1. Hello and thank you very much for coming out today. My name is Russ Lombardy and I am an estate planning attorney here in Longmont. I want to discuss estate planning from a legal perspective. When I’m talking about an estate plan, I mean primarily the tools you have used to put into place a plan for managing your assets during life, and distributing those assets at death.
2. Much of what I do is document driven. Many of the strategies and techniques I use are based on establishing appropriate documents to meet my clients’ needs. Before I discuss the goals of estate planning, I want to give you my goals for this workshop. My goals are simply for you to take three things away from my presentation. First, I want to emphasize that preparation is the name of the game in effective estate planning. There is no absolutely no substitute for being prepared and rarely do appropriate results happen without adequate preparation. Second, I’m going to mention Medicaid planning in a few moments and I want to emphasize that you should only engage in Medicaid planning with professionals that do Medicaid planning day in and day out—its a very complex area of the law. Third, and most importantly, I want to give you enough information in the next 18 minutes or so to allow you to understand some of the estate planning alternatives out there, and therefore be able to ask questions about your own circumstances.
From what I have seen in my practice, most people have three goals when it comes to estate planning for themselves. First, people want to ensure that their assets are passed at death to the beneficiaries they pick, and in the way they want those assets to be passed (be it outright to the beneficiary or using some type of trust structure to give assets to the beneficiary over time). Additionally, many individuals need to ensure that their estate planning takes into account the potential taxability of their assets at death so these assets can be shielded from taxation to the greatest extent possible.
The second goal most people have is to ensure that loved ones are taken care of. This typically means making sure a guardian has been nominated in your will if you have a minor child or possibly making sure there is continuity of care for a disabled family member.
Third, making sure plans are in place in case of a disability is another major concern. This means having people of your choosing legally and psychologically ready to manage your assets if you cannot and ready to make health care decisions for you if you are unable to (whether this inability is short- or long-term).
3. So let’s look at how assets are passed at death. Typically, you will use either a Last Will to pass assets at your death, called appropriately enough Will-based planning, or the combination of a Revocable Living Trust and Pour Over Will, referred to as Trust-based planning.
At death, the Will is filed with the court and the person named in your Will as your Personal Representative is given the authority by the court to take control of your assets and distribute them according to you Will. This process is called Probate.
A typical Will does the following. It sets out to whom your assets should pass at your death and how (whether outright, over time, etc.). Importantly, if you have minor children, your Will designates who you would like to act as guardian for your children. The court is not obligated to follow your instructions with respect to a guardian, but it will unless evidence is presented showing your preferred guardians will not be adequate. Finally, your Will incorporates tax planning. Basic tax planning, which can be done in a number of ways in the Will, enables a married couple to take advantage of up to twice the federal estate tax exemption amount (which I will discuss in just a moment). More sophisticated tax planning can be incorporated in your Will should you anticipate having more assets at death than twice the federal estate tax exemption amount.
The Trust-based estate plan utilizes a Trust established during your life into which you place all of your assets. This means physically retitling your assets into the name of the trust. While you are alive and able to manage your assets, you act as the Trustee and are able to control your assets in exactly the same way as when you owned them outright. These trusts bring no tax benefits and are actually transparent for tax purposes—the IRS “sees” these assets in the same way as if you still owned them directly. At death, the trust distributes your assets in much the same way a Will would do. The primary difference is that distribution under a Trust does not require the involvement of the probate court. You will see that I list a Pour-Over Will to be used in conjunction with the Trust. Because the Trust contains all of the provisions regarding distributing your assets at death, the Pour-Over Will simply places anything that you own at death into the trust. Ideally, you would own nothing outright at death because everything would be owned by the Trust. However, a Pour-Over Will is always used with the Revocable Living Trust, just in case.
If there are reasons for you to use Trust-based estate planning, it is important to understand that a Trust-based plan will accomplish all of the above items that can be accomplished under a Will. Additionally, a Trust-based plan is useful in several specific situations.
First, if you are anticipating a pending disability, this type of planning makes a lot of sense. When you are no longer able to manage your assets, the person you have designated in the Trust as the alternate Trustee will step into your shoes and continue to manage your assets for your benefit.
Second, if you have real property such as a vacation home or rental property in a jurisdiction in which the probate process is expensive and time consuming, there is a great benefit to owning this property in trust instead of outright. At death, the trust already owns the property and is able to distribute it without going through the probate process.
A third reason many individuals use Trust-based estate planning is to protect their family’s privacy. Because trusts are not filed with the probate court like Wills, and therefore do not become public documents, it is not easy to see who is receiving assets from your estate. I have had many clients who are worried about a child or grand child receiving a significant gift by Will and then being extorted or even kidnapped in an attempt by thieves to gain access to the money. So that’s an overview of ways in which assets can pass at death. Now I want to discuss Disability Planning.
