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Transferring Motor Vehicles To Living Trusts

Motor Vehicle Transfers to Maryland Revocable Living Trusts

A question often arises when funding a new or existing revocable living trust (“living trust”) whether the trustmaker should retitle his or her motor vehicles to the trust. Two recently enacted Maryland laws have added clarity to this issue but no definitive answer.

Chapter 663 of the 2017 Laws of Maryland as of July 1, 2017 makes it clear that a trustmaker may retitle his or her motor vehicle to a living trust without having to worry that a Maryland 6% excise tax or certificate of title fee will be due when the trustmaker transfers the vehicle to the Trustee or when the Trustee subsequently transfers the vehicle to certain family members of the trustmaker (e.g., upon the death or disability of the trustmaker). Chapter 684 of the 2017 Laws of Maryland will not be effective until October 1, 2017, but on and after that date, a vehicle owner may avoid probate for the vehicle after his death by registering the vehicle with a designated transfer-on-death beneficiary.

Why transfer a motor vehicle to a living trust?

As with most of a trustmaker’s non-qualified plan property, the funding issue boils down the costs and benefits of creating a living trust in the first place. Among their principal virtues are the facts that living trusts avoid post-mortem probate for assets owned by the Trustee at the decedent trustmaker’s death and that they provide one of the best vehicles for managing pre-mortem assets during the trustmaker’s incapacity. With regard to funding motor vehicles, the question becomes whether these benefits are worth the costs of the retitling, especially when the inherent aging process of vehicles may make it unlikely that a particular vehicle will continue to be owned by the trust when the trustmaker dies or becomes incapacitated. In addition, even if individual ownership of the vehicle is retained by the owner at death, the value of his or her probate estate may be less than the $50,000 jurisdictional limit for expedited small probate estates.

Heretofore, a principal cost of transferring a vehicle to a Trustee was the potentially steep cost of ultimate transfer to a family member after death or the disabling event. Since transfers from the probate process were already exempt from such transfer taxes and fees, this author suggested the legislation that became Chapter 663 for the benefit of client trustmakers owning expensive “family heirloom” classic vehicles. As a result of Chapter 663, that steep cost should no longer be an impediment to transferring a vehicle to a living trust. However, what complicates the analysis is that Chapter 684 will now provide an alternative, relatively easy, and inexpensive means to avoiding probate inclusion for a vehicle intended to be transferred after the death of its owner.

Arguments Against Transferring Vehicles to a Living Trust

If probate avoidance and incapacity management remain desirable reasons to place a vehicle in trust, what are the arguments that deciding not to do so makes more sense? Two of these arguments can be dismissed at the outset: First, although some argue that placing a vehicle in trust opens up other trust assets to claims by creditors injured by operation of the vehicle, in point of fact a living trust provides no immunity for the claims of such creditors even if the vehicle is not placed in trust. Section 14.5-508(a)(1) and (5) of the Maryland Trust Act make it clear that, in Maryland,

“During the lifetime of the settlor, the property of a revocable trust is subject to claims of the creditors of the settlor; … and [a]fter the death of a settlor, and subject to [certain statutory provisions providing for a shortened post-mortem limitations period for such claims and the right of the settlor to direct the source from which liabilities are to be paid] the property of a trust that was revocable at the death of the settlor is subject to claims of the creditors of the settlor.”

Second, some commentators argue that placing a vehicle in trust makes it more difficult to obtain casualty and liability insurance for the vehicle. That has not been the experience of this writer. Federal law provides that moving a vehicle to a trust does not affect the insurance on that vehicle, and this writer has found that insurers will readily add a trust as an additional insured on the policy of the transferring trustmaker without additional cost. (Adding the trust as an additional insured is important because, after transfer, the insurable interest for casualty and negligent entrustment is now held by the trust.)

In some states, transferring a motor vehicle to a living trust involves payment of a sales tax or transfer fee. Chapter 663 now makes it clear that as of July 1, 2017, those are not applicable in Maryland. However, minimal (less than $30) re-registration fees do still exist here.

In addition, some states require new vehicle safety inspections when transferring a vehicle to a trust. The excellent Maryland Motor Vehicle Administration (“MVA”) website article on Titling – Placing a Vehicle into a Trust, found heremakes it clear however that transferring a Maryland titled vehicle into a trust in which the current owner of the vehicle is the primary beneficiary of the trust requires no such new safety inspection.

If the existing title to the vehicle reflects a lien for money borrowed to buy the vehicle, the MVA will require a trustmaker requesting transfer to supply a statement from the lien holder on the lien holder’s stationery authorizing the lien to be transferred to the new trustee title. Lien holders may not be cooperative in supplying such statements, so this may be one insurmountable impediment to transferring a vehicle to trust.

Absent such a lien with a difficult lien holder, the real arguments against placing the vehicle in trust are (1) the available alternatives to the benefits of doing so and (2) the potential likelihood that the vehicle may no longer remain in the trust when incapacity or death occurs. Argument (2) will always involve depreciation rate and actuarial guesses. As to argument (1), Chapter 684 will make it relatively easy to use a transfer-on-death beneficiary designation to avoid probate (albeit with the payment of a re-registration fee), but this alternative fails to provide management in the event of incapacity. However, if a vehicle owner is willing to give this management authority to a surrogate in a power of attorney, the MVA has readily available procedures for using that power of attorney when incapacity occurs.

