We Want Our Children To Inherit Everything We Have. But What If The Survivor Of Us Changes That Plan?
Many married couples envision that their children will someday inherit what remains of their estate, as they know it. What many fail to consider is what could go wrong with that plan during the surviving spouse’s life.
After the first spouse died the survivor may find happiness and companionship in a future relationship, which in turn may come with financial responsibilities for a new family. A prenuptial agreement would offer some protection for the assets of the first marriage. But what if the survivor does not get a prenuptial agreement with the future spouse?
What if the survivor was to suffer from diminished mental capacity at some point? Let’s say the survivor was to lose the ability to manage that property from the first marriage, that both intended to leave to their children. Suddenly, the survivor will have to rely on others to manage and protect that property. What if they change the estate plan? What if the surviving spouse falls victim to predators or scammers?
All of these concerns can be addressed with a carefully designed estate plan. For example, the plan may provide for a Marital Trust that will hold and protect half of the marital property after the first death while still making that property available for the survivor’s needs. Even distributions from a retirement plan to a surviving spouse can be protected that way. There is plenty to consider and discuss with your estate planning attorney. Work with an attorney who listens to your wishes and customizes your documents to address your goals.
Any time during our adult life, we could experience periods when our capacity is diminished to the point where we could not communicate with our healthcare providers or handle our finances. We would be in a situation where we would have to depend on others to make healthcare decisions for us, and we would have to rely on trusted members of our family or friends to step in and pay our bills, file our taxes, handle any financial matters that might come up.
The document that allows us to appoint someone we choose, because we trust them with our health, is called an Advance Directive, and it has three parts; there’s (1) the health care power of attorney, where we name our agents and describe what we authorize them to do on our behalf; (2) the Living Will, where we express our wishes regarding life support at the end of our lives; and (3) the post-death instructions regarding organ donation and funeral or cremation instructions. Don’t be confused by the term “living will” – it is not the Will that distributes our property. We recommend having conversations with the named agents, so they know as much as possible about how we think about healthcare, and any special wishes we may have, in particular when it comes to end of life care. Agents may need to step in to help on short notice – they need to know they were named.
You may wonder what happens when someone doesn’t set up an Advance Directive. Their family will have to petition the local court to appoint a Guardian of the Person, who can then talk with the doctors and make decisions. That is a legal proceeding that involves court and attorneys’ fees that will no doubt exceed the cost of setting up an Advance Directive. To make matters worse, should the family not see eye to eye on who the court should appoint, the whole process could end up in costly litigation.
With regard to getting help with financial matters during incapacity, we can legally authorize persons we choose, by naming them as agents in a durable power of attorney. Since agents deal with our property as fiduciaries, they carry responsibility and are exposed to liability. The clearer we describe what it is we want them to do for us, the better for us and for the agent. If we don’t have a power of attorney, the family has to petition the court to appoint a Guardian of the Property, another court process that will undoubtedly cost more than any attorney’s fee for setting up a power of attorney.
If you would like to set up these documents, an experienced estate planning attorney can guide you through the process of choosing the right agents. The attorney can also make sure that the documents are drafted so they unambiguously reflects your wishes. This helps you and all of those who care about you and want to help.
I often get contacted by young parents who wonder if they need a Will. Some were told to get a Will, perhaps by their financial adviser or by members of their family. For many reasons, everyone does their surviving relatives a favor by leaving behind a Will, and young parents in particular!
Why is that? In their Wills, the parents can say who they would like to name as their children’s Guardians. Those Guardians could sign the children up at school and take them to the doctor. If, on the other hand, the parents both died without Wills, leaving minor children behind, then the parents’ families would have to petition a court to request that someone be appointed Guardian, to have the legal authority to handle education and health matters for the children. In a perfect World, the two families would agree on who the Guardian should be and who the children would live with, but what happens if the two families don’t agree? The legal proceeding for the appointment of the Guardian would become a costly tug of war over the children, who would be left in limbo, and in the end, the court will select the Guardian. It could end up being someone who would not have been the parents’ first choice. Therefore, setting up Wills, in which the parents clearly identify the Guardian they prefer, and maybe even backup Guardians, in case something happens to their first choice, will avoid uncertainty and potential costs.
