Frequently Asked Questions

  • Medicaid Planning

    Q: What is Medicaid for Nursing Home Coverage?

    A: Medicaid is a federal program that works with the State of Alabama to provide payment for nursing home care for persons unable to afford private pay. While federal eligibility standards are the same throughout the United States, each state has its own additional standards. As a result, you need to know your residential state law requirements. Medicaid eligibility is generally based upon the amount of assets a person owns along with the person’s monthly income. Eligibility is decided at the State of Alabama Medicaid offices.

    Q: What Do I Need To know?

    A: Medicaid law is very complex. As an elder law attorney, I have carefully studied the Medicaid statutes and regulations and applicable State law to be able to assist my clients in obtaining these benefits.

    Medicaid is important to lower and middle income Americans. It is important because they did not purchase long term care insurance to cover the cost of long term care for illnesses such as Alzheimer’s disease or paralysis caused by stroke. People who need such care will eventually deplete all of their hard earned assets and become unable to pay the costs of nursing home care.

    Q: How much does a nursing home cost?

    A: The cost of a nursing home varies between geographic regions and depends largely on the type of care required. A good estimate would place the average cost somewhere between $6,000 and $8,000 per month. These costs are consistently increasing over time.

    Q: How will I pay for the cost of nursing home stay?

    A: There are three basic choices:

    1. Use your personal assets to pay the cost;
    2. If you have a long-term care insurance policy, the insurance would cover some, if not all of the cost; or
    3. Qualify for Medicaid and have the government subsidize your stay.

    Q: Will Medicare cover the cost of a nursing home?

    A: Medicare only provides a limited amount of coverage, and only under certain circumstances. Medicare does not cover custodial care in a nursing home, only rehabilitative care. If an individual is in the nursing home and is rehabilitating, Medicare will cover the full cost for the first 20 days, and then part of the cost for the next 80 days. After that, the individual is responsible for the full amount of the monthly cost.

    Q: What is long term care insurance?

    A: Long-term care insurance is an insurance product that is designed to pay some or all of the policyholder’s long-term care expenses. These expenses can include home health care, assisted living, community-based residential facilities and nursing homes. Policies have become increasingly customized, so it is important to discuss your situation with a long-term care insurance specialist.

    Q: Is it advisable to give assets away to my children?

    A: The key to proper estate planning is to keep as much control of your life and your assets as possible. By giving assets away to your children, you’ve not only lost control of your assets, but those assets are now vulnerable if a child gets divorced, is involved in a lawsuit, or dies. Assets should only be given to children if it is part of a plan that is carefully crafted by a qualified elder law attorney with your particular life situation in mind.

    Q: What is Medicaid and how do I qualify?

    A: Medicaid is a combined federal and state program that provides funds for long-term care expenses for those with limited income and resources. In order to qualify, an individual must have monthly income that is less than their long-term care expenses. In addition, the applicant must have few or no assets. For single individuals, the amount of non-exempt resources must be less than $2,000. For married couples, the applicant must be below $2,000, but the spouse can typically keep anywhere from $50,000 to $110,000. There are certain exempt assets that are not counted when determining the amount of assets. These assets include the family residence, personal belongings, certain vehicles, burial assets and a small amount of life insurance.

    Q: Can I give assets away and still qualify for Medicaid?

    A: Giving assets away in order to reduce them to the size of the applicant’s estate qualifying levels is frowned upon by the government entities that fund the Medicaid program. Therefore, on the Medicaid application, the applicant is asked to disclose any gifts made within the prior 60 months (“lookback period”). If any gifts were made during this period, there is a penalty period imposed that is calculated based on the total value of assets given away during the period. Remember: The larger the amount of the gift, the longer the penalty period. During the penalty period, the applicant will be expected to pay for long-term expenses from other sources. The goal of the lookback period and the penalty period is to discourage and eliminate any gifts made with the intention of qualifying for Medicaid benefits.

  • VA Pension Planning

    Q: Are there Veterans Benefits that can help me pay for assisted living and/or nursing home costs?

    A: Yes. There is a federal assistance program offering a monthly payment from the Department of Veterans Affairs designed to provide care for people who are disabled or frail and might have trouble living on their own. The money can be used to pay assisted living bills, home health care, or nursing home expenses. Anyone on this type of benefit automatically qualifies for VA health care benefits.

