Courts extend estate tax, pension plan rights to same-sex couples
November 25, 2013
In recent months, courts have extended important elder rights to same-sex married couples.
Last summer’s landmark ruling by the U.S. Supreme Court in United States v. Windsor struck down a provision of federal law that excluded same-sex couples from the definitions of “marriage” and “spouse.”
Edith Windsor sued to obtain a refund of federal estate tax she had paid after the death of her spouse, Thea Spyer. Edith and Thea married in Canada in 2007, and their marriage was recognized by the state of New York, where they resided. Edith claimed she was entitled to a refund because of the exemption from federal estate tax available to surviving spouses, but the IRS denied the refund.
The Supreme Court ruled it was unconstitutional for the law to exclude same-sex couples from the definition of “marriage.” “The federal statute is invalid, for no legitimate purpose overcomes the purpose and effect to disparage and to injure those whom the State, by its marriage laws, sought to protect in personhood and dignity,” the Court held. “By seeking to displace this protection and treating those persons as living in marriages less respected than others, the federal statute is in violation of the Fifth Amendment.”
As a result, Edith was entitled to an estate tax refund of $363,053.
Following the Windsor ruling, a federal court in Pennsylvania ruled in favor of another same-sex surviving spouse who sought of the death benefits from her deceased wife’s pension plan.
Under the terms of pension plan, death benefits were payable to the surviving spouse unless she had signed a written waiver. Jean Tobits, who was considered the spouse of Sarah Farley under Illinois law where they lived, applied to receive Sarah’s pension plan death benefits after Sarah died from cancer in 2010.
The Pennsylvania-based law firm for whom Sarah worked also received a claim for death benefits from Sarah’s parents. The firm asked the court to resolve the competing claims.
Following the Windsor decision, the court held that Jean met the definition of a “spouse” under applicable federal law, since her marriage to Sarah was recognized as valid by the state where they lived. Since Jean had never signed a waiver, she was entitled by law to receive the death benefits of Sarah’s pension plan. (Cozen O’Connor, P.C. v. Tobits, et al.)
Currently, Pennsylvania neither permits same-sex marriages nor recognizes such marriages entered into in other states, territories, or countries. A lawsuit in federal court has challenged the constitutionality of Pennsylvania’s laws on this issue. The presiding judge has said the case may go to trial in June of 2014, according to Reuters. (Whitewood, et al. v. Wolf, et al.)
Why use an IRA trust?
October 18, 2013
Andrew Sykes presents “12 Cool IRA Protection Strategies” to Pittsburgh area financial advisors on October 17, 2013
Qualified retirement plans, like IRAs, can have superior advantages when left to a loved one. Chief among those advantages is the ability to “stretch” distributions, which can double or triple the lifetime value to the beneficiaries.
But your plan to leave retirement assets to your beneficiaries may get tripped up in various ways. Here are a few:
Rapid depletion. Rather than carefully stretching distributions over allowable life expectancy, the beneficiary may take down all the money much sooner (perhaps right away). Rapid depletion will foreclose long-term tax deferral, and could very well mean the beneficiary pays more in taxes on the amount distributed. Early depletion can also diminish the chances that proceeds from the inherited IRA will benefit grandchildren or other heirs.
Divorce. Depending on state law, some portion of the distributions could be lost to former in-laws if a beneficiary divorces. (The “lifelong probability of a marriage ending in divorce is 40%-50%,” according to statistics cited in Wikipedia.)
Creditors. Creditors may be able to reach inherited IRAs. A ruling earlier this year in the Seventh Circuit Court of Appeals for the Seventh Circuit held that inherited IRAs do not fit the Bankruptcy Code’s exemption for “retirement funds.” Other appeals courts have held the opposite. But unless the Supreme Court overrules the Seventh Circuit’s ruling, creditor protection for inherited IRAs will depend on where your beneficiaries happen to live.
