by Monte L. Schatz

When the topic of estate planning comes to mind, most individuals think about the distribution of their assets at death.   The increased longevity of our population requires equal attention to diminished cognitive skills caused by dementia or other diseases that affect normal cognitive functioning.

Dementia is a syndrome in which there is deterioration in memory, thinking, behavior and the ability to perform everyday activities.  An estimated 5.5 million Americans of all ages have Alzheimer’s disease.  One in 10 people age 65 and older has Alzheimer’s dementia.  The average survival time for people diagnosed with dementia is about four and a half years, new research shows. Those diagnosed before age 70 typically live for a decade or longer.  The time frame from mild cognitive decline to the onset of dementia averages seven years.   Typically, when an individual is in the moderately severe cognitive decline, assistance may be required for daily activities and management of the person’s financial affairs.

The difficulties that families encounter is determining when the person no longer can manage their own affairs or maintain his or her own physical well-being.  The ultimate question of capacity is a legal determination and in some cases a judicial determination, not a clinical finding. A clinical assessment stands as strong evidence to which the lawyer must apply judgment considering all the factors in the case at hand.  While psychologists and other health professionals may use different terms than lawyers, conceptually the clinical model of capacity has striking similarities to the legal model.

The best estate planning approach is to take proactive legal steps ahead of mental decline to assure adequate personal and financial care and to minimize unnecessary legal costs or litigation expenses.  The legal tools available to circumvent legal capacity issues include:

  • A will drafted in advance of cognitive decline to minimize heirs contesting an estate.
  • A living trust should be considered to assure proper management of assets and continuity of financial management by a trustee for the incapacitated person’s benefit.
  • A durable power of attorney for financial matters designating a trusted and financially responsible individual to manage assets upon the onset of mental incapacity.
  • A health care power of attorney or directive that provides for a designated person to make health decisions in the event of incapacity.
  • A living will that outlines, in advance, the wishes of a person who receives artificial life sustaining treatment.

Thoughtful estate planning in advance of mental decline can help avoid expensive court alternatives that can include court conservatorships or guardianships during life and/or estate litigation after the person’s death.  More importantly, well designed advanced planning minimizes the possibility of disputes among heirs that may disrupt family relationships.

© 2017 Vandenack Weaver LLC
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Preventing Financial Abuse of Elders

Elder abuse can take many forms, but according to a True Link report, 36.9% of elder abuse takes the form of financial abuse in any five year period. This same True Link report estimates that financial abuse of elders costs $36.48 billion, annually. One particularly challenging area of financial elder abuse stems from high-pressure selling tactics for estate planning tools, such as living trusts, that are unnecessary for the senior.

Although living trusts have many benefits, the seniors targeted by the high pressure sales tactics tend to have few transferrable assets, which makes the benefits of having a living trust relatively small. What’s worse, when a sales tactic is successful and the senior signs up for a living trust, usually that relationship leads to an estimated $2,000 of needless financial products sold to that senior for every $20 lost to the initial exploitation. Overall, this type of financial elder abuse costs seniors an estimated $17 billion dollars, with trust abuse at $6.7 billion, annually.

For elders, prior to agreeing to a living trust or other financial vehicle, speaking to another financial professional will aid in combating these abusive sales tactics. Moreover, if you purchase a living trust agreement in a location other than the seller’s place of business, you have three days to cancel the deal. Finally, take the time to verify any facts presented in a high pressure sales effort.

© 2016 Vandenack Williams LLC
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New Considerations for Planning with a Special Needs Trust

Special needs trusts remain a critical planning tool for individuals with disabilities, or parents with children that have disabilities. Moving into 2016, a multitude of changes are occurring within the law that require a practitioner to at least review the potential complications. These changes involve ABLE accounts, state-based entitlement programs, or even potential complications with veterans’ benefits. However, of particular concern is the revamped Social Security Administration special needs trust review process.

