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House Bill 4351: Going After Pension Poachers

March 4, 2016

by Lawyers With Purpose with 3 Comments Asset Protection Legal Technical VA

House Bill 4351 should be stopped!

For the past several years, bills have been introduced for Congressional approval that would impose a three-year look back, and penalties up to 10 years, for veterans and their spouses who give away their assets and then apply for a pension program designed for indigent wartime veterans. The bills were limited to addressing the concerns of deliberate impoverishment by veterans with the help of lawyers, financial advisors, and others. The bills never passed.

In January 2015, the Veterans Administration published proposed changes to the laws in the Federal Register that would change Title 38 of the Code of Federal Regulations. The VA included penalties for transfers of assets, and used very broad definitions of transfers (i.e. the purchase of an annuity), just like the previous bills that had been introduced. However, the VA went much further, proposing to (1) extend beyond its Congressional authority and (2) extend beyond the scope of the perceived needed changes.

Beyond VA Authority.

Under the pension program for wartime veterans, the claimant must meet an income and asset standard. With regard to income, the VA deducts from gross income all permissible medical expenses. Home healthcare is a permissible medical expense. But the VA proposed to limit the deduction to the average cost of home healthcare based on a national average set two years prior to the proposed changes, which would be $21 per hour. The law is clear that if a medical expense is deductible, then the entire amount must be deducted, and a change of this nature is in violation of the Congressional right.

Beyond the Scope

The purpose of the bills introduced into Congress and the purpose of the proposed changes to the VA regulations is to prevent people from divesting themselves of assets, which they otherwise could use for themselves to pay for care, in order to qualify for tax-free income from the VA to pay for their care. The VA exceeded the purpose of these bills when they included in the proposed changes a limitation on the lot coverage for veteran’s home place. The home place and a reasonable lot area have always been exempt by the VA when applying for pension. A reasonable lot area has always been defined as the same or similar in size to those in the same community or neighborhood. Rather than keeping the long-standing laws, the VA wants to count any property value that exceeds two acres. This makes no sense under the purpose of the law changes to keep people from divesting themselves of assets. First, a 900-square-foot condo in New York City may be worth well over $1,000,000, but it would be an exempt resource under the proposed changes. Whereas, a house sitting on five acres in south Georgia would be a countable resource, even if its value is only $150,000. Moreover, the veterans may have been living in the house for 10, 20, 30 years or more and had no intention of ever filing for the VA pension when they bought the house. Thus, the change in the law has nothing to do with the perceived abuses of people trying to save their assets and qualify for benefits.

Congress has apparently given up on trying to pass a bill that specifically details a look back and penalties for wartime veterans who give money away to qualify for the pension. After all, this is an election year and that would not look very good.

Nonetheless, a few members have found a sneaky way to get the VA’s proposed changes passed by Congress without Congress necessarily knowing what they are actually passing. House Resolution 4351, submitted in the House of Representatives on January 8, was sponsored by Rep. Matt Cartwright of Pennsylvania and co-sponsored by Rep. Sanford Bishop of Georgia, Rep. Sheila Jackson Lee of Texas and Rep. Walter Jones of North Carolina. It has been referred to the Committee on Veteran’s Affairs.

Its stated goal is “To protect individuals who are eligible for increased pension under laws administered by the Secretary of Veterans Affairs on the basis of need of regular aid and attendance from dishonest, predatory, or otherwise unlawful practices, and for other purposes.” The act would be titled, “Veterans Care Financial Protection Act of 2016.”

This sounds really good, because Congress is professing to protect veterans from financial predators. Second, the act does nothing more than mandate that the secretary of the VA work with the heads of federal agencies, states, and such experts as the secretary considers appropriate to “develop and implement Federal and State standards to protect individuals from dishonest, predatory, or otherwise unlawful practices.” The VA would then have 180 days to submit the standards to the Committee on Veterans’ Affairs of the Senate and of the House of Representatives. If this resolution passes, the VA can just hand over the proposed changes in the laws as the standards. The resolution does not say what the two committees are to do once they receive the standards from the VA.