Aside from naming Guardians, a Will typically identifies the immediate family, it allows instructions for the distribution of the property and includes the names the persons who should be put in charge of that distribution. Those persons will also have to handle any payments for last expenses and taxes. The process of administering the property of someone who died is called probate and is handled through the local Register of Wills office where the Will is filed after death.
Dying without such instructions, without a Will, is called “dying intestate.” When that happens, the State in which the deceased person lived will have laws that determine who will inherit the estate and who will administer it. Clients are often surprised how the State would distribute their property, since it does not correspond to what they thought would happen.
We recommend parents work with an estate planning attorney who can advise them during the planning process. They will discover that they can address how their children’s inheritance can be managed for them while they are young, and at what ages they can learn to manage it themselves. Parents can also protect their children’s inheritance in case of divorces, or from future creditors. As an estate planning attorney, I spend a lot of time in conversations with my clients, using my experience to help them come up with the best solutions, and then we reflect those in their Wills through careful drafting.
Can a Spousal Lifetime Access Trust (a SLAT) capture the current estate tax exemption? And could it help maintain an expensive life insurance policy? The answer to both questions is Yes.
You may be asking yourself what steps you could take in light of the anticipated drop in the estate tax exemption? If you already have an estate plan, how will these tax law changes affect your current estate plan? Is there anything else you need to do to avoid exposure to estate tax and preserve your property?
And what about that Irrevocable Life Insurance Trust aka ILIT, that you set up to shelter the life insurance proceeds from estate tax? Are the annual premiums greater than $20,000? What if the rumored changes to the annual gift tax exclusion become law, so that each of us will be limited to a total of $20,000 of excluded gifts each year? If that was the case, the excess premium above $20,000 would have to be reported on a gift tax return. And lifetime gifts erode the available estate tax exemption at the time of death.
These are only some of the questions our concerned clients are asking at this time.
We would like to describe a powerful planning tool, a trust, that you could incorporate into your existing estate plan that gives you a shot at trying to lock in the current estate tax exemption and, if you need to can provide the funds for those expensive life insurance premiums, all while continuing to keep the policy out of your taxable estate.
Meet the Spousal Lifetime Access Trust, also known by its acronym as SLAT. What is a SLAT?
It is an irrevocable Trust, set up by one spouse for the benefit of the other spouse. Assets are protected from the other spouse’s creditors, the other spouse chooses the investments and the trustees, and if the transfer to the trust is a completed gift, the assets are not part of the taxable estate of either spouse. A transfer of property to such a trust in an amount that is greater than the anticipated new estate tax exemption (anywhere from 3 to 6.8 Million) can be covered by the current unified gift and estate tax exemption. Current tax law provides that there will not be a claw back. No claw back means that the use of the exemption will not be undone if the exemption is smaller in the year the donor spouse dies. However, tax laws can be changed and even be made retroactively effective. Caution must be taken include provisions that allow for a flexible response to any estate and gift tax law changes that become the law quicker than anticipated.
How is a SLAT different from another irrevocable trust you may already have? Why would someone consider such a trust aside from the creditor and estate tax benefits?
Since the other spouse is the beneficiary of the trust, that spouse could share distributed property with the first spouse in the event the first spouse runs out of assets. That gives a sense of comfort. Children could also be added as beneficiaries, and for the unmarried individual, the trust could include provisions for a potential future spouse, often referred to as the so-called “floating spouse”. In addition, the children could be named as beneficiaries.
Some other attractive features of a SLAT are that the Spouse could have a lifetime and testamentary limited power of appointment. That means the spouse could appoint funds back to the first spouse who set up the trust.
Bottomline is that a SLAT can provide significant estate and gift tax savings making it worthwhile to consider. We are here to advise and explore if a SLAT is a good fit for your family.
The passage of the SECURE Act left many wondering if their estate planning documents need to be
Generally, we do not need to revise your trusts to comply with SECURE. It is important to understand
that trust rules did not change. If you included conduit trusts for your beneficiaries, they will still work
as intended, as conduit trusts. If you included a see-through accumulation trusts, they will also still work
as intended, as accumulation trusts.