    Q: Am I eligible to receive these VA Benefits?

      1. A: You must pass the Veteran status requirements:
        1. If you served prior to September 1 ,1980, you must have served at least 90 days of continuous active duty;
        2. If you served after September1, 1980, you must have served 24 months of continuous active duty;
        3. You must have served a minimum of one day of wartime; and
        4. Your discharge must be other than dishonorable.

      1. You must pass the “Needs” tests:
        1. You must pass the monthly income test; and
        2. You must pass the minimum asset test.

    1. Once you pass tests (1) and (2) above, the VA will determine whether you qualify for pension due to disability. There are three levels of benefit based upon disability:
      1. Improved Pension: You can receive “Improved Pension” if you are permanently and totally disabled. You are automatically considered permanently and totally disabled if you are over the age of 65, are in a nursing home, or have been determined disabled by the Social Security Administration. If you are not automatically considered permanently and totally disabled, you must show you are unemployable and this condition will last the remainder of your life.
      2. Improved Pension Plus Housebound Allowance: You can receive an additional “Housebound Allowance” if you can prove you “substantially confined to the home or immediate premises due to a disability which is reasonably certain will last your lifetime.”
      3. Improved Pension and Aid and Attendance: You can automatically receive additional “Aid and Attendance” if you are in a nursing home or blind. If you are not in a nursing home or blind, you must prove that you have a substantial daily need for assistance with the activities of daily living.

    Q: Are there any VA benefits for a veteran’s surviving spouse or dependent children?

    A: Yes. The VA provides benefits for the surviving spouse or dependent children of veterans under certain circumstance.

     
  • Estate Planning

    Q: What is estate planning?

    A: Estate planning is a process that accomplishes the following objectives:

    • Controlling property while you are alive and well
    • Taking care of yourself and your loved ones in the event of a disability
    • Giving what you have to whom you want, when you want, and how you want upon your death.

    Without a good estate plan, you and your family may lose control over your property, suffer through unnecessary court proceedings, and pay excessive taxes. The lack of an estate plan may also deprive your family of the opportunity to receive from you a lasting legacy designed to bring your family closer together.

    Q: What happens if you do not plan your estate?

    A: If you do not plan your estate correctly, your assets may pass to beneficiaries in accordance with state law, not in accordance with your wishes. The court system will be in charge of choosing your executor and the guardians for your minor children. The court will have jurisdiction over the assets inherited by minor children until they reach the age of 19, at which time each the child will receive full control over the assets, without guidance or advice from others.

    Q: What are some common estate planning documents?

    A: Common estate planning documents include the following:

      • Will – A will is a written document that tells the court how to divide your property at the time of death. It also tells the court who should be the guardian for your minor children and your executor.

     

      • Trust – A trust is a written legal document that provides instructions on how the property titled in trust’s name is to be managed and distributed. Trusts have the advantages of increased privacy, increased asset protection for surviving spouses and children, planning in the event of a disability, legitimate tax avoidance and probate avoidance.

     

      • Durable Power of Attorney – A durable power of attorney is a written document wherein you (“principal”) appoint someone else (“agent”) to have the authority to act on your behalf. The agent will have the authority to act even in the event you become disabled. The authority granted to the agent can include all financial transactions, managing investments and making gifts.

     

      • Health Care Power of Attorney – A health care power of attorney is a written document wherein you (“principal”) appoint someone else (“agent”) to have the authority to make health care decisions on your behalf when the you cannot make them yourself. Your agent should have a clear understanding of your views with regard to continuing health care decisions under certain circumstances.

     

      • Living Will – A living will is a document that instructs your physicians regarding specific types of medical treatment that you do and do not want to receive. They are mainly used by those who desire to authorize the withdrawal of life sustaining treatment if the treatment is simply prolonging life without any hope of a meaningful recovery.

     

    • HIPAA Authorization – The Health Insurance Portability and Accountability Act of 1996 (HIPAA) ensures the privacy of your health care information. These strict privacy rules may restrict your loved ones from obtaining access to this information when necessary. A HIPAA Authorization will allow the individuals you designate to obtain this information.
  • Asset Protection

    Q: What is a Living Trust?

