Trust Planning

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The initial inquiry of McHugh & Macri through our Client Profile is to determine the current estate and tax planning needs of the client. Reduced to basics, estate planning is the need for a Will, a Power of Attorney and a Health Care Directive/Living Will in order to assure that your "legal house is in order." In the event the estate is subject to either the Federal or New Jersey estate taxes, the necessary tax planning will be incorporated into the estate planning. This is the beginning, not the end, of the need for planning.

We next concentrate on the life care planning to minimize income and gift taxes on investments while you are alive and to implement asset preservation planning to protect your lifetime estate from medical spend down for long term health care costs.

While estate taxes can take 40% and income taxes up to 38%, long term care cost is referred to as the "100% tax" since it can exhaust your entire nest egg and estate.

The above estate, tax and lifetime planning needs utilize specialized trusts to achieve asset preservation.

Tax/Estate Trust Planning

To avoid or minimize estate taxes, McHugh & Macri will utilize "qualified disclaimer" trust provisions to allow establishment of a "credit shelter" and/or a "marital" trust for the benefit of the spouse and children. There may be a need for "spend thrift" trusts for potential beneficiaries who are financially irresponsible; a need for "disability trusts" for the special needs/care of disabled children or beneficiaries; "minor trusts" for under age beneficiaries to allow the money to be utilized for limited purposes until a mature age when the funds are released.

Most tax and estate planning advisors stop there with the tax techniques and leave the residuary of the testamentary estate to the surviving spouse, without addressing the 100% tax noted above. Without further protection, the Will is the same "sweetheart Will" we see on a daily basis whereby one spouse passes the entire estate to their sweetheart/surviving spouse.

Consider these complications beyond saving taxes: what if the surviving spouse is disabled, in a long term care facility or on public benefits? The inheritance received must be spent on the medical care/facility cost of the surviving spouse and will disqualify them from public benefits/Medicaid. This forces the entire inheritance to be spent down on medical care before the beneficiary could again qualify for public benefits. That inadvertent effect does not need to happen.

Here's how:

In addition to the tax trust, there is a need for a "supplemental benefits trust" (SBT). This is a health care trust which pays only for the medical needs of the beneficiary which are not otherwise paid by insurance, Medicare, Medicaid or long term care insurance, i.e. it supplements, not replaces, those public benefits. This testamentary SBT trust protects/preserves/shelters the inheritance from medical spend down in addition to sheltering it from tax spend down. Tax trusts alone are not sufficient estate planning. Since there are pitfalls and land mines along the path to achieve these benefits, it is critical that a certified elder law attorney drafts that trust to conform with current laws.

Life Care Planning

Once the client's testamentary estate is protected, trusts can/should be used for lifetime planning. Qualification for Medicaid public benefits continues to allow transfers by an individual, typically to the same beneficiaries/children as the Will and their establishment of a Living SBT as described above. While transfer planning is subject to the Medicaid five year look back, the penalty need not be five years and certain "sole benefit of" (SBO) trusts are not subject to the Medicaid look back penalty, provided the funds are paid out over the beneficiaries' lifetime. Further, the amount which is transferred to an SBO trust is not countable should the parent or grandparent or the beneficiary need future Medicaid or public benefits, provided the trust meets the complicated rules imposed by Medicaid law.

Another example of a lifetime trust is a special needs trust (SNT) funded by a claimant after an auto accident, malpractice or Court award. This is a self-funded trust with the recipient's own funds. Although the trust provides the benefit of not being countable should the recipient seek public benefits, that trust requires that upon death any balance in that trust must repay any public benefits paid, unless the trust has fully paid out during the beneficiaries' lifetime.

While these trust techniques are available, they will not be found in "form books" or on "legalzoom" on the Internet. A certified elder law attorney has the knowledge and expertise to "dot the i's and cross the t's" necessary to do the trust right...the first time.

Common Trust "Mistakes"

  • Trusts have too many "rules" that impair my access to the funds - In fact, subject to conforming with certain legal provisions, you make the rules for the trust.
  • You need a revocable trust to avoid the high cost of probate - This is the typical mantra of "trust mills" selling "one size fits all" trusts which insert your name into the boilerplate documents - Ususal cost of probate in NJ counties - under $200.00. Cost of the revocable trust - $2,000.00. Not a wise investment!
  • McHugh & Macri's mantra - "Preserve your assets...without losing control." How? By use of the appropriate tailored trusts described above.

Don McHugh and Vince Macri are two of 450 attorneys nationwide who are certified in elder law (CELA) by the National Elder Law Foundation.