The 10-Year Rule Basics
The problem introduced by SECURE is that the stretch-IRA and the income tax benefits of distributions
over the life expectancy of the beneficiary are mostly gone and replaced by a requirement that the
entire IRA will have to be paid out within 10 years of your death. There are five situations where the 10-
year rule does not apply; (1) when the plan has no designated beneficiary and the plan participant dies
after the required beginning date for distributions, since the plan continues to pay over the remaining
life expectancy of the deceased plan participant, and (2-5) there are four categories of beneficiaries who
are still eligible to withdraw their inherited interest in the form of minimum required distributions over
their expected lifetime. The eligible groups of beneficiaries are (i) minor children through majority (see
discussion below), (ii) chronically ill or disabled beneficiaries, (iii) persons not more than 10 years
younger than the plan participant, and (iv) spouses named as sole beneficiaries of a trust. Spouses
named directly as beneficiaries can still roll their interest over.
For a conduit trust beneficiary, who does not fall within one of the 4 eligible categories, the 10-year rule
means the beneficiary’s entire share of the inherited IRA has to be distributed to the beneficiary within
10 years. Since the 10 year period will include months of 11 tax years, the income tax impact of
distributions can be spread over 11 tax years. The rate at which distributions are taken is up to the
trustee of the trust.
For accumulation trust beneficiaries, who does not fall within one of the four eligible categories, that
means the distributions have to be made to their trusts by the end of the 10 years, over 11 tax years,
and the trustee decides at what rate to withdraw.
We see that the SECURE Act changed the income tax reward of a life-expectancy based payout.
Children and the 10-Year Rule
A minor child beneficiary falls within one of the exceptions to the 10-year rule and the child’s life
expectancy will be used to calculate payouts until the child “attains majority”. At that time, the payouts
switch to the 10-year rule. There is a lot of confusion about what “majority” means. Until we get clear
guidance from the Treasury, the assumption is that it means age 26, as long as the child is a student.
Thus, your child’s share of your IRA will be fully distributed to your child by age 36.
Note that this rule only applies to your minor child. It does not apply to other minors, such as nieces,
nephews, or grandchildren. Also note that for a disabled child, life expectancy payouts continue as long
as the disability lasts.
If the thought of your child having control over their entire share of your IRA by age 36 is a concern, you
could remove the conduit trust provisions for your child’s trust and convert it to an accumulation trust.
Additional updates to your revocable trust could allow your Trust Protector to convert a conduit trust to
an accumulation trust at the time of your death, if circumstances should have changed for your child by
An adult child will receive the payout from the IRA within 10 years of the participant’s death. A conduit
trust for an adult child could be replaced with an accumulation trust, if you wish to keep the
distributions in the child’s legacy trust for asset protection purposes and income taxation at the trust’s
income tax bracket is not a concern. Recall that trusts have compressed marginal tax brackets.
Currently, a trust pays 37% for income above $12,700. If your child is a high earner, the distributions
would be taxed at 37% whether they would be distributed outright to your child or kept in the trust. In
such cases, the benefits of asset protection may weigh in favor of replacing a conduit trust with an
Talk to Your Estate Planning Attorney Today
This is a time to review your estate plan. We offer free initial consultations for new clients and free
reviews to our existing clients.
Many parents have their retirement savings socked away in 401(k)s and IRAs. So that your beneficiaries do not have to pay taxes on the funds prematurely, it’s important to properly structure the beneficiary designations for these accounts. Unfortunately, when a beneficiary has special needs, things get complicated.
If the beneficiary receives the IRAs and 401(k)s directly, the required minimum distributions (RMDs) could prevent your child from receiving the government benefits he needs, such as Medicaid or Supplemental Security Income (SSI). But if you designate a special needs trust as the beneficiary of a retirement account, there could be adverse income tax consequences.
Fortunately, with proper trust drafting, such tax results usually can be prevented. Here’s a summary of the issues.
RMDs are the distributions that must be taken on tax-deferred accounts starting when the account holder reaches age 70 1/2 and continuing after death when the account is passed to beneficiaries. When you name individuals as the beneficiaries of your retirement account, RMDs may be taken based on each individual’s life expectancy. However, if there is no person named as a designated beneficiary, or if the beneficiary is a trust that is not considered to be a designated beneficiary by the IRS, the minimum distributions either will continue based on your age when you died or must occur within five years of your death. This would likely mean that the annual distributions are much higher, generating a higher income tax bill that is paid earlier, resulting in paying taxes at higher rates and the loss of earning on the funds paid to the IRS.
