October 2013

CURRENT ISSUES IN THE AREAS OF ESTATE, TAX

AND PERSONAL AND BUSINESS PLANNING

The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.

Another Qualified Plan Suggestion. We have provided numerous suggestions in recent newsletters concerning IRAs and other qualified arrangements, such as a 401(k). For those who have a charitable inclination, please remember that designating a charity as your beneficiary of an IRA or another qualified arrangement will provide a double tax benefit: there will be no income tax incurred by the charity, and there will be no federal estate tax because of the available charitable deduction. As noted in previous newsletters, many clients make the mistake of leaving a bequest or a percentage of their estate pursuant to their wills or trusts to a charity, when it would be better from a tax perspective to designate the charity as a beneficiary of a portion of an IRA. If a charity receives a bequest of a percentage of an estate or trust, then that means that non-charitable beneficiaries will be receiving the remaining percentage, which distributions will generally be free of income taxes (except to the extent that there is income built into the distribution from a trust, which will typically be non-existent or negligible). However, if a charity is designated to receive an equivalent amount from an IRA or another qualified arrangement, then that means that less of the taxable money will be received by the non-charitable beneficiaries, and the charity can receive the IRA or other qualified plan benefits without income tax effect, leaving more of the non-taxable estate or trust to be distributable to individual beneficiaries. Further, if a decision is made later to change the charitable arrangement, the individual’s will or trust will not need to be revised, since the charitable distribution is contained in a beneficiary designation rather than in a new will or trust. It will only be necessary to sign a different beneficiary designation.

Planning Issues Relating To Minor Children. In the context of estate and lifetime planning, consideration must be given to the clients’ minor children and who will manage their assets and care for and see to their education. In general, a guardian of the person will be appointed who will have the care and custody of the minor child until he or she reaches the age of majority (age 18 in the State of Indiana), and either a guardian of the child’s estate or a trustee may be in charge of the child’s money and property. If clients decide to designate a married couple as co-guardians of minor children, consideration must be given to what would happen if one of the co-guardians should die or if the co-guardians were later to divorce. Preferences should be stated to avoid or minimize the risk or impact of a custody fight by the divorcing co-guardians over the care and rearing of the minor children. In some cases it may be better to designate one individual rather than both of the married persons, but in any event, consideration must be given to changes in the circumstances which are likely to occur in the future. In many instances it will be better to have a different person in control of the money, such as a trustee or guardian of the estate who would be separate from the guardian of the person, or a custodian could be named under a Uniform Transfers To Minors Act (which can be continued until the age of 21, while a trust can be continued for much later ages), so that there will be a separation between the people who are responsible for the child’s care and rearing and those holding the money who can observe the minor child’s living arrangements to determine whether or not the use of funds is appropriate for particular purposes.

Acronym Trusts For Asset Protection. Several previous issues of this newsletter have addressed various aspects of asset protection. There are numerous types of acronym trusts that may be used to achieve different estate and tax planning objectives which may also provide an asset protection benefit. For example, a charitable remainder annuity trust (“CRAT”) may be considered as a way of dedicating property to a charity after a person’s death, while retaining the right to an annuity payment for a period of time or during the person’s lifetime. Because the establishment of the CRAT involves a gift to a charity and an independent trustee is in control of the assets, the assets in the trust should be protected from the creator’s creditors, although of course any payments to the creator could be attached or garnered by the creator’s creditors in appropriate circumstances. There are many different types of acronym trusts besides the CRAT: a “GRAT” (grantor retained annuity trust), “GRIT” (grantor retained income trust), “GRUT” (grantor retained unitrust), “CRUT” (charitable remainder unitrust), “CLAT” (charitable lead annuity trust), “CLUT” (charitable lead unitrust), “QPRT” (qualified personal residence trust), “IDIT” (intentionally defective irrevocable trust), and so forth. Timing is very important in regard to the establishment of arrangements in order to preserve the asset protection benefits of those arrangements. A person who implements a particular kind of transfer on one day, for asset protection purposes, who is involved in a serious accident the next day with potential liability to result, may not be deemed to have been engaged in a fraudulent transfer scheme because there was obviously no intent to hinder, impede or defraud a creditor at the time that the arrangement was implemented. In the context of Medicaid planning for long term care, obviously the sooner an arrangement is implemented, then the more protection that arrangement is likely to provide, particularly in light of the five-year look-back period applicable to transfers which may impact a person’s Medicaid eligibility.

What Is Probate? Although this question has been addressed before, issues relating to probate bear repeating. There is much misunderstanding on the part of laypersons in regard to the matter of probate and the goal of probate-avoidance. Stated simply, probate is the process by which a deceased person’s property is transferred to his heirs or distributees under a will. Probate only applies to property owned in the individual’s sole name. Probate, and likewise the person’s last will and testament, will not apply to or be affected by property which passes by joint ownership, by pay-on-death (“POD”) designation, transfer-on-death (“TOD”) designation, or by a beneficiary arrangement such as in the case of life insurance, IRA’s or other qualified plans and annuities. Consequently, many times people will establish very detailed wills, which will ultimately have minimal or perhaps no impact on their estate because at the time of their death most of their assets or perhaps even all of them will pass by means of various non-probate transfer arrangements, such as joint ownership, beneficiary arrangements, etc. Similarly, people will often establish very detailed trusts, and following death, their trusts do not operate as contemplated because the assets were never transferred to the trust and do not pass into the trust by means of other arrangements, such as by beneficiary designation.

The “probate” of a person’s last will and testament is not the same thing as the “probate” of an estate. The probate of a will entails simply filing the will with the court so that it is determined to be the deceased person’s last will and testament. Most wills in Indiana are now “self-proved”, so that a simple petition can be filed and the will can be probated without the appearance of a witness and without a formal hearing. A will might be probated even though there is no need to probate a person’s estate. In the past, because there was a three year time limit on the probate of a last will and testament in the State of Indiana, it was a good idea to probate a will even though it may not have been necessary to do so, since issues could have arisen later which could be impacted by the will, and it might be too late to probate the will because of the expiration of the three year time limit. Because there is no longer a time limit on the probate of a will, it is now a common practice not to probate a will at all unless there is a need to do so, although clients are advised to preserve and protect the last will and testament in anticipation of the possibility that it might be needed in the future. Additional information regarding the probate process will be addressed in the next newsletter.