A well drafted IRA trust can mitigate the effects of these pitfalls by controlling how and when distributions are taken from the trust, and providing an additional layer of protection from the effects of divorce, creditors, and other unexpected occurrences.
Protecting the IRA in Medicaid situations
August 10, 2013
Filed under: Estate Planning,Medicaid Planning — admin @ 11:19 am
An individual retirement account (IRA), 401k, or similar retirement account is a wonderful way to save for retirement, provide for a surviving spouse, and even to leave a legacy to the next generation.
But if a retiree has uninsured long term care needs, that valuable account could be at risk.
Here are some thoughts on protecting such an account.
At the crisis point
Let’s start with a situation in which someone –let’s call him Joe – needs skilled nursing care right now. What are the options?
If Joe is married, his wife’s qualified retirement account is exempt from spend-down in qualifying for Medicaid. Joe and his wife may qualify for benefits depending on what assets they have and how much they spend on care, but if his wife had an IRA worth, say, $200,000, it wouldn’t count in the equation.
What if Joe has an IRA worth $200,000? It is countable, so what can Joe do?
First, he may be able to make an exempt transfer to someone else. For example, if Joe has a disabled child or other family member, he may consider giving the contents of his IRA (after taxes) to his disabled child or establishing a special needs trust for a disabled family member who is under age 65 (a grandchild, for instance). While asset transfers to others made less than five years before a Medicaid application usually lead to ineligibility for benefits, exempt transfers don’t count.
Second, Joe might cash in his IRA and use it to purchase items that are exempt. He could buy irrevocable burial reserves for himself and his wife. If his wife were renting an apartment, he could even buy her a house to live in. Joe could therefore qualify for benefits sooner while benefitting his wife.
Joe could also consider using his IRA to purchase an annuity. This alternative raises complex legal questions under the Medicaid rules. But if done right, an annuity for Joe’s spouse could give her greater income while avoiding unnecessary spend-down of assets.
If Joe were unmarried, he could still consider annuitizing his IRA. This option requires a careful analysis of Joe’s age, life expectancy, care costs, income, and other factors. There is some legal authority providing that an annuity purchased “by or on behalf of an annuitant who has applied for [Medicaid]” with proceeds of an IRA is not considered an “asset” for purposes of penalized asset transfers. In the right situation, Joe’s heirs could benefit more from the annuity option than from a straight spend-down.
As with many elder law issues, better results come from planning ahead.
If you’re not at the crisis point, see your financial advisor or insurance professional about long term care insurance. It’s a great way to protect your retirement assets and have better care options.
Protection of retirement assets can also be part of a comprehensive estate and asset protection plan. We discuss this topic in depth at our regular estate planning workshops. See our website at www.elderlawofpgh.com/event-calendar for upcoming dates.
Video: Overview of Estate Planning in Pennsylvania
March 8, 2013
Filed under: Estate Planning — admin @ 1:55 pm
We have begun adding videos to our website to explain basic elder law issues. Our first video – Overview of Estate Planning in PA – answers these questions:
What is estate planning?
Why would you want to plan your estate?
Protect yourself from being subject to your state’s default rules. Ensure your wealth and assets are distributed the way that you desire. Be prepared if for some reason you cannot make your own decisions. By working with an experienced elder law attorney, you can make sure these documents are properly executed and valid.
Sign up for a free estate planning workshop.
Best planning tips for IRAs, 401(k)s, and other retirement plans
February 14, 2013
Here are three tips I picked up at a talk by Natalie B. Choate, a Boston lawyer and author who is nationally renowned for her expertise in retirement benefits. She addressed a packed house of financial professionals at the Financial “Four”um in Pittsburgh a few months ago.
Many of her tips were quite sophisticated or applied in rare circumstances only, so I’m including only those that apply to a wide array of retirees. These tips are aimed at qualified retirement plans such as individual retirement accounts, 401(k)s, 403(b)s, and similar plans, which have rules different from “defined benefits” pension plans.
