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The Shifting Role of Taxes in Estate Planning

The Shifting Role of Taxes in Estate Planning

I am often asked if Estate Planning has gotten easier as a result of recent changes in federal and Maryland estate tax law. My response: Estate Planning has not gotten easier, it has just become different. Coupled with other changes in society (e.g., lengthening mortality, volatile securities markets, a lengthy period of extremely low interest rates, and new artificial methods of conception), the need for flexibility in Estate Planning seems to have taken on new importance. This article focuses on how the concerns planners address are evolving in light of recent tax law changes.

 

Generally speaking, if a decedent’s assets are subject to potential estate taxation when he or she dies (and even if available exemptions are present to preclude such estate taxation), the capital gains basis of such “property acquired from a decedent” in the hands of his beneficiaries “steps up” (or “steps down”) to its fair market value at the date of the decedent’s death. Such beneficiaries as a result receive this property without the inherent capital gains income that was realizable before the decedent’s death. (Note, however, that this principle does not apply to property that is “income in respect of decedent” such as IRAs and other retirement plans, annuities, Series E savings bonds, or other property where inherent ordinary income has been earned but not yet taxed when a decedent passes away.)

Because the reduction of potential future capital gains taxes by “step up” requires potential exposure to estate taxation at the time of the decedent’s death, a fundamental tension has long existed in estate planning (especially for married couples) between saving estate taxes and saving capital gains taxes. Do we maximize the amount we can exempt from estate tax by placing the first decedent spouse’s assets after his death in a “credit shelter trust” designed to benefit the surviving spouse without having those assets included in her taxable estate? Or do we expose as much of the couple’s net worth as possible to potential estate tax at the death of the survivor to maximize basis “step-up”? A comparable tension exists in Medicaid planning for single individuals where the question becomes: should the potential Medicaid recipient gift his property to family members (who receive the donor’s cost basis) to “spend down” assets to qualify rather than leaving these assets to beneficiaries at his death with a stepped-up capital gains basis?

For a long time, resolution of this tension was easy. If likely estate taxation would occur at 55% of date of death value for federal purposes and from 8% to 16% of such value for Maryland estate tax purposes, there was no question that avoiding such estate taxation by preserving all available exemptions far outweighed the potential of future 15% income taxation on capital gains. Such easy resolution has, however, become very much more difficult in the recent past for a number of reasons:

First, recent dramatic increases in estate tax exemptions have significantly decreased the number of estates where estate taxation is potential or likely. Where a decedent could once only shelter $600,000 from potential federal and state estate taxes, decedents dying before 2026 can each now shelter some $11.2 million of their asset value from federal and Maryland estate taxation. After 2025, even if the federal law is not changed, decedents will still be able to shelter some $6 million from estate taxation. For persons likely to die before 2026 with less than $11.2 million or afterward with no more than $6 million, estate planning to minimize future capital gains taxes has become obvious because their families will not have to worry about estate taxation.

Second, since 2010, a predeceasing spouse can avoid wasting his estate tax exemption by means of “Portability” without using a credit shelter trust that precludes a step-up in basis at his surviving spouse’s death. Portability allows the executor of a deceased spouse to make an election on the first decedent spouse’s estate tax return to transfer or “port” such deceased spouse’s unused estate tax exemption to the surviving spouse’s estate. For example, if two spouses each have $5 million in assets, prior law would have required the first decedent spouse to use as much of his estate tax exemption as possible for a credit shelter trust to avoid his family’s loss of its benefits. In so doing, no further basis step-up would be available for that trust property when the surviving spouse died. Now, however, the first decedent spouse can leave his entire estate to the surviving spouse to be potentially estate taxed when his surviving spouse dies (and with everything other than income in respect of decedent getting a basis step-up at this later date) when the surviving spouse’s estate will potentially have available exemptions of over $16.2 million until 2026 (i.e., $5 million “ported” from the first decedent spouse plus the survivor’s personal $11.2 million exemption) or some $11 million (i.e., the first decedent’s $5 million and the survivor’s $6 million) thereafter. For married couples with larger estates, it is now possible to leave up to $22.4 million before estate taxes apply, with all such property potentially receiving a stepped-up basis at the second death. With such large exemptions from estate taxation available at the survivor’s death, getting as much capital gains basis step-up as possible at the second death has become the primary priority in many more couples’ estate planning. Note, however, that obtaining the advantages of such Portability requires the time and expense of preparing and filing of a federal estate tax return when the first decedent spouse dies; and, unlike credit shelter trust assets, appreciation of “ported” assets do not escape inclusion in the surviving spouse’s taxable estate.

