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Last week, Aretha Franklin passed away at 76 due to advanced pancreatic cancer. This week, reports have been coming in claiming that the Queen of Soul had died without a Will or Trust. According to her long-standing attorney, Don Wilson, he had requested that she establish a trust numerous times, but she never got around to creating one.

Unfortunately, Aretha Franklin is far from the first notable individual to pass without establishing a Will or Trust, many of whom often happen to be significant celebrities and musicians. Perhaps immense fame comes with a sense of immortality. But, the sad truth is that two-thirds of estates are administered without a Will or a Trust.

The process of signing a document that identifies your beneficiaries, your executor, and the guardian for your minor children—if you have them—is not particularly difficult or overly time consuming. If anything, taking the time now will save you and your loved ones a lot of stress in the long run. Failing to properly establish this document means that you are choosing to allow state law to make those decisions for you.

Continue Reading Aretha Franklin is Reported to Not Have Left Behind a Will

What would you do if you won the lottery? That is the big question we ask ourselves as the anticipation builds for the $1.5 billion Powerball drawing. After all, there’s nothing wrong with imagining what we would do if we held a winning lottery ticket or hit the jackpot in a casino.

But for the winners, there are some real concerns. Most importantly is how to protect your asset – the winning ticket. The jackpot will be paid to the person who carries the ticket into the State Lottery Commission office. If you are the lucky owner of the winning ticket, keep it in a safe place. Take time-stamped pictures of the ticket to document your ownership. It is often recommended that you sign the back of the ticket to prevent anyone else from redeeming it. Unfortunately, signing the ticket may limit your other planning options, but it may be the best protection from theft.

Before redeeming the ticket, you also need to decide whether to choose a lump sum or annuity payout. That decision isn’t as simple as it sounds. A $1.5 billion lottery jackpot is really the sum of $50 million annual payments over the next 29 years. The lump sum payout is $930 million – 62% of the advertised jackpot. Neither option is bad, but you must consult with tax and investment professionals to analyze the options. In simple terms, the annuity payout only yields around 2.2% annually, but the annuity allows you to pay the income tax liability over 29 years, instead of paying it all up front.

Continue Reading Are You Prepared to Win the Powerball Jackpot?

That well-worn adage may seem trite and arcane, but strict adherence to technical requirements is critical in Medicaid planning.  Since federal and state budget deficits are now the rule, rather than the exception, it is not surprising to see Courts stretch to find technicalities that can be used to deny eligibility for Medicaid benefits.  A prime example occurred this past summer, when the Massachusetts Court of Appeals disqualified a widow for Medicaid benefits because of a technicality in a trust established by her deceased husband more than 25 years earlier.  First, let me provide some definitions.

The term “Testamentary Trust” refers to a Trust established by the terms of a decedent’s Last Will and Testament, indicating only that the Trust provisions are described within the pages of the decedent’s Last Will and Testament.

The term “Inter-Vivos Trust” refers to a Trust established during lifetime, indicating only that the Trust provisions are described in a separate Trust Agreement, not in the individual’s Last Will and Testament.

The term “Medicaid Qualifying Trust” refers to a Trust that disqualifies its beneficiary for Medicaid benefits, since the Trust is presumed to have been established solely for the purpose of qualifying for Medicaid benefits.  Under Massachusetts Law, Inter-Vivos Trusts are presumed to be Medicaid Qualifying Trusts, but Testamentary Trusts are not.

In Victor v Mass. Executive Office of Health & Human Services (Mass. Ct. App. No. 09-P-1361, July 21, 2010), Mr. Victor wanted to create a Trust for the benefit of his wife, to take effect upon his death if he predeceased her.  To accomplish that result, he could have created a Testamentary Trust in his Last Will and Testament, or he could have created an Inter-Vivos Trust, with the Trust provisions in a separate Trust Agreement.  In either case, the Trust provisions would have been identical and the Executor of Mr. Victor’s Estate would be directed to transfer the balance of Mr. Victor’s Estate to the Trustee of the Trust.  The sole difference would have been the piece of paper which Mr. Victor used to describe the Trust provisions.

If Mr. Victor had chosen to include the Trust provisions in his Last Will and Testament, creating a Testamentary Trust, the Trust would not be a Medicaid Qualifying Trust and Mrs. Victor would have been eligible for Medicaid benefits.  Unfortunately, when Mr. Victor created the Trust more than 25 years earlier, he chose to use an Inter-Vivos Trust instead, making it a Medicaid Qualifying Trust and, thereby, making Mrs. Victor ineligible for Medicaid benefits.