The VA plans to finalize proposed changes (with modifications) by early summer. What is unclear is whether a passage of this “blind” resolution would immediately sanctify any changes the VA has made, or if the changes cannot take effect until after the two committees have taken some action of approval. What is clear is that advocates and veterans must once again push to make your political leaders, specifically those in the two Veterans’ Affairs committees, aware of these damaging changes that have no bearing on the purpose of the proposed changes – limiting home healthcare to an outdated national average and limiting the home place lot coverage to two acres instead of a reasonable lot for the area.

If you would like to know more about the VA Proposed 3 Year Lookback and Other Law Changes join our FREE WEBINAR on Wednesday, March 16th at 4EST. Click here to reserve your spot today.

Victoria L. Collier, Co-Founder, Lawyers with Purpose, LLC; Certified Elder Law Attorney through the National Elder Law Foundation; Fellow of the National Academy of Elder Law Attorneys; Founder and Managing Attorney of The Elder & Disability Law Firm of Victoria L. Collier, PC; Co-Founder of Veterans Advocates Group of America; Entrepreneur; Author; and nationally renowned Presenter.

Who Should Be Trustee?

March 3, 2016

by David Zumpano with No Comment Asset Protection David J. Zumpano Estate Planning Drafting Software Legal Technical

There's a constant battle between lawyers as to who should be trustee of an irrevocable asset protection trust. The primary school of thought is that it should never be the grantor, and some schools of thought believe it should never be the beneficiary. At Lawyers with Purpose, we disagree with both of those positions, but we recognize the concerns and rely on sound principles of asset protection law in making the final determinations.

Let's first discuss the question of whether the grantor should be trustee. Many practitioners believe that allowing the grantor to be trustee makes the assets of an irrevocable trust available to the grantor's creditors. Such a proposition is ludicrous. The challenge with most lawyers is that they do not allow the grantor to be trustee of his or her irrevocable trust. When pushed to explain why, they typically assume that's the way it was always done. Few dig further to see why it was done that way. So let's examine why grantors were not traditionally named trustee. The most adverse impact is that, if the grantor is trustee, they're deemed to retain enough control to have the assets of the trust included in their taxable estate when they die. For many generations, this was the death knell? of an asset protection trust. But in the last 15 years it's become irrelevant because of the rise of the estate tax exemption. Today only two in a thousand Americans have a taxable estate, so preventing the grantor from being trustee because of a potential inclusion of the trust asset in the estate of the grantor is not relevant to 99.8 percent of Americans. So why hold them to that standard?

The next major argument is a theory that if the grantor has control of the trust, then he could direct it back to himself. Well, that depends. What does the trust say? If the trust says that the grantor is not a beneficiary, or similarly the grantor is not a principal beneficiary but is entitled to the income, does that mean that the grantor as trustee all of a sudden gains a super power to violate the terms of the trust and give himself the principal when it's not allowed for? Hardly. In fact, there is consistent case law throughout all of the states, including cases that lead all the way up to the Supreme Court, that supports the notion that a grantor as trustee has all of the same fiduciary obligations as any other trustee and by no means has authority to act outside the powers granted to trustee. I specifically refer you to my Law Review article, "The Irrevocable Pure Grantor Trust: The Estate Planning Landscape Has Changed" in the Syracuse Law Review. In this article, I go through in‑depth review of all of the case law nationwide, and I'm excited to say that it is sound law that a grantor can be a trustee without risking the assets to the creditors of the grantor. One caveat, however, is if the grantor does retain the right to the income, then absolutely the income will be available to the creditors of the grantor.

So are there circumstances when the grantor as trustee's trust is invaded? Absolutely, but in every single case the invasion was not due to the grantor being the trustee, but rather was due to the pattern of behavior by a grantor trustee who violated regularly the terms of the trust in favor of themselves, and the trust was thereafter deemed a sham. In such cases, I concur with any court that makes that decision based on people who try to defraud the system. Irrevocable trusts must be managed in an arm's length manner, and as lawyers we do not plan for someone to become fraudulent. They are fraudulent to their own peril. But a properly drawn trust when the trustee is the grantor in no way, shape or form creates any risk of loss of asset protection if the terms of the trust are followed, as they are required to be in every case whether the grantor is trustee or not.

So at Lawyers with Purpose we encourage our members to do good legal work based on sound law, not fear, conjecture or because that's the way it's always been done. In the end, the client wins. It is silly to deny thousands of clients that we serve the ability to manage and control their own assets for the benefit of their families, just because some rogue case in some rogue state from some vile fact pattern allowed the court to invade against the intentions of the grantor. Protect your clients. Teach your clients. Share with your clients how these work. They are very safe and a great planning tool.