In 2014, the Social Security Administration (SSA) started routing all Supplemental Security Income applications that include a trust to the Regional Trust Reviewer Team. This was a response to criticism that the prior system, which simply allowed the local office to review based upon their interpretation of the Program Operations Manual System (POMS) trust guidelines, was inconsistent. As a result of the new system, unintended consequences recently started surfacing. For example, the SSA is now retroactively rejecting previously approved trusts under the redefined policy interpretations. This means special needs trusts must meet the new interpretations of the POMS trust guidelines, otherwise risk having the disabled individual disqualified from government benefits.

For those considering a special needs trust to plan for an individual with a disability or those that currently have a special needs trust, this new review process requires considering whether the redefined trust rules would disqualify the individual from receiving government benefits. If questions arise about amending a special needs trust or the process taken by a regional reviewer, an individual should consult with a trust attorney.

© 2015 Vandenack Williams LLC
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IRS Private Letter Ruling on Testamentary Powers of Appointment of Trust Property

In late 2014, the Internal Revenue Service (IRS) issued two Private Letter Rulings (PLR) regarding testamentary powers of appointment. In the PLRs, the IRS evaluated whether a grandchild’s power of appointment over a grandparent’s trust property qualified as a general power of appointment. The importance of the distinction is determining whether the trust property would be included in the grandchild’s estate. If the trust property is considered a part of the grandchild’s estate, his or her creditors could attach to the property in the trust.

The PLRs declared that the testamentary powers of appointment, as drafted, were not broad enough to consider them a general power of appointment. The language explicitly detailed that it was a discretionary trust and upon the grandchild’s death, the property must be distributed to the grandchild’s issue as designated by the grandchild. Since the power of appointment was limited to a finite number of individuals, it was not a general power. Since this was a testamentary trust, the grandchild lacked the ability to appoint any creditor or himself as beneficiary. Thus, the IRS determined that the trust assets are not attachable by the grandchild’s creditors, nor included in the grandchild’s estate.

For more information please see the original private letter rulings, PLR 201446001 and PLR 201446011.

© 2015 Houghton Vandenack Williams Whitted Weaver Parsonage LLC

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In re Castellano: A Strike at Third Party Spendthrift Trusts

By Mary E. Vandenack.

In In re Castellano,  a Bankruptcy Court in Illinois applied Section 548(e) of the  Bankruptcy Code to disregard a third party trust containing spendthrift provisions and conclude that the spendthrift trust was a device similar to a self-settled trust and that the assets of the trust were subject to seizure by the creditors of a trust beneficiary who filed bankruptcy.

Faith Campbell created the Faith M. Campbell Living Trust (“LT”) on February 18, 1997 in South Carolina, where she was a resident. The LT provided that upon Faith’s death, its assets would be divided equally among her children. The LT stated that “[upon] the death of Faith F. Campbell and upon settlement of her estate, this Living Trust shall terminate”.  The LT contained a spendthrift clause as follows:

“If any beneficiary should attempt to alienate, encumber, or dispose of all or any part of the income or principal of this trust before it has been delivered by the Trustee, of if by reason of bankruptcy or insolvency or any attempted execution, levy, attachment, or seizure of any assets remaining in the hands of the Trustee under claims of creditors or otherwise, all or any part of the income or principal might fail to be enjoyed by any beneficiary or might vest in or be enjoyed by some other person, the interest of that beneficiary shall immediately terminate…Thereafter, the Trustee shall pay to or for the benefit of that beneficiary only those amounts that the Trustee, in its sole and absolute discretion, deems advisable for the education and support of that beneficiary until the death of the beneficiary or the maximum period permissible under the South Carolina rule against perpetuities, whichever first occurs.”

Faith died on February 11, 2011, survived by all four of her children, including Linda Castellano (“D”), who was a debtor in the case. Bank of America declined to accept its appointment as trustee and in March 2011 Faith’s children, including D, named the husband of one of Faith’s grandchildren (a nephew by marriage) as trustee.

D filed bankruptcy on November 18, 2011. Prior to filing, D’s counsel sent a letter to the trustee of LT indicating that D was insolvent and directing the trustee to set aside and retain any assets that might otherwise be distributed to D in a spendthrift trust. On October 31, 2011, D signed a receipt acknowledging she would receive no distribution from LT.