“If you do these three things,” Ms. Choate said, “you will be 95% of the way toward happy IRA ownership.”
Take your RMDs
Starting at age 70½, most plan owners need to start taking a required minimum distribution (RMD) each year. The RMD is an amount taken from a plan based on your life expectancy and the total amount you hold in all your plans. You need to request a distribution, which is then paid to you out of your plan and is taxable.
You can defer your first year distribution until April 15 of the next year. As Ms. Choate pointed out, deferral may make sense unless it puts you in a higher tax bracket.
The penalty for not taking your distribution on time is severe: an additional tax equal to 50% of the amount you should have taken.
So you really need to take your proper RMD each year.
Fill out your beneficiary form
One of the most valuable wealth-preserving features of IRAs and similar plans is the ability of your beneficiary to stretch distributions over many years (or in the case of a surviving spouse, the ability to roll it over and make it their own).
But your beneficiaries will have these abilities only if you do one thing: put your beneficiaries’ names on your beneficiary form.
Sounds simple, and it is, but it mustn’t be neglected. Without named beneficiaries, the retirement plan administrator may require your funds to go to your estate. In that case, all funds must be paid out in five years and your beneficiaries’ wealth-preserving advantages will be lost.
Be careful with rollovers and transfers
IRS rules allow you to transfer or roll over your funds from one plan to another, such as rolling over your 401(k) funds into your own IRA when you retire.
However, you must take care to follow some strict rules.
For example, if you retire and ask for a lump sum distribution of your 401(k) plan, you have 60 days to roll it over into an IRA. If you accomplish that within the 60 days, you keep all the many tax and savings advantages that come with these retirement plans. If you miss the deadline, those advantages are lost and you will have to pay tax on your whole lump sum distribution. (A better alternative in this example is to roll over your 401(k) to an IRA with a direct “trustee-to-trustee” transfer, meaning the funds go from one bank to another without being paid to you in the interim.)
Bad things happen with rollovers and transfer, Ms. Choate reminds us, so make sure you follow the rules to the letter.
Ms. Choate’s book, Life and Death Planning for Retirement Benefits, is widely considered the “Bible” of retirement plan law. It is available for order online at http://www.ataxplan.com/.
Consumer Reports: “Legal DIY sites no match for a pro”
August 11, 2012
An article in Consumer Reports’ latest issue caught my attention this week. It evaluated whether do-it-yourself legal documents created on popular websites LegalZoom, Nolo, and Rocket Lawyer met consumers’ needs.
The conclusion: “Using any of the three services is generally better than drafting the documents yourself without legal training or not having them at all. But unless your needs are simple — say, you want to leave your entire estate to your spouse — none of the will-writing products is likely to entirely meet your needs.” As a result, “many consumers are better off consulting a lawyer.”
You can read the entire article here.
I would add a couple of points. First, if a low price is your top priority, a legal stationery store can provide forms for a few dollars each, far below the price of the on-line sites. But the same challenges remain: will you know what provisions you need, how to write or insert them properly, and how to make the document valid with proper execution?
Second, a danger not raised by Consumer Reports is the false sense of security people may feel with documents created by some entity that gives the appearance of expertise. That sense of security may prevent consumers from seeking the advice they need. They (or more likely their families) won’t discover the pitfalls until it is too late.
What is a “self-proved” or “self-proving” will in Pennsylvania?
November 22, 2011
If you’re the executor of an estate, you want to be able to walk into the register of wills office, present the original will (along with other required materials), get sworn in, obtain the documents you need, and walk out ready to start settling the estate.
A “self-proved” or “self-proving” will is going to help.
If you are doing your estate planning now, make things easier for your executor by signing a will that is self-proved. (I will discuss how shortly.)