Special Trust Rule
The good news is that sometimes the IRS is willing to treat a trust (such as a special needs trust) as a designated beneficiary and allow the RMDs to be stretched out based on the life expectancy of the oldest beneficiary named in the trust. For a trust to qualify as a designated beneficiary, it must meet the following basic requirements:
It must be irrevocable.
All trust beneficiaries must be identifiable in order to determine the oldest beneficiary.
All trust beneficiaries must be individuals – not charities or corporations.
These facts must all exist as of October 31st of the year after the year the retirement account holder has died. Sometimes personal representatives or trustees can take steps to make sure that the facts on the ground by that date meet these requirements, even if they don’t on the date of death.
The most difficult issue often is identifying all of the potential beneficiaries and determining who is the oldest. The easiest way to satisfy this requirement is to use a so-called “conduit” trust that requires that the RMDs be distributed immediately to the primary beneficiary. With such trusts, RMDs are based on the life expectancy of the primary beneficiary, and the IRS does not look at the ages of any other beneficiaries. However, this doesn’t work for special needs trusts because the distributions would likely destroy eligibility for certain public benefits.
Applying the Rules to Special Needs Trusts
The alternative is a so-called “accumulation” trust, which permits RMDs to be held by the trust, rather than requiring their distribution. The RMDs can still be stretched out based on the life expectancy of the oldest beneficiary, but the IRS will look at all of the potential beneficiaries of the trust. “Powers of appointment,” for instance, can mean that not all of the beneficiaries can be identified.
But things can easily go awry with this strategy. Funds potentially going to a charity can mean that the trust does not meet the requirement that all of the beneficiaries are individuals. A provision in the trust saying that funds will be held for the benefit of a minor can be problematic, depending on what the trust says will happen to the trust funds if the minor dies before distribution. In short, you can create a special needs trust as an accumulation trust that will be treated as a designated beneficiary by the IRS, but you have to be very careful.
An alternative, if you have more than one child, is to allocate your non- retirement assets to the special needs trust, and name the other children in the family as the beneficiaries of the retirement accounts. This can be much simpler. The problem with this approach is that it’s sometimes difficult to make the amounts equal among the children.
Or you can decide that it’s okay for the trust to pay taxes on its share of your retirement plan within five years of your death. The taxes will have to be paid eventually in any case, and if your retirement plan is to be divided into several shares, the amount of the distributions per person may be relatively small.
Each approach has its pluses and minuses, and you will have to decide which option is best for you. To work through the pros and cons of the various choices, talk to your special needs planner.
As you are planning how to leave your IRA, 401(k), 403(b) or other qualified retirement accounts to your spouse, children, or other beneficiaries, consider setting up a separate Retirement Plan Trust.
Any trust that authorizes the trustee to handle the withdrawal of assets from a retirement account and distribution to a beneficiary must contain carefully drafted provisions to comply with requirements of the IRS Tax Code to successfully achieve the desired results. Generally, there are two basic ways to structure retirement asset management by a trustee. The “conduit trust” requires that the trustee immediately distribute all withdrawn amounts to the beneficiary. The “accumulation trust” gives the trustee discretion with regard to the timing of the distribution of withdrawn amounts to the beneficiary, so that the withdrawn amounts could accumulate in the trust. For certain types of beneficiaries, such as young children, it is desirable to accumulate, and for disabled individuals receiving governmental benefits, it is necessary to accumulate in order not to disqualify the beneficiary from governmental benefits.
A significant difference between conduit and accumulation trusts is the starting time for required minimum distributions from the retirement account. In the case of a conduit trust, withdrawals distributions don’t need to start until the year in which the plan participant, who set up the account and saved into it, would have turned 70 ½ years of age. That year, the beneficiary has to begin withdrawing funds at a rate based on the beneficiary’s life expectancy. The younger the beneficiary, the smaller the distributions. In the case of an accumulation trust, withdrawals from the retirement account to the trust need to begin the year following the plan participant’s death. The withdrawal rate will also be calculated based on the beneficiary’s life expectancy.
Conduit and accumulation trusts can be incorporated into a Will or revocable trust. However, to make use of the most sophisticated planning options, including special administrative powers for the trustee and a powerful role for a trust protector, to optimize the conveyance of the retirement accounts to beneficiaries, requires skilled drafting. Incorporation of such provisions into an estate planning document that is likely to be updated at some future time, possibly by another attorney who may not be familiar with the constantly evolving tax laws affecting retirement assets, could lead to failure of the intended plan.