If you want to learn more about Lawyers With Purpose you can find all the information about becoming a member by clicking here to download our Membership Brochure.

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Nadeau v. Thorne – No Reason To Fear

February 4, 2016

by David Zumpano with One Comment Asset Protection David J. Zumpano

The recent Massachusetts decision in Nadeau v. Thorne considering a primary residence held in a Grantor trust as an available resource and thereby disqualifying the Medicaid applicant has the Medicaid industry in turmoil. A careful review, however, will calm any fears that this in anyway changes what we have always known about Medicaid.

Is Asset Protection Dead? Pfannenstiehl v. Pfannenstiehl

February 2, 2016

by David Zumpano with No Comment Asset Protection David J. Zumpano

A recent Massachusetts case throws into question whether long-term asset protection is safe. This particular case was disturbing because the defendant in a divorce proceeding's share in an irrevocable trust from his parents was deemed to be a marital asset and had to be distributed to his ex‑wife. This was a third-party trust, created by the parents for the benefit of their son, that had specific spendthrift provisions to prohibit such an attack. The Massachusetts court deemed otherwise.

So is asset protection planning on its way out? Absolutely not, in light of the fact that the case had several significant factors – and as always, the devil is in the details. First, Massachusetts has a very strong statute regarding marital property interests. Second, the trust had a specific termination date wherein the son was going to get the rest, residue and remainder of his share at a specific date. Third, payments from the trust were made regularly and consistently and stopped on the “eve” of the divorce. And fourth, the trustee had ascertainable distribution standards of health, education, maintenance and support. Finally, it had the ideal plaintiff: the wife who shared two special-needs children with the defendant. Put all of that together and judges will find a way to pierce the trust. So what is one to do?

While this case was shocking to many, decisions like this are not a surprise in the Lawyers with Purpose community, which is why we have been recommending certain strategies to safeguard against even the pickiest judges and fact patterns. For example, when traditionally drafting a trust and leaving it to beneficiaries in asset protection trusts, we believe the strongest protection comes from having separate share trusts for each beneficiary, with provisions specific to the needs of the individual beneficiary. Second – and this is the most important part – we believe there should not be ascertainable standards, but rather pure discretionary rights to the trustee. Finally, whenever possible the beneficiary should not be an individual, but rather a class of people. For example, in this case, instead of naming just the son as beneficiary, we would recommend naming the son and his issue as beneficiaries, thereby opening up the class of beneficiaries and enhancing the asset protection. One may be fearful of naming the issue. Well, therein lies the trick. Who is named beneficiary is not ultimately the determining factor of who benefits, but rather who the trustee determines who benefits. Create a class of people the trustee can sprinkle income and/or principal among as they deem appropriate in their absolute discretion (not ascertainable standards).

In the Massachusetts case, this could have solved the problem. How? During the marriage, it is likely most of the regular payments provided to the son were actually used in the marriage for the children or items that the husband and wife benefited from jointly. By opening up the class of people, the trustee could have made distributions directly to the children to provide support for the children that the husband was using the money for anyway. By doing this, it surely indicates the assets were not assets of the husband's, but were truly a third-party trust that, at the discretion of the trustee, was distributed to various members in the class, thereby not making it a marital asset. The defendant could have continued to use proceeds from the trust for the benefit of his special-needs children even after the divorce; in fact, most fathers would not penalize their children for divorcing from their spouse. But the key distinction would be that the husband would have remained in control of the assets rather than having to surrender them to a former spouse, wherein there would be no control.

The challenge today is that too many lawyers are on autopilot when they're drafting trusts – or worse, their trust drafting software system doesn’t allow the customizations and protections that the Lawyers with Purpose client-centered software does. Our client-centered software advises the attorneys and allows them to custom tailor each and every option. In addition, LWP™ attorneys are trained to think like the worst court you can imagine and identify how to create provisions that are not specifically targeted at a particular goal but rather strategically drafted to accommodate multiple objectives.

Click here now to see how our trust drafting software will keep your client's needs always in the front of your planning.

