For years people have been worried about Social Security’s future, but what is the actual outlook? According to the federal government, unless Congress acts to intervene, Social Security shortfalls are expected beginning in 2035.
Social Security retirement benefits are financed primarily through dedicated payroll taxes paid by workers and their employers, with employees and employers splitting the tax equally. Employers pay 6.2 percent of an employee's income into the Social Security system, and the employee kicks in the same. Self-employed individuals pay the entire 12.4 percent Social Security payroll tax. This money is put into a trust fund that is used to pay retiree benefits.
The trustees of the Social Security trust fund have reported that if Congress doesn’t take action, the fund’s balance will reach zero in 2035. This is because more people are retiring than are working, so the program is paying out more in benefits than it is taking in. Additionally, seniors are living longer, so they receive benefits for a longer period of time.
Once the fund runs out of money, it does not mean that benefits stop altogether. Instead, retirees’ benefits would be cut. According to the trustees’ projections, the fund’s income would be sufficient to pay retirees 77 percent of their total benefit.
Congress can act to shore up Social Security before this happens. Some ideas include eliminating the cap on benefits. Right now, workers only pay Social Security tax on the first $137,700 of income (in 2020). That amount can be increased, so that higher-earning workers pay more in taxes. The Social Security tax or the retirement age could also be increased.
Social Security is immensely popular and lawmakers are unlikely to allow steep benefit cuts to take place. The last time the program was in financial trouble and received a major overhaul was in 1983, when President Ronald Reagan and congressional Democrats struck a deal to increase taxes and gradually raise the retirement age from 65 to 67.
For more information about a the potential Social Security shortfall, click here and here.
With careful Medicaid planning, you may be able to preserve some of your estate for your children or other heirs while meeting Medicaid's low asset limit.
The problem with transferring assets is that you have given them away. You no longer control them, and even a trusted child or other relative may lose them. A safer approach is to put them in an irrevocable trust. A trust is a legal entity under which one person -- the "trustee" -- holds legal title to property for the benefit of others -- the "beneficiaries." The trustee must follow the rules provided in the trust instrument. Whether trust assets are counted against Medicaid's resource limits depends on the terms of the trust and who created it.
A "revocable" trust is one that may be changed or rescinded by the person who created it. Medicaid considers the principal of such trusts (that is, the funds that make up the trust) to be assets that are countable in determining Medicaid eligibility. Thus, revocable trusts are of no use in Medicaid planning.
An "irrevocable" trust is one that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the "grantor") for life, and the principal cannot be applied to benefit your or your spouse. At your death the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or your spouse for either of your benefits. However, if you do move to a nursing home, the trust income will have to go to the nursing home.
You should be aware of the drawbacks to such an arrangement. It is very rigid, so you cannot gain access to the trust funds even if you need them for some other purpose. For this reason, you should always leave an ample cushion of ready funds outside the trust.
You may also choose to place property in a trust from which even payments of income to you or your spouse cannot be made. Instead, the trust may be set up for the benefit of your children, or others. These beneficiaries may, at their discretion, return the favor by using the property for your benefit if necessary. However, there is no legal requirement that they do so.
One advantage of these trusts is that if they contain property that has increased in value, such as real estate or stock, you (the grantor) can retain a "special testamentary power of appointment" so that the beneficiaries receive the property with a step-up in basis at your death. This will also prevent the need to file a gift tax return upon the funding of the trust.
Remember, funding an irrevocable trust within the five years prior to applying for Medicaid (the "look-back period") may result in a period of ineligibility. The actual period of ineligibility depends on the amount transferred to the trust.
Testamentary trusts are trusts created under a will. The Medicaid rules provide a special "safe harbor" for testamentary trusts created by a deceased spouse for the benefit of a surviving spouse. The assets of these trusts are treated as available to the Medicaid applicant only to the extent that the trustee has an obligation to pay for the applicant's support. If payments are solely at the trustee's discretion, they are considered unavailable.
