What about Fluffy? Pet Trusts: Another Important Estate Planning Tool

It’s estimated that two-thirds of American households currently have at least one pet, a number that has steadily increased in the last 60 years. With more pets comes a growing industry devoted to helping Americans better care for, and even indulge, their pets, has developed. Businesses that provide pet day care, pet sitters, grooming, spa services, and even pet cemeteries have become common.

Many even consider pets part of their family, a sort of child, brother, sister, or at the very least, friend. Since so much love and attention is given to these fury and feathery companions, many wish to provide for their animals in the event that they become incapacitated or die before their pet. With family greed, skepticism, and fraud on the rise, many seek a better solution than hoping Junior will “do the right thing.” As a matter of fact, owner death and/or disability is one of the top reasons that animals end up in Shelters across the country.

Several states have made changes to their laws to help people provide for the care of their pets after the owner’s death, thereby statutorily allowing for “Pet Trusts.” Pet trusts can be useful in a number of situations. Should the owner of a pet die, a pet trust can ensure that the pet continues to be taken care of, provided a home, food, and veterinary care. A properly-funded pet trust can give an owner peace of mind that should something happen to them, their pet will continue to be cared for, and not end up in an animal shelter or otherwise abandoned.

Forty states currently have pet trust laws on the books. Sadly though, Massachusetts is not one of them (Start writing those letters to your Representative). However, that doesn’t mean that you can’t provide for “Mr. Droolsalot” and “Fluffy Von Furball” when you pass in Massachusetts.

Should you choose an intervivos trust, one that exists outside of your Will, you’ll need to be very specific as to what your money can and can’t be spent on for your pet’s care. In states with pet trust legislation, you are able to leave many of the details to the statute. Depending on how you fund your trust, it can be effective on your disability, incapacity, or death.

You also have the option of choosing a testamentary trust, one that exists within your Will itself. This option is often less expensive than an intervivos trust, however the trust is not in existence until after your passing and therefore does not protect the pet if you were to enter a nursing home or were otherwise incapacitated. Both of these options can be accomplished by adding an extra clause or two to your existing documents.

It is important to remember to have an attorney experienced in estate planning for pets prepare or update your documents. If your current attorney doesn’t take you seriously when you indicate your desire to care for you animals, they may not have YOUR best interests in mind. Estate planning is intimately personal and cookie-cutter plans should not be accepted.

Top photo courtesty of Maggie Smith. Bottom photo courtesy of my cat, Mr. Griffin.

Irrevocable Trusts & the Current Federal Estate Tax (IRC 1022), Friend or Foe?

The following is a repost of a blog recently written by Attorney Dale Krause of Krause Financial Services. Attorney Krause is also a fellow member of the National Academy of Elder Law Attorneys (NAELA). The original version can be found here.

An Irrevocable Trust can offer a grantor lifetime control over his or her assets of the trust is established with the following provisions:

• All taxable income shall be disbursed to the grantor;
• The grantor shall have the right to direct how the trust assets are held or reinvested; and
• The grantor shall have a limited power of appointment over the final distributions of the trust; this power shall be in favor of a limited class of beneficiaries, consisting of the grantor’s children and grandchildren; the disbursements do not have to be in equal amounts or shares.

After the trust is established, totally funded, and 60 months passes, the grantor can qualify for Medicaid benefits. None of the trust assets will be included in the grantor’s Medicaid application, in that they are outside of the 60 month look-back period for uncompensated transfers. The grantor will qualify for Medicaid benefits with generally his or her personal property, a prepaid funeral plan, and $2,000.00, or less, of cash assets.

Medicaid eligibility will require that the grantor pay substantially all of his or her monthly income to the nursing home, including that received from Social Security, any pension, and the trust. The only monthly income retained by the grantor is a personal needs allowance, which amount is designed to provide him or her with toiletries and other personal items. Nationally, the personal needs allowance ranges between $30.00 to $101.10.

From an income tax viewpoint, in that the grantor retained all the taxable income, and a limited power of appointment over the final distributions of the trust, the trust is deemed a “grantor trust.” See IRC 671-679. Grantor trusts do not pay any income taxes. Instead, the income flows directly out of the trusts to the grantor, to be placed on their personal income tax returns. For many, the end result is a lower total tax, in that the trust tax rates for individuals are much lower than those for non-grantor trusts.

From an income planning standpoint, in that the grantor retained the right to direct the investment of trust assets, the income taxes can be minimized, or totally eliminated, if the trustee is directed to invest the trust assets in tax-deferred annuities. No income is recognized from a tax-deferred annuity until the trustee either elects to take a withdrawal or annuitize the product.

From a gift tax viewpoint, again, since the grantor retained all taxable income, and a limited power of appointment over the final distributions of the trust, these provisions prevent the funding of the trust from being treated as a “completed gift.” See IRC 2036(a)(10). The end result is that without a taxable gift, no gift tax will be due, nor the requirement that a gift tax return be completed and filed.

Finally, from an estate tax viewpoint, in that the transaction is being treated not as a completed gift, the trust assets will be included in the grantor’s gross estate. The end result is that certain trust assets will receive an automatic step-up in basis. See IRC 1014(a). For example, if a grantor paid $50,000.00 for a house, and made lifetime improvements of $25,000.00, his or her cost basis is $75,000.00. At the time of the grantor’s death, assuming it occurred prior to 2010, if the house was worth $250,000.00, the beneficiaries would receive a tax basis of $250,000.00. Thus, if they later sold it for $250,000.00, or less, they would not owe any capital gains tax. The sale would be tax-free. However, as a result of IRC 1014(a) being repealed on December 31, 2009, the aforementioned tax result will not take place. Instead, if the grantor’s death occurs in 2010, the beneficiaries will receive a tax basis of $75,000.00 – which is likely to result in the payment of capital gains tax when the property is later sold. The present law states that each trust asset will receive a basis equal to the adjusted basis of the property in the hands of the grantor/decedent, or its fair market value on the grantor/decedent’s date of death, whichever is lesser. See IRC 1022.

Ring in the New Year with an Estate Plan!

Resolutions abound as the New Year quickly approaches. Each year we make a pact with ourselves to make lifestyle changes for the better. Whether it is to exercise more, skip the daily fast-food lunch breaks, or give up bad reality television, the intentions are always good, though often we do not follow through. How many times have we seen the new year rush at the local gym, but notice the crowds slowly dwindle come the beginning of February?

One resolution that you should make every effort to keep is to meet with an experienced estate planning attorney and develop or update your plan. The New Year is the perfect time to consider your assets, beneficiaries, retirement goals, and your health. And don’t be fooled, estate planning is not just for Grandma and Grandpa. All adults age 18 and older should be thinking about their health care wishes and how to dispose of their assets. No financial sum is too small to consider, and no one is invincible against a tragic accident. Consider the following:

• Do you have minor children?
• Do you have any children or grandchildren with special needs?
• Are your insurance beneficiaries up to date?
• Have you thought about who will receive your precious wedding china, or your antique cuckoo clock after you are deceased? Often the sentimental value placed on personal items can far outweigh financial gain, and arguments over such matters can cause rifts between family members. Now is the time to determine where these treasures will end up.
• Do you have an existing will or trust but have recently married? Divorced? Had a child?
• Have you thought about life-saving measures that you would want performed in the event of serious illness or accident? Have you shared your wishes with family members?
• Have you thought about whom you would want to make health care decisions for you if you were to become incapacitated?

If you answered ‘yes’ to any of the above, then make your 2010 New Year’s resolution one that will give you peace of mind. Many options are available depending on the size of your estate and your desired wishes, but at the very least, consider a simple will, sign a durable power of attorney and appoint a health care proxy. Have a safe and happy holiday!

Michael Jackson’s Estate Plan Manages to Keep Some Private Matters Private

The media has been covering Michael Jackson’s death quite extensively and many regularly scheduled programs will not air tomorrow as his memorial service is broadcast live around the world. News outlets are digging, trying to answer many questions surrounding his untimely passing, including estate and guardianship issues involving his children. However distasteful, it isn’t surprising that Michael Jackson’s Will was made available for anyone to see online within hours of it being filed with a Los Angeles Probate Court.

Ever wonder what a pop icon’s Will looks like?

Shocked that such an intimate document is available for public reading? Don’t be. Wills become public documents when they are filed at the local Probate Court.

So what did we learn from his Will?

• His ex-wife, Deborah Rowe received nothing,
• He named his mother, Katherine Jackson, to act as guardian for his children and their estates  if he died while they were minors.
• The successor guardian, if Katherine can’t serve in that role, is none other than Diana Ross!! (Huh?!)

So what do you do if you don’t want all your estate planning wishes to be read and scrutinized by anyone, including the media? How do you maintain your privacy? You create a Revocable Living Trust in conjunction with your Will. Michael Jackson did and you don’t need to be a superstar to have one drafted to protect your family.

Jackson created the Michael Jackson Family Trust, which is referenced in his Will. Both were signed in 2002. These are the most recent estate planning documents Jackson executed that have been presented to the court, to date. There is a chance that more recent documents will surface in the near future. In Massachusetts, anyone holding a Will of a deceased person has 30 days to file it with the appropriate Probate Court.

So how much money did Michael Jackson have? Who gets his real estate and assets under the Will? His entire estate was  transferred to the Michael Jackson Family Trust, a private document that is not scrutinized by anyone other than his named trustees.  Arguably, not even the Probate Court in Massachusetts would be involved had he been a resident. Logically, his three children are would-be beneficiaries, but no one knows for sure because the Trust is a private document.

So, despite all the media kerfuffle that has occured since Michael Jackson’s passing, the King of Pop has managed to keep some private matters private through proper estate planning, something even the average American should consider.

So when is a Will not enough? Want to know if a Revocable Living Trust is right for you and your family? Set up a consultation with Vickstrom Law to review your family’s specific needs.