MARCH 2022
CURRENT ISSUES IN THE AREAS OF ESTATE, TAX AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
More Comments Regarding Bequests and Beneficiaries. One common problem encountered when wills and trusts are drafted is determining the proper name or reference of a particular beneficiary. Suppose a testator of a will or a settlor of a trust desires to make a gift to or designate a beneficiary to be a charity – if the reference is to the national organization, but a local address is used, was the national or the local organization the intended beneficiary? Making that decision may require a court determination of the testator’s or settlor’s intent. When naming people, full names should always be used. It is also a good idea to reference the relationship, if one exists, and the current residence, if available, or at least the city and state of residence. The goal is to avoid confusion about who was actually intended to be the recipient of the gift. In a Tennessee case, a testator left a bequest to “Mrs. Mosely.” A woman named “Mosely” claimed the bequest even though she had never met the testator. Another woman, whose name was actually not “Mosely,” but who was known as “Mrs. Mosely,” was ultimately determined to be the intended recipient. Proper name references can avoid a lot of this confusion.
Continued Discussion of Common Asset Protection Planning Errors. The last few issues of this newsletter addressed the most common asset protection planning errors, i.e., failing to plan at all, or making direct gifts or transfers which can have adverse tax consequences or result in the money or property transferred not being available to meet the needs of the person for whom the planning is being undertaken. When assets are being transferred in the context of asset protection for Medicaid qualification, it is almost always desirable to utilize an irrevocable “income-only” type of asset protection trust. If a residence is being transferred, the transferor’s occupancy can be protected through an occupancy agreement. The terms of occupancy are generally included in a separate occupancy agreement rather than in the trust itself, considering that cases in some states resulted in the right of occupancy being deemed an interest in the property when the right is contained in the trust itself. If the property is sold during the transferor’s lifetime, all of the proceeds of sale will be protected inside the asset protection trust. The trust would be designed to be a “grantor” trust for income tax purposes so that there will be no tax consequences associated with the trust from the sale of the property, and the trust creator will be taxed on the capital gain in the same way that he or she would be taxed if he or she had owned the property itself. The trust creator would retain a limited power of appointment, which is the ability to change how the assets are ultimately distributed
(Continued on Reverse Side)
following the trust creator’s death. This provides additional planning flexibility. When the trust has been established and the assets transferred, the five year look-back period commences with the date of the transfer. After five years, the existence of the trust will have no Medicaid impact other than the generation of income, if any. All income should actually be paid out to the trust creator and not accumulated. “Income” should be defined to exclude capital gains or capital gain distributions, which should specifically be defined in the trust as constituting principal and not being subject to distribution.
Representing Couples and Families. Problems can arise when an attorney is representing both spouses because of the potential for conflicts of interest when joint representation is involved. In the context of estate planning or planning for long term care, one spouse can be disproportionately wealthier than the other. As a result, there may be planning reasons for keeping assets separate, or transferring them into a form of joint ownership. While doing so may not pose problems while the couple remains married, such arrangements can create significant problems in the event of a separation or dissolution of marriage. Similar problems exist in the context of blended families. Clients’ interests in protecting assets for one another may be offset by a desire to retain the assets within a particular owner’s family. It may be difficult to design a plan that meets the goals and wishes of each spouse. Consequently, there must be a candid discussion of all of the issues involved and the ramifications of implementing one arrangement as compared to another. In the context of Medicaid qualification, it is often desirable to transfer virtually all of the assets from one spouse to the other (typically to the “community” spouse, i.e. the spouse who continues to reside in the community while the other spouse may require long term care). Such a transfer may benefit the community spouse, but it might not be in the best interest of the ill spouse, particularly if there is a desire to assure that certain assets will pass to the ill spouse’s children or in accordance with the ill spouse’s wishes. Even when conflicts do not exist or are not apparent at the time of the initial representation, later problems might arise.
There are different approaches to deal with the problem of representing a married couple. My approach in general is to explain the potentiality for a conflict of interest and to require that both spouses sign a representation consent form that documents the joint representation and which states that the potential for conflicts of interest exists. I make it clear to both spouses that I cannot deal with one and fail to disclose communications to the other, and that no information provided by one spouse can be kept from the other spouse. I make it clear that I reserve the right to withdraw from any further representation if there appears to be any irreconcilable conflict of interest. In most instances, when representing a married couple, it is very important that they work together. Consequently, there is nothing wrong with joint representation, but the potential for conflicts of interest must be recognized and actual conflicts of interest must be dealt with.
Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.
To download a copy of this newsletter, click here.