Conclusion

Whether to fund motor vehicles into living trusts has always been a difficult decision. Because Chapter 663 of the 2017 Laws of Maryland relieves most worries about potential down-the-road excise taxes and certificate of title fees, we now encourage our clients to take the guessing out of the equation by transferring their motor vehicles to their new living trusts. If nothing else, doing so avoids potential probate hassles with regard to the vehicles. We recognize however that this is still a close cost-to-value judgment and that many clients will decide to act alternatively. If they do, Chapter 684 will provide clients another means by which to avoid probate inclusion if and when that becomes more important.

If you would like to learn more about this topic or would like to set up a consultation to discuss your options, please feel free to contact Richard T. Wright at The Wright Firm by phone at (410) 224-7800 or contact us through our website’s Contact Page.

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Securing Your Family’s Future Using Inheritance Trusts: Part 1

PART 1: Inheritance Trusts and How They Work

The key to estate planning is understanding clients’ goals for the process. Generally, as a primary overarching goal, clients cite their desire to maintain their assets for as long as possible as a safety net protecting themselves and their loved ones from both anticipated and unforeseen threats and challenges. Nothing worries parents more than a creditor or divorcing spouse depriving their loved ones of the assets they worked so hard to pass on. Given this goal, it shouldn’t be any surprise that in our practice, once clients understand how Inheritance Trusts work, they choose to leave their estates to their loved ones by such trusts over 90% of the time.

Inheritance trusts have been with us for many years, primarily to manage funds for minors and others who would otherwise have trouble maintaining them. The basic idea was originally to separate management from benefit to protect the benefits for as long as necessary. The modern “wrinkle” has been the recognition that, by making the capable beneficiary the manager (i.e., the trustee) and by maintaining the trust in place, the protections and safety net remain in place for as long as possible without significant loss of beneficiary control or enjoyment.

In this installment, we describe Inheritance Trusts and explain how they work. To do so, however, we first have to review some basics:

The Law Underpinning our Use of Trusts

Trust law has developed over hundreds of years as an outgrowth of our laws of property and judicial support of fundamental fairness (equity). Under our law of property, the bundle of rights held by an owner includes the right to transfer his property in the manner he chooses. The law of equity will support and enforce such transfer as long as the transfer does not violate a paramount principle of public policy. In particular, the law grants primacy to the intent of the transferor in transferring his property, regardless of whether he transfers his entire bundle of rights in the property to one or more persons or whether he chooses to parcel out different rights in the property to different persons. Such differing rights could include the right to control how and/or how long property is used in a particular fashion, the right to receive the benefits of the property as so utilized, and the rights to transfer the property in the future and to administer the proceeds of such future transfer. This potential, indeed likelihood, for court enforcement of the transferor’s intent is the fundamental “glue” that underpins the use of trusts.

A trust is really nothing more than a transfer of property that separates the owner’s bundle of rights in the property at the time of transfer. In the case of an Inheritance Trust, that separation generally occurs after someone’s death, most likely, when a beneficiary might otherwise have inherited the property outright from the decedent.

What is a trust?

A trust is a court enforceable relationship established by a property owner when he transfers property to someone who will thereafter own and use the property according to a set of instructions that binds the new “owner” as to what he can or cannot do with the assets subject to those instructions. This relationship generally involves three types of parties: the original owner who is called a “settlor” or “Trustmaker”, a “Trustee” who will thereafter own the property and put it to use, and a “Beneficiary” who will now or at some time in the future enjoy the benefits of the property while it is owned by the Trustee. (Please note that although the words, “Trustmaker”, “Trustee”, and “Beneficiary”, are used here in the singular, there may be more than one Trustmaker, Trustee, and/or Beneficiary; and a person may simultaneously hold one or more of these capacities with respect to any trust.)

The Trustmaker is the party who establishes the trust by transferring property to the Trustee and by creating the instructions (i.e., in a will or trust agreement) that control that property in the Trustee’s hands. The Trustee is the party who actually has title to the trust property and who carries out the instructions. As the name suggests, the Beneficiary is the person who is intended to benefit from the trust assets and the Trustmaker’s instructions. It is the Trustee’s legal fiduciary duty to carry out the Trustmaker’s instructions for the benefit of the Beneficiary. If he or she fails to do so, the Trustee’s personal wealth is subject to court order to rectify any breaches of the terms of the trust (i.e., the Trustmaker’s intent).