    A: A living trust is a written legal document that provides instructions on how property titled in the trust’s name is to be managed. There are generally three parties involved with trusts:

    1. Trustmaker – the person who makes the trust
    2. Trustee – the person on institution entrusted by the Trustmaker to carry out the trust’s instructions
    3. Beneficiary – the person who benefits from the trust

    Living trusts go into legal effect upon signing, when the Trustmaker is still alive. This distinguishes them from testamentary trusts, which become legally effective when the Trustmaker dies.

    Q: What are the advantages of having a Living Trust?

    A: Like a Will, a Living Trust is a legal document that provides for the management and distribution of your assets after you pass away. However, a Living Trust has certain advantages when compared to a Will. A Living Trust allows for the immediate transfer of assets after death without court interference. It also allows for the management of your affairs in case of incapacity, without the need for a guardianship or conservatorship process. With a properly funded Living Trust, there is no need to undergo a potentially expensive and time-consuming public probate process. In short, a well-thought out estate plan using a Living Trust can provide your loved ones with the ability to administer your estate privately, with more flexibility and in an efficient and low-cost manner.

    Q: Will I lose control over my assets if I establish a Living Trust?

    A: Absolutely not! During your lifetime when you are mentally competent, you have complete control over all your assets. You may engage in any transaction as the trustee of your Trust that you could before you had a Living Trust. There are no changes in your income taxes. If you filed a 1040 before you had a trust, you continue to file a 1040 when you have a Living Trust. There are no new Tax Identification Numbers to obtain. The Living Trust can be modified at any time or it can be completely revoked if you so desire. Upon your incapacity, your successor trustees are able to act on your behalf, according to the instructions you have laid out in the Living Trust. Upon your passing, the Trust becomes irrevocable so that no one can change your testamentary wishes.

    Q: What assets are left outside of my trust?

    A: Assets with beneficiary designations such as a life insurance policy or annuity payable directly to a named beneficiary need not be transferred to your Living Trust. Furthermore, money from IRAs, Keoghs, 401(k) accounts and most other retirement accounts transfer automatically, outside probate, to the persons named as beneficiaries. However, when you do your estate planning, it is important to seek the counsel of an experienced attorney who is familiar with the intricate regulations of retirement accounts and can coordinate the appropriate beneficiary designations with your overall estate plan.

    Q: If I transfer real estate to my trust, can the bank call my loan?

    A: In most cases, no. Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your Living Trust as long as you continue to live in that home. The only exception to the federal law, enacted as part of the 1982 Garn-St. Germain Act is that it does not provide protection for residential real estate with more than five dwelling units. However, we find that most clients who do own residential property with more than five dwelling units tend to own them through a business entity and not directly in their individual names and hence are not concerned with the five dwelling exception.

    Q: Why do I need a Pour Over Will if I have a Living Trust?

    A: A Pour-Over Will is used first to name a guardian for minor children. Second, it protects against intestacy in the event any assets have not been transferred into the trust at the death of the Trustmaker/Owner. It will also invalidate any previous Wills which you may have executed. Its function is to “pour” any assets left out of the trust into it so they are ultimately distributed according to the terms of the trust.

    Q: What is the purpose of a Special Needs Trust?

    A: While you can certainly bequest money and assets to those with special needs, such a bequest may prevent them from qualifying for essential benefits under the Supplemental Security Income (SSI) and Medicaid programs. However, public monetary benefits provide only for the bare necessities such as food, housing and clothing. As you can imagine, these limited benefits will not provide those loved ones with the resources that would allow them to enjoy a richer quality of life. But if parents leave any assets to their child who is receiving public benefits, they run the risk of disqualifying the child from receiving them. Fortunately, the government has established rules allowing assets to be held in trust, called a “Special Needs” or “Supplemental Needs” Trust for the benefit of a recipient of SSI and Medicaid, as long as certain requirements are met.

    Q: When should a Special Needs Trust be established?

    A: Generally, a Special Needs Trust should be established no later than the beneficiary’s 65th birthday. If you have a disabled or chronically ill beneficiary, you may want to consider establishing the Special Needs Trust at an early age. One benefit of having the Trust in place is that if the disabled beneficiary becomes the recipient of funds such as gifts, bequests or a settlement from a lawsuit they can immediately be transferred to the Special Needs Trust without affecting that individual’s eligibility for government benefits.