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

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Why You Might Be A Trust Mill

February 1, 2016

by David Zumpano with No Comment Asset Protection David J. Zumpano Estate Planning Drafting Software

Having practiced in the estate planning field for almost 23 years, I'm amazed when I review many trust plans done by lawyers that are still "boilerplate," with nothing distinguishing them other than the names of the client and beneficiaries. Interestingly, even when reviewing trusts created by software systems from well-known organizations in the estate planning industry, I am perplexed about the over-complexity, but also the under-simplicity, of how they work. Most trust systems in the estate planning industry have many options to designate different legal technical phrases and provisions to enter into the trust document. Unfortunately, once an attorney chooses the "standard provisions," nothing else changes in the document but the client names. So while they believe they have a very comprehensive estate planning trust system, they really have a glorified trust mill system (a better mouse trap?).

The Lawyers with Purpose client centered document creation system is unparalleled in the industry. It is the only software in the industry that was reverse-engineered. Rather than identifying the specific legal provisions required, it instead identifies the particular needs and goals of the client. Once those goals and needs are determined, the software then allows you to custom tailor every single core element of the trust to accomplish those client objectives. As you complete the client needs and their particular customizations, the software automatically inserts the necessary legal provisions and clauses to accomplish the client goals. No two LWP drafted trusts are ever the same. There are over 5,000 combinations of choices, and that's not even including the customization element in each of the decision levels.

While it sounds scary, the systemization of it makes it quite easy. In fact, it is the only document creation system in the industry that is integrated into a complete estate planning practice module. What does that mean? The marketing, legal technical training, workshop presentation, and client design are all integrated to facilitate and work with each other. Each one supports the other. For example, the initial client educational workshop helps identify the various issues that can be addressed in planning – which flows into the vision meeting, where, based on a series of questions – the client is able to self-select one of five different plans that will accomplish the specific goals the client identified. Next, the design meeting is tailored to focus on the specific plan (legal documents) chosen by the client. Then, the most exciting part: the attorney can customize every single aspect of the general plan to meet the client’s individual needs.

The cherry atop all of this is that the attorney designs the custom plan using specific design templates that permit others in the office to actually draft the trust (the software follows the template, including all customizations). Don't be a trust mill – learn how to put the client first. Client-centered document creation software is the first key. Click here to discover how the Lawyers with Purpose Client Centered Software can transform a mere practice, and discover the impact you can have on your client. Reserve a day and time that works for you now.

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Estate Planning & Tax Basis Basics

January 27, 2016

by David Zumpano with No Comment Asset Protection David J. Zumpano Estate Planning Drafting Software

When doing estate planning, it is critical that the attorney is aware of the basic tax basis issues and their impact on estate planning.

Tax “basis” is a term related to income taxes. The “tax basis” of an asset owned by an individual can change based upon the type of asset, when it was purchased, and the value at sale or death of the owner. So let's start with the basics. Most principal assets are purchased. This includes stocks, bonds, mutual funds, real estate, and even businesses, among other things. When you purchase a principal asset, the IRS looks at the value of that asset when purchased to determine what, if any, income tax should be paid when and if it is later sold. For example, if you buy a stock at $10 per share and hold it for a period of years and then sell it when it is worth $15 a share, the IRS will identify your tax basis as $10 and your sale value at $15 to net an income taxable amount of $5 per share (aka “capital gains”). Over the years, the government has taxed capital gains differently from ordinary income.

There are additional issues to consider with basis. For example, it can change if you own real estate, and if it is used as a business (rented out to others), you can “depreciate” the real property. Depreciation is a non-cash-flow expense against your income. For example if you buy a commercial building for $250,000 and rent it out, in addition to the regular expenses incurred each year from your cash flow, including interest, taxes, insurance, utilities, and general maintenance, the IRS also allows you to take a depreciation expense that represents a percentage of the value of the real estate. Traditionally, depreciation periods are over 27½ or 39½ years. So a $250,000 building divided by 39½ years provides for the annual depreciation amount of $6,329. While the IRS allows you this deduction, you do not have to pay anybody anything to get the deduction. In contrast, however, the $6,239 depreciation deduction reduces your basis in the real estate. So, for income tax purposes, your building no longer has a basis of $250,000, but now $243,761. As you continue to own the building and take the depreciation expense, your tax basis in the real estate continues to decrease, thereby leading to a greater potential income tax when the property is later sold. If the property had been depreciated for 10 years, the basis would have been reduced by $63,390, netting a new tax basis of $186,710. If later sold for $350,000, a capital gain will be assessed on the difference between the sales price and no adjusted basis ($163,290), not the original purchased price and sales price ($100,000).