If the Trustmaker retains the right to take back the property initially transferred to the Trustee or to change the instructions that control that property in the Trustee’s hands, the trust is called a “revocable trust”. If the Trustmaker expressly fails to retain or no longer has such rights (e.g. by reason of his death), the trust is called an “irrevocable trust”. Additional distinctions exist depending on when the trust is created: If the owner/Trustmaker establishes a trust during his lifetime, the trust is called a “lifetime”, “living”, or “inter vivos” trust. If the trust is created after the owner/Trustmaker’s death (e.g., a trust created under the Trustmaker’s will), the trust is generally styled as a “testamentary” trust. Absent express language in the trust document to the contrary, a Maryland lifetime or living trust is deemed to be a revocable trust. Since the Trustmaker is no longer alive to change his instructions, a testamentary trust will be irrevocable unless a court finds that the Trustmaker’s instructions (intent) have become impossible to achieve or that a unanimously agreed upon modification of trust terms is not inconsistent with a material purpose of the trust.

Examples Of Inheritance Trusts

Let’s say you and your spouse would like to establish Inheritance Trusts for your two daughters after both your deaths. You and your spouse will first create a will or living trust as a Trustmaker. Each of these documents will contain instructions to establish trusts for your daughters together or for each of them and will transfer your property to the Trustees of those trusts after both of you have passed.

You believe your oldest daughter is already prepared to manage the assets transferred to her trust, so you name her as the trustee of her trust so that she can control that property and you give her discretion as to when she can distribute property income (or the trust property itself) to herself or her descendants.

You would like to see your younger daughter grow into her future role as Trustee, so you name her as a Co-Trustee of the trust (with her sister or another trusted family member or friend as the other Co-Trustee) until your younger daughter reaches a certain age (e.g., 30). At that time, the trust instructions say that she will become her trust’s sole Trustee. While your younger daughter serves as a Co-Trustee with the consent of her Co-Trustee required to make decisions, your trust instructions require the Co-Trustees to distribute certain amounts to her annually so that she can count on receiving those annual benefits.

Once each daughter becomes sole Trustee of her respective trust, each will act as caretaker of the inheritances and manage their investment until they are ready to pass them on to their own children and/or more remote descendants.

In the meantime, while her trust remains in existence, you state in the trust document for each daughter that no right to benefit from the trust may be transferred by any beneficiary as such, and no creditor of a beneficiary may attach trust property or any trust interest. Trust property will remain transferrable by the Trustee, but under Maryland law, “[a] creditor may not . . . reach or otherwise compel distribution of the beneficial interest of a beneficiary that is a trustee or the sole trustee of the trust, . . . except to the extent that the interest would be subject to the claim of the creditor were the beneficiary not acting as cotrustee or sole trustee of the trust.” Subject to certain limited public policy exceptions for unpaid taxes, child support, and alimony, each daughter’s interest in the trust and the trust property itself is therefore protected from claims by potential creditors.

Stay tuned for future installments

In future installments of this series about Inheritance Trusts, we will explain these and other benefits of using Inheritance Trusts in your planning. We will also explain the process of receiving an inheritance in trust, as well as titling trust assets, setting up trust accounts, and the obligations of Trustee-beneficiaries to their other or future beneficiaries.

If in the meantime you would like to speak with us about securing your own plans for the future, please give us a call at (410) 224-7800.

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Securing Your Family’s Future Using Inheritance Trusts: Part 2

PART 2: The Benefits of Using Inheritance Trusts

In part 1 of this series, we described Inheritance Trusts and how they can achieve clients’ desires to maintain their assets for as long as possible as a safety net protecting themselves and their loved ones from both anticipated and unforeseen threats and challenges. In this installment, we go over the particular benefits they offer at relatively little cost.

Benefits of Receiving Your Inheritance in Trust

There are three significant benefits to receiving your inheritance in trust rather than outright: (1) asset and creditor protection, (2) transfer (i.e., estate, gift, and GST) tax minimization, and (3) disability planning.

Asset Protection

As we discussed in Part 1 of this series, inheritances held in Inheritance Trusts are typically what are commonly referred to as “spendthrift” trusts. This term comes from the trust provisions that prevent a beneficiary from being able to pledge, assign, or otherwise anticipate their interest in the trust before he or she actually receives it. Because the beneficiary has no right to receive trust distributions ahead of the time when the Trustee (who may be the beneficiary himself but who acts in a fiduciary, as opposed to an individual, capacity) actually distributes them to him, the beneficiary’s creditors similarly cannot reach his trust interest until it is actually in his possession. As a result, his individual judgment creditors will not be able to reach the assets owned by the beneficiary’s Inheritance Trust unless they are creditors of the trustee (in his or her separate role as trustee) or creditors of a beneficiary with respect to alimony, child support, or taxes. In other words, the Inheritance Trusts’ assets are protected from lawsuit judgments against the beneficiary (or the beneficiary’s descendants or siblings).

Asset protection is important in a litigious society where the divorce rate hovers around 50%. The value of trust asset protection cannot be emphasized enough, especially since public policy generally makes it impossible for an individual to obtain this level of asset protection with respect to his or her personal assets. Spendthift trust creditor protection is made possible by the law’s view that, as long as he does not violate some important public policy in doing so, the manner in which a Trustmaker ties up his assets after death is his business and an entitlement resulting from his ownership of these assets in the first place. Spendthrift trusts are not deemed to be violative of public policy.

