BLOODLINE TRUSTS TO KEEP ASSETS IN YOUR BLOODLINE

When Sharon was planning for how her assets would pass to her four children, she envisioned an easy transition. She had read all the articles on avoiding probate, setting up trusts, and organizing her affairs. She had even spoken to her children about her wishes (a very difficult thing to do). All of her children had wonderful relationships with each other and the assets were to be divided equally. After Sharon died, the transition was easy; each of her children received an equal share of assets and everyone was happy. Unfortunately, shortly thereafter the real trouble began.

Her number 1 son was a doctor. He had a good practice and he thought his patients were happy. One was not, and sued him above his malpractice insurance levels, and WON! Suddenly all of this son's assets, including Sharon's legacy, were gone.

Daughter number 2 was married with 3 children of her own. She thought she would follow her mother's estate plan when she died, since things had progressed so smoothly. Suddenly her husband filed for divorce, and demanded half of all assets, including Sharon's. After a terrible legal battle (which cost thousands in legal fees), most of Sharon's money was gone.

Daughter number 3 was ill most of her life, but had a terrific husband who cared for her, along with a faithful nurse and two children. When she died, she left everything to her loving husband, who promptly married the nurse. He added her name to all the assets. When he later died, everything was left to the nurse. Daughter number 3's children got nothing.

Son number 4 was single, and had never had much money. After receiving Sharon's inheritance, he felt rich and proceeded to buy all the thing in life he had never been able to afford. Before too long, all the money was spent and he was no better off.

What happened? This was not what Sharon had planned so carefully for. She missed one critical step: protecting her money even after she was gone. But how? With a BLOODLINE TRUST! This starts out like a simple Living Trust while Sharon is alive. She has full access to and control of the funds. Upon her death, the assets avoid probate, but instead of distributing outright to her four children, the assets are divided into four separate trust shares to be held for each of her children for life. Each child can have access to his or her share for everyday living expenses, but does not receive the lump sum in one chunk. The share held in trust is protected from the lawsuits, divorce, death or crazy spending of the children. Yet the money is there if needed. Plus, when each child dies, his or her remaining share is left to his or her children, Sharon's grandchildren, whom she adored and wanted to benefit if she could.

This simple, but often overlooked, planning tool would have been the answer to Sharon's prayers, and could be perfect for you too. See an attorney who focuses on Estate Planning and Probate Avoidance to establish a Bloodline Trust.

CAREGIVING AGREEMENTS

Congress is continually making it more difficult to protect your home and life savings from expensive nursing home care. It’s difficult, but it’s NOT impossible! Here is a useful technique to protect your assets from Medicaid, called Care Agreements.

First, some background. Lots of times children and other family members provide care to help mom or dad stay at home. Maybe it’s driving mom to the doctor, or picking up groceries. Perhaps it’s more extensive, like putting out the medications every morning, or helping dad dress and bathe. And sometimes it may mean living with mom or dad because they can’t be left alone. This work can be hard, physically and emotionally. Yet, most times kids provide this help without expecting to get paid.

But here’s the planning tool. Plan ahead for nursing home care by paying a child or other family member for services provided. Here’s an example. Say dad has $100,000. His daughter has provided all kinds of care for years, for free, just because she’s a good daughter. When dad has to go to the nursing home, he can’t just give away his money to his daughter—that will be penalized. His entire $100,000 will go to the nursing home before he gets Medicaid. But if dad has planned ahead and pays his daughter for help, he could protect some or all of his savings. Let’s say he pays his daughter $4,000 a month for her hard work. In two years, his entire $100,000 would have gone to his daughter, not the nursing home. If he then goes to a nursing home, Medicaid will pay.

One of the tricky issues is setting the appropriate payment amount. It must be a fair amount for the services provided. You can’t pay a child $10,000 for one trip to the doctor. But you could call a professional caregiving service and get a written estimate for the care your parent needs, then use that to set your fee. Also, services must actually be needed by the parent.