Finally, it is important to note as an estate planner that tax basis gets automatically “stepped up” if you own the asset at death. Under the previous scenario, if you bought a stock for $10 that grew to $15 or you owned a piece of property that you paid $250,000 for and depreciated $63,000, when you die, both are revalued at your date of death and the values are included in your taxable estate for estate tax purposes. The good news is their estate tax does not trigger any actual payment requirement unless the estate exceeds $5,430,000. Conversely, while it does not incur an estate tax, the beneficiaries get a “step up” in basis after the death of the original owner to the value at date of death, so any subsequent sale after death will yield no income taxes. When planning, sometimes holding assets until after death has a strategic advantage if they are significantly appreciated.

This is also true in charitable planning. If assets that have been appreciated are donated to charity prior to death, the donor will receive an income tax charitable deduction equal to the fair market value, not the tax basis, but there are limitations on the charitable deduction if the contribution was made from appreciated assets. A charitable contribution made with a full basis asset (i.e. cash) can be deducted up to 50 percent of the donor’s adjusted gross income, whereas the deduction for a charitable donation of appreciated property is limited to 30 percent of adjusted gross income. The biggest advantage, however, comes from individuals waiting until after death to convey their highly appreciated assets, so no capital gains tax is incurred to the client (because they didn’t sell it during life) nor the beneficiary (because they received a “step up” in basis). Understanding tax basics is critical to ensure that you always consider the income tax impacts when signing in the short and long term for a client.

If you are interested in learning more about Lawyers With Purpose and in particular how our Client Centered Estate Planning Drafting Software can make a difference in your estate and/or elder law practice, just click here and schedule a day/time that works for you to discover it for yourself – first hand. Just show up with any questions you have! We've got the answers!

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Will You Be In The Conference Room or The Courtroom Resolving The Estate?

January 19, 2016

by David Zumpano with No Comment Asset Protection David J. Zumpano Estate Planning Drafting Software

Many clients understand the benefits of trusts because of the past 25 years of the marketing of revocable living trusts. Clients, however, don't always understand what makes trusts work. Still today, many lawyers draft simple trusts that are little more than a "fill in the blank" form in an attempt to "avoid probate." Even if attorneys are able to deliver higher-quality trusts, many still fail to fund them. This leads to the greatest challenge of all. After death, will the client's family be in a courtroom trying to resolve the estate or will it happen in your conference room? The worst part is, most attorneys don’t think they have a "fill in the blank" trust, because they have a document creation system from XYZ Estate Planning organization. Surely they know what they are doing!

The key to the answer will depend upon the terms of the trust created, and the integration of the financial assets into the plan to ensure probate is avoided and the full benefits of the trust are accomplished. Unfortunately, most advanced trust systems are nothing more than a higher-level "fill in the blank" trust and usually create around the attorney’s needs, not the client's. That inevitably leads to other challenges.

The next question in trust planning centers around the after-death provisions in a living trust. A lot of control and latitude can be provided to the family members of a decedent if the trust was properly drafted and funded. The specific powers you grant to the after-death trustees, in addition to the specific manner in which the assets can be distributed, can also have a significant impact. For example, a majority of practitioners still continue to deliver the trust assets to the beneficiaries outright after the death of the grantor. While this is simple, it requires a whole other estate planning endeavor for the beneficiary that didn’t have to happen. While that puts more money in the beneficiaries’ pocket, I am not sure it is the best way to meet the client’s overall goal.

Another strategy to consider while drafting revocable living trusts is to transfer the assets to a separate share asset protection trust for each of the beneficiaries. This assures that the client's ultimate goals of protecting their assets for their loved ones – and perhaps from their loved ones – can be achieved. Obviously this can’t be achieved in the "fill in the blank" trusts many lawyers use, and not easily in the lawyer-centered document systems.

Don't go it alone. Let Lawyers with Purpose help you sort this out in a systemized and organized fashion that includes the legal technical training, comprehensive customization of trusts and particular drafting available to accomplish the myriad needs of the clients’ overall planning strategy – and helps them sleep at night. Don't go it alone. Join us for the legal technical, practice management, and marketing strategies to be a comprehensive solution to your client.