To make a valid will in Pennsylvania, you must put it in writing and sign it at the end. If you can only make an “x” or some other mark instead of signing, two witnesses must be present and must also sign their names to the will in your presence. If you can’t sign or even make a mark, you can authorize someone else to sign for you, but again, you must have two witnesses who also sign their names to the will in your presence.
In order for the will to be accepted by the register of wills to open an estate, Pennsylvania law requires that the will be “proved by the oaths or affirmations of two competent witnesses.”
So if you had simply signed your will in front of two witnesses, those witnesses could appear at the register of wills office and swear under oath that they did indeed watch you sign that will. But what an inconvenience for the witnesses!
And what if you signed the will 30 years before you died? Will the witnesses still remember? Are they still alive? Can they be found? If not, can someone else swear that they recognize your signature on the will?
A self-proved (sometimes called “self-proving”) will solves this problem.
If the will contains certain acknowledgements and affidavits, the register of wills shall accept the will without the need of witnesses to the signature.
Here is an example of an acknowledgement and affidavit that would be acceptable under Pennsylvania law:
When it won’t be accepted
There are three situations in which the register of wills would not accept a self-proved will:
1. When the validity of the will is being contested;
2. When the will is signed by mark; and
3. When the will is signed by someone else (as described above in the first paragraph under Background).
In these situations, you’ll need to have witnesses appear or submit sworn statements.
Finally, it’s important to remember that to make an effective self-proved will, the document must be executed correctly.
You’re not required to use the services of an attorney, but a qualified attorney can often help you make sure your will is drafted and executed properly.
Doctors: Can you tell the family when a patient needs a guardian?
November 11, 2011
Let’s suppose you are a doctor, or other similar health care provider. Every time you see your patient Joe his memory has worsened.
Joe struggles to recall whether he took his medications this morning, and if so, what they were. He used to ask about your children, but now he seems not to recognize you. Yesterday he left his coat – containing his wallet and keys – in the waiting room.
You believe Joe now needs someone to look after him.
Can you tell the family?
If a family member or friend of Joe’s calls to ask whether you think he needs a guardian, can you answer the question?
Thankfully, the regulations under HIPAA (the Health Insurance Portability and Accountability Act) provide an answer.
In certain circumstances, HIPAA allows a health care provider to furnish information relevant to a patient’s care to “a family member, other relative, or a close personal friend” of the patient, or to “any other person identified” by the patient for involvement in health care matters.
One circumstance appropriate for such disclosure is when the patient agrees to disclosure, or at least does not object when provided the opportunity. For example, if Joe brings his caregiver daughter to his appointment, he may agree to let you discuss his condition with her.
A health care provider may also make this type of disclosure if the patient is unable to agree to disclosure “because of the individual’s incapacity” and the provider determines that “disclosure is in the best interests of the individual.” In that case, disclosure may be made even if the patient is not present and has not agreed.
In either of these circumstances, the provider may “disclose only the protected health information that is directly relevant to the person’s involvement with the [patient]’s health care.”
(The regulation discussing these circumstances may be found in the Code of Federal Regulations at 45 C.F.R. §164.510(b).)
You can therefore tell an appropriate person in Joe’s life that you believe Joe can no longer make and communicate decisions effectively and is unable to manage his financial resources or meet essential requirements for his physical health and safety.
So HIPAA not only protects Joe’s patient information when he has all his mental faculties, but also allows his doctor to notify an appropriate person when Joe has lost capacity and needs guardianship.
When you see Joe next, you may have more peace of mind knowing that someone else is in charge of his finances and health care decisions.
A version of this blog post originally appeared in the Western Pennsylvania Hospital News.
A pet trust for Fluffy
November 2, 2011
Filed under: Estate Planning,Trusts — admin @ 4:38 pm
You don’t have to be Leona Helmsley to set up a trust for a beloved pet.
After the billionaire Helmsley’s death, her white Maltese lived in the lap of luxury on its multi-million dollar trust fund. But Pennsylvania law allows people of even modest means to provide for a dog, cat, or other animal that is as dear as a family member (or, let’s face it, more dear than that nephew who drops by only when he needs help paying his bar tab).
