SC Power of Attorney LAW CHANGE and how it may affect you!

If your financial power of attorney, sometimes called Durable Power of Attorney, or general power of attorney, was drafted and signed prior to January 2017, then you need to know how the laws changed and how this affects you!

The state of South Carolina changed its power of attorney code and document requirements on January 1, 2017. 

These changes are meant to provide stronger protections for the person signing the document from financial exploitation by others (usually their agent – the one they appoint to help them). More importantly, an increasing number of bank and financial institutions were not accepting “general” powers of attorney but assured policy makers that they would accept the newest form when presented unless there was actual evidence of exploitation. In practice, however, this is not actually happening, and most powers of attorney executed prior to January 1, 2017, even though they meet the statutory requirements are not being accepted. What we have learned through this process with our clients is that:

  1. At a minimum, you should be using the new financial power of attorney as recommended under the January 1, 2017, laws.

  2. For asset protection and the desire of future government assistance (like Veterans Benefits or nursing home Medicaid), the standard language is not sufficient for the complex planning involved if and when necessary, thus, enhanced language added to the form is essential. In our forms, we protect our clients by adding very specific language to address the potential for this assistance ever being needed.

  3. Some Banks are still refusing to accept powers of attorneys; thus, we include very specific language in our documents to make it much more likely the financial institutions will accept them.

  4. Some Banks are requiring certain sections of the statutory change to be stated VERBATIM in the power of attorney before accepting them.

If your power of attorney for financial matters is older than January 1, 2017, or if you have a standard form without enhanced asset protection provisions, give us a call! We are providing a special to those that understand the value of getting it right, not just having it done. When you call THIS WEEK or NEXT WEEK and schedule an appointment to have your powers of attorney updated, we will offer you up to 50% off our regular rates.

You have nothing to lose and a whole lot more protection to gain.

 

CALL 803-980-1199 today!

Choosing an Executor, Health Care Proxy, and Others

The executor and guardians for children are usually named in your will; the health care proxy, living will, and durable power of attorney are usually distinct legal documents authorizing specific individuals to carry out certain tasks. The trustee of your trust is named in your trust document.

Executor of the Will

The executor carries out the terms of the will and sees the estate settlement process through to completion. The executor should have financial savvy and patience, because that person will be responsible for collecting the deceased's assets, paying bills, submitting tax returns, submitting and petitioning for court documents, and distributing the assets to beneficiaries on behalf of the estate. If your executor does not have any experience with estate settlement, he or she may likely turn to an attorney for guidance.

You may appoint more than one executor, if you know two people who have skill sets and personalities that make them good candidates for the role together, as co-executors. You may also wish to appoint a professional, such as a lawyer, accountant, bank, or trust company, as executor or co-executor.

Guardians for minor children and other dependents

To help ensure that the needs of your minor children are taken care of in the event of your death, a legal guardian to care for them is usually named in the will. A guardian can be your spouse, a family member, or a trusted friend.

If you leave assets outright to your minor children, then the guardian might manage those funds, as well. This person will be responsible for adhering to state guidelines on how your children’s money is spent and invested until the children reach the age of majority. The guardian may have to submit annual accountings to the court to ensure that these funds are being properly managed for the benefit of your children.

If you name minor children as the beneficiaries of a trust, the trustee will carry out the terms of the trust and distribute the trust assets accordingly.

Consider naming a guardian for children or other dependents who may be unable to care for themselves as adults to ensure they have the care and oversight they need indefinitely. Life insurance may help ensure they have the necessary funds for living expenses if they are unable to make a living for themselves.

For other aspects of their care, many options and combinations of options, up to full legal guardianship, are available to balance the individual's autonomy and best interests. An attorney with experience in this area can help you make the best choices for your situation.

Health care proxy and living will

A health care proxy document allows you to give another individual legal authority to make health care decisions for you in the event you become incapacitated. In addition, a living will or advance health care directive can allow you to state your wishes directly to your doctors.

The names of these documents, their validity, and how they are used vary from state to state. Some states combine them into one document, and some allow a single document to give the same person power of attorney and appoint them health care proxy ("health care power of attorney").