The court applied Section 548(e)(1) of the Bankruptcy Code to conclude that the assets in the spendthrift trust were subject to seizure by D’s  creditors. The court concluded that D had made a transfer as a result of the combined effect of the letter from her counsel to the trustee, her signature on the receipt, release and refunding agreement and a “familial” Trustee.

 The court concluded that the transfer by D  was to a device similar to a self-settled trust because the trust was created to shield D from creditors and to preserve the rights of D to future distributions from the trust. The court indicated that D had indirectly created the trust by refusing to take a distribution of assets from LT and instead engaging in a course of action that resulted in setting aside her share of LT in the spendthrift trust.

The court’s decision in this case seems flawed. It is our understanding that counsel for D is considering an appeal.

© 2014 Parsonage Vandenack Williams LLC

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How Can a Lawyer Help Me With Artificial Reproduction?

A Video FAQ with Mary E. Vandenack.

The technical term is assisted reproduction, at least from a legal perspective, and a lawyer can help in a variety of ways. One thing that is really important is that each state’s laws vary on different aspects of  the assisted reproduction process.  You need to understand the state law and the state you are working in. Those laws affect such things as who the parents are. You also need to consider updating your wills and trusts to identify who your heirs are. So you might have a grandparent and one of their grandchildren is the child of assisted reproduction and you need to make decisions about including or excluding, exactly what you mean, when you refer to children and grandchildren in your trust and will documents.

© 2014 Parsonage Vandenack Williams LLC

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What Are the Important Laws Related to Artificial Reproduction?

A Video FAQ with Mary E. Vandenack.

There are a variety of laws that relate to what is actually called assisted reproduction. Most states have some version of a Uniform Parentage Act or some type of law like that. What those laws do is to specify who the father is in the case of a sperm donor and other similar issues. There are also surrogacy laws that define whether surrogacy is permitted, whether it can be paid for, and what type of things you can do in contracts. If you enter into any type of contract related to assisted reproduction, there are a variety of things to consider and each state’s laws govern those aspects.

© 2014 Parsonage Vandenack Williams LLC

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Are There Any Lifetime Planning Options Available to Me to Reduce My Exposure to Estate Taxes?

A Video FAQ with Mary E. Vandenack.

There are a variety of techniques that can be used to reduce your exposure to estate tax. A really simple one is an annual exclusion. Every year you can make a gift to any individual for up to a certain amount–that amount changes from year to year. You can also make lifetime gifts to your heirs/beneficiaries that are going to add up to the maximum amount you can pass during your lifetime. Next you want to go ahead and set up a trust or consider other lifetime planning strategies. There are a variety of trust techniques that will allow you to reduce your exposure to estate taxes. There are also some newer techniques that just using portability in your estate plan that can minimize your exposure to estate taxes.

© 2014 Parsonage Vandenack Williams LLC

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What Is a Revocable Living Trust?

A Video FAQ with Ronald K. Parsonage.

A revocable living trust is a document that is created by yourself as the grantor and its purpose is to hold assets for the benefit of yourself and your family, typically during your and their lifetimes. The idea of a revocable trust is that the assets can pass to or for the benefit of your family without probate. It has another very unique value connected to it in the fact that you can coordinate a lot of tax activities by using skip generation planning within the trust and cause the assets to pass down to your spouse, children and grandchildren without being taxed again.

© 2014 Parsonage Vandenack Williams LLC

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What Benefits Does a Trust Offer?

A Video FAQ with Mary E. Vandenack.

A trust can offer a variety of benefits. One possibility is probate avoidance. If all of your assets are titled in a trust, then the assets are not going to go through the probate process in that state.

Another advantage that a trust can offer is to protect assets from creditors. If I create a trust for my son, depending on how I structure that trust, there are certain protections from his creditors or from a divorcing spouse.

Another benefit of using a trust is to reduce estate taxes. If you have an estate tax exposure, there are certain ways you can structure the trust to protect those assets.

You can also control disposition among a mixed family. If your particular estate plan involves a remarriage and kids from one or more families, you can set up a trust so that each is treated, in some respect, fairly within that trust.

© 2014 Parsonage Vandenack Williams LLC

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