Therefore, these testamentary trusts can provide an important mechanism for community spouses to leave funds for their surviving institutionalized husband or wife that can be used to pay for services that are not covered by Medicaid. These may include extra therapy, special equipment, evaluation by medical specialists or others, legal fees, visits by family members, or transfers to another nursing home if that became necessary. But remember that if you create a trust for yourself or your spouse during life (i.e., not a testamentary trust), the trust funds are considered available if the trustee has the ability to use them for you or your spouse.
Supplemental needs trusts
The Medicaid rules also have certain exceptions for transfers for the sole benefit of disabled people under age 65. Even after moving to a nursing home, if you have a child, other relative, or even a friend who is under age 65 and disabled, you can transfer assets into a trust for his or her benefit without incurring any period of ineligibility. If these trusts are properly structured, the funds in them will not be considered to belong to the beneficiary in determining his or her own Medicaid eligibility. The only drawback to supplemental needs trusts (also called "special needs trusts") is that after the disabled individual dies, the state must be reimbursed for any Medicaid funds spent on behalf of the disabled person.
To find out whether a trust is the right Medicaid planning strategy for you, talk to your elder law attorney.
“Unlike personal property, real property–such as real estate or automobiles–is titled to convey ownership.”
Title to real property must be transferred, when the asset is sold and must be cleared (free of liens or encumbrances) for the transfer to occur. Unlike other real property assets, real estate ownership can take several forms. Each of these forms has implications on how ownership can be transferred and can affect how they can be financed, improved or used as collateral.
Joint Tenancy. This is when two or more people hold title to real estate jointly, with equal rights to enjoy the property during their lives. When one dies, their rights of ownership pass to the surviving tenant(s). The parties in the ownership need not be married or related, but any financing or use of the property for financial gain must be approved by all parties and cannot be transferred by will after one passes. Another disadvantage is that a creditor with a legal judgment to collect a debt from one of the owners, can also petition the court to divide the property and force a sale in order to collect on the judgment.
Tenancy In Common. In this situation, two or more persons hold title to real estate jointly with equal rights to enjoy the property during their lives. However, unlike joint tenancy, tenants in common hold title individually for their respective part of the property and can dispose of or encumber as they chose. Ownership can be willed to other parties, and in the event of death, ownership will transfer to that owner's heirs undivided. An owner can use the wealth created by their portion of the property, as collateral for financial transactions, and creditors can place liens only against one owner's specific portion of the property. Any liens must be cleared for a total transfer of ownership to take place.
Tenants by Entirety. This can only be used, when the owners are legally married. This is ownership in real estate under the assumption that the couple is one person for legal purposes. The title transfers to the other in entirety, if one of the couple dies. The advantage is that no legal action is required at the death of a spouse. There’s no need for a will, and probate or other legal action isn't necessary. Conveyance of the property must be done in total, and the property can’t be subdivided. In the case of divorce, the property converts to a tenancy in common, and one owner can transfer ownership of their respective part of the property to whomever they want.
Sole Ownership. This is ownership by an individual or entity legally capable of holding title. The main advantage to holding title as a sole owner, is the ease with which transactions can be accomplished, since no other party needs to authorize the transaction. The disadvantage is the potential for legal issues regarding the transfer of ownership, if the sole owner dies or become incapacitated. Unless there’s a will, the transfer of ownership upon death can be an issue.
Community Property. This form of ownership is by husband and wife during their marriage for property they intend to own together. Under community property, either spouse has the right to dispose of one half of the property or will it to another party. Anyone who’s lived with another person as a common-law spouse and doesn't specifically change title to the property as sole ownership (which is legally transacted with approval by the significant other) takes the risk of having to share ownership of the property, in the absence of a legal marriage.
Community Property With the Right of Survivorship. This is a way for married couples to hold title to property. However, it is only available in Arizona, California, Nevada, Texas, and Wisconsin. It lets one spouse's interest in community-property assets pass probate-free to the surviving spouse, in the event of death.
Entities other than individuals can hold title to real estate in its entirety. Ownership in real estate can be done as a corporation. The legal entity is a company owned by shareholders but regarded under the law as having an existence separate from those shareholders. Real estate can also be owned as a partnership, which is an association of two or more people to carry on business for profit as co-owners. Real estate also can be owned by a trust. These legal entities own the properties and are managed by a trustee on behalf of the beneficiaries. There are many benefits, such as managerial influence, financial and legal liability and tax considerations.
