrast, in an Irrevocable Trust, you would name a third-party (not a spouse) as trustee, and the principal is no longer accessible to you or under your control. However, you as Grantor are entitled to any income the Trust generates. Assets commonly transferred into these Trusts include residences and investments such as bank accounts, certificates of deposit, stocks and bonds. You as the Trust creator (Grantor) continue to earn all income (interests, dividends, etc.) generated by either Trust. You also retain any property tax exemptions you were entitled to prior to the transfer.

A key difference between these two types of Trusts is that the Irrevocable Trust allows for asset protection should you require long term skilled nursing care, a Revocable Trust does not. Once a five-year period has elapsed from the date of the transfer of an asset to the Irrevocable Trust, the transfer of that asset will no longer impact your Medicaid eligibility.

The cost of long-term care is very expensive. Most people cannot afford to privately pay for long term care services for very long. Nursing homes can cost approximately $96,000 per year in Central New York to $113,000 per year in the Rochester area.  Downstate nursing homes can cost $124,000 to $142,000 in NYC and Long Island.  Home health care can also be expensive, with hourly rates ranging from $20 to $30 an hour.

Today, not even the comfortably well off can afford these exorbitant costs. Most individuals do not want the money they have worked their whole lives for to be used to pay for their nursing home care were they to become ill. There are several ways to protect your assets in the event you are struck with a catastrophic illness requiring long term care, and an Irrevocable Trust is just one of these vehicles.

While many individuals are uncomfortable with losing “control” over their assets, they may still want to consider establishing an Irrevocable Trust in which to place their residence, as it will not change their lifestyle. Despite the recent decline in real estate value, more often than not the residence is a major portion of an estate. The benefit of the Irrevocable Trust is that you retain the right to live in the home for their lifetime yet the house could be sold if necessary and the Trust can purchase replacement property without the asset being considered available to the Grantor for Medicaid eligibility purposes. You would also retain your STAR and any Veteran’s exemption. Title to the property does not pass to one’s heirs until the Grantor’s death and the termination of the trust.

The Irrevocable Trust is structured so that any income generated by the Trust will be taxed at your tax bracket and the trust income will be reported on your individual Form 1040. The Trustee may be required to file “informational” fiduciary income tax returns for the Trust.

There are no gift taxes due on transfers to the Irrevocable Trust because the transfer is deemed to be an incomplete gift. In contrast, if you were to transfer assets to your beneficiaries outright, any income from those assets would be taxable to the recipients at their tax brackets. In addition, placing assets in an Irrevocable Trust rather than transferring to beneficiaries outright protects those assets from that beneficiary’s creditors and/or personal problems.

Both the Revocable and Irrevocable Trusts direct distribution of your assets at your death. At death, the trust assets will not be subject to a probate proceeding, saving probate, legal, and executor fees. The Trust assets will, however, be includable in your estate for estate tax purposes. This will enable your beneficiaries to obtain a step-up in basis (fair market value at the time of death) as to any appreciated assets as opposed to receiving your original cost basis had you gifted the appreciated property to them. For example, if the residence were held in the Irrevocable Trust, your heirs would receive a step-up in basis for income tax purposes which would minimize the taxes due on the subsequent sale of the premises. Your Irrevocable Trust may also provide protection against your own creditors after your death.

While not appropriate for everyone, an irrevocable trust is one vehicle available to protect your assets and/or residence while providing an income for the Grantor and, at the same time, allowing the Grantor to qualify for Medicaid benefits. There are many things to consider before creating a trust and there are several different provisions that can be used to protect your interests in the trust property. The question is whether the strategy is good for you. As always, you should consult with an attorney or financial planner to further explore whether a Trust is appropriate for your particular situation.

Goetz Fitzpatrick LLP has been offering clients insightful solutions throughout the New York Metropolitan area since 1967. The firm provides its clients with expertise in the areas of Construction and Real Estate, Trusts & Estates Administration & Litigation, Commercial Litigation, Corporate, Bankruptcy, and Labor & Employment. The firm’s office is located at One Penn Plaza, Suite 3100, New York, NY 10119, Telephone 212 695 8100, [email protected], www.goetzfitz.com. You can learn more about Goetz Fitzpatrick on: LinkedIn | X (Twitter) | Soundcloud | YouTube | Facebook | Instagram

Author

Alison Arden Besunder

Alison Arden Besunder, Esq. is Chair of the Trusts & Estates Planning and Fiduciary Litigation group at Goetz Fitzpatrick. She has extensive experience and focuses her practice in the areas of Trusts & Estate Planning, Guardianship, Estate Litigation, Commercial Litigation, Elder Law, and Business Succession Planning.

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