    Q: Who can establish a Special Needs Trust?

    A: While Special Needs Trusts are typically established by parents for their disabled children, any third party can establish a Special Needs Trust for the benefit of a disabled beneficiary. It is important to seek the assistance of competent counsel when creating a Special Needs Trust. Indeed, a poorly drafted Trust can easily be subject to “invasion” by the government agencies who provide benefits. Our law firm has the experience and the expertise to establish effective Special Needs Trusts for anyone who wishes to provide for a disabled beneficiary.

    Q: Our family is wealthy. Do we still need to create a Special Needs Trust?

    A: Yes, you should still establish a Special Needs Trust to protect your disabled beneficiaries from potential creditors. For example, if your disabled beneficiaries are ever sued in a personal injury action, the assets in the trust would not be available to the plaintiffs. Furthermore, because the funds in the Special Needs Trust are not countable as available assets for purposes of determining government benefit eligibility, more of your money can be used for those supplemental expenditures that will allow your disabled beneficiary to enjoy a higher quality of life. Otherwise, much of your assets will be used to pay for private care benefits that are extremely expensive and can drain even significant sums of money over a period of years.

  • Business Law

    Q: What is business law?

    A: Business law encompasses the many rules, statutes, codes, and regulations that are established which govern commercial relationships and provide a legal framework within which businesses may be conducted and managed. Business law is highly diverse and includes areas such as:

    • business formation and organization
    • transactional business law (contracts)
    • business planning
    • business negotiations
    • mergers and acquisition
    • divestitures

    Q: What factors should be considered in choosing the type of business form for my business?

    A: Although there are many important things to think about when choosing a business form, some of the main considerations include your preference of tax treatment, how you intend to capitalize the business, whether you plan to issue stock and trade it publicly, how you intend to structure the management of your business and issues surrounding the liability of the business owners, among other things. It is very important to plan your business and to work closely with someone who can help you choose the business form that will meet your needs.

    Q: How can a properly established business entity such as a corporation shield me from personal liability for business debts and obligations?

    A: Personal liability arising from business obligations can devastate the accumulated wealth of a lifetime of work. Personal liability may extend to business losses, but other obligations may also reach individuals, including:

    • Damage awards in lawsuits
    • Tax penalties
    • Back wages and benefit payments


    Limited liability offered by corporations and other business entities shelters business owners from personal liability. Nonetheless, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for corporate status, he or she may face personal liability despite the corporate shelter.

    Q: What is the difference between a subchapter C and S corporation?

    A: The Internal Revenue Code allows for two different levels of corporate tax treatment. Subchapters C and S of the code define the rules for applying corporate taxes. Subchapter C corporations include most large, publicly-held businesses. These corporations face double taxation on their profits if they pay dividends: C corporations file their own tax returns and pay taxes on profits before paying dividends to shareholders, which are subsequently taxed on the shareholders’ individual returns. Subchapter S corporations meet certain requirements that allow the business to insulate shareholders from corporate debts but avoid the double taxation imposed by subchapter C. In order to qualify for subchapter S treatment, corporations must meet the following criteria: Must be domestic Must not be affiliated with a larger corporate group Must have no more than one hundred shareholders Must have only one class of stock Must not have any corporate or partnership shareholders Must not have any nonresident alien shareholders. Additionally, after a business is incorporated, all shareholders must agree to subchapter S treatment prior to electing that option with the Internal Revenue Service.

    Q: What does it mean to pierce the corporate veil?

    A: Sometimes, courts will allow plaintiffs and creditors to receive compensation from corporate officers, directors, or shareholders for damages rather than limiting recovery to corporate assets. This procedure bypasses the usual corporate immunity for organizational wrongdoing, and may be imposed in a variety of situations. The specific criteria for piercing the corporate veil vary somewhat from state to state and may include the following:

    • Courts may not allow owners to benefit from a corporation’s limited liability if the underlying business is indistinguishable from its owners.
    • If a corporation is formed for fraudulent purposes.
    • Courts may impose liability on the individuals controlling the business if a business fails to follow certain corporate formalities in areas such as record-keeping.