Suppose you’re concerned about Fluffy, who greets you with wild tail-wagging each morning, listens attentively to everything you say, and never talks back. What will become of Fluffy when you die or go to a nursing home? Who will walk him and buy him his favorite smoked pig ears?
In recent years, Pennsylvania joined about 40 other states that have passed laws to make pet trusts valid and enforceable. Such statutes are important because pets (otherwise considered property by law) cannot inherit from their owners.
Under a pet trust, you give Fluffy, along with enough money to pay for his care, to a trustee. The trustee, usually a trusted friend or bank, has a duty to arrange for the proper care of the pet according to your instructions.
You can establish a pet trust for Fluffy during your lifetime (called an “inter vivos” trust), or by means of a clause in your will.
One advantage of an inter vivos trust is that it can go into effect as soon as you become unable to care for your pet. A clause found only in your will may not be discovered until after Fluffy has gone hungry or been given away.
Your pet trust should contain specific instructions about Fluffy’s care, such as the type and amount of food (and any specific brands) he eats, medical care (including preferred veterinarian), grooming needs, daily routine, favorite treats, toys, and so on.
Determine who the trust should name as Fluffy’s caretaker. The trustee will deliver Fluffy to the caretaker for care according to your instructions.
Check to make sure the caretaker you name is willing to take on the responsibility. That will put you one step ahead of Leona Helmsley, whose proposed caretaker reportedly had no interest in the post. Be sure to name a substitute caretaker in case your first choice dies, or is unable to provide care.
You can fund the trust up front, or provide for funding through a bequest in your will. The funds can come from your estate, or from some other arrangement such as life insurance, a “pay on death” account, annuity, or retirement plan. Depending on your pet’s needs, the trust may require as little as $200 to $2,000 a year.
If you set up an inter vivos trust, you may also need to change your will to make reference to the trust and perhaps provide additional funding.
Under Pennsylvania law, the trust lasts until the end of your pet’s lifetime. If you have set up the trust for more than one pet, it will last until the death of the last surviving animal. Any remaining funds will then return to you, if you’re still alive, or can pass to a beneficiary you name.
You will probably also want to leave instructions about disposition of the pet’s remains after its death, such as burial or cremation.
An attorney knowledgeable about estate planning, and pet trusts in particular, can help you set up a pet trust that complies with Pennsylvania’s trust laws.
Fluffy might not eat hand-fed meals from a silver serving set like the Helmsley dog, but you can rest easy knowing Fluffy will have his smoked pig ears even when you’re gone.
National Estate Planning Awareness Week
October 17, 2011
Filed under: Estate Planning — admin @ 4:29 pm
The third week in October is National Estate Planning Awareness Week, as designated by the U.S. House of Representatives. (H. Res. 1499 2008)
In its resolution, the House noted that “over 120 million Americans do not have up-to-date estate plans to protect themselves or their families in the event of sickness, accidents, or untimely death;
“…two-thirds of Americans over age 65 believe they lack the knowledge necessary to adequately plan for retirement, and nearly one-half of all Americans are unfamiliar with basic retirement tools, such as a 401(k) plan;
“…careful estate planning can greatly assist Americans in preserving assets built over a lifetime for the benefit of family, heirs, or charities;
“…careful planning can prevent family members or other beneficiaries from being subjected to complex legal and administrative processes requiring significant expenditure of time, and greatly reduce confusion or even animosity among family members or other heirs upon the death of a loved one;
“…the implementation of an estate plan starts with sound education and planning, and then may require the proper drafting and execution of appropriate legal documents, including wills, trusts, and durable powers of attorney for heath care…”
You can find out more about estate planning at this blog and at many other reputable sites, including Elder Law Answers and the National Academy of Elder Law Attorneys.