Future Transfer Tax Minimization

Inheritance Trusts also implement important estate and generation-skipping transfer tax planning. Under this type of planning, the assets in an Inheritance Trust will not be included in the beneficiary’s gross estate for federal or state estate tax purposes, no matter how much they grow in value. While the beneficiary can control the trust as its Trustee and has powers in this regard that are quite broad, those Trustee powers are by design insufficient under federal and state law to make them the functional equivalent of outright ownership. The same is true as to inherited rights as a trust beneficiary. As a result, while retained in the Inheritance Trust, the trust assets are not taxed for estate tax purposes as a part of beneficiaries’ respective taxable estates, and they can be passed on to the next generation (i.e., the Trustmaker’s descendants) without being subjected to estate tax.

An Inheritance Trust can be passed on to the next generation tax-free because it is exempt for the federal generation-skipping transfer tax (“GST Tax”). This is a tax equal to the federal estate tax that becomes payable when trust assets are distributed to beneficiaries more than one generation below the person in whose taxable estate the trust assets were last included. In essence, the federal GST Tax is designed to capture the estate tax that would have been payable from a generation where estate tax on trust assets is skipped. To limit the reach of this GST Tax on “smaller” estates, Congress allows an exemption from GST Tax for each individual taxpayer. Inheritance Trusts can be specifically designed to take advantage of all of the GST Tax exemptions of both the Trustmaker and the Trustmaker’s spouse. (The current GST Tax exemption available to a decedent is $5,450,000, but this amount will be indexed for future inflation. In the case of spouses, those exemptions can be doubled with careful planning). Unfortunately, unused GST Tax exemptions are not portable from a prior spouse to his survivor, so each spouse will need to use an estate plan utilizing Inheritance Trusts to take advantage of his or her GST Tax exemption.

Beneficiary Disability Planning

While a beneficiary is alive and able to manage his finances, he can serve as Trustee of the Inheritance Trust set up for his benefit. In addition, Inheritance Trusts often authorize the beneficiary to determine who will succeed him as Trustee when he is no longer willing or able to serve. To do so, the beneficiary will have to nominate a person, persons, or entity as Successor Trustee in a written document executed with the level of formality required in the trust instructions. If the beneficiary fails to nominate a successor trustee, the Trustee of the Inheritance Trust will be as the Trustmaker originally nominated in the trust by default. Please note that if a beneficiary wants his spouse to serve as Trustee of his Inheritance Trust if he cannot do so, he will usually need to create a writing that specifically makes this designation. To avoid complications of any potential divorce, a spouse is not generally otherwise named as a part of a line of succession.

In any event, if the beneficiary becomes disabled, management of his trust assets for his benefit is assured without court appointment of a guardian of his property or the ambiguities of enforcing a power of attorney.

 

In the final installment of this series about Inheritance Trusts, we will explain the process of receiving an inheritance in trust, as well as titling trust assets, setting up trust accounts, and the obligations of Trustee-beneficiaries to their other or future beneficiaries.

If in the meantime you would like to speak with us about securing your own plans for the future, please give us a call at (410) 224-7800.

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Securing Your Family’s Future Using Inheritance Trusts: Part 3

The Logistics of Inheritance Trusts

In parts 1 and 2 of this series, we described Inheritance Trusts and how they can achieve clients’ desires to maintain their assets for as long as possible as a safety net protecting themselves and their loved ones from both anticipated and unforeseen threats and challenges. In this installment, we go over the mechanics of setting up and operating an Inheritance Trust.

Titling Trust Assets and Setting Up Trust Accounts

When an Inheritance Trust is established, its Trustee (and in particular, a Trustee who is also a beneficiary of the trust) will need to keep inherited assets (as well as assets acquired in the future using the proceeds of these inherited assets) segregated from his personal assets. He does so by the titling of trust property and by using a separate trust taxpayer identification number.

Title to all newly inherited trust assets (and the proceeds of these inherited assets) should be kept in the name of the Inheritance Trust at all times. We prefer the following format for titling assets in the name of an Inheritance Trust:

“Gloria Sample Jones, Trustee of the Gloria Sample Jones Inheritance Trust under Article Twelve of the John Sample Living Trust dated December 24, 2008”

Obviously, each beneficiary Trustee would insert his or her name in this language and the particulars of the source document when titling inherited assets to his trust. However, to avoid future problems with banks and financial houses, it is important to use a title that references the document that states the authority for the trust, the trust administration provisions, as well as the source for Trustee powers and succession provisions.

Merging Separate Inheritance Trusts from Each Parent

Often, children of the same parents will technically receive an Inheritance Trust from each parent. To avoid having multiple trusts, the source document will generally have a merger clause allowing the Trustee to merge multiple trusts with the same beneficiaries and trust provisions. As such, the substantially identical trusts set up by each parent can be merged by having the Trustees sign what is known as a Trust Merger Agreement. Thus, two separate Inheritance Trusts (i.e., one received each parent) are consolidated into a single Inheritance Trust for the beneficiaries involved.

