Proper Remarriage Protection Planning

May 10, 2016

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

Many lawyers proclaim to have remarriage protection in their estate planning documents, but few are worthy of this claim. For most lawyers, having remarriage protection means removing a spouse’s right to benefit from a trust in the event the spouse remarries. Although this is a good start, it is wholly insufficient in determining the expansive abilities that one can have regarding remarriage protections.

So let’s look at the key points. Typically, clients use trusts to benefit their spouse. Outright conveyances to spouses are common, but they do not provide any asset protection or remarriage protection. To ensure that assets are protected in a remarriage, one must plan appropriately in four core areas.

Beneficial interest of the spouse
The definition of “remarriage”
Powers of appointment to the spouse
Removal powers to the spouse

When designating trusts for clients of long-term marriages, most want to ensure that the intentions of the couple are carried out after the death of the first spouse, and are not adversely influenced. Although this is a common goal, it could be derailed when a new relationship enters the picture after the death of the first spouse. The goals and intentions of the surviving spouse are often altered significantly due to the fear of having lost their spouse and/or the introduction of a new relationship that can influence them. To ensure that the deceased spouse’s intentions are carried out, the Lawyers with Purpose Client-Centered Software (LWP-CCS) ensures remarriage protection at all three levels. Let’s examine each and how they apply to remarriage protection.

First is the spouse’s right to a beneficial interest. The surviving spouse often has a right to principle and/or income from the deceased spouse’s trust. That interest can come in the form of a family-type trust that benefits the spouse’s kids/non-family, or a common trust with other beneficiaries. So often, we see lawyers name just the spouse as the beneficiary of the family trust. Although this protects the spouse, it also unduly restricts them. A spouse who wants to benefit a child and use assets from the deceased spouse’s trust often has to take the distribution and then give it to the child. Instead, it is more practical to include the children and other descendants as benefits of the principal and income to a surviving spouse. This allows the surviving spouse, as trustee, to distribute or “sprinkle” the income or principal as they determine to accomplish the goals of the family. In contrast, if the surviving spouse gets unduly influenced by a new relationship, then one must be able to restrict that spouse’s right to income and principal under the deceased spouse’s trust. Remember, the surviving spouse has assets that are still available as provided by the original planning.

Another critical issue in remarriage planning is the definition of remarriage. Most trusts define remarriage as however remarriage is legal in the jurisdiction. This is another mistake. In today’s day and age, no one gets married anymore, but not getting married does not mean that a new “significant other” does not have significant influence over the surviving spouse. That’s why Lawyers with Purpose’s Client-Centered Software includes default remarriage language that identifies remarriage as any marriage legal in the jurisdiction or any relationship that results in cohabitation for one night. The software also allows attorneys to custom-tailor the definition of remarriage any way they choose. What’s critically important is what remarriage protections are triggered when the remarriage definition is met, first, upon remarriage under the definition, the ability to access principal or income can be restricted in the LWP-CCS software.

In addition, a deceased spouse’s trust can allow a spouse certain powers of appointment to ensure that the couple’s goals are continued after the death of the first spouse. When there is an outside influence or a remarriage (as defined by you), then you may also begin to restrict the surviving spouse’s power of appointment to ensure that the children are not penalized for failing to agree with the surviving spouse, and the power to make distributions that would go against the deceased spouse’s intentions.

Perhaps the most significant power that can be removed in the LWP-CCS remarriage protection software is the ability to remove a surviving spouse’s removal powers. Removal powers include the surviving spouse’s ability to remove a trustee and/or trust protector of the deceased spouse’s trust. Allowing removal powers after the influence of a new third party can adversely affect children or other beneficiaries who are acting as co-trustees, or trust protectors who were independent and in place to ensure the preservation of the deceased grantor’s intentions. Interestingly, the Lawyers with Purpose software allows not only the appointment of all these powers to a spouse, it also allows you as the attorney to cherry pick which powers, or any combination of them, are altered upon the remarriage of a spouse as you wish to create them with the client.

Again, this is what we call trust drafting. Too many times we have lawyers get comfortable and lazy with the simple provisions most would call “remarriage protection.” That’s why at Lawyers with Purpose our software supports your ability to be purposeful to your client’s plan.

If you want to learn more about what it means to be a Lawyers With Purpose member, consider joining us for THE estate and elder law event not to be missed this June in San Diego. You can see the full agenda here: http://retreat.lawyerswithpurpose.com/agenda/. If you aren't a member contact Molly Hall at mhall@lawyerswithpurpose.com to find out more information about how you can reserve your spot today. Early bird pricing ends Friday, May 13th so register today!