If you're at all interested in joining Lawyers With Purpose and making 2016 your best year yet – we'd like to invite you to a webinar THIS FRIDAY, January 22nd at 2 EST. Register now for "How You Can Have the Business, the Income and the Life that You Once Dreamed About When You First Started Your Practice" and see how we can help you make it happen once and for all!

David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

What David Bowie Taught Us About Personal Care Plans

January 11, 2016

by David Zumpano with 2 Comments Asset Protection Estate Planning Drafting Software

I was in 5^th grade when I got my first ghetto blaster. It was pink and came from Santa wrapped up with a David Bowie cassette tape. I played “Dancing in the Street” on that ghetto blaster, danced around my room and stared at my David Bowie poster what seemed like a million times. He was an icon. His music masterfully took over MTV during the time period when MTV played music videos. He was able to paint the exact picture he desired his audiences to see. A talent he held even in death. David Bowie fought cancer for 18 months privately and died in his home, peacefully, surrounded by family. With the help of his wife, Iman, and children David died exactly as he lived … on his own terms.

As soon as I read of the way that he passed, I instantly knew that David had a personal care plan. He decided exactly who he wanted around him at death. It has been reported that when he got too sick to go to his favorite pub for his favorite sandwiches, assistants would go pick them up for him. When facing a chronic disease, there is so little we can control, but isn’t it nice to know that we can plan to be as comfortable as possible, surrounded by the things and people we love and sheltered from those we do not want around.

Personal care plans are an amazing, yet largely overlooked, estate planning tool. While having our finances in order is critical, knowing we will pass with the comforts and dignity we deserve can offer more assurance than any other portion of a well-made plan. Early in my career, I largely disregarded the personal care plan as an ancillary document not necessary. But, as I watched client after client pass in various ways under various circumstances, I saw over and over not only the comfort it brought to the ill party, but the guidance and assurance it brought to family members that they were honoring their loved one as he would have wanted.

A well written personal care plan allows a client the ability to guide who visits during end stages of life. It guides the determination of when and in what condition the person wishes to be taken out in public. It allows a person to select what food, drinks, television shows, books and entertainment he wants available when he can no longer articulate such things. It lists religious preferences and whether or not one wishes to attend church services.

Personal care plans also offer the ability to appoint one’s own disability panel. This disability panel is a group of individuals in someone’s life who will decide when a person is incompetent for purposes of any trust in which his estate is held. What a power! Now this person has kept his life from going on display as a Judge who knows little about him determines his competence. Instead the decision is made by a hand selected group of loved, trusted people in a private manner.

On his 50^th birthday, David Bowie stood in Madison Square Garden and said, “I don’t know where I’m going from here, but I promise it won’t be boring.” And, it wasn’t. He left us on top of the charts and under his own terms. As LWP attorneys, how great is it that we make sure our clients pass with the same dignity? And we have everything we need to do it right at our fingertips within the drafting software…

If you aren't a Lawyers With Purpose member consider joining our FREE webinar "How You Can Have the Business, the Income and the Life that You Once Dreamed About When You First Started Your Practice" on Friday, January 22nd at 2:00 EST. In just one hour we'll share with you lots of effective techniques – and you don’t want to miss any of them:

Streamline your practice, increase revenue, avoid malpractice – all while working fewer hours and enjoying more time to spend with your family and serving your community.
Create targeted marketing and sales efforts so your practice grows reliably, predictably, and CONSISTENTLY!
Build lasting relationships with referral sources and strategic partners – ensuring your clients stay loyal AND work on your behalf referring their friends over and over again!

All Designed With YOUR Practice And YOUR Success In Mind

Kimberly Brannon, Legal-Technical & Software, Lawyers With Purpose

Revoking An Irrevocable Trust

January 6, 2016

by David Zumpano with No Comment Asset Protection David J. Zumpano Estate Planning Drafting Software

Did you ever wonder if you can revoke an irrevocable trust? The bigger question is, why would you want to? Didn't the grantor set it up to ensure it's not revoked? All good questions, but you never know.