The basic ideas, however, are to 1) appoint a person you trust to act on your behalf for health care decisions when you cannot, and 2) ensure that your intentions are well understood. Regardless of whether or not you choose to create a living will, a frank conversation with your health care proxy about your wishes under various scenarios is a good idea.

Power of attorney

A power of attorney document gives another individual the authority to make legal decisions and take action on your behalf in accordance with the document. This person is known as the "attorney in fact" or "agent" and can be your spouse, partner, or anyone you trust. A power of attorney can apply to all your affairs, or be limited and apply only to particular assets or accounts you own.

A durable power of attorney means this arrangement will generally continue until your death, unless it is formally revoked; it remains in effect when you become incapacitated or are no longer able to make financial decisions on your own behalf. The durable power of attorney can take effect immediately or at the time of your incapacity, but must be established while you still have your mental faculties. You cannot create a durable power of attorney once you become incapacitated.

Trustee

Any asset placed in a trust as part of your estate plan will require a trustee. The trustee acts as the legal owner of trust assets, and is responsible for managing the assets, ongoing administration and tax filings for the trust, and making distributions to your beneficiaries according to the terms of the trust.

The trustee designation is included in the terms of the trust. It is also a good idea to consider a successor trustee or include terms for choosing a successor trustee, to take over in the event your original choice becomes unwilling or unable to fulfill the role.

If you don't feel you know anyone who can carry out the duties of a trustee effectively, you might consider co-trustees or naming a corporate trustee, like Fidelity,* to serve as sole or co-trustee. Corporate trustees often have the advantages of:

  • Being experienced financial professionals, familiar with maintaining and growing assets, keeping records, filing tax returns, and respecting client privacy.

  • Acting as neutral, objective third parties, who can make even difficult decisions according to the terms of the trust and in the beneficiaries' best interests without the influence of personal bias or family dynamics.

  • Ensuring continuity for the life of the trust, unlike a private individual who may need to step down from the role due to illness, death, or other obligations.

Irrevocable Trusts / Medicaid Planning: Why should I consider it?

The Value of Using Irrevocable Trusts in Medicaid Planning

People often wonder about the value of using irrevocable trusts in Medicaid planning. Certainly, gifting of assets can be done outright, not involving an irrevocable trust. Outright gifts have the advantages of being simple to do with minimal costs involved, including the cost of preparing and recording deeds and the cost of preparing and filing a gift tax return. Many financial institutions have their own documents they use for changing ownership of assets so there are typically no out-of-pocket costs for the transferor.

 

So, why complicate things with a trust? Why not just keep the planning as simple and inexpensive as possible? The short answer is that gift transaction costs are only part of what needs to be considered. Many important benefits that can result from gifting in trust are forfeited by outright gifting. These benefits are what give value to using irrevocable trusts in Medicaid planning.

Prior to state implementation of the federal Deficit Reduction Act of 2005 (DRA) in recent years (with the exception of California), federal Medicaid law contained a bias against trusts: Most transfers of assets to trusts had a 5-year look-back period, whereas there was a 3-year look-back period for non-trust transfers. This different standard induced many clients to elect outright gifting in preference to gifting in trust. The DRA leveled the playing field by imposing a 5-year look-back period for ALL transfers. Removal of the bias against trusts shifted the discussion of elder law attorneys with clients to the real benefits of gifting in trust versus gifting outright.

Key benefits of gifting in trust are:

  • Asset protection from future creditors of beneficiaries

  • Preservation of the Section 121 exclusion of capital gain upon sale of the settlors’ principal residence (the settlor is the trustmaker)

  • Preservation of step-up of basis upon death of the settlors

  • Ability to select whether the settlors or the beneficiaries of the trust will be taxable as to trust income

  • Ability to design who will receive the net distributable income generated in the trust

  • Ability to make assets in the trust noncountable in regard to the beneficiaries’ eligibility for means-based governmental benefits, such as Medicaid and Supplemental Security Income (SSI)

  • Ability to specify certain terms and incentives for beneficiaries’ use of trust assets

  • Ability to decide (through the settlors’ other estate planning documents) which beneficiaries will receive what share, if any, of remaining trust assets after the settlors die

  • Ability to determine who will receive any trust assets after the deaths of the initial beneficiaries

  • Possible avoidance of need to file a federal gift tax return due to asset transfer to the trust

We will briefly discuss each of these potential benefits in sequence. Each of these potential benefits depends on the specific language selected in the design and drafting the trust. None of them is automatic or inherent in every trust. Thoughtful planning and careful drafting is necessary to take advantage of the benefits available, thus it is important to understand how and why each benefit comes about. This ElderCounselor™ newsletter is just an introduction to these topics, not a specific drafting guide. We are available to discuss any of these issues in more detail.