    Q: What is the difference between a joint venture and a partnership?

    A: Joint ventures and partnerships share certain characteristics. A joint venture is a sort of partnership where two or more entities join together for a particular “short term” purpose. In both partnerships and joint ventures, each partner has equal ability to legally bind the entire entity. A partner can represent the entire organization in the normal course of business and his or her legal actions on behalf of the joint venture or partnership create legal obligations.

    Though the powers of individual partners in a partnership or joint venture can be limited by agreement, such agreements do not bind third parties. Because business contacts outside of the partnership may have no knowledge of the limitations, they may be entitled to rely on the apparent authority of an individual partner as determined by the usual course of dealing or customs in the trade.

    Q: What is a non-profit corporation?

    A: A non-profit corporation is a corporation formed to carry out a charitable, educational, religious, literary, or scientific purpose. A nonprofit corporation doesn’t pay federal or state income taxes on profits it makes from activities in which it engages to carry out its objectives. This is because the IRS and state tax agencies believe that the benefits the public derives from these organizations’ activities entitle them to a special tax-exempt status. The most common federal tax exemption for nonprofits comes from Section 501(c)(3) of the Internal Revenue Code, which is why nonprofits are sometimes called 501(c)(3) corporations.

    Q: How often should a corporation hold meetings and update its minutes?

    A: Any time a corporation undertakes a major change or transaction, it should be reflected in its minutes. In addition, meetings of shareholders and directors should take place at least annually if for no other reason than to elect new officers and directors. Failure to adhere to the formality of regular meetings can jeopardize the corporation’s ability to shield its officers, directors and shareholders from personal liability for the corporation’s actions.

    Q: Is it a good idea to have a Buy-Sell Agreement?

    A: Corporations with more than one shareholder should seriously consider a buy-sell agreement. A shareholder’s death, divorce, disability or termination of employment can create serious problems for a corporation and its other shareholders. A buy-sell agreement can help minimize these problems by providing for an orderly succession in such plans. Similar provisions are recommended for partnership.

    Q: What does involved in a corporate merger?

    A: Like most corporate law, mergers are regulated at the state level. While these laws vary by jurisdiction, many aspects of the merger process are the same across the nation. Generally, the board of directors for each entity must initially approve a resolution adopting a plan of merger that specifies the names of the entities involved, the name of the proposed merged company, the manner of converting shares of both entities, and any other legal provisions to which the corporations agree. Each entity notifies all of its shareholders that a meeting will be held to approve the merger. If the proper number of shareholders approves the plan, the directors sign the papers and file them with the state. The secretary of state issues a certificate of merger to authorize the new corporation.

    Each state has its own corporate statutes that govern the procedure for mergers. Furthermore, state or federal agencies may wish to investigate the potential anticompetitive effects of a proposed merger. Because of the requirements and variables involved in merging, a corporation considering a merger should consult a lawyer who is experienced in mergers and acquisitions law.

  • Probate Law

    Q: What is Probate?

    A: Probate is a legal proceeding under the jurisdiction and supervision of the Probate Court in the decedent’s county of residence. The probate process is used to appoint an executor, gather and value the decedent’s assets, notify and pay creditors, pay court costs and administration expenses, and distribute the remaining assets to the intended beneficiaries.

    Q: How is Trust Administration different from Probate?

    A: A trust administration is a process used to administer assets in a decedent’s trust at the time of death. Many tasks are the same as probate, such as gathering and valuing assets, paying creditors and administration expenses, and distributing assets to beneficiaries. However, there is no Probate Court involvement in a trust administration. This results in no court costs and virtually no court filing requirements. All documents filed with the Probate Court are available for review by the general public, whereas a trust administration protects the privacy of all interested parties. The trust administration process is generally faster than a probate proceeding.

    Q: When a loved one dies, what should I do?

    A: When a loved one dies, you should contact a qualified estate planning attorney, preferably the attorney who drafted the estate planning documents. That attorney will be in the best position to readily understand the planning that was done and to advise you accordingly. The ideal time to meet with the attorney is within the first week following the date of death, as this may be a period of time when the family is together. It is important to have this meeting in order to protect the estate planning that was done. Family members who act too quickly without legal advice by selling or distributing assets can unintentionally defeat the terms of the decedent’s estate plan.