Many clients' biggest concern with creating irrevocable trusts is, “what if something happens” they never expected. As estate planning attorneys, we are able to calm client fears by expressing that an IPug® trust can permit them, as grantor, to retain rights to the income and continue for their life to continue all their assets and retain the complete authority to distribute the principal to anyone they choose at any time, other than themselves or their spouses (if Medicaid eligibility is a goal). Inevitably, there's always one client who worries they might need it.

A typical response is, they can distribute it to their kids and the kids can give it back. While this is true, it is not a foolproof planning strategy, as we cannot be assured that the children will actually give it to them in the manner the grantor so desired. More commonly, the need to revoke an irrevocable trust occurs if the client falls ill and needs long-term care prior to the five-year look-back period running. To “cure” the transfer to the irrevocable trust, one seeks to revoke the irrevocable trust in whole or in part, to ensure funds are given back to the grantor to pay through any penalty period caused by the transfer of assets that remain in the IPug. The question becomes, can you revoke an irrevocable trust?

The answer is, it depends on your state law. In most states, an irrevocable trust can be modified or revoked (completely or partially) if all of the parties consent. In an IPug trust, however, you do not need all of the parties to consent to modify the trust, as the grantor retains a non-generated power of appointment that allows the grantor the full rights to modify the trust beneficiaries in any way, shape or form, including the ability to modify the timing, manner and method of distribution to the beneficiaries. But one unbending restriction is that the grantor can never change the trust to give himself or herself access to the principal.

So who are considered the parties to the trust? Generally, the parties consist of the grantor, the trustee, and all of the beneficiaries. When drafting an irrevocable IPug trust, the grantor and trustee is traditionally the client. Therefore two out of the three can be accomplished with just the grantor. Further, getting consent of all of the beneficiaries traditionally includes the grantor, as they may be an income beneficiary during their life. The distinction then becomes, who else are the beneficiaries?

When considering those who are responsible to consent to a modification or revocation, one must look to the trust terms to determine if an individual is a present beneficiary, a residuary beneficiary, or a contingent beneficiary. Generally, most states require the consent of the present and residuary beneficiaries. Consent will not be required from any beneficiaries whose interest is not affected by the amendment or revocation. Some states, however, require even the consent of the contingent beneficiaries. Contingent beneficiaries are those who would receive the benefit from the trust if the present interest or residuary beneficiaries were not able to. Typically, this would be the children beneficiaries where a "per stirpes" distribution is provided for.

This can become very problematic if you need contingent beneficiaries’ consent, because most would be a minor and unable to consent. Then you would need to look to state law to see if a parent can consent on behalf of a child. In most states, since it's a property interest, parents do not automatically have the legal right to affect the property interests of their children, just guardianship over their “person.” The strategy with an IPug is to utilize the retained power of appointment to remove all beneficiaries except one, and then get that one named beneficiary to consent to the modification. After the modification is accomplished, the grantor can again modify the trust and rename all of the original beneficiaries if desired. Where it can get complicated is if any of the parties are deceased. Generally speaking, if a party is deceased, then the contingent beneficiaries would be required.

The bigger challenge is if the grantor is deceased. While a strong argument can be made that consent of the beneficiaries who ultimately benefit from the trust should be enough, it is very difficult to overcome a challenge that an irrevocable trust in the absence of the grantor who created it was meant to remain unchanged. It is presumed in the creation of the trust that the intentions of the grantor will be maintained in their absence. If you want to ensure that it can be modified after a grantor’s death or incompetence, your irrevocable trust should authorize a modification with the consent of the beneficiaries in the absence of the grantor by virtue of incompetency or death. You must, however, in all circumstances ensure that no modification can be made to permit the grantor to have access to the principle. Doing so would invalidate all of the protections originally sought by the irrevocable trust.

In a handful of states, consent of the parties is not sufficient to modify an irrevocable trust and consent from the court is required. This is a much more difficult approach, if for no other reason than the time it takes to get the court's consent, and the possible consequences or loss of assets caused by the delay. The cost by utilizing courts can be counter to the client's “protection” goal. That's obviously on a state by state and court by court basis. So if you're doing this planning, know your state's rules. The good news is that it is rare, if ever, that you need to revoke an IPug trust, and if you need to, it is quite simple to do by minimizing the beneficiaries through your power of appointment.