Asset Protection from Future Creditors of Beneficiaries

A central benefit of gifting in trust is to protect the gifted assets from the creditors and predators of the beneficiaries. This is accomplished by means of a spendthrift provision – special provisions in the trust that make trust assets not subject to attachment, foreclosure, garnishment, or a laundry list of undesirable actions by the creditors of the beneficiaries.

 

Preservation of Section 121 Exclusion of Capital Gain on Sale of Principal Residence

Section 121 of the Internal Revenue Code (Tax Code) creates an exclusion from capital gains tax of up to $250,000 of capital gain in the taxpayer’s principal residence when it is sold if the taxpayer owned and lived in it at least two of the past five years before the sale (only one of the past five years if the homeowner had to move to a nursing home). If there are two qualifying co-owners, they can each exclude $250,000 of gain upon sale in such circumstances. This is a very valuable benefit that has been in the Tax Code since 1997. A trust can preserve this benefit if it is a “complete grantor trust” – a grantor trust as to both income and principal. On the other hand, a residence gifted outright to someone and then sold by the successor would need to qualify for the Section 121 exclusion based on the ownership of the donee to avoid capital gain in excess of the adjusted cost basis of the donor. Our senior population often has owned their home since the late 1940s, 1950s or 1960s, so a huge amount of appreciation in value has occurred since then.

 

Preservation of Step-Up of Basis

When an appreciated asset is included in a decedent’s taxable estate for federal estate tax purposes, it receives step-up (or down) of basis to the date of death value under Section 1014 of the Tax Code. Normally gifted assets pass to gift donees with “pass through basis”; that is, the donees receive the assets with the donor’s adjusted cost basis, rather than the date of gift value of the assets. If, however, something pulls the assets back into the taxable estate of the donor upon the donor’s death, the donee will own the asset at that point with the donor’s date of death value as his or her basis, rather than the donor’s original adjusted cost basis. For highly appreciated assets, such as the donor’s home or stocks that he or she owned for a long time, obtaining step-up of basis can be a huge benefit for minimizing or eliminating capital gains tax when the donee later sells the assets. This benefit of step-up in basis can easily be forfeited by outright gifting. However, a provision in an irrevocable trust that pulls the property back into the taxable estate of the settlor upon the death of the settlor can preserve step-up of basis for benefit of the donee. With the amount of assets that can pass free of federal estate tax being well beyond the value of most Medicaid planning clients’ estates, estate inclusion and step-up of basis is generally a great benefit to design into the trust, without any actual tax liability. A Limited Power of Appointment retained by the settlor can accomplish this. Other provisions can also cause taxable estate inclusion.

 

Ability to Select Whether Trust Income is Taxable to Settlors or Beneficiaries

This brings us to the topic of “grantor trusts.” Grantor trusts are treated by the Tax Code as “owned” by the settlor (also called the grantor) for income tax purposes. As mentioned above, preservation of the Section 121 exclusion of capital gain upon the trustee’s sale of the settlor’s primary residence that was earlier funded into the trust requires that the trust be a “grantor trust” as to both income and principal. The creation and significance of grantor versus nongrantor trust status takes an entire seminar or article unto itself, so can only be touched upon lightly here. But the choice of whether a trust will be a grantor or nongrantor trust and how that will be accomplished are key design decisions. For example, it may be important that income generated in the trust not be taxed to the settlor. This requires nongrantor trust status, which necessitates that every trust provision that would cause grantor trust status be avoided in the drafting of the trust. In other examples, however, grantor trust status is important as a goal for tax reasons, or if the settlors are to receive income from the trust.