By using a separate retirement plan trust, the risk of plan failure can be avoided. Furthermore, the strict drafting requirements for retirement assets may stifle the flexibility that could be included in the Will or revocable trust. A retirement trust could be drafted as a conduit trust, as an accumulation trust, or as a conduit trust that can be converted to an accumulation of trust following the plan participant’s death. Such a conversion could be desirable for certain beneficiary situations. For example, the accumulation trust structure would be desirable where a beneficiary’s distributions would be exposed to the beneficiary’s creditors. Since the trustee can accumulate the withdrawn amounts, those assets can be kept in the trust and protected. Another reason to consider a separate retirement plan trust would be the nature of the assets held in the retirement account. Thus, retirement accounts that hold business entities or real estate are best administered separately from the other assets of the estate. The use of a separate retirement plan trust would build a firewall between those accounts and the rest of your estate.
A nationwide movement has been underway since the late 1990s to improve end-of-life health care planning by individuals. While Advance Directives including Living Wills and Do-Not-Resuscitate Orders (DNRs) have been widely used to address future decisions regarding life support, pain relief and the administration of nutrition and fluids, they do not capture a patient’s preferred level of medical intervention for care either on a routine basis or on an urgent basis due to an acute medical condition. To give individuals the opportunity to express their medical treatment preferences, a process developed that begins with conversations between physicians and patients about available treatment options, and provides forms that record the patient’s preferences for all of the patient’s health care providers to see. Throughout the various States, these forms are known as physicians’ orders for life-sustaining treatment (POLST), medical orders for life-sustaining treatment (MOLST), physicians’ orders for scope of treatment (POST), and medical orders for scope of treatment (MOST). The National POLST Paradigm Task Force provides guidance for successful implementation of such forms.¹ In Maryland, we have the Maryland MOLST Training Task Force. The State provided regulations for the use of Maryland’s MOLST form in July 2013.²
Who Should Have a MOLST form?
Regulations require the MOLST forms to be completed at assisted living programs, home health agencies, hospices, kidney dialysis centers, and nursing homes for newly admitted patients and at hospitals for certain patients.
In addition, the rule of thumb is that any person for whom it would be true that a doctor would not be surprised if the person died within the year should have a MOLST form. Anyone of advanced age or frail health or both should have a MOLST, even those individuals who are not terminally ill, in a persistent vegetative state or suffering from an end-stage condition. Persons in these categories should have a conversation or a series of conversations regarding end-of-life care with a health care provider. Ideally, the conversations are a team effort by all involved in the person’s care and decision-making. End-of-life care is an evolving field. Understanding the nature and effects of treatments, procedures, medications, and methods, is important for every patient, and requires open and frank discussion.
1 The Center for Ethics in Health Care at Oregon Health & Science University first convened the task force. See OR. POLST TASK FORCE, GUIDANCE FOR OREGON’S HEALTH CARE PROFESSIONALS 6, 17 (2013), available at http://www.polst.org/wp-content/uploads/2013/ 12/2013.12.26-OR-Guidebook-2013.pdf 2 The Department of Health and Human Services regulations are found in COMAR 10.01.21
The Shortcomings of Advance Directives and DNRs
Most of us are familiar with a typical Advance Directive that includes a Living Will. Such a document allows an individual to specify whether or not to be administered life-sustaining treatment, as well as nutrition or fluids if the person has no expectation of recovery from a terminal condition, a persistent vegetative state, or an end-stage condition. The Advance Directive is executed with a hypothetical future health event and goes into effect in the future when the client is no longer capable of making health care decisions. At such time, the agent appointed in the directive has decision-making authority on the patient’s behalf.
Most of us are also familiar with Do-Not-Resuscitate (DNR) orders, which prevent resuscitation in the event of cardiopulmonary arrest. Such orders are issued by physicians for certain patients after a conversation with the patient or the patient’s decision-makers.