The agreement needs to be formalized by a written contract drafted by a lawyer. Otherwise, Medicaid may say these are gifts, not payments for services. And gifts are penalized. Additionally, Medicaid won’t let you pay afterwards for services provided without a written contract. You can go forwards, but not backwards.

Most people are willing to pay their fair share for long term care. But you shouldn’t have to lose everything you’ve worked so hard for. A caregiving agreement is one of the many legal strategies that allow you to protect at least some of your life savings.

DO YOU KNOW WHETHER YOU NEED ESTATE PLANNING OR MEDICAID PLANNING?

Most people don't. I meet with clients all the time who come in thinking that they need to protect assets from the nursing home and find out they really need new Wills, Trusts and Powers of Attorney. Or, the other way around!

Estate planning is the process of providing for yourself and your family in the event of your retirement, disability or death. Through a properly-crafted estate plan, you put your legal and financial affairs in order so that the assets you have accumulated during your lifetime will be preserved and transferred to your heirs with the least amount of financial and emotional cost. The most common estate planning tools available include a Will, a Trust, a Durable Power of Attorney, a Health Care Power of Attorney and a Living Will Declaration.

This encompasses sitting down with your family to plan out some of the most important issues you face. For example, who will handle your affairs when you are incompetent or dead, how do you want to pass your assets to the next generation and what kinds of medical treatment you want OR DON'T WANT at end of life.

You also have to plan to avoid probate, minimize federal and Ohio estate taxes and not leave a mess for your family. Your plan will vary depending upon your family situation, assets and goals and plans for the future. The more your net worth, the more complicated and more important the planning becomes.

Medicaid planning includes many of the same things as you need for Estate planning. However, the main focus is on how to protect and preserve your assets in the event that you need long-term medical care. It can dove-tail with Estate Planning or it can be mutually exclusive.

Often Medicaid planning means trying to qualify for Medicaid benefits, the only government program that will pay for long-term care at home, in assisted living and especially in the nursing home. However, it is a welfare program. You cannot have much in the way of assets or income to qualify.

With nursing home costs running up to $100,000 per year, people need to plan early to legally preserve as many assets as possible. This may include spending your money on certain protected assets or even giving them away. The planning is not easy, and must follow the letter of the law in order to not run afoul of the many regulations that exist. The longer you wait, the fewer options that exist.

You also need to plan to avoid the state's rights to recover any remaining assets from your or your spouse's estate if you die after having received Medicaid benefits. Again, there is not an easy or clear-cut solution.

So, how do you know which kind of planning you need? And, how do you know what specific planning tools you need among the hundreds of tools available? You must to investigate all the possibilities. Please be sure to see a qualified Elder Law Attorney for assistance. He or she will assist you in focusing your Estate or Medicaid plan on your own personal needs and wants. One size definitely does not fit all with these issues!

Ohio's Trust Code Can Cause you Problems!

     Do you have a Trust Agreement? Many people do for lots of different reasons: probate avoidance, estate and income tax savings and to keep assets in the family bloodline. Trust Agreements have also provided privacy from nosy friends, relatives, or even a nosy Trust beneficiary! However, the Ohio Trust Code, effective January 1, 2007, created a variety of new rights and responsibilities for trustees and beneficiaries that may interfere with that privacy. Be careful-it applies to both new trusts and to trusts created years ago.

     For example, lots of people have a trust that provides for the surviving spouse after one spouse dies. While the surviving spouse is alive, he or she can decide how to invest the funds and can take money as needed from the trust while keeping his or her Trust business private. But the Trust Code creates a new obligation for the surviving spouse. In most cases, he or she will have to provide financial accountings to the other beneficiaries (usually your kids). In other words, you'll have to tell your children how you are investing and how you are spending the trust funds. This disclosure may not cause a problem. However, it could cause a horrible family relationship with your kids. You have to tell them everything you're doing with your money! What if they think you are making investment mistakes or that you are spending too much of "their inheritance?" Giving them financial information about everything you do in the Trust is an open invitation for the kids to be nosy.