 

Ability to Design Who Will Receive Trust Income

Unlike an outright gift, by which the donor gives up the right to receive income generated by the transferred assets, an irrevocable trust can be designed so funding constitutes a completed gift for Medicaid purposes although the settlor reserves the right to receive income from the trust. This is an attractive option for some seniors, although it does result in an inherent downside for Medicaid planning purposes: Any income that the trustee has the power to distribute to the settlor will be counted for Medicaid eligibility purposes, even if the trustee decides not to actually distribute the income to settlor. Some seniors avoid trustee discretion by making distribution of all trust net income to them mandatory, rather than discretionary. In this case, the income would also be counted for Medicaid eligibility purposes as well. Others go the entirely opposite direction by prohibiting the trustee from distributing any income to the settlor, thereby ensuring that trust income will not be part of the settlor’s cost of care budget when the settlor is on Medicaid. There are several factors to weigh in such decision-making, but the key point for this discussion is that use of an irrevocable trust in Medicaid planning gives the client these design choices, whereas an outright gift does not.

 

Ability to Make Trust Assets Noncountable for Beneficiaries’ Medicaid or SSI

It is a sad fact that an outright gift or bequest from a donor, such as a parent, to a disabled donee can result in the donee becoming ineligible for means-based governmental benefits that he or she was eligible for before the gift or bequest, or soon would have become eligible for. In such situations, unless irrevocable trust planning is then done to establish a “self-settled special needs trust,” the gifted or bequeathed assets typically get consumed for the donee’s care and once they are gone, the donee goes onto the governmental benefits from which the gift or bequest disqualified him or her until consumed. One way of looking at this outcome is that the indirect recipient of the gift or bequest was the governmental benefit program from which the gift disqualified the disabled person for a period of time. This is generally considered poor planning.

 

Better planning is for the gift or bequest to be made in an irrevocable special needs trust for benefit of the disabled beneficiary, so the gift or bequest will be managed to enhance the living conditions of the disabled beneficiary by paying for things that the governmental benefits do not pay for. If a disabled person becomes entitled to an outright gift or bequest, or an outright gift or bequest recipient later becomes disabled, depending on the age of the disabled person, it may be possible to establish a “self-settled special needs trust” for the disabled beneficiary. Such trusts (funded with assets of the disabled person) must contain a provision stating that upon the death of the disabled beneficiary any remaining trust assets must pay back the state up to the full amount of Medicaid benefits received by the beneficiary, and only after the state is reimbursed may any excess pass to other beneficiaries such as other relatives. The payback provision requirement is Congress’s “quid pro quo” – the balancing deal that makes it fair for the disabled person’s otherwise disqualifying assets to be set aside in a Medicaid- and Supplemental Security Income-noncountable trust that is nonetheless able to be consumed by the trustee for benefit of the disabled person to supplement but not replace the governmental benefits.

 

Ability to Specify Terms and Incentives for Beneficiaries’ Use of Trust Assets

Many parents or grandparents desire to infuse their planning for their children or grandchildren with positive aspirations. Such goals may be as simple as that the gifts or bequests may only be used for the recipients’ education, to finance a career change or buy a home. Or the goals may be more serious, for example, establishing that the intended recipient will only become eligible to receive the gift or bequest if he or she participates in a drug or alcohol rehabilitation program or gives up some other behavior that the donor wants to create an incentive for the donee to abandon. Such planning goals of a client almost always indicate an irrevocable trust with beneficiary incentive provisions as the vehicle to implement the plan. This is completely compatible with Medicaid asset protection planning for seniors at the same time.

 

Ability to Decide Which Beneficiaries Will Inherit Upon Settlor’s Death

The retained Limited Power of Appointment referred to above (sometimes called a Special Power of Appointment) preserves for the settlor the power to decide who within a designated class of recipients will receive the benefits of the trust, how much they will receive, and in what way they will receive it. The class of potential recipients can be as broad as everyone in the world except the settlor and his or her creditors, and the settlor’s estate and its creditors. Most often, however, the class of potential appointees consists of the settlor’s descendants, certain other relatives or in-laws, and/or certain charities. Such a Limited Power of Appointment (LPOA) can determine whether the trust is a grantor or nongrantor trust, as well, so the specific language of the LPOA must be crafted carefully with regard to the grantor trust rules of the Tax Code. As an aside, a power of appointment is sometimes referred to jokingly as a “power of disappointment” because it truly retains for the settlor or other power holder the power to disinherit someone who acts badly.