Neither the Advance Directive nor the DNR provides a client the opportunity to specify the kind and level of medical intervention, during or at the end of life, that reflect the client’s preferences, values, and goals. The choices are either for no intervention at all or full intervention. A MOLST allows the patient to clearly and accurately identify the desired level of care from among the available treatment options as they are explained to the patient or the patient’s health care decision-makers by a physician, physician’s assistant or nurse practitioner. The care-related decisions can be addressed separately from the choice regarding DNR orders. Thus, a person may not want to be resuscitated, but, in all other situations, the person may want more or less aggressive care. Since the patient may lose the capacity to participate in the conversations, it is still important to have an Advance Directive that appoints a health care agent, who can talk with the patient’s health care providers on behalf of the patient.
What Treatment Categories does the MOLST Cover?
The Maryland MOLST allows the patient to make informed choices regarding the administration of antibiotics, nutrition, fluids, ventilation, blood transfusion, hospital transfer, medical workup, and dialysis, in addition to cardiopulmonary resuscitation (CPR). As part of the conversation with medical staff regarding the treatment categories, the staff will summarize key facts and opinions about the patient’s medical situation and prognosis, and the relevance of various treatment options.³ The medical staff is expected to ensure that the patient’s choices are informed as a result of the consultation with the physician, physician’s assistant or nurse practitioner, who signs the order. Since a patient’s medical needs are likely to change over time, it is important to continue to have these conversations. The MOLST can be updated when the patient reverses an earlier decision based on changes in his or her medical condition.
What is the Purpose of the MOLST Worksheet?
An individual who is not currently facing an acute medical condition and has the capacity to discuss health care treatment options with a health care provider has the option of completing the MOLST Worksheet. The worksheet is part of the MOLST and allows a person to document treatment preferences for future situations. If and when the time comes that the person needs a MOLST, the worksheet provides valuable input for the completion of the MOLST form. The topics covered by the worksheet are the same as those addressed on the MOLST form. An individual may choose which of these topics to address. There is no requirement that all categories be worked on.
Minors with Terminal Illnesses and Individuals with Disabilities
Some states allow minors with terminal illnesses to have POLSTs, and some provide a section for special concerns of individuals with disabilities. The Maryland MOLST does not provide a section for individuals with disabilities.
MOLST Need to be Kept Where They Can Be Found – the Registry
Emergency Medical Technicians (EMTs) or first responders will respect and implement a patient’s wishes. They can only do so if they see the MOLST. A physician can provide guidance on where to keep the form; on the bedside table or room door, for the bed-ridden patient, on the refrigerator, in the purse, or any other place where it can be discovered before procedures are started that may go against the patient’s wishes.
Some states maintain a registry for their residents’ POLST or MOLST forms. The advantage of a registry is that EMTs and other providers have access to the forms. Maryland has such a registry.
³See Health Care Decision Guide for Health Care Professionals by the Maryland MOLST Training Task Force, May 2012.
A competent individual’s use of a MOLST, properly executed in accordance with local law, is protected by constitutional and common law. The Due Process Clause protects our deeply personal liberty to reject medical treatment. Since the form is completed after conversations with the physician, a patient’s informed consent, as well as the individual’s liberty and privacy concerns are satisfied. A health care provider’s refusal to honor a MOLST would implicate common law and constitutional violations at the least.
The US Supreme Court has been united in its view that a competent individual, absent a specific compelling public interest has a right to refuse medical treatment.
“On balance, the right to self-determination ordinarily outweighs any countervailing state interests, and competent persons generally are permitted to refuse medical treatment, even at the risk of death. Most of the cases that have held otherwise, unless they involved the interest in protecting innocent third parties, have concerned the patient’s competency to make a rational and considered choice.”4 This language is decisive for the constitutional validity and enforceability of a MOLST. It announces that each person has a fundamental liberty interest to control his or her medical care.
The MOLST Should Be Signed By the Patient
The Task Force recommends that the MOLST be signed by the patient to ensure that there was at least some communication about the form with the patient or the patient’s health care agent. Such a requirement would increase the confidence that the form reflects the patient’s informed decisions.
Patients who do not wish to have very expensive treatments, benefit from having a MOLST that is properly implemented.
MOLST has to be part of estate planning and elder law consultations
The Medical Orders for Life-Sustaining Treatment (MOLST) form and associated worksheet are part of a comprehensive estate planning consultation. Estate planning and elder law attorneys need to draw clients’ attention to the existence and function of this form.