Utilizing the Assets of An Inheritance Trust

In order to provide the asset protection and tax benefits described in Part 2 of this series, there need to exist certain technical restrictions on beneficiary Trustee access to an Inheritance Trust’s property. However, beneficiary Trustees need not feel particularly limited by these restrictions because these provisions are purposefully drafted to be as expansive as possible without causing tax effect. The beneficiary Trustee will generally have complete authority as to the investment of trust property and broad authority as to when to make distributions.

A Trustee of an Inheritance Trust may make distributions of trust property to trust beneficiaries (including himself) for their education, health, maintenance or support. These terms have very broad meanings as demonstrated below:

Education

Includes payments for tuition, fees, books, supplies, living expenses, travel and reasonable spending money related to private pre-school, kindergarten, elementary school, middle school, college preparatory high school, undergraduate college, graduate college, and vocational, professional, or other specialized training

Health

Includes payments for medical services, prescription/over-the-counter drugs, and/or medical equipment, and, in general, anything directly promotive of the good health of trust beneficiaries

Maintenance or Support

Includes payments to keep the beneficiaries living in the manner that is reasonable given the amount of funds which can be devoted to this purpose, i.e., anything reasonably required to maintain the beneficiary’s lifestyle. (In addition, Trustees are often given the discretion when and whether to take the beneficiary’s other resources into consideration in making such lifestyle maintenance distributions.)

The principal limitation here is that Inheritance Trust assets may not be used to benefit persons or entities other than those persons who are currently the beneficiaries designated by the Trustmaker.

Types of Property an Inheritance Trusts Can Own

In general and unless otherwise specified in the Trustmaker’s instructions, Inheritance Trusts may own any type of property that is readily available to the public, such as: real estate, farming/ranching businesses, stocks, bonds, commodities, options, metals, partnership interests, limited liability company interests, and other types of closely-held business interests. The limitations here are that the Trustee is obligated to the beneficiaries to invest prudently and to avoid self-dealing.

Inheritance Trusts may also own life insurance or annuity products. However, you should consult with an estate planning attorney prior to purchasing a life insurance or annuity product with an Inheritance Trust. Notwithstanding trust provisions, if the Trustee of a trust owns life insurance on his own life, that life insurance can be made taxable as a part of his estate.

Other Ongoing Trustee Duties

In addition to the duties discussed above, Trustees of Inheritance Trusts need to remember that they now have fiduciary duties to others to be responsible for many of the same tasks they would have been doing if they owned the property in their own name (rather than as Trustee of the Inheritance Trust), such as:

Insuring trust property against potential hazards/casualties;
Keeping records of the trust’s financial history; and
Filing annual federal and state income tax returns for the trust on April 15th of every year.

It is important to note that Inheritance Trusts will each be separate income taxpayers and will require their own respective income tax returns. To this end, Trustees need to use separate federal tax identification numbers for their trusts. Because trusts pay federal income tax based on very compressed tax brackets (in 2017, a trust’s undistributed income is taxed at 39.6% once that income totals only $12,500), Trustees will probably want to do some distribution planning to make sure that as much of this income as possible is taxed at lower rates available to trust beneficiaries.

Trusts currently written as a Maryland trust are also subject to Maryland income tax. However, beneficiary Trustees who reside outside of Maryland may change the taxing state if the trust is being administered outside of Maryland and was not created under the will of a Maryland resident. One of the first administrative activities a beneficiary Trustee might want to consider undertaking is an examination with a local accountant or attorney as to where it makes the most sense to have the trust taxed.

Finding Assistance

Much of this may seem new to you, but it is not “rocket science”. We are in business to help our clients plan their Inheritance Trusts and to help with their implementation and administration. If you would like to speak with us about achieving your goals for the future, please give us a call at (410) 224-7800.

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Becoming A Personal Representative: Begin With The End In Mind

 

A Personal Representative is the individual who is appointed to carry out all of the duties of collecting a decedent’s assets, paying the decedent’s outstanding obligations, and distributing the remaining property to the decedent’s legatees or heirs.

When you become a Personal Representative, it’s important to begin with an understanding of what will be required during the course of the administration. Within nine months of appointment, and at least every six months thereafter until the administration is completed, the Personal Representative must submit for review and approval by the supervising county Orphans’ Court an accounting describing all receipts of the Estate and any purchase, sale, transfer, compromise, disbursement, or distribution of the Estate’s assets. Any of these transactions are subject to examination by the Court’s staff. With this in mind, a Personal Representative will want to follow appropriate procedures to keep track of this information while setting up and managing the Estate.

 

LETTERS OF ADMINISTRATION CERTIFICATE

When new Personal Representative is appointed, he or she is given multiple copies of a certificate known as “Letters of Administration” that proves his or her appointment. Financial institutions are very careful when dealing with surrogates for their depositors, so a Personal Representative will need to prove that he or she is entitled to deal with the decedent’s assets. The Personal Representative therefore needs to always be prepared to supply a Letter of Administration certificate when collecting the decedent’s financial assets or when opening a new account.