 

Ability to Determine Successor Beneficiaries

A major concern in Medicaid asset protection planning and estate planning in general is who will be the successor beneficiaries of anything a client leaves to someone. If the gift or bequest passes outright, the recipient has control through lifetime consumption of assets and income or through his or her estate plan, to determine who will receive anything that the initial recipient doesn’t use up. Of course, the recipient’s creditors or predators also may gain control over the assets and income gifted outright to the initial recipient. If the client would prefer to designate that only blood descendants, or descendants and their spouses, and/or certain charities will receive what is not consumed by the initial recipient, an irrevocable trust is a key instrument to create such a plan. This is true almost regardless of the initial size of the gift or bequest – if a modest amount of funds are left in trust, there may nevertheless be a remainder to pass to a successor beneficiary or even another successor beneficiary. This sounds like a “dynasty trust” and it actually is, even though it is of modest size. The point is that by use of an irrevocable trust, the client has the option to decide who the possible recipients will be, and even to grant limited powers of appointment to the named recipients in order to give them some control as well.

 

Analysis of Need to File a Federal Gift Tax Return for Year of Funding

A goal of many planners in design of irrevocable trusts is to make the initial trust-funding gift(s) “incomplete” for tax purposes. The purpose is generally to prevent the settlor from having to file a federal gift tax return for the year(s) of the funding transaction(s), assuming that the taxpayer makes no other “taxable gifts” in any such year.

 

There is a split of authority with the Internal Revenue Service concerning when transfers to an irrevocable trust are considered “complete,” thus requiring the filing of an income tax return. Normally there will not be any gift tax due (the current laws allow an individual to give away $5 million in assets during her lifetime without paying any tax on the gift) but it is important to follow the rules that do require filing a gift tax return, even if no tax is due. We are happy to assist with this analysis.

 

Conclusion

The above discussions demonstrate that use of irrevocable trusts in Medicaid planning, as in other fields of estate planning, provides many opportunities to create great benefits beyond simply transferring assets. Some or most of these benefits may be achieved through the use of an irrevocable trust. If care is taken to include the desired provisions, an irrevocable trust can greatly enhance the value of the clients’ Medicaid planning beyond what can be accomplished through outright gifting. We are happy to assist seniors and their loved ones with considering whether an irrevocable trust may be appropriate for them. Please contact our office to schedule a time to discuss these issues further.

 

KHALED LAW | 803.980.1199

 

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer's particular circumstances.

Disturbing Estate Planning Problems: All of which can be AVOIDED!

Each of these 13 disturbing estate planning facts is true; but, each situation can be avoided with a strong, individualized, comprehensive, and up-to-date estate plan.

· If you don’t name a guardian in your will, your minor children could end up with persons you either don’t like or don’t know.

· If you don’t provide for your pet in your estate plan, your pet may be euthanized when you die.

·  If you put assets in joint tenancy with a second spouse, your children may be disinherited.

·  If you put the family vacation house in joint tenancy with a sibling, your children will not inherit your share of the house if you die before your sibling.

·  A troubled child’s inheritance could make a drug, alcohol, or gambling addiction worse or even kill them.

·  After you die, your spouse may loan or give the assets you left for the family to a new friend/spouse.

·  Your gift to a family member may disqualify him or her from receiving Medicaid or Veterans benefits to pay for long term care expenses.

·  Powers of attorneys may get “stale” and should be updated every few years.

·  If your spouse gets into a serious car accident after your death, all of the assets that you left for him or her and the children can be seized in a law suit.

·  Your child’s spouse could get his or her hands on all of the money you give to your child outright.

· If you put your child’s name on your house or bank account, his or her creditors may be able to seize those assets.

· If you transfer your house to your children during your lifetime, they get your original tax basis and could pay much higher capital gains taxes when they sell it than if you transferred the house to them at your death.

· Assets given outright to a special needs beneficiary are likely to disqualify him or her from receiving vital governmental assistance.  So, your money goes down the drain and causes a logistical hassle.

Indeed these estate planning facts are completely avoidable with good planning.  Be sure to consult with a qualified and experienced estate planning attorney.