“While everyone from brand new parents to great grandparents can benefit from the advice of a competent estate planning lawyer, frequently the individuals making sure that their affairs are in order, are those in their golden years. They have a common concern: what about their grandbabies?”
Leaving money or real estate to a child under the age of 18 requires careful handling, usually under the guidance of an estate planning attorney. The same is true for money awarded by a court, when a child has received property for other reasons, like a settlement for a personal injury matter.
According to the article “Gifts from Grandma, and other problems with children owning property” from the Cherokee-Tribune & Ledger News, if a child under age 18 receives money as an inheritance through a trust, or if the trust states that the asset will be “held in trust” until the child reaches age 18, then the trustee named in the will or trust is responsible for managing the money.
Until the child reaches age 18, the trustee is to use the money only for the child’s benefit. The terms of the trust will detail what the trustee can or cannot do with the money. In any situation, the trustee may not benefit from the money in any way.
The child does not have free access to the money. Children may not legally hold assets in their own names. However, what happens if there is no will, and no trust?
A child could be entitled to receive property under the laws of intestacy, which defines what happens to a person’s assets, if there is no will. Another way a child might receive assets, would be from the proceeds of a life insurance policy, or another asset where the child has been named a beneficiary and the asset is not part of the probate estate. However, children may not legally own assets. What happens next?
The answer depends upon the value of the asset. State laws vary but generally speaking, if the assets are below a certain threshold, the child’s parents may receive and hold the funds in a custodial account. The custodian has a duty to manage the child’s money, but there isn’t any court oversight.
In Georgia, the threshold is $15,000. Check with a local estate planning attorney to determine your state’s limitations.
If the asset is valued at more than $15,000, or whatever the threshold is for the state, the probate court will exercise its oversight. If no trust has been set up, then an adult will need to become a conservator, a person responsible for managing a child’s property. This person needs to apply to the court to be named conservator, and while it is frequently the child’s parent, this is not always the case.
The conservator is required to report to the probate court on the child’s assets and how they are being used. If monies are used improperly, then the conservator will be liable for repayment. The same situation occurs, if the child receives money through a court settlement.
Making parents go through a conservatorship appointment and report to the probate court is a bit of a burden for most people. A properly created estate plan can avoid this issue and prepare a trust, if necessary, and name a trustee to be in charge of the asset.
Another point to consider: turning 18 and receiving a large amount of money is rarely a good thing for any young adult, no matter how mature they are. An estate planning attorney can discuss how the inheritance can be structured, so the assets are used for college expenses or other important expenses for a young person. The goal is to not distribute the funds all at once to a young person, who may not be prepared to manage a large inheritance.
“In some states, clients are charged court costs and attorney’s fees, based on the worth of their probate assets. Thus, the cost of the administration of the estate increases, as the value of the probate estate increases.”
This is just one of the reasons people think they want a trust: to ensure that the value of their overall estate will not decrease, because of the cost of probate. The most common way to do that is with a trust, says The Houston Chronicle in the article “Elder Law: Which should I have—A Living trust or a will?”
In some states, probate is not an expensive or overly time-consuming issue. Texas, for example, has what is called an independent administration. Executors handle the tasks involved in settling an estate and distributing assets to beneficiaries. As a result, there’s very little court involvement. However, that’s not the case everywhere. In California, the Probate Court closely supervises the entire probate process and no assets can be distributed without the Court’s approval. Further, in California, probate costs are 5% to 7% of the gross value of the estate. For instance, if your estate is $1 million, the probate costs can be as high as $50,000. If you want to avoid probate costs, you should hire an estate planning attorney. An experienced estate planning attorney can tell you whether a trust is right for your estate. He or she can also explain the difference between different types of trusts.
The trust most frequently used to avoid probate, is known as a revocable management trust, living trust or an “inter vivos” trust.
Selecting the best type of trust for each situation is different. Here are some advantages of living trusts:
Avoiding probate. The cost of probate alone is not reason enough to use a trust. However, if your assets are in trusts, you may not need to file an inventory listing your assets with the court. That’s not always required in every jurisdiction, but if it is required where you live, a trust can help keep your asset list private, by ensuring that it is only seen by beneficiaries.