THE ESTATE’S TAXPAYER IDENTIFICATION NUMBER

One of the first steps in our process for a new Personal Representative is to obtain a new taxpayer identification number (or “TIN”) for the Estate. When a decedent dies, his Estate becomes a new taxpayer for federal and state income tax purposes. The federal income tax rates applicable to estates and trusts differ markedly from those applicable to living individuals. The decedent’s Social Security Number is therefore no longer available as an identifier for the income earned on the property belonging to the decedent before death since that income will no longer be taxed to the decedent as an individual. Because financial institutions are required to report this income to the IRS and applicable state tax authorities, they will not change the ownership of the decedent’s funds or open any new account for the Personal Representative without first receiving and verifying the Estate’s new TIN. Consequently this TIN and the Letters of Administration will both be required for the Personal Representative to begin his or her financial duties.

DEPOSITS INTO THE ESTATE BANK ACCOUNT

If you are a new Personal Representative, you will want to begin by gaining access and closing out any individual accounts held by the decedent. Once closed, deposit the funds along with any cash and checks belonging to the decedent into a separate Estate account (usually a checking account) in your name as Personal Representative with all income on the account being taxed to the Estate’s new TIN. Keeping an Estate account separate from your personal account is both a fundamental Personal Representative duty and a primary means of obtaining and keeping information needed for the Estate account.

Knowing that you will be required to account for all Estate financial transactions, be sure to keep written records of all checks received and deposited by making photocopies or scanning and storing images of the checks as digital files. Because bank statements only list the total amount of a deposit (and not the separate deposited items), one very good idea is to list on each deposit slip exactly what checks were included in that deposit or to staple the deposit slip to copies of those checks. Keep this backup information and a list of all checks and cash received with the amount, the payer, and the reason for the payment of the funds in question. That way, this information will be readily accessible when it comes time to prepare the required Estate account. Not having such information will lead to needless expense down the road if it needs to be reconstructed.

PAYING ESTATE EXPENSES

Make sure also that you have copies of all checks written or a complete check register for all Estate expenditures. If your bank will supply copies of checks written, make sure you sign up for this service for the Estate checking account. Accounts dedicated to an Estate cannot be used for your personal expenses or for Personal Representative compensation or attorney’s fees without a court order. Also, while telephone and cable TV and internet bills initially received by the Estate can be deducted as Estate accrued liabilities, they will generally not be allowed afterwards at accounting time, so be sure to cancel the services as soon as they are no longer necessary for the administration of the Estate.

MAKE THE ESTATE ACCOUNT AN ONGOING EXERCISE

Make sure that you supply copies of your records to your attorney no less than every two months. At The Wright Firm, we ask our clients monthly to deliver or mail us their bank statements with copies of their canceled checks written to date. As soon as we know what comprises the Estate assets, we start and maintain the accounting of the activities they perform as Personal Representative throughout the administration process to ensure that we get all the details we will need and that all expected rules and procedures are accurately followed. It’s much easier to keep the account contemporaneously than to have to reconstruct activities after their details are forgotten. If we start early with a good understanding of the financial transactions involved and with assembling the proof of those transactions that we may need at the end of the process, preparation of the final required accounting at the process’ end is much easier and less expensive.

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Maryland Trust Act Developments and Applications

Richard T. Wright will be a featured speaker and panelist on “Maryland Trust Act Developments and Applications” at the Maryland Bar Association’s Advanced Tax Institute on November 15, 2016. Learn more about the Maryland State Bar Association’s 2016 Advanced Tax Institute at ati.webflow.io.

As a member and former chair of the Estates and Trust Law Section of the Maryland Bar Association, Mr. Wright was instrumental in helping to write and then shepherd the Maryland Trust Act through both houses of the Maryland Legislature. This significant piece of legislation codified and updated Maryland trust law and coordinated many of its provisions with the nationally recognized Uniform Trust Code. In addition, Mr. Wright was the principal author of Subtitle 5 of the Maryland Trust Code dealing with “Creditor’s Claims; Spendthrift and Discretionary Trusts”. Along with his colleagues on the Advanced Tax Institute panel, Mr. Wright has focused on the developments and applications of the Maryland Trust Act and has shared this knowledge with Maryland attorneys and other financial professionals in many speaking engagements throughout the state since the Act became law. In addition, Mr. Wright has written a number of articles explaining pertinent aspects of the Maryland Trust Act and the effects of the most recent changes. See, for example, two articles titled The Maryland Trust Act and The Uncertain Duration of the Post-Mortem Rights of Creditors of a Revocable Trust Settlor.

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Don’t Get Overwhelmed With Your Estate & Trust Responsibilities

Are you a Trustee or Trust Beneficiary with financial responsibilities that seem a little overwhelming? You may have realized there are several legal obligations, processes and actions in taking on the role of a Trustee or Personal Representative. Here at the Wright Firm, we have years of experience in providing these services and want to help you achieve peace of mind in knowing that everything is taken care of from start to finish. With our Estate & Trust Administration services, we guide you through pertinent procedures such as probate, the process by which a Court and the county Register of Wills oversee a Personal Representative’s administration and distribution of an estate in accordance with the decedent’s will and the law. The Wright Firm provides counseling and services to keep you on track and make sure all of your duties are tended to thoroughly and properly.