4. Disability planning encompasses having a mechanism in place to allow a financial agent of your choosing to manage your assets, having a health care agent of your choosing to be able to make health care decisions for you, and leaving written information for your doctors should you not have a health care agent available to make decisions for you. I always feel obligated to discuss the Five Wishes document when I speak on disability planning. The Five Wishes document is a four-page form document available very inexpensively on the web and elsewhere that attempts to cover all the disability planning bases with a general form. I think the Five Wishes document is much better than no disability planning at all. However, I would never recommend the Five Wishes document, because I favor documents written by in-state legal professionals that address the individual needs of a particular person. Therefore, let me show you the documents I use to cover the disability planning process.
First, I use a Financial Power of Attorney to enable an agent to manage the assets of my client should that client become disabled.
Second, I use a Medical Power of Attorney to enable an agent to make health care decisions should my client not be able to do so. A Medical Power of Attorney is, in my opinion, one of the most important documents in any estate plan. There were changes in the law in the year 2000 regarding medical information privacy that usually means any Medical Powers of Attorney drafted in the year 2000 or before should be redone to comply with the new privacy rules. Finally, a Living Will is a document that speaks directly to your doctors and is only used when you cannot make medical decisions but are facing a terminal condition and there is no Medical Agent available to speak on your behalf. This document basically tells your doctors when enough is enough with respect to keeping you alive through extraordinary measures.
There is one more area of disability planning, and it is an area that I deal with on a much more regular basis now than when I started my practice in New York. This area is long term care planning, an area I want to discuss in more detail.
5. I think of Long Term Care planning in three different ways, depending on how much time is available to put the planning into place.
First, there is ideal planning when you have plenty of time to get your ducks in a row. This type of planning typically uses Traditional Long Term Care Insurance to provide for potential future long term care in a very cost effective manner today.
Second, there is what I call Time is of the Essence Planning when you know you will need long term care, but only have a short period of time to plan for it. This type of planning typically involves converting an asset that becomes less important in the face of a prolonged disability into a Long Term Care policy that will usually cover some, but not all, of the expenses of long term care. Because the time for planning is short under this scenario, the economic realities usually mean that long term care insurance is used only to take the bite out of long term care bills.
Finally, there is immediate need planning. This typically involves an injury or some other incident that requires long term care to begin right away. Unfortunately, unless the injured person has long term care insurance, this almost always results in the need to plan for ultimate Medicaid qualification. As I mentioned at the outset of this discussion, one of the things I want you to take away from this workshop is that Medicaid planning is extremely complex and should only be handled by someone who deals with Medicaid planning on a daily basis. As a rule of thumb, although Medicaid planning is expensive, appropriate planning can usually save at least half of a person’s assets from being spent for long term care. Ok, so we’ve discussed different methods of distributing assets at death and planning for disability, now let’s shift gears and talk about the Role of Tax Planning in the Estate Plan.
6. Tax planning covers planning for several types of federal taxes: income tax and gift tax planning is done to protect lifetime earnings and gifts; generation skipping transfer tax planning is done to protect lifetime and after death gifts to grandchildren and others multiple generations removed from the person giving the gift; and estate tax planning is done to protect the estate at death from being reduced by taxes. I will be happy to discuss any of these after the workshop, but because of the time limitations on this presentation, I am only going to discuss estate tax planning. A question I routinely hear from my clients is who needs to consider tax planning. My answer surprises some people and typically involves individuals who, based on the increasing amount of the estate tax exemption, did not think they would have to engage in such planning. The estate tax exemption amount I refer to is the amount of assets, including insurance and retirement accounts, that a person can die with before a federal estate tax is imposed.
Looking at the current estate tax exemption amounts for the next several years, you can see that the exemption amount is indeed increasing. Today, a single individual or family with no existing tax planning can die owning up to $1,500,000 in assets without being subject to the estate tax. Very basic tax planning incorporated into the Will or Revocable Living Trust allows me to enable a married couple to protect up to twice this amount from taxation. As you can see, the estate tax exemption amounts increase to $3,500,000 in the year 2009, and then, in 2010, the estate tax is repealed completely, meaning that no one that dies in 2010, irrespective of how much they own, will be subject to the estate tax. However, as you can see, repeal is only in effect for one year and then the amounts are drastically reduced to $1,000,000 for a single individual or family without tax planning.
So, when I’m asked who needs to consider tax planning, I refer to the 2011 exemption amounts and answer that any family that may have $1,000,000 by the year 2011 needs to incorporate tax planning into their estate plan. Counting insurance proceeds and retirements accounts, there are many of you here who may be subject to the estate tax who are probably thinking that you are safe. Additionally, any family with more than twice the estate tax exemption amount, meaning any family that may have $2,000,000 or more by the year 2011, needs to consider going beyond basic tax planning and consider planning designed for larger estates.