Asset management for incapacity. A living trust goes into effect, while you are alive. If you become incapacitated, an alternate trustee can step in to manage assets, pay bills and ensure that finances are taken care of.
Avoiding probate in another state. If you own out-of-state property, your estate may need to be probated in your home state and in the other state. If you have a living trust, out-of-state parcels of land can be deeded into the trust during your lifetime, thus avoiding the need for probate in another state. After your passing, your trustee can handle the out-of-state property in the living trust.
Administrative ease. There are, unfortunately, instances when Power of Attorney can be challenged by financial institutions. The authority of a trustee is more likely to be recognized, by banks, investment companies, etc.
There are some questions about whether it’s better to have a living trust or a will. The most complex part of having a living trust, is the process of funding the trust. It is imperative for the trust to work, that every asset you own is either transferred into the trust or retitled into the name of the trust. If assets are left out or incorrectly funded, then probate will probably be necessary. This can occur, even if only one single asset is left out.
If an asset is controlled by beneficiary designation, then the trust may not need to be named a beneficiary, should you want it to pass directly to one or more beneficiaries.
Funding the trust becomes complicated, when retirement accounts are involved. Consult with an experienced estate planning attorney, if you want to make the trust a designated beneficiary of a retirement account. This is because very specific and complex rules may limit the ability to “stretch” the distributions form the account.
Using a trust instead of a will-based plan is growing in popularity, but it should never be an automatic decision. An estate planning attorney will be able to explain the pros and cons of each strategy and help you and your family decide which is better for you.
“According to the Centers for Disease Control and Prevention, more than 42,000 people lost their lives due to opioid use in 2016, a fivefold increase from 1999.”
Opioid addiction has reached epidemic proportions, with drug overdoses now the leading cause of death for Americans under age 50. Families struggling with the emotional and financial damage, are the subject of the article “How to leave money to a family member with an addiction” from MarketWatch.
Even good children from loving families become addicted and are driven to steal and lie to get money to support their habits. Parents of children are wracked by guilt and anger. The stories of families spending hundreds of thousands of dollars in an effort to help their children are growing in number—as are the number of families who exhaust their retirement savings paying for rehabilitation and related services.
Trusted family advisors, including estate planning attorneys and financial advisors, find themselves working with families to protect the family finances and the well-being of their addicted family members. The fallout from addiction creates many secondary problems for families.
Estate planning for a family grappling with addiction addresses many different issues, not just inheritance. Guardianship of minor children and protecting the interests of family members are among the issues that estate planning addresses. A mindfully created estate plan can serve as a resource and a means of protecting a legacy.
Lump sum distributions or full bequests to an adult struggling with addiction can be deadly, if the person uses the funds to purchase large quantities of drugs. At the same time, writing someone out of the will completely and withdrawing all support, can be devastating to the addicted adult and the family.
Creating a trust can help to protect assets and ensure that there is some degree of accountability in how the distributions are made. Incentive trusts, where a certain behavior or accomplishment markers are determined, can be used to encourage behaviors.
This may mean that the addicted adult does not receive funds, until after passing a drug test, attending a certain number of treatment sessions or entering a residential rehabilitation program.
Incentive trusts are part of a special area of estate planning. Therefore, it is necessary to work with an attorney who has experience with trusts and with incentive trusts. Ideally, the attorney who helps your family, will be one who is also familiar with the impact of addiction on families.
Creating incentives for positive outcomes includes having consequences when the person fails to meet the terms of the trust.
In this situation, a trustee who is extremely trustworthy and not prone to being manipulated is necessary. They will need to make sure the person adheres to the requirements and while they may be given certain levels of discretion, this person will need to be strong-willed enough to withstand a strong-minded, potentially aggressive, addict.
This kind of trust may require the beneficiary to submit to specific terms and provide access to their health records, which itself requires a HIPAA waiver for the trustee.
Creating an estate plan with an incentive trust presents many challenges for the family and the trustee. It may well become a highly charged, emotional process. However, talking about these issues openly is part of preparing for the future. Concerns about what will happen to an addictive member of the family after the parents are gone, will hopefully create some peace of mind in a turbulent setting.
