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Traditional Estate Planning Vs Modern Estate Planning

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Safe Harbor Trusts
Written by: Rajiv Nagaich

Traditional Estate Planning is based on notions that may be out of sync with today’s realities. It deals with the notion that estate planning should be undertaken for the benefit of removing the troubles for the heirs; the assumption being that one will go to sleep and never wake up leaving problems for the heirs.

Another assumption used to be – and in the minds of many still is – that when they die Uncle Sam will come to claim part of their estate. The reality is that Uncle Sam will only look for their pound of flesh if your estate exceeds $3,500,000 for a single person and $7,000,000 for a couple for Federal tax purposes. To address Washington State tax it is $2,000,000 for a single person and $4,000,000 for a couple. These are for the year 2009, please remember that changes will be made again in 2010.

Most of us will not have to worry about this. Worrying about heirs is something that is valid. But assuming that we will go to sleep one day and never wake up may not be as applicable today as it was twenty years ago when we were expected to live a few years in retirement.

Today, thanks to modern medicine and medical advancements many of us will live many, many more years in retirement. For a significant number of us many of these years will be spent living with debilitating chronic care conditions which will make us dependent on others for our day to day living activities – getting out of bed, transferring, bathing, toileting, walking, eating, dressing etc.

Statistics from the Alzheimer’s Association suggest that one out of eight individuals who turn 65 will deal with dementia-related disabilities; and that number reaches an astounding one out of every 2 individuals reaching age 85. For a nation where the fastest growing segment of our population is 85 plus, this is not good news. And yet traditional estate planning is largely silent about this issue.

Is there something that can be done about this issue? Can you do anything today to try to protect assets from uncovered long term care costs that can be quite catastrophic for most who face the situation? The answer is yes.

But only if your goal is to engage in legal planning that will allow you to protect your assets from uncovered long term care costs over which you may have no control and you care to maximize your quality of life. If these issues are not important to you, tune me out.

To begin with, understand that families that face chronic disabilities are going to be facing bills that will likely exceed their monthly income by a significant margin, eating away at the assets that they so carefully put away to enjoy in their golden years.

Sadly, the people who are most at risk are those who have estates between $50,000 and $1,500,000. For larger estates the issue is not financial, rather the issue is managing the finances and the care needs.

For the poor Medicaid is there to cover their needs.

For the rest of us, who have worked hard all their lives, avoided having purchased brand new cars every year or otherwise lived beyond our means, we are left with no choice but to spend down our estates whereas if we had just been careless and splurged and not saved and done the responsible thing we would have qualified for Medicaid.  The issue is engaging in legal planning that will allow you to access assistance with these uncovered long term care costs so your hard earned savings do not disappear.

Most of us who have worked hard and saved for our rainy day have two hopes and desires: (1) to live our golden years in as much comfort as possible without having to face the possibility of going broke; and (2) having a desire to leave a bit of our estate to our children.

However, families who face chronic illnesses – Alzheimer’s, Parkinson’s, after effects of strokes or heart attacks etc. are robbed of these goals. Many in this situation will actually run out of resources before they run out of life (like my in-laws did); many will take drastic measures to protect their assets or feel guilty about being forced to consider drastic measures such as divorce or legal separation or gifting assets to their children in order to qualify for Medicaid benefits.

But much of this can be avoided. Here are your options:

To begin with, your estate planning can and should incorporate the use of “Safe Harbor Trusts” commonly referred to as “Special Needs Trusts” in your Wills. We have used trusts for many years to help people with large estates that would be subject to estate taxes to avoid or minimize the incidence of estate taxes. Here is how the concept works, in the case of married couples each spouse has the ability to leave $2,000,000 to his/her heirs without having to worry about paying estate taxes.

However, most people have wills that say if the first spouse dies everything goes to the surviving spouse and vice versa. Assume that your estate was worth $3,500,000.00 million dollars. Under our community property laws, most couples would control half of this estate, which means that the husband would be deemed to own 1,750,000.00 million and the wife would be deemed to own 1,750,000.00 million. But the community property laws do not say that the spouse must leave his/her half to the other spouse, indeed the half can be left to anyone the spouse chooses.