7. There are an incredible array of tools available for an estate planner to use to protect families with larger estates from the estate tax—either partially or in full. However, most of these tools give one of two results: either reducing the assets owned at death, resulting in a lower taxable estate; or generating estate tax deductions that will offset the full impact of the estate tax.
One of the most utilized tools in my experience is the Irrevocable Life Insurance Trust. There are a variety of ways an individual or family can fund such a trust without income or gift tax consequences. The trust will hold life insurance policies, thereby moving these policies out of the estate of the family members. Additionally, the trust typically receives the at death benefit and then distributes it, tax free, to the intended beneficiaries.
Another great method of moving wealth down the family line is to place investment assets into a family limited partnership or family limited liability company. Once these business entities are funded, usually by parents, ownership in the entities can be moved to successive generations in such a way that the gift tax implications are much less than they would be if the underlying investment assets were gifted directly. One important point of caution is appropriate here. The Internal Revenue Service has stated that it is attempting a 100% audit rate for estates that have utilized family business entities to move value to successive generations. This tool still works for some families, but only under certain pre-existing circumstances. If you have one of these entities or are considering using one to pass on wealth, make sure you are receiving counsel from an appropriate tax professional.
Dynasty Trusts, either set up either here in Colorado or in jurisdictions that provide additional asset protection, are great ways to provide funds that will be available for many successive generations. Once funded, the assets in a property drafted Dynasty Trust will be exempt from gift, estate, and generation skipping transfer taxes forever. Additionally, these trusts can be set up to be in existence for very long periods of time, often limited only by the period of time in which the funding assets last. For instance, if you were to put funds in a Dynasty Trust that was set up to pay out only the income the trust generates, your descendents would be able to receive this income in perpetuity.
Different forms of charitable planning are becoming much more important to my clients. As opposed to the above tools which lessen the amount of assets you own for tax purposes at death, charitable planning usually focuses on creating charitable deductions of which your estate can take advantage.
Various types of trusts exist that allow you to give a portion of the trust funds to charity, with the rest going to your beneficiaries. This moves assets to your beneficiaries at a discount by generating a tax deduction to offset income, gift, or estate taxation.
Many investment advisors have off-the-shelf funds in which you can invest that will give you an immediate income tax deduction. These Donor Advised Funds work in the following way: You put money in the fund, and suggest to the advisor what charity should be benefited by your gift.
Finally, Private Foundations can be established in your family’s name to benefit charitable purposes. Not that long ago, such foundations were only an option for the ultra rich because administrative costs were high. Now, I advise my clients who would like to give approximately $100,000 to charity over the next 10-12 years to consider using a Private Foundation. Such foundations can exist in perpetuity, can fund things like scholarships that Donor Advised Funds cannot, and will allow you and your family members to participate in your philanthropy (usually as paid employees). Many families like this last aspect as they are able to involve their children and grandchildren in their giving.
8. This is the last slide I have that I want to discuss. I will make this brief as my 20 minutes have almost run. There are two things that you can do to protect the nest egg you have put together so that you will be able to protect and grow it during retirement and have something left over for your heirs.
First, hire the right people to assist you with your financial and legal planning. I have written my own Wills and disability planning documents but I would not consider purchasing insurance, buying a rental property, or establishing an investment plan on my own any more than I would consider mending my own broken bone or fixing an aching tooth on my own. I do what I know, and I leave the rest to the professionals I trust. Speaking from experience dealing with a multitude of families at every level of financial sophistication, it is my honest opinion that you will be better off in every aspect by finding professionals to assist you with each aspect of your planning.
Second, practice asset protection in everything you do.
Never hold assets that can create liability, such as investment property, personally. The liability from a slip and fall in your rental property could reach all of your other assets if you own the property personally. The same slip and fall in your rental property, if the rental property was owned by a Limited Liability Company, for instance, in which you owned 100% of the ownership interests, could at most reach the assets of the LLC—the house. The worst case scenario then is that the house is lost, but your retirement, your kids’ college funds, and your investment accounts are saved.
Additionally, if you engage in activities that could create liability (and here I’m speaking directly to any doctors or dentists in the room), putting the bulk of your investment assets in a trust designed to protect you from creditors is a great way to protect your family and your retirement (these trusts exists both in several state such as Alaska as well as many offshore jurisdictions).
9. With that said, I’m done. I have a list of other questions here that I’m often asked. If any of these questions apply to you, please feel free to see me after the workshop.
10. I put my bio in the presentation on the last slide. I will appreciate it if each of you will look it over. I like to know who the professionals I use are, and encourage my clients to do the same. You can find out more information about me and my practice areas, as well as see several of my publications, on my website, RussLombardy.com. I’ll be happy to take a few questions, and thank you very much for your attention.