“Typically, criticisms of trustees center around fees, locality and beneficiaries’ perceived lack of access to funds and to the administrator.”
Officers at trust companies often hear comments that it hardly seems necessary to have a professional involved in administering an estate. After all, they ask, how difficult can it be? Serving as a trustee can actually be extremely complex, says Kiplinger in the article that explains it all: “Why You May Need a Pro Trustee: Trust Administration is Not Just Common Sense.” Here’s one of many examples of how much can go wrong.
Let’s call our client Linda. She wants to identify a successor trustee. Linda’s parents had identical estate plans with trusts that were set up for Linda and her two siblings Jack and Diane. Linda was the family’s responsible one, so she received her share in each estate outright and served as the trustee for the other separate trusts, two for Jack and, two for Diane, since the second of her parents died some 10 years ago. This is not unusual—parents will often give the responsible person in the family, the role of trustee, when their siblings are seen as less likely to perform the necessary tasks.
These four trusts were close in value, with about $440,000 in each. They were identical in other ways: the trustee had the power to pay from income and principal each year for the beneficiary’s health, maintenance and support, but there was no requirement to distribute anything. Linda had done a great job, in keeping with her reputation. For 10 years, she recorded every transaction. Because she knew her siblings resented her serving as trustee, she never paid herself a fee.
Linda was tired, and she wanted to let someone else be in charge of the trusts.
When the trusts were presented to an institutional trust officer, it was clear why the trusts had never been merged. Linda’s mom had executed an amendment to the estate plan, after Linda’s dad died that ensured that when these siblings passed (that would be Jack and Diane), the trusts would pass to their descendants. Linda’s mom executed this amendment, so that when Jack and Diane passed away, the trust from the mother would be divided among her surviving children. This meant that Linda would get another share, and Jack and Diane’s children would get less benefit from that trust.
Linda’s mom thought she was doing a good thing. However, her decision put Linda in a bad position. She became an “interested” trustee, with the power to make decisions that would eventually put more funds into her pockets or diminish her share. Of course, that would only happen if she outlived her siblings.
Linda had been diligent and responsible, insuring that the trusts had the exact same asset allocation and investments, paying out income from the trust and when one called asking for money, giving both the same additional amount from the mother’s trust and the father’s trust, even though any distributions made from the mother’s trust make her less likely to receive a larger share in the future. She also made the same distribution for the other sibling, to keep things even.
However, Linda’s actions, while seemingly very prudent and fair, could be interpreted as a breach of trust that leaves her open to a lawsuit judgment against her.
Her sister Diane had few or no other income sources. Each year, she spent every penny she got, just to get by. Diane requested additional distributions every year. When Diane dies, Jack will receive an additional share of Diane’s trusts, if he survives her.
Jack had plenty of income and assets. If Diane survived him, she’d receive a share of one of his trusts. But wait—Jack’s been receiving funds from the trust that was to have benefited his spouse and dependents, not Diane. Therefore, while Linda’s been trying to keep everything fair, she has actually been undermining the trusts that may pass to Jack’s descendants, by distributing funds Jack didn’t even need. Linda could have made distributions from her mother’s trusts to increase the chances that Jack’s and Diane’s descendants would receive a greater share at their parent’s death.
Linda didn’t see the larger picture, and as a result has made 10 years of decisions that could create a serious financial problem for herself, if one of her siblings is litigious.
This is one example of how even the best of intentions and integrity have the potential to create a trust nightmare. An estate planning attorney would have seen the vulnerabilities in this distribution plan and advised the trustee how to best deal with the administration of the trusts to protect themselves and the other heirs.
“What would happen to your pet’s if you died tomorrow? Would a friend or relative take them? Are you sure?”
If you have pets that you consider family members, you’ll want to make sure you have made plans for their care, after you have passed. That’s the message from U.S. News & World Report in the article “How to Build an Estate Plan for Your Pets.”
How much time and money you devote to your pet’s care after you are no longer able to care for them, varies widely from state to state and depends on what you consider a comfortable lifestyle for your furry pals. You might include your pet in your estate in some states, or you may do better with a pet trust.