    Q: What are some of the questions that need to be answered during a Probate or Trust Administration?

    A: The questions include the following:

    • Who will administer the estate and what are their duties?
    • How will the executor or successor trustee gain access to the decedent’s financial records?
    • What is the value of the decedent’s assets as of the date of death?
    • Who are the beneficiaries on retirement accounts and what payout options are available?
    • How are life insurance claims to be submitted?
    • How will debts and administration expenses be paid?
    • Who will prepare the decedent’s income tax returns?
    • Is an estate tax return necessary and, if so, who will prepare it?
    • How will assets be distributed to beneficiaries?

    Q: How long does a Probate proceeding or Trust Administration take?

    A: The length of time for a proper administration varies depending on several factors, which include the size of the estate, the complexity of the assets, the relationship among beneficiaries. A probate proceeding generally takes about 12 months. A trust administration generally takes less time due to the lack of court involvement. The time frame for a typical trust administration is 3 to 12 months.

  • Tax Law

    Q: Will my estate be subject to death taxes?

    A: There are two types of death taxes that you should be concerned about: federal estate taxes and state estate taxes. The federal estate tax is computed as a percentage of your net estate. Your net taxable estate is comprised of all assets you own or control minus certain deductions. Such deductions can be for charitable donations as well as an “applicable exclusion amount”. The applicable exclusion amount varies from year to year: In the year 2009, it is set at $3,500,000 per year, which means that you may pass on up to that amount in those years without being subject to any federal estate tax. The federal estate tax is “repealed” for the year 2010, but the repeal “sunsets” on December 31, 2010 and the applicable exclusion amount goes back to $1,000,000 for 2011 and onward. Even if you believe that that you may not be affected by the federal estate tax, you still need to determine whether you may be subject to state estate taxes and whether you will have a taxable estate in the future as your assets appreciate in value. You should regularly review your estate plan with an experienced estate planning attorney to make adjustments to reflect changes in the tax laws as well as shifts in your individual circumstances.

    Q: What is my taxable estate?

    A: Your taxable estate comprises of the total value of your assets including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies – minus liabilities and deductions such as funeral expenses paid out of the estate, debts owed by you at the time of death, bequests to charities and value of the assets passed on to your U.S. citizen spouse. The taxes imposed on the taxable portion of the estate are then paid out of the estate itself before distribution to your beneficiaries.

    Q: What is the unlimited marital deduction?

    A: The federal government allows every married individual to give an unlimited amount of assets either by gift or bequest, to his or her spouse without the imposition of any federal gift or estate taxes. In effect, the unlimited marital deduction allows married couples to delay the payment of estate taxes at the passing of the first spouse because at the death of the surviving spouse, all assets in the estate over applicable exclusion amount ($3,500,000 in 2009) will be included in the survivor’s taxable estate. It is important to keep in mind that the unlimited marital deduction is only available to surviving spouses who are United States citizens.

    Q: What is a Credit Shelter or A/B Trust and how does it work?

    A: A Credit Shelter Trust, also known as a Bypass or A/B Trust is used to eliminate or reduce federal estate taxes and is typically used by a married couple whose estate exceeds the amount exempt from federal estate tax. For example, in 2009, every individual is entitled to an estate tax exemption on the first $3.5 million of their assets.

    Because of the Unlimited Marital Deduction, a married person may leave an unlimited amount of assets to his or her spouse, free of federal estate taxes and without using up any of his or her estate tax exemption. However, for individuals with substantial assets, the Unlimited Marital Deduction does not eliminate estate taxes, but simply works to delay them. This is because when the second spouse dies with an estate worth more than the exemption amount, his or her estate is then subject to estate tax on the amount exceeding the exemption. Meanwhile, the first spouse’s estate tax credit was unused and, in effect, wasted. The purpose of a Credit Shelter Trust is to prevent this scenario. Upon the death of the first spouse, the Credit Shelter Trust establishes a separate, irrevocable trust with the deceased spouse’s share of the trust’s assets. The surviving spouse is the beneficiary of this trust, with the children as beneficiaries of the remaining interest. This irrevocable trust is funded to the extent of the first spouse’s exemption. Thus, the amount in the irrevocable trust