Whether you have recently acquired these responsibilities or have been handling them for years, we will help you with all of your needs and concerns. Our Estate & Trust Administration services include guidance and advice with probate obligations, counseling and implementation for the administration of trusts, filing estate and gift tax returns, and the preparation of fiduciary income tax.

Give us a call at (410) 224-7800 to set up a consultation.

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Protect Your Family From Unforeseen Creditors

Caring for a loved one can be quite an undertaking for you and your family. In light of this, we want you to be prepared for circumstances such as debts accumulated from unforeseen creditors. Here at The Wright Firm, we provide guidance and resources to protect your loved one’s hard-earned assets from various unforeseeable creditors, including business creditors, tort creditors, divorce, and nursing home costs. Asset Preservation covers protected inheritance trusts, planning for Medicaid and long term care, and special needs trusts. To get started in protecting your assets for your loved ones, please call us at (410) 224-7800 or visit our website, thewrightfirm.net.

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Five Tips for Affording the Cost of Long Term Care Insurance

The Maryland Health Care Commission estimates that about 70% of individuals over age 65 will require at least one type of long term care (“LTC”) during their lifetime. If LTC is required, the cost of this care in a nursing facility in our area currently averages between $70,000 and $120,000 per year. Alternatively, according to the Genworth 2015 Cost of Care Survey, the national hourly rate for home health aides is $21.50 and is expected to increase 4% annually. Obviously, these are significant expenses that can drain or deplete the average person’s savings.

Medicaid, the government’s safety-net for LTC, may be or become available to pay these costs, but Medicaid is means-tested and is only available to persons with very limited resources ($2,500 or less in available assets, with certain additional limited exceptions for spousal needs, a car, household furniture, and prepaid burial expenses, etc.). Until persons requiring LTC “spend down” to these limits (strategically or otherwise), those persons are required to use their available individual or family resources to pay the cost of LTC. With the exception of brief stays in nursing homes following a hospital stay, Medicare does not cover long term care. Private health insurance will cover LTC only if it is a specific LTC policy.

Understanding How LTC Insurance Coverage is Priced

As with many risks, insurance is generally available to pay the costs of LTC if the insurer believes it has sufficient time to build a fund that can provide the likely benefits it may be required to pay out plus a profit for its shareholders or members. Premiums for such insurance (“LTC Insurance”) are therefore based on:

  • (A)  the age and health of the insured (i.e., the likely time when LTC benefits will be required and length of the probable “build-up” period for the fund to pay those benefits);
  • (B)  the likely amounts of LTC benefits to be paid, which, in turn, are based on:
    • (1)    the daily (or monthly) LTC benefit actually paid,
    • (2)    the length of time the daily (or monthly) LTC benefit will continue, and
    • (3)    the “elimination period” between when the insured first qualifies for LTC Insurance and when payments under that LTC Insurance begin (i.e., the “self pay” period before which the LTC Insurance payments commence);
  • (C)  the anticipated investment performance of the insurer using the premiums paid;
  • (D)  the costs of insurance administration anticipated by the insurer; and
  • (E)  the profits the insurer seeks to achieve.

Tips for Affording the Cost of LTC Insurance

Most residence owners carry homeowners’ insurance to cover the risk of loss occasioned by fires and other casualties and premises-based tort liability. Yet, while a 70% likelihood of LTC would seem to dwarf the likelihood of such casualties and tort liability, why do so few seniors have LTC Insurance? When I ask clients who lack this insurance why this situation exists, the most common response is: “we looked into LTC insurance and found that it would be prohibitively expensive.” This is when I try to make sure they asked the right people the right questions and offer the tips below:

First, start your LTC Insurance inquiry early, i.e., before you reach age 60-65. The longer the period the insurer has to “build-up” a fund from which to pay your LTC benefits (and its profits), the less the insurer needs to charge as a premium. If you are generally in good health, the optimum time to buy LTC Insurance is probably while you are in your early 50s. However, if you are already older than that, don’t give up the idea of obtaining LTC insurance. There are other ways to cut its costs.

Second, shop around. Don’t just get a quote from one insurer. Different insurers use different experience and actuarial ratings to determine how long the likely length of the probable “build-up” period for the fund and projected time when LTC benefits will be required. In addition, different insurers will have different anticipated investment performances for the premiums paid, different charges for insurance administration, and different expectations with regard to the profits sought for investors. Pricing factors (C), (D), and (E) listed above are in fact variable. Probably the best approach is to use a broker that can obtain LTC Insurance from more than one insurer. Don’t forget, however, that your LTC Insurance “eggs” will likely all be in “one basket”. Make sure the ratings of whichever insurer you choose make it likely that the insurer will still be in business if and when your LTC needs occur.