Include your pet in your will. One option is to use your will to leave your pet and some money to a trusted caretaker. This is kind of like leaving a collectable car to someone, as opposed to asking someone to be a guardian for your minor children. You are transferring the pet as an asset and making a bequest of a certain amount of money for their care. However, remember that the funds are being transferred with the hope and trust that the person will use them as you intend. The use of the money is not legally binding.
Have a pet trust created. This is admittedly a more expensive way to go but it gives you more control over the care of your pet. It allows you to set up a plan that mirrors how you’d create a plan for guardianship, rather than a piece of property. Your estate planning attorney will know what your state allows for pets.
The key part of a pet trust is the designation of a primary caretaker or physical custodian who will be responsible for caring for your pet on a daily basis. The second is a trustee, who will be sure that funds allocated to the pet trust are managed, invested and paid out as needed.
Get buy-in from the trustee and the caretaker. This is not something you want to spring on someone after you’re gone. Make sure the people you have in mind understand what you want them to do and what their responsibilities will be. You also want a back-up plan. Some shelters, especially no-kill shelters, have plans for taking in pets for the rest of their lives, although they do request a donation be made. Visit the facility and make sure you understand how their program works, before naming them as a back-up on your pet care plan.
Know how much this will cost. Caring for a quarter horse will have a completely different cost than caring for a 70-pound golden retriever. If you can, track the cost of care, including food, toys, vet visits, groomers, etc., over the course of a year. Talk with your vet about expected medical costs for the future, especially if your pet is very young. Plan out your budget carefully, so the caretaker will have enough money, then leave a little extra for unforeseen circumstances.
Keep your pet care plan up to date. Just as your estate planning documents need to be kept up to date, so do those for your pets. If you add another furry member to the family, or if one dies, make sure that your estate plan reflects these changes.
“Many of us have experienced the unexpected "telephone call" from a hospital or loved one that a sudden negative medical event has occurred, involving a member of your family.”
It’s never a good thing, when you get a call and the person on the other end asks if you are sitting down.
A sudden death or medical crisis can turn your world upside down, especially if the person was not prepared with the right documents says The Union in the article “Estate planning in a time of crisis.” Your heart sinks and questions start flooding your mind. Will they survive? How far is the hospital and how fast can you get there? Will they end up in nursing care? Who will be able to help you care for them?
The questions go on, long after the initial panic subsides.
There are three documents you’ll wish you had when dealing with a medical crisis for a loved one: a health care directive, a durable power of attorney and a living trust.
When a loved one needs help in making decisions and discussing their situation with doctors and other care providers, a health care directive grants you the authority to speak on their behalf. The law requires health care professionals to have legal permission to speak with a representative about highly personal and confidential information. The law requires medical professionals to perform life-saving procedures, which are sometimes painful and unwanted. If the wishes of the person are not correctly documented, it is not possible to stop these procedures from being initiated.
The most common need for this document, is what kind of on-going care is needed and wanted for the loved one, who can no longer express their wishes or care for themselves without help.
Any asset owned by an incapacitated person that is not titled in the name of their trust, cannot be overseen by the successor trustee. The person who is named a durable power of attorney is permitted to control and direct these assets, including transferring them into the trust.
Retirement accounts, 401(k)s, IRAs, Deferred Compensation Benefit Plans, SEPs and all other assets or benefit plans not titled in the trust name can be administered only by the person named the durable power of attorney.
If there is no power of attorney at the time a loved one becomes incapacitated, the only way they can access funds outside a trust is to have a guardian appointed for their loved one. The court must be involved in every part of their life, as long as their loved one lives.
A living trust is a legal document that provides for the smooth transition of management, administration and distribution of assets by the grantor, the person who is putting their assets into their trust during their lifetime. When that person is no longer legally competent, the successor trustee takes over with all the legal powers outlined in the living trust document.
This document gives clear legal authority so that assets can be managed, income can be distributed and bill paying and distribution of the estate at death can take place.
Speak with a qualified estate planning attorney to put these important documents into place, along with creating a will, so you are protected before an emergency occurs.