Assuring an Inheritance for your Heirs

Newsletter | Sep 29, 2017 | Hook Law Center

Many of our clients come to us primarily for estate planning. They are interested in making sure that their assets are distributed to their beneficiaries in the amounts and in the manner that they want. For many of our clients, that means devising ways to transfer assets to children after the death of one or both spouses. However, because we are elder law attorneys, most of our clients are also advised about long-term care planning and asset protection strategies. We believe that good estate planning does not and cannot happen in a vacuum and attention should be paid to all matters that may impact a client’s goals.

For instance, many clients feel strongly that it is important to provide some measure of an inheritance to their children. However, it is clear in reviewing their overall financial picture that if one of the spouses requires long-term care, there may be very little to no inheritance left to give. For clients in such circumstances, pre-planning for long-term care costs may well allow them to assure an inheritance that could otherwise be lost.

We can create a trust that provides for the payment of the income of the trust back to the creator (or the “grantor”) of the trust and which, upon the death of the grantor, distributes the remaining assets of the trust to grantor’s beneficiaries (typically the grantor’s descendants but could also be a continuing income interest for the surviving spouse). If the trust is created and funded more than 5 years before the grantor applies for Medicaid, the Department of Social Services cannot consider the assets held by the trust in determining the eligibility of the grantor for Medicaid. In addition, Medicaid cannot put an estate recovery lien against the property held in the trust upon the death of the Medicaid recipient. Thus, the assets put in the trust are preserved for the heirs of the grantor. Only the income paid out by the trust can be assessed against the grantor and counted as part of his income for Medicaid purposes. Not quite like having your cake and eating it too, but you are certainly licking the icing.

What assets are appropriate for such an income only trust? Truly any assets can be used for such a trust. A residence can be a good asset to transfer into the trust for these purposes because a residence typically does not produce any income. The grantor can maintain a right to live in the house via a lease agreement with the trustee of the trust and pay the carrying costs of the house (insurance, real estate taxes, maintenance etc.) instead of rent. Thus there is no income to be distributed to the grantor and the grantor continues to live in the house and pay the expenses he or she was already paying. If the grantor wants to downsize or needs to move into a nursing home, for instance, the trustee can sell the house and reinvest the proceeds. If the grantor is still living independently, the assets can be invested in income-producing property that can be distributed to the grantor for living expenses. If the grantor is on Medicaid, the property can be invested in very low or no-income producing property that minimizes the income that is payable to the grantor (and thus to the nursing home for care). If it is not appropriate to transfer a residence into the trust (for instance because it still has a mortgage on it), other assets – from cash to stocks and bonds – can be transferred to the trust.

The trust is structured in a way to preserve the income tax benefits that are available to the grantor if nothing were done. For instance, the grantor can still exclude $250,000 of capital gains if he or she transfers his or her primary residence to the trust and the trust later sells the house. In addition, all of the assets in the trust receive a step-up in basis to the fair market value of the assets as of the date of the grantor’s death, just as if he or she had held them in his or her name alone at death. This means that when the assets are distributed from the trust to the grantor’s beneficiaries, they will be able to sell them with far less capital gains tax to pay than if the same assets were gifted outright to the beneficiaries before the grantor’s death.

Part of the beauty of an income-only trust plan is that while the grantor is living a healthy and independent life, he or she can benefit from the income generated by the assets (or continue to live in the home). However, it should be noted that the gift of the assets into the trust is a completed gift at the time of the transfer. The grantor has no ability to change his or her mind later, to access the principal of the trust or to compel the trustee to distribute the assets back to him or her. This limitation on the ability for a grantor to change the plan in the future is why we do not advise clients to put all of their assets into a trust of this sort. It is important that clients have sufficient other assets in their own names to continue to live their lives, pay their bills and support themselves. Thus, while the income only trust is not miracle cure in the sense that it cannot protect all of a client’s assets from the costs of long-term care, it can assure that at least some part of the estate is preserved for the heirs.

Make an appointment with any of the experienced attorneys at the Hook Law Center to discuss whether an income-only trust can be an appropriate part of your estate plan.

Ask Kit Kat – White Giraffes

Hook Law Center:  What can you tell us about white giraffes? Are there really such creatures?

Kit Kat:  Yes, there really are! Two such giraffes were recently spotted in Kenya in Garissa County near the Ishaqbini Hirola Conservancy. Technically, reticulated giraffes come from eastern Africa, and have large brown spots which are separated by cream lines. The two which were sighted in Kenya appeared to be whitish, with the baby giraffe being a tad darker than its mother. As the giraffes mature, those with leucism, like the ones observed in Kenya, become lighter. They are not really albinos. They have the condition known as leucism, meaning they have pigmentation in their soft tissue, but not very much in the skin cells. Animals with leucism also have normal eye color; those with albinism usually have red eyes. Leucism exists throughout the animal kingdom, and species as diverse as birds, lions, fish, moose , and snakes all have been noted to have the condition.

Giraffes currently are classified as ‘vulnerable’ to extinction. This classification is somewhat less alarming than the ‘endangered’ classification, but it does mean that they warrant protection. In the last thirty years, the giraffe population has declined by 40 percent. At present, it appears there are 97,600 giraffes worldwide. However, they are extinct in at least seven countries in Africa. According to the Giraffe Conservation Association, half of all baby giraffes die before the age of six months, because they are the victims of other animal predators like lions and hyenas.

This was the third sighting of giraffes with leucism over the past few years. One of the other sightings occurred in another part of Kenya and in Tanzania. According to Dr. Abdullahi H. Ali, founder of the Ishaqbini Hirola Conservancy mentioned previously, the two giraffes will be monitored to gather information about their life span. The normal life span is in the range of 25 years. Time will tell whether these two recent specimens will be so fortunate. (Yonette Joseph,“Rare White Giraffes Cause a Stir in Kenya,” The New York Times, September 16, 2017)

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