Protecting Your Life Savings

II. ESTATE TAXES AND UTILIZING THE

UNIFIED ESTATE AND GIFT TAX CREDIT

TO YOUR ADVANTAGE

- Married couples who are U.S. citizens get a special break on estate taxes known as the Aunlimited marital deduction@.  Husband and wife during their lifetimes and upon death can transfer unlimited amounts of assets and property to each other without any estate or gift tax consequences.  However, upon the death of the second to die of husband and wife, estate taxes, if any are due, can be reduced or eliminated if proper use of the exemption amount has been taken advantage of during the lifetime of both husband and wife.

- The Unified Gift and Estate Tax Credit allows everyone to make taxable gifts or transfers of assets during their lifetime or upon their death which are exempt from estate and gift taxes:

2001 - - - - - - - - - - - - - - - - - - - - - - - - $  675,000

2002 and 2003- - - - - - - - - - - - - - - - - - $1,000,000

2004 and 2005- - - - - - - - - - - - - - - - - - $1,500,000

2006, 2007 and 2008  - - - - - - - - - - - -  - $2,000,000

2009 - - - - - - - - - - - - - - - - - - - - - - - - $3,500,000

2010 - - - - - - - - - - - - - - - - - - - - - - - - Repealed

- Proper utilization of the exemption amount in both the estate of a husband and wife can save the estate of the second to die hundreds of thousands of dollars in estate taxes.

- Last Will and Testaments or Living Trusts which contain what are known as ACredit Shelter Trust Provisions@ will allow both a husband and wife to take full advantage of the Exemption amount in each of their estates upon their demise.

- Credit Shelter Trust provisions in a Last Will will be ineffective if there are not sufficient assets in the decedent=s name alone on the date of death so as to utilize the exemption on date of death.

III. LAST WILLS AND TESTAMENTS

A writing wherein you state your wishes as to how assets (real property, tangible personal property) which are in your name alone on the date of your death are to be disposed of upon your demise.

- A Last Will disposes of property either outright or in trust to named beneficiaries.

- A Last Will and Testament has no control over assets which are in joint name, in trust for accounts or have named beneficiaries (e.g. IRA=s, Life Insurance, etc.)

- In your Last Will you will have to appoint someone to act as the executor or executrix of your Will. Person(s) responsible for executing upon the described dispositions stated in said Last Will.

- Executor or Executrix gathers all assets and pays all debts of the estate, arranges for filing and payment of any estate taxes due.

- A Last Will and Testament must be admitted to probate in the Surrogate=s Court of the County where the decedent resides in New York before it is legally recognized as the valid Last Will and Testament of the decedent.  Once the Last Will is admitted to probate, the Court will issue letters testamentary to the executor named in the Last Will.

IV. REVOCABLE LIVING TRUSTS

A Revocable Living Trust is an agreement between the Grantor(s) (Creator(s)) of the Trust and the Trustee(s) (Administrator(s)) as to how property transferred to the trust is going to be held, distributed and administered during both the lifetime of the Grantor(s) and upon the death of the Grantor(s).

- Grantor can also be a sole trustee of the Revocable Living Trust so long as the trust has remainder beneficiaries.

- To be effectively utilized, all of the assets of the Grantor(s) have to be transferred into the name of the trust during the lifetime of the Grantor(s).

- Advantages of a Revocable Living Trust

1.              Avoids probate

2.              Privacy

3.              Can utilize all estate tax planning tools (e.g. Credit Shelter provisions) that could be taken advantage of by use of a Last Will.

- Disadvantages

1.              Need to transfer all assets to trust during your lifetime

2.              Need to consult with your attorney to make any revisions to the trust regarding terms of administration during lifetime or death.

3.              May still need to probate a Last Will if all assets not transferred to trust.

4.              Has no special estate tax treatment - depending on size of estate may need to file Estate Tax Returns and pay estate taxes.

5.              Higher standard of competency required than a Last Will.

THE REVOCABLE LIVING TRUST

THE FACTS AND THE FICTION

By: Anthony J. Enea, Esq.*

Over the last ten to fifteen years much has been written about the Revocable Living Trust by estate and financial planners, some of which has been factually accurate and some of which has been purely fictional.  By most accounts the Living Trust was first heavily promoted by estate planners in California where the cost of probate and the length of time involved in probating a Last Will and Testament has been described as onerous.  However, as a result of extensive promotion the popularity of the Living Trust has spread eastward over the last five years.  Although it has not been widely embraced by attorneys in New York, its use as an estate planning tool has increased in popularity.

WHAT IS A REVOCABLE LIVING TRUST?

A Revocable Living Trust is a written instrument created during the lifetime of the Grantor (the person establishing the trust) and is effective during the lifetime of the Grantor with respect to the assets which are placed into the trust.  The trust is not effective until it is funded with assets.  The Revocable Living Trust is distinguishable from a testamentary trust which is made a part of a Last Will and Testament, and only becomes effective upon the death of the testator (the drafter of the Will).

The Grantor of a Revocable Living Trust retains the power to freely amend and revoke the trust as well as to reacquire its assets.  It is distinguishable from an Irrevocable Trust which cannot be amended or revoked by the Grantor.

New York now permits the same person to be both the sole trustee and the sole holder of the present beneficial interest so long as one or more other persons holds a beneficial interest.  The beneficial interest held by the other person can be vested or contingent (present or future).  A lifetime trust will be deemed to be irrevocable unless it expressly provides that is revocable.