     Another problem is that some parents don't treat their children exactly the same at death. To avoid issues, the parents keep this fact a secret within the Trust Agreement. Now, under the Trust Code, the kids are given new legal rights to be able to find out how the others are being handled. This can cause a major family rift between siblings. You hope they will get along after you are gone; not have jealousies or hurt feelings among themselves.

     Trusts rarely have language giving children these kinds of rights to information. But the Ohio Trust Code can impose these rules on trusts even when the trust document itself does not. Plus, not only do the children have these rights, the Trustee has to INFORM THEM of these rights.

     If you don't want your kids to have a legal right to stick their noses into your Trust business and you especially do not want to be required to notify them of these rights, you need to take ACTION! Any new Trust Agreement must waive these rights in its terms. If you have an old Trust Agreement, it will be subject to the law unless you amend the terms of the Trust to include a waiver. The waiver must be in writing and be a part of the Trust Agreement. Don't risk mistakes by trying to make the changes yourself. See an Estate Planning Professional who can explain the new law and assist you with the appropriate steps.

New Rules for Roth IRAs for 2010

1. CAN I CHANGE MY TRADITIONAL IRA TO A ROTH IRA?
Yes. Normally when you convert a traditional IRA to a Roth IRA, all of the converted amount is included in income in the year of conversion. However, If you convert in 2010, one half of income is included in income in 2011 and one half is included in income in 2012. The election to make the deferral of income into 2011 and 2012 must be completed by the date of filing of your 2010 Tax Return. With extensions that could be October 15, 2011.

2. WHY WOULD I EVER CONVERT MY TRADITIONAL IRA TO A ROTH IRA?
A traditional IRA grows tax deferred while a Roth IRA grows income tax free. The decision to convert a traditional IRA to a Roth IRA is complicated.
Advantages of Conversion to Roth
• Tax free growth
• No minimum distribution for owner
• Reduces Federal and Ohio Estate Tax
Disadvantages of Conversion to Roth
• Payment of income taxes on IRA early distributions
• Inclusion of income will increase tax bracket potentially
• Will impact taxability of Social Security in the year of distribution
• May increase the cost of your Medicare premium since your income goes up.

3. WHO SHOULD CONSIDER CONVERTING TO A ROTH IRA?
There is no simple rule. The ideal person to convert from traditional IRA to Roth IRA fits the following description:
a. No need to access the money in the IRA.
b. Beneficiary of Roth IRA will be in an income tax bracket at least equal to or greater than the owner. (Even if the tax rate is lower, it still may make sense depending on factors such as time period for accumulation, the rate of removal of assets from the Roth IRA and the source of the funds used to pay taxes on conversion ).
c. Income tax liability is paid with assets other than the IRA.

4. WHO IS ELIGIBLE TO CONVERT?
In 2010 anyone can convert their traditional IRA to a Roth IRA. In 2011, the rule goes back to conversions only if your adjusted gross income with some modifications is $100,000 or less.

5. IF I DECIDE TO CONVERT TO A ROTH SHOULD I CONVERT NOW OR NEAR THE END OF THE YEAR?
• Convert as early as you can in 2010.
• If the market goes up, all of the growth is now in a tax-free account
• If the market goes down, you can change your mind and convert back to the Traditional IRA. If you convert a Traditional IRA to a Roth IRA in 2010, the taxpayer has until he files his 2010 tax return to switch back to a Traditional IRA. With extensions that decision can be made as late as October of 2011 to reconvert back to a Traditional IRA.
• If you convert to a Traditional IRA from a Roth, you must wait the longer of the tax year after you converted to a Roth or 30 days before you can convert again. For example, if you convert to a Roth IRA in the beginning of 2010 and then change your mind on in July of 2010 and convert back to a Traditional IRA, you must wait until January 1, 2011 to elect again to convert to a Roth. If you wait and change your mind on December 31, 2010 then you must wait 30 days, January 31, 2011.