Registration link: www.retreat.lawyerswithpurpose.com

Dave Zumpano, Co-founder – 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.

Don't miss THE estate and elder law event that is not to be missed this February 24th – 26th in Orlando, FL. We only have 15 seats left and on-time registration ends tomorrow – Friday, January 8th at midnight! Register now and let us show you how Lawyers With Purpose can make a difference for you and your team both personally and professionally. Registration Link: http://retreat.lawyerswithpurpose.com/

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

Lawyers With Purpose Unites With Life Care Funding

September 10, 2015

by Lawyers With Purpose with No Comment Asset Protection VA

Do you ever feel like you don’t know how to help a client? That the traditional planning strategies just won’t work in the situation presented? Here is a common scenario:

Jane, a widow who lives in an assisted living facility, has two adult children who are independent with no disabilities. When Jane’s husband, David, died two years ago, Jane gave each of her children $100,000 without consulting a lawyer. At that time, Jane was living at home and doing well. About six months after David died, Jane began experiencing a series of mini-strokes. The cost of her care is depleting her resources rapidly. The children really want to avoid putting her in a nursing home but are concerned she will need one soon. During your meeting, you naturally raise the possibility of a transfer of assets penalty due to the prior transfers.

If you are like many elder care attorneys, you will likely try to find ways for the remaining funds to stretch out during the penalty period. You may even propose that the children return the gifts if possible. It is not possible.

Is there anything you are overlooking? Maybe a dormant asset you can utilize?

There may be. Have you asked your client if she has life insurance?

Term life, universal life, and whole life insurance policies can be sold to pay for care. In Jane’s case, she has a $300,000 policy. She was considering letting it lapse because she can no longer afford the annual premiums. Instead of letting it lapse, let it work for her to pay for care during the Medicaid look-back period. Assuming a company purchases the policy for 40% of its face value, Jane would then have a fund of $120,000, or $3,333 per month for 36 months, to pay for care during the remaining five-year look-back. Jane’s income, added to these additional funds, will be sufficient to cover the cost of the assisted living facility for three years. At that time, the family can feel comfortable and confident about transitioning Jane into a nursing home and applying for Medicaid, if necessary.

Lawyers with Purpose is proud to announce that we have teamed up with Life Care Funding to assist lawyers and clients in identifying good situations to fund care!

To learn a little more about Life Care Funding for yourself, your team and your clients click here. If you have clients that could benefit from converting a life insurance policy into a long term care benefit click here for the Long Term Care Benefit Qualification Form. Or to learn more this new planning option for seniors, go to www.LifeCareFunding.com. Never hesitate to contact Life Care Funding directly at 888-670-7773 or email info@lifecarefunding.com.

Chris Orestis, CEO, will be sharing more information at the Lawyers with Purpose Tri-Annual Retreat, October 21-23, in Phoenix, Arizona. If you haven't registered yet – we are reaching capacity! Register today before pricing goes up and all seats are filled.

Victoria L. Collier, Co-Founder, Lawyers with Purpose, LLC, www.LawyersWithPurpose.com; 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, www.ElderLawGeorgia.com; Co-Founder of Veterans Advocates Group of America; Entrepreneur; Author; and nationally renowned Presenter.

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When to Use the KIT™Trust

September 9, 2015

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

Over the years, LWP has become known for its MIT, FIT and KIT trusts for asset protection and long-term care benefits planning, but few understand the KIT and its flexibility. Let's do a quick review…

A MIT Trust, or “My Income Trust,” is an income-only irrevocable IPUG asset-protection trust that allows the client to maintain control of assets, benefit from them to the extent they're willing to put them at risk, and modify or change the trust in all regards at any time other than in regards to the protection of which they seek.

The FIT Trust, or “Family Irrevocable Trust,” is an irrevocable IPUG asset-protection trust that allows the client to be in control of the assets, manage them and identify who gets distributions from it and when, but the client does not retain any rights to the income or principal.

Finally, the KIT Trust, or “Kids Irrevocable Trust,” is created by the children of the benefit of the MIT or FIT client where assets have already been conveyed to the children prior to being educated as to the benefits that the MIT or FIT could provide for the client's assets. The typical use of the most difficult form of KIT Trust is when mom and dad transfer the family farm (or other major assets) to avoid losing them to the nursing home. The KIT Trust is a strategy to protect assets that have already been conveyed to the kids (or others) before the client got to you.

How do KIT Trusts work?