ADVANTAGES OVER USE OF A LAST WILL

The use of a Revocable Living Trust rather than a Last Will and Testament as an estate planning tool provides the following benefits:

A. Avoids the cost and time of probate and its attending expenses such as Court filing fees, legal fees, guardian ad litem fees and executor=s commissions (but, will have trustee=s commissions);

B. Helps avoid potential challenges to a Last Will and Testament regarding issues of Testator=s competency.  Attacks on grounds of lack of due execution are very difficult, although standard of competency required to execute a revocable trust is higher, e.g.; capacity to make a contract;

C. A Revocable Living Trust protects Grantor=s privacy.  It is a private document, unlike a Will its provisions are not accessible for public review;

D. Assets in the Revocable Living Trust will be available for immediate distribution after the death of the Grantor, subject to insuring sufficient assets are available to pay estate taxes;

E. No gift tax consequences of making transfer of assets to the trust.

F. Continuation of asset management of Trust assets in the event of disability of Grantor/Beneficiary.

THE DISADVANTAGES OF USING A LIVING TRUST

There are some disadvantages to utilizing a Living Trust:

A. You must transfer all of your assets including title to any real property to the Trust during your lifetime, additionally, any assets acquired during the Trust=s existence must be transferred to the Trust;

B. The cost of having an attorney prepare a Revocable Living Trust is generally higher than the cost of preparing a Last Will and Testament;

C. There will be legal fees incurred in amending or modifying the Trust during your lifetime and you will still need a Last Will (commonly known as a Apour over@ Will) in the event there are assets which have not been transferred to the Trust.

THE FICTION

Many estate planning professionals in their advertisements and writings relevant to Revocable Living Trusts have all too often exaggerated the estate tax advantages of utilizing a Revocable Living Trust rather than a Last Will.  All of the estate tax planning that can be implemented through the use of a Revocable Living Trust can also be effectuated through the use of a Last Will.  For example, the use of Credit Shelter Trusts can be implemented in a Last Will.  In my opinion, the Revocable Living Trust has no advantages over a Last Will for estate tax planning purposes.

The Revocable Living Trust does not eliminate in its entirety the need to have a Last Will.  Even if you have a Living Trust it is still advisable that you have a Last Will.  It is highly unlikely that you will have transferred all of your assets into a Living Trust prior to your death, thus, creating the need for the existence of a Will to transfer the assets that are in your name alone at the time of your death.

Furthermore, the assets transferred to the Revocable Living Trust are not protected for purposes of Medicaid eligibility and long term care planning.  Because the trust is revocable the assets are considered an available resource for Medicaid eligibility purposes and would be subject to a spend down to Medicaid eligibility levels.  In my opinion, this is perhaps the most significant drawback of utilizing this trust.

In conclusion, it is advisable that one consult with an attorney before executing a Revocable Living Trust so as to be able to fully understand the advantages and disadvantages of its usage.

V. Powers of Attorney

A.    Defined â?? A Power of Attorney ("POA") is a written document wherein one individual ("Principal") appoints another individual (s) as his or her "attorneyâ??inâ??fact" or agent.  The attorneyâ??inâ??fact or agent is given the authority to act on behalf of or in place of the principal for the purposes specified in the POA.  A POA is effective immediately unless stated otherwise.  (A sample short form statutory Power of Attorney is attached hereto, as revised effective 1/1/97).

B.    Purpose â?? Permits one individual to delegate to another the authority to manage his or her day to day affairs such as banking (e.g., check writing), bond and stock

transactions, real estate transactions, business transactions, among others.  Important in event of emergency or illness or when someone is away or on vacation.

C.    Types of Powers of Attorney

1.  Durable â?? Survives the incapacity or disability of the principal.  It is extremely important that a POA be durable; if not, it will terminate upon the incapacity or incompetency of the principal.  For example:  POA should state " This power of attorney shall not be affected by the subsequent disability or incompetence of the principal."

2.   Springing POA â?? Not effective immediately but becomes effective upon the occurrence of a specific future date or event, e.g., the incompetency of the principal.  If POA becomes effective upon occurrence of a specific event, it will be activated only by a written statement that the event has occurred.  A new form of Power of Attorney became effective on October 1, 1994.

3.     General POA â?? Agent is given unlimited discretion to make all decisions for principal with exception of life sustaining medical decisions which requires execution of a Health Care Proxy in New York.

4.     Limited POA â?? Agent's authority is limited to the specific activities stated in the POA, e.g., banking, real estate, etc.

Note:  New York statutory short form Power of Attorney will not be effective to transfer real property in Florida unless it meets statutory requirements in Florida.   For example, it must specify the exact real property in question, must be signed before two witnesses and notarized.

VI. Health Care Proxies

Defined â?? A written document which enables a competent adult ("principal") to designate an individual ("agent") to make all health care decisions for the principal when he or she is unable to make his or her own health care decisions, e.g., incompetency.

â?? Only document legally recognized in New York State regarding health care decisions, effective as of January 18, 1991, when New York State adopted "The Health Care Proxy Law."

Purpose â?? Allows individual to designate someone he or she trusts to make important health care decisions in the event of incompetency or inability to make such decisions.

â?? The Health Care Proxy will be effective as to life sustaining treatments, medications, or any other special  needs specified.  The agent will be unable to make decisions as to principal's intentions regarding artificial  nutrition and hydration (feeding tubes) unless agent specifically knows said intentions or the Health Care Proxy specifies those intentions.

Effectiveness and Duration â?? A Health Care Proxy will not be effective until the principal's attending physician determines "to a reasonable degree of medical certainty" that a principal lacks capacity to make his or her own health decisions.  To withhold life sustaining measures the attending physician must consult with a second physician that the principal lacks capacity.

â?? Proxy is in force indefinitely unless limited in document.  Principal can revoke it any time orally or in writing.

â?? Only one agent at a time can be appointed, an alternate agent may be designated.  The agent must be an adult with exception of an operator, administrator or employee of a residential health care facility or hospital in which the principal is a patient or resident.

- Agent will not be liable for health care decisions he has made if he has acted in good faith.