The impact of dying with the traditional estate plan where the husband’s half would go to the wife and the wife’s half would go to the husband, is that if the husband dies, the wife will own the entire $3,500,000.00 million estate. Then when she dies she can only leave $2,000,000.00 million of that free of estate taxes – the other $1,500,000.00 million would be subject to estate taxes. We do not like that result, so we say to the husband to leave a Will stating that upon your death your $1,500,000.00 million will go to a tax shelter trust, which will be available to wife for her needs, but will not be counted as part of her estate for purposes of estate taxes. This way when the husband dies his half does not go to the wife and then when the wife dies she only has $1,500,000.00 million in assets and therefore there is no estate tax on this estate.

The use of Safe Harbor Trusts is similar to this concept, but is used in estates that are not large enough to lead to estate tax issues. The purpose is that if a spouse is going to a nursing home in the future or needs nursing care at home and the costs will be prohibitive, one could reach out to the Medicaid program for some assistance. But Medicaid is only available to those with less than $2,000 in assets. Taking into account that traditional estate planning calls for the husband’s share of the assets to go to the wife, thereby making it so that the wife will have all of the assets which will need to be spent down to $2,000 before she can ever access Medicaid, an option would be to direct the husband’s half to the Special Needs Trust. The assets in this trust will not be counted as being owned by the wife if she applies for Medicaid and therefore at least half of the estate is protected. Nifty – legal – because the Congress sanctioned this planning opportunity. But it is up to you to incorporate this in your estate plan. Do not expect the government to do it for you.

Next: What about your quality of life while you are living? Most of us who have taken time to execute an estate plan will have named a loved one as our agent who will be responsible for looking after our care needs when we reach a point that we are unable to do so ourselves. Usually it is a spouse or a child or other family member. However you should think about the issues they have to deal with. You are dealing with Alzheimer’s – the agent reaches out to the doctor to ask what they should be doing and the doctor says that you should start looking for a nursing home or an appropriate institution. This is institutional bias in our system. So the agent follows the prescription written by the doctor directing nursing home placement. But is this appropriate? Is there any chance the doctor was wrong?

Are there alternatives to the nursing home? It is not appropriate to leave your agents the awesome responsibility to look after your care needs without providing them with something more than just an expectation that they are to look after you. You have heard me speak of Geriatric Care Managers. Indeed, as a lawyer I employ four of these professionals in my office and ask them to guide me in planning my clients affairs. A geriatric care manager is usually a nurse or a social worker with experience in a hospital or a nursing home setting or both. They know how the long term care system works. They can assess whether or not you can continue to stay at home and if so what interventions will need to be put in place.

They can help determine the least restrictive alternative to a nursing home if staying at home is not possible, which includes adult family homes, assisted living facilities or boarding homes. Why start with a nursing home when better and less expensive alternatives exist? You need to include directives in your powers of attorney that you do not wish to burden your agents with the heavy decisions they might have to make without providing them some resources and to that end you wish to direct them to use your estate assets to procure the services of a qualified geriatric manager to assist them with long term care decisions. This will serve to provide you a better quality of life and will not make the task a heavy and almost unbearable chore for your agents. This is something that you will seldom find in most traditional powers of attorney, because most powers of attorney are drafted with the aim of protecting and growing your estate and not providing for your quality of life. You have the opportunity to change that paradigm in your powers of attorney.

Enough reason to reconsider your current estate plan? I hope so. See a good elder law attorney who is familiar with these issues. Better yet, see one who has walked the walk and cared for an aging parent and has lived the standards you espouse. lf you wish to stay at home, see an elder law attorney who has been successful in keeping a parent at home when the doctors and others said that it is time for a nursing home.

Ask questions!
If you don’t know of such an attorney, you do now.
I have walked this walk…

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