A transfer of assets by individuals to their children may protect the assets from their long-term care costs and other risks, but it puts them squarely at risk from the creditors and predators of the children to whom they were transferred. For example, if one of the children that the farm was transferred to gets divorced, sued or dies, that child's ownership interest is no longer subject to the client’s influence, but rather is subject to the child's estate plan, or worse, lack of an estate plan.

That's why the KIT Trust is a great tool to use when assets have already been conveyed to the children. A properly designed KIT Trust will be created by the children as co‑grantors, and it will be an irrevocable IPUG asset protection trust, which allows the children to be a sole trustee or co‑trustee with their parents in the management of assets transferred to the trust.

Once it is created and the assets are transferred to it (typically the assets the children received from their parents), the assets are protected from the children's creditors and predators. In fact, as a third-party trust, it is not even countable in mom and dad's Medicaid eligibility calculation if they were named beneficiary of the trust. The question is how to properly create a KIT irrevocable trust.

The key point when creating a KIT Trust is understanding that the children become the client in the context of the trust creation. The KIT Trust is a grantor trust, but to the children. Therefore, all income generated by the trust, regardless of whom it’s distributed to, will be passed to the children who created it, so ensuring a proper investment strategy that works well with the children's tax planning is essential.

Another key element with a KIT Trust is identifying the beneficiaries. Can you make mom and dad the income or principal beneficiary of the KIT Trust? Well, the answer is yes, but it's up to each attorney and their comfort level. I have successfully named parents beneficiaries of the income and principal of a KIT Trust for years without it becoming an available resource when determining their Medicaid eligibility.

The key distinction is the fact that it is a “third-party trust,” not a trust created by the parent as Medicaid applicants, but rather, by a third party, their children. Many raise the issue of it being funded with assets that were the parents', but that is not a fact at issue, as the children are not applying for Medicaid and the assets of the irrevocable trust are not subject to the look-back period related to parent eligibility.

Again, although it is permissible, some attorneys are not comfortable naming the parents principal beneficiary. In reality, it may not be necessary to name the parents as principal beneficiary, since it was evident by the giving up of the asset to the kids that they no longer needed to have access to them. A more conservative approach is to allow them access to income only, but it is in no way reckless to permit access to principal.

The final question in creating a KIT Trust is what to do when mom and dad die. Since the trust is created by the children (siblings), there can be an inherent gift upon the funding of the trust if the children transfer the asset from the parents to the KIT Trust, depending on how it’s created. Presumably, upon mom and dad’s death, the kids get back their share of the remaining assets, but a complete gift will occur during the parent’s lifetime whenever a distribution is made from the trust. In addition, even if the children receive equal shares upon the death of mom and dad, under tax law it is not presumed that the share they receive was the share they put in.

So, by creating a KIT Trust, if it is not properly designed, there could be inherent gift tax issues between the children upon the funding of the trust and upon the termination of the lifetime trust after the death of the parent. One way to alleviate this concern is to set up separate shares and ensure that all distributions to any beneficiary are made equally from each separate share, and at the termination of the lifetime trust, each child gets their separate share balance back. This should mitigate any risk of gift tax issues and offer the opportunity to convert the KIT Trust to a separate MIT Trust or FIT Trust for each of the children's separate shares upon the death of the parent. It all requires a clear knowledge of the subject and a software system to keep your practice aware of the key issues.

If you want to learn more about Lawyers With Purpose and in particular would like a free demo of our estate planning drafting software, click here now to schedule a call.

Our Tri-Annual Practice Enhancement Retreat registration is open. If you want to experience what it's like to be a Lawyers With Purpose member consider experiencing it first hand by being in the room with us October 21-23 in Phoenix, AZ. But register soon and save – the price goes up 9/19! We are half way at capacity and the first few days are completely SOLD OUT!

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

A Look at the Pros and Cons of Business Planning with iPug™ Trusts and LLCs

April 16, 2014

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

An event not to be missed! On this free webinar we will carefully distinguish the pros and cons of the use of trusts to replace high net worth planning and planning in general for successful business owners and business succession planning using iPugs instead of LLCs.

Here's a sneak peek at what we'll be covering:

Planning for Business Owners
Planning for Efficient Gifting and Federal Estate Tax Planning
Planning for reasons such as…
- Maintaining Control
- Promoting Family Unity
- Protecting Family
- Wealth from Failed Marriages
- Managing Family Assets Efficiently
- Protecting Family Wealth from Creditors

Registration for this live event is FREE … Click here now to reserve your space!

To your success,

Dave Zumpano,

Co-Founder, Lawyers with Purpose
Practicing Attorney…Just Like You!