If you haven’t started your inquiry early enough and if, even after shopping around, you find that the premiums for covering all your likely LTC needs are too expensive, don’t stop the inquiry there. You can look for ways to cut the cost of LTC Insurance by limiting the coverage sought to those most likely to match some or all of your potential risks. Partial coverage of those risks is most likely better than no coverage at all. Consider the following tips for partial coverage alternatives:

Third, accept reasonable limits on the length of the period LTC benefits will be payable for your benefit. You probably will not need LTC coverage for your entire life expectancy after the onset of the need for that coverage. That need will probably make it likely that you will not live to the same life expectancy as others your age not having that need. The average length of stay in a LTC facility is currently less than three years. If full LTC Insurance coverage for the balance of your lifetime is too expensive, consider limiting the coverage period to a dollar amount equal to four to six years (i.e., because of likely medical advances, a period slightly longer than the current average length of stay). Five year LTC Insurance coverage will provide LTC payments for any “penalty” period required for Medicaid means-testing strategies. In addition, if you are married, make sure your respective policies provide that any unused coverage purchased by a decedent spouse is available to the surviving spouse after the decedent’s death.

Fourth, accept a longer “elimination period” between when you first qualify for LTC Insurance and when payments under that LTC Insurance begin. If your entry into LTC is preceded by a prior hospital stay of at least 3 days, you need skilled care (such as skilled nursing or physical therapy services), and you are admitted to a Medicare-certified nursing facility within 30 days of your prior hospital stay, Medicare will pay some or all of your LTC costs for up to 100 days. (Currently, Medicare pays 100% of your costs for the first 20 days; and, for days 21 through 100, Medicare will pay the cost of your expenses over $161 per day.) Self-paying LTC costs during the elimination period may allow you to afford better coverage to protect your assets thereafter.

Fifth, and finally, consider a daily LTC benefit that will cover part but not all of your LTC costs. You may have other income that can contribute as well. If you can’t afford $250 or more per day coverage, price out the cost of $100 per day or $150 per day coverage. Don’t settle for no coverage just because you can’t afford insuring against all of the costs of LTC. Because of monthly social security benefits, other income, and investment compounding, partial coverage may go a long way toward extending available personal or family resources.

Learn how The Wright Firm can help you with your Long Term Care planning.

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Team Building and Collaboration Project

The Anne Arundel Estate Planning Council announces its 2016 Team Building and Collaboration Project

In the past, members have repeatedly requested programs and opportunities to meet and to learn how to collaborate with other estate planning professionals on estate planning projects. In response, the Anne Arundel Estate Planning Council is pleased to announce its 2016 Team Building and Collaboration Project.

Project Goal:
To build multi-discipline estate planning teams, to learn by experience how to collaborate on estate planning projects with other professionals, and to learn how best to communicate estate plans to clients in differing walks of life

How to Participate:
Assemble a team that will together plan for the growth and transmission to family members of the estates of a married couple under three sets of assumed facts:

• A married couple with assets totaling less than $1,000,000;
• A married couple with assets totaling approximately $7,000,000; or
• A married couple with assets totaling approximately $13,000,000

Each team should be comprised of at least 3 members including AAEPC members from multiple professional disciplines (e.g., an attorney, a CFP, and an insurance professional or a CFP, an accountant, and an insurance professional).

When your team is assembled, please register your team with the Project Monitor, Rich Wright, at RWright@thewrightfirm.net or (410) 224-7800.

Facts for each scenario will be designed by the AAEPC Executive Committee with an eye toward including the expertise of all types of represented member professionals.

Each assembled team will choose which of these scenarios they wish to address.

Intended Product:
An effective presentation of your team’s estate plan as you would do so to clients who are not avid readers PowerPoints and diagrams are encouraged. Extended written text is not. The goal here will be to teach all viewers how best to present a proposed estate plan.

Project Timeline:
By May 1, 2016 – Assemble and register your team with the Project Monitor
May 1, 2016 – Fact scenarios will be distributed to registered teams
By June 1, 2016 – Each team should choose and register with the Project Monitor which fact scenario they will be using
Summer, 2016 – Each team should meet and prepare the plan for the couple in the chosen scenario and decide how to present that plan
November 10, 2016 – AAEPC meeting presentation of the plans by each team with responsive comments to be provided by a common
review panel and the audience of AAEPC members (Note: This is not a competition. The panel will serve to provide feedback in the place of the client couple.)

Scenario 1: Harry & Sally
Download PDF

Scenario 2: Jack & Diane
Download PDF

Scenario 3: Brenda & Eddie
Download PDF

 

Any Questions? Contact the Project Monitor, Rich Wright, at:

The Wright Firm
888 Bestgate Road Suite 211
Annapolis, Maryland 21401
Email: RWright@thewrightfirm.net
Phone: (410) 224-7800

NAEPC-logo-big-b&wAnne Arundel Estate Planning Council (AAEPC) was created by a group of tax, legal, insurance, and financial advisors to provide a forum for local wealth planning professionals from various disciplines to exchange ideas and build relationships.  AAEPC hosts 3-4 educational and networking events for advisors each year, offering opportunities for its sponsors to gain exposure to Anne Arundel County’s leading estate planning professionals.  The AAEPC functions under the 501(c)(3) umbrella of the Community Foundation of Anne Arundel County (CFAAC) – your leading local resource for charitable giving.