Logic and reason can, sometimes, overcome technical deficiencies, but not when it comes to Medicaid eligibility.  One cannot assume that an individual will receive Medicaid benefits because it seems to make sense, or it seems to be the fair outcome.  Fairness and logic cannot replace technical precision.

Mrs. Victor did nothing to warrant being ineligible for Medicaid benefits.  She violated no Medicaid regulations.  She did not even create the Trust – her deceased husband did.  The Trust provisions did not lead to the disqualification.  This case was decided solely on the fact that Mrs. Victor’s deceased husband chose to use an Inter-Vivos Trust, instead of a Testamentary Trust, more than 25 years earlier.

We’re just a few days away from witnessing something that was never supposed to be.  I have always cautioned client against expecting tax law to be logical.  In many areas of the law, the correct answer is the one that makes the most sense.  But tax law is driven by politics, not by common sense.

Even so, in more than 30 years of practicing law, I have never seen anything as absurd as what is happening now.  In 2001, a political compromise led to a temporary reduction in the federal estate tax.  Without the 2001 tax reduction, the amount exempt from federal estate taxation would have been $1,000,000.  The 2001 law temporarily increased that exemption through 2009, eliminated the estate tax for 2010 estates, and will reinstate the $1,000,000 exemption on January 1, 2011.

By its very nature, estate planning deals with uncertainty because so many life events will always be unpredictable.  How long will I live?  What health issues will I face?  What will my family look like?  What special needs will my beneficiaries have? Will anyone challenge my choices?  With all that uncertainty, having a stable, permanent, estate tax law helped keep the planning simpler, and therefore, less costly.  Since 2001, the task of developing estate plans that met our clients’ needs and objectives has been like trying to hit a moving target.  The estate tax uncertainty left us trying to plan around an infinite number of possibilities – a $1,000,000 exemption, an unlimited exemption, and anything in between.

Since 2001, most pundits have been certain that Congress would never let 2009 pass without amending this illogical tax law.  Even after Congress proved the pundits wrong, they remained convinced that Congress would act in 2010.  At the least, Congress was expected to allow 2010 estates to elect to use the 2009 law, since couples with a net worth of $7,000,000 or less fared better in 2009 than in 2010.  Still no action and only 2 weeks left in the year.

Sadly, Congress is not even discussing a permanent fix.  To the contrary, the only proposal currently being debated is whether to continue the uncertainty with another temporary fix – this one good for only 24 month.  Observing Congress’ 10-year failure to enact a permanent fix, the question is whether there is a political disincentive to do so.  The estate tax is a perfect wedge issue on both sides of the political aisle, giving rise to speculation that we will never have a rational and permanent solution.

If Benjamin Franklin were still alive, his oft-quoted statement would likely have been: “In this world nothing is certain but death, taxes, and politics.”  The estate tax changes in the Economic Growth and Tax Relief Reconciliation Act of 2001 stand as a testament to the absurd results made possible when politicians are permitted to write tax law.  Tax law that are dictated by political agenda hurt everyone.

Although the 2001 changes altered the structure of the estate tax, they were temporary, leaving pundits certain that the law would be changed or made permanent before long.  They were wrong.  The law has remained unchanged for the past 7 years, preventing families from engaging in meaningful planning based on a reliable and predictable tax law.  The federal budget deficit makes it now unlikely that the changes will become permanent.

The absurdity for New Jersey residents is reflected in the chart below, which shows the effect of the 2001 estate tax changes on three estates:

  Estate #1 Estate #2 Estate #3
Value $1,000,000 $10,000,000 $100,000,000
2008 $33,200 More Tax $607,820 Savings $2,047,460 Savings
2009 $33,200 More Tax $1,282,820 Savings $2,722,460 Savings
2010 $33,200 More Tax $3,727,400 Savings $39,187,400 Savings
After 2010 $33,200 More Tax No Difference No Difference

The federal estate tax debate is unlikely to end.  It serves as a useful political tool, allowing opponents of the tax to demonstrate concern for its impact on family businesses and farms, while allowing supporters of the tax to point to repeal as yet another clash between the haves and the have-nots.  The only question remaining is whether the uncertainty will ever end.