6. IF I DECIDE TO CHANGE MY ROTH BACK TO AN IRA CAN I CHOOSE THE INVESTMENTS I WANT TO RECONVERT BACK TO A TRADITIONAL IRA?
No. You must reconvert the entire Roth IRA back into a traditional IRA. Consequently, you cannot pick and choose which investments to reconvert. For example, you cannot reconvert just the assets that dropped in value. To avoid this problem, set up several Roth IRA accounts when converting with different investments in each Roth. That way you can convert the Roth IRA that dropped in value back into a Traditional IRA while not converting the Roth IRA that increased in value.

7. CAN I CONVERT AN INHERITED TRADITIONAL IRA TO A ROTH IRA?
Yes. The IRS allows a beneficiary of an inherited IRA to convert to a Roth IRA if he satisfies the requirements.

8. WHO SHOULD BE A BENEFICIARY OF A TRADITIONAL OR ROTH IRA?
That answer depends on both your financial situation and who you want to be a beneficiary. The beneficiary could be a spouse, child , grandchild or a specialized Trust for the benefit of a beneficiary or even a charity. A Traditional or Roth IRA does not have to liquidate on the IRA owner’s death if the beneficiary designation is done properly. You should sit down with your lawyer to discuss the options.

9. ISN’T IT TRUE THAT I WILL OWE 70-80% OF MY IRA IN TAXES ON MY DEATH?
No. The 70-80% tax would only happen if you are subject to both a Federal Estate and Income tax. In 2010 there is no Federal Estate tax . In 2009 the exemption was $3.5 million. Even if Congress does reinstate the Federal Estate tax, most people will not be subject to the Federal estate tax so that the IRA will only be subject to an income tax and Ohio estate tax.

Make sure you protect your special needs child!

You're taking care of your disabled child and hopefully, you?re doing okay. But what will happen when you're gone? If you plan ahead, you should be able to make sure your child is protected. Is it enough to leave an inheritance for your child? No, not if you want to protect your child after you?re gone. There are two big problems with leaving money or property to an adult child with disabilities.

First, can the child manage the inheritance? If the disability is mental or emotional, that could be a major problem. If the disability is physical, managing money could still be a problem, particularly if the child is not mobile!

Second, is the inheritance enough to provide for all of the child's needs for life? If not, leaving money outright to a disabled child may be a bad idea. Here's why: if your disabled child has money, he or she cannot obtain any public benefits, such as Medicaid, SSI or food stamps. The child will have to spend the inheritance until it's gone. Once the inheritance has been used up, then the child may receive those public benefits. But public benefits don't cover a lot of comforts of life. They are very basic. For example, they may pay for a nursing home, but not for other housing options. They may pay for basic food needs, but not for transportation, telephone, or cable.

How can we protect a disabled child? For many people, the answer is a special needs trust. With this trust, you can leave an inheritance for a child and place someone you trust in charge of managing the money. Perhaps the money should be managed by another one of your children, or by another trusted family member, or even a trusted friend. If there?s no one, you could name a professional manager, such as a bank trustee.

Any other benefits to a special needs trust? Yes. A Special Needs Trust can be used to preserve a child's eligibility for public benefits. So even though you've left an inheritance, the child can still get Medicaid, SSI and food stamps.

And since public benefits only provide very basic support, the trust funds can be used to supplement the public benefits, providing more of the comforts of life. It's a wonderful way to protect a disabled child.

Is a special needs trust just the same as a regular living trust? No. A regular trust will not protect a disabled child adequately. A Special Needs Trust is a very specialized trust that must satisfy a number of legal requirements for it to work. Where do we get a special needs trust? A Special Needs Trust is only part of the planning that may be needed to protect a child with a disability. To get help, you should seek the services of a lawyer experienced in dealing with the needs of people with special needs.

Make sure you have prepared for the day you'll no longer be able to care for your disabled child.