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David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center

Irrevocable Trusts After Divorce

December 29, 2015

by David Zumpano with One Comment Asset Protection David J. Zumpano Estate Planning Drafting Software

Many clients I come across as an estate planning attorney have been married for 30 or more years. I recall once when a couple who had been married for 37 years came into my office to engage in estate planning. I encouraged them to plan for remarriage if either of them died. They both giggled and laughed and said, oh my gosh, how silly. We don't need that. We're very confident in each other that each of us will take care of our kids and not be influenced by a new relationship.

In a weird twist of fate, six months after completing their plan, the husband came back in with a blonde bombshell 20 years his junior at his side. He explained to me that, soon after executing the plan with us, his wife contracted cancer and died within three months. Now, three months after that, he had this newfound “friend,” and he was asking me to change his trust to make her a beneficiary and not his children. I reminded him of the planning he and his wife set out, and he was adamant to say, “Nope, we decided we could do whatever we wanted.” Unfortunately, his version of whatever he wanted and his wife’s were different for me than they were for him.

Needless to say, I refused to do the work; he fired me and found another lawyer to make his modifications. The LWP™ Client Centered Software has extensive remarriage planning options – but it also has provisions to address if a husband and wife that we did estate planning for decide to divorce before they die. I've had this happen on a couple of occasions.

The key question you must ask yourself in this situation is, what type of planning did the client do? If your client did traditional estate planning consisting of wills, healthcare proxies, powers of attorney or a revocable trust, then it becomes critical after a divorce to amend those plans to accommodate each spouse’s new goals separately. But, what if your married clients did an irrevocable asset protection trust as part of their planning?

In the Lawyers with Purpose Client Centered Software (LWP-CCS) system, the traditional trust we would use to protect against creditors, predators and to ensure the client is eligible for Medicaid and other needs-based benefits is an IPug®, which is an Irrevocable Pure Grantor Trust®. If you think about it, an IPug trust or other asset protection trust is set up to protect against creditors and predators and to ensure that the client is eligible for state-funded long-term care benefits should the need arise. But what about protecting from each other? A properly drawn IPug protection trust provides the terms for a divorce. The trust clearly identifies the beneficiaries of the irrevocable trust during the couple’s life and after their death. Interestingly, the LWP-CCS has a customized divorce provision in the trust that ensures that, if the grantors divorce, the trust bifurcates and all of the terms and provisions related to each spouse apply to them in the separate trusts. Further, the provision eliminates all references to spouse, and thereby creates the trust for the other beneficiaries as if the spouse were deceased. So, the question becomes, what does it mean when the trust bifurcates and thereafter is managed in accordance with all of the other trust term provisions? That's where the drafting of your IPug trust becomes critical.

In the LWP-CCS trust system, you are able to customize the contributions of each spouse and include them on separate and/or joint schedules. In addition, the question of whether you design the trust to separate a deceased spouse's assets for the benefit of the surviving spouse will be critical in determining what happens in the case of a divorce. By separating assets into two schedules, bifurcated trusts are created. Each spouse then manages his or her funds through the bifurcated trust. This ensures that, when a spouse passes a way, all assets of the individual deceased spouse will be allocated to the separate bifurcated trust, thereby sheltering said assets from the living spouses subsequent remarriage and divorce. The trust further includes protective provisions regarding divorce for the trust beneficiaries through the disability panel, specific bequests and other customizations.

So, as estate “planning” attorneys, we must not only be concerned about protecting the assets from our client's remarriage after the loss of their spouse, we can also ensure that proper divorce planning is accomplished at the same time. Hey, like Prego spaghetti sauce, it's in there. The LWP-CCS has you covered. Hopefully they'll never have to use it, but for those few times it happens, it's nice to know there'll be one less thing to worry about.

In the LWP-CCS trust system, you are able to customize the contributions of each spouse and include them on separate and/or joint schedules. In addition, the question of whether you design the trust to separate a deceased spouse's assets for the benefit of the surviving spouse will be critical in determining what happens in the case of a divorce. By separating assets into two schedules, bifurcated trusts are created. Each spouse then manages his or her funds through the bifurcated trust. This ensures that, when a spouse passes away, all assets of the individual deceased spouse will be allocated to the separate bifurcated trust, thereby sheltering said assets from the living spouses subsequent remarriage and divorce. the trust further includes protective provisions regarding divorce for the trust beneficiaries through the disability panel, specific bequests and other customizations.

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David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center