“Estate Planning Essentials” – our revised and updated workshop

For more than two years, we have regularly held a workshop on estate planning and asset protection. It has won praise from clients, financial advisors, attorneys, and other attendees.

Now we have updated and revised the workshop format, retaining the best material but adding new stories, examples, and illustrations to help attendees learn the most about how to arrange their estates for maximum benefit.

In Estate Planning Essentials, we start with asking attendees what motivated them to come to the workshop, and to spend time writing down their concerns and the impact estate planning (or the lack of it) will have on their lives, their assets, their lifestyles, and their families.

We explore the philosophy behind estate planning — why do it in the first place, how it fits into your life, and how it can affect you and your loved ones.

As always, we ask attendees at the beginning of the workshop to suggest questions and topics, so the presentation can be tailored to the interest of the participants.

The main part of the presentation emphasizes how the main estate planning vehicles — trusts, wills, powers of attorney, and health care directives — work, how they can meet life’s challenges (incapacity, care needs, living in a blended family, disability of family members, and so on), and how they can improve outcomes for all family members.

Anyone attending a workshop receives a complimentary opportunity to meet with a Sykes Elder Law attorney to review their own estate planning needs.

Upcoming workshop dates and times include:

  • February 20, 5:30 – 7:30
  • March 5, 2:30 – 4:30
  • March 20, 5:30 – 7:30

Call (412) 531-7123 to register. The workshop is free, but we keep class sizes small so you must have an advance registration.

Courts extend estate tax, pension plan rights to same-sex couples

In recent months, courts have extended important elder rights to same-sex married couples.

Estate tax

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.

Pension plan

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.)

Pennsylvania status

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?

Andrew Sykes presents "12 Cool IRA Protection Strategies" to Pittsburgh area financial advisors on October 17, 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

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.

Planning ahead

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

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.