Finally, the rates of taxation for these two planning alternatives are narrowing. Federal estate taxation is now at 40%, rather than 55%, of fair market value at death. For those assets to which Maryland estate tax applies, the combined federal and state estate tax rate is just under 50%. At the same time, capital gains income tax rates have climbed over the years. In addition to the original 15% federal rate, an additional 3.8% net investment income tax on capital gains now exists for individuals earning more than $200,000 (or $250,000 for married couples filing jointly) and an additional 5% capital gains tax (above the net investment income tax) applies for individuals earning more than $425,800 annually (or $479,000 for married couples filing jointly). In addition, state income taxes on capital gains apply with most taxpayers paying between 7% and 9% of such gains, depending on income and county of residence. Thus, combined federal and state capital gains rates of tax at over 30% has become closer to combined federal and Maryland estate tax rates at just under 50%. This is not to say that the taxes paid for capital gains will be more than the estate tax due because the tax base for each is very different. However, the increased burden of capital gains taxation has taken on new importance when estate taxes (and especially federal estate tax) are no longer a major consideration because of increased exemptions and Portability.

As I noted at the outset, these tax changes have not made Estate Planning easier, just different. We often now focus more on capital gains tax minimization than we do on estate tax minimization. If, as expected, Maryland this year reverses its 2019 recoupling with the federal estate tax exemption (because it doesn’t want the Maryland estate tax exemption to climb to $11.2 million), another level of complexity and an increased need for flexibility will be introduced. As we try to emphasize to all our clients, such law changes and changes in family dynamics make it extremely difficult to plan for more than the next 3 to 5 years. Estate Planning is a process, not a one-time event; and providing flexibility to accommodate change is increasingly critical.

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2018 Estate and Trust Tax Planning

Inflation Adjustments and Initial Observations on the 2017 Tax Act’s Impacts:

In late October, the Internal Revenue Service issued its inflation-adjusted exemptions, exclusions and tax brackets to be used for 2018 federal tax returns. See generally, Internal Revenue Notice 2017-178 and Revenue Procedure 2017-58 issued on October 19, 2017. In the estates and trusts area, the principal adjustments are as follows:

  • An individual’s federal estate, gift, and generation-skipping tax exemptions are increased after December 31, 2017 to $5,600,000. Thus, for decedents dying after December 31st with a gross estate (i.e., a taxable estate at death plus prior adjusted taxable gifts) of less than $5,600,000, there will be no federal estate tax due and no federal estate tax return is required to be filed. In addition, individuals may cumulatively make up to $5,600,000 in taxable lifetime gifts before any federal gift tax is imposed.
  • After years of remaining fixed at $14,000 per year, the federal gift tax exclusion will increase to $15,000. As a result, for calendar year 2018, individuals may make gifts that can be enjoyed immediately totaling $15,000 or less to any number of individuals without those gifts counting as lifetime taxable gifts (and without those gifts requiring the use of the $5,600,000 gift tax exemption mentioned above).
  • Finally, for trusts receiving and retaining taxable income, the federal income tax brackets have changed such that trusts do not reach the 39.6% marginal rate until they have taxable income in excess of $12,700. (Please recall that trusts get “distributable net income” deductions for amounts distributed to trust beneficiaries so that this maximum marginal rate will only be imposed on retained ordinary income above that amount. In turn, the beneficiaries receiving this distributable net income will pay tax on the income received at their personal marginal rates.) Note that the new bracket amount does not affect the Maryland income tax paid by the trust at Maryland rates on top of the federal tax.

Despite the IRS’s October pronouncement, a real question exists as to whether any of these limits will apply in 2018. As I write this article, House of Representatives and Senate conferees in Congress have agreed upon a final version for a bill entitled H.R. 1, “the Tax Cuts and Jobs Act of 2017” (referred to below as “the TCJA”). This “Conference Committee” version of the TCJA will now come before both houses of Congress for separate votes of approval. If, as expected, this Conference Committee report is approved by the House and Senate, the Conference Committee version of the TCJA will become law and generally apply with respect to tax years commencing after December 31, 2017. The Conference Committee approved version of the TCJA will substantially change the applicable 2018 estate and generation-skipping transfer tax exemption numbers already announced by the IRS and will change the income tax brackets for trusts:

  • The Conference Committee version of the TCJA will double the basic federal estate, gift, and generation-skipping tax exemptions from $5,000,000 to $10,000,000. With inflation adjustments back to 2010, the actual exemptions per individual will increase to approximately $11,200,000, and a married couple will be able to shelter over $22,000,000 for their post-mortem beneficiaries before having to worry about paying federal estate tax.
    On January 1, 2019, the Maryland estate tax exemption is scheduled to become “recoupled” with the federal exemption. As of now, were the TCJA to pass with the doubled estate tax exemption, that doubled estate tax exemption will apply for Maryland estate tax purposes as well. Time will tell how Maryland reacts to this substantial decrease in tax revenue.
  • The original House of Representatives’ version of H.R. 1 would have repealed the federal estate and generation-skipping transfer taxes entirely as of January 1, 2025. This repeal, however, is not included in the Conference Committee’s approved final version of the TCJA, and for now such repeal is no longer on the agenda.
    Since neither the House nor the Senate versions of the TCJA (nor the Conference Committee report) repeal or change the federal gift tax exclusion amount, it appears that the federal gift tax exclusion will in fact increase to $15,000 for 2018 and succeeding years (until inflation again requires an adjustment in a $1,000 increment).
  • Under the Conference Committee version of the TCJA, the brackets for trust taxable income will be changed as follows:
    • Retained trust income up to $2,550 would be taxed at 10% (a rate below the current 15% tax on such income);
    • From $2,550 to $9,150, retained trust income would be taxed at 24% (a rate also below that mandated by current law);
    • From $9,150 to $12,500, retained trust income would be taxed at 35% (a rate higher than that mandated by current law); and
    • Above $12,500, retained trust income would be taxed at the maximum 37% (a rate that is 2.6% less than that mandated by current law).

    Thus, under the Conference Committee’s version of the TCJA, the maximum bracket for federal income tax on retained trust income will apply at an amount slightly below that projected by the IRS in October, but the rate itself would be 2.6% lower.

  • Because estates and trusts are generally subject to the same rules for calculating taxable income as individuals and because the TCJA suspends most individual itemized deductions until December 31, 2025, estates and trusts will be subject to the same TCJA provisions as individuals with respect to the loss or limitation of itemized income tax deductions (e.g., a $10,000 limit on the deductibility of state and local property and income taxes, limits on the deductibility of home mortgage interest, and loss of the deduction for preparation of tax returns). In particular, trusts and estates will no longer be able to claim as deductions expenses that previously were allowable if they exceeded 2% of taxpayer’s adjusted gross income. However, trusts and estates will now be eligible for a new complicated deduction for certain “qualified business income” received for the taxable year with respect to pass-through business entities.
  • Since individual beneficiaries will not be able to make itemized deductions for these pass-throughs (at least until after December 31, 2025), residuary beneficiaries of estates and trusts will no longer be eligible to benefit from unused excess deductions for estate and trust administration expenses after termination of an estate or trust.
  • The TCJA does not change the “stepped-up” basis provisions of current law with respect to capital gains on inherited assets. As such, beneficiaries will continue to inherit capital assets with the date of death fair market value of the assets as their respective bases for capital gains purposes and without the potential of realizing income taxation on pre-mortem appreciation (or losses) in value.

To learn about how The Wright Firm can help you make adjustments to your estate planning, please contact us at (410) 224-7800, or shines@thewrightfirm.net.

All of this will make wonderful fun for the IRS’s tax return designers over the Holidays. Here’s hoping that your Holidays are merrier than theirs and that we all have a Happy New Year.

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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 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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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.