TEN IMPORTANT ESTATE PLANNING CONSIDERATIONS – PART 2

by Thomas D. Begley, Jr., Esquire, CELA, and Joellen C. Meckley, Esquire

This is the second of a two-part series on ten important Estate Planning considerations. (Part one can be found here.)  Gifts/Loans to Children.  Sometimes parents have made gifts or loans to one child (e.g., to use as a down payment on a home) and to equalize that gift in their Will.  Any outstanding balance on the loan can be forgiven and the children who did not receive a gift or loan can be given an extra share equal to the gift or loan amount.

1. Retirement Plans/SECURE Act.  A Retirement Plan Trust should be considered where there is a significant retirement account (i.e., $500,000 or more).  By leaving the retirement account to a Retirement Plan Trust, the distributions to the children who are the beneficiaries of the trust can be limited to the Required Minimum Distribution (RMD) so that the money is not squandered.  The money in the trust can also be protected from the children’s creditors, divorce, remarriage of children’s spouses, etc.  Prior to the SECURE Act, parents could establish stretch IRAs for their children.  The children could then take the money out of the retirement account over the child’s life expectancy.  Under the SECURE Act, with certain exceptions, monies must be withdrawn from the retirement account with 10 years.  Exceptions include spouses, minor children, individuals with disabilities, individuals with chronic illnesses, individuals less than ten years younger than the Plan Participant.  There are two types of clauses to be considered in a Retirement Plan Trust.  One is a Conduit Trust.  This means that all of the monies withdrawn from the retirement account must be distributed to the beneficiaries in the year of their withdrawal.  The advantage is the beneficiary typically pays tax at a lower rate than the trust.  The disadvantage is that the distributions receive greater protection while in the trust.  The other type of trust is an Accumulation Trust.  This trust gives the trustee the right to accumulate withdrawals from the retirement account in the trust.  The disadvantage is that the trust may pay higher taxes than the beneficiary.  The advantage is that withdrawals receive greater protection while in the trust.
2. Business Ownership.  If the client owns a business the succession plan should be reviewed, or if one does not exist, should be designed.  Business entity records should be kept up to date.  There should be a Shareholder’s Agreement or an Operating Agreement.  There should be Employment Agreements for the client and all key employees. Consideration should be given to having a business valuation.
3. Charitable Giving.  Many clients are charitably inclined and intend to make a gift to charity on death.  The best way to do this is to name a charity as a beneficiary of a portion of a retirement account, because the charity will pay no estate or income tax on the gift.  If that strategy is not possible, then the charity or charities can be named in the Will or Living Trust.  The client should give careful consideration to which charities he or she wants to name and how much to leave to each charity.  The gives can be lump sums or a percentage of the estate.
4. The Intersection of Estate and Medicaid Planning.  For older clients, and by that the authors mean clients age 75 or above, or any client having a diagnosis indicating an eventual need for long-term care, consideration should be given to incorporating a Long-Term Care Planning in with Estate Planning.  For example, an Irrevocable Trust should be established and the residence transferred to the trust.  If this is done five years prior to applying for Medicaid, the home would be protected.  If the home were transferred to the trust four years before needing long-term care the client would have to pay one year before applying for Medicaid, but it is cheaper to pay for one year than it is to pay for five years.  The deed transferring the residence to the trust would retain a right for the client to use and occupy the home for the rest of his or her life and contain the obligation on the part of the client to pay all costs and expenses of maintaining the home.  If the client has income-producing assets, an irrevocable Income Only Trust could be established and income-producing assets transferred to that trust.  The client will reserve the right to the income produced by those trust assets.  New Jersey has a broad definition of “estate” for estate recovery purposes.  This means that Medicaid would recover from the assets in the Income Only Trust on the death of the Medicaid recipient.  To avoid this result, prior to applying for Medicaid the trustee would distribute the assets in the Income Only Trust out to beneficiaries other than the Medicaid applicant or spouse.  There would be a Medicaid penalty based on the amount of income being produced by the trust multiplied by the remaining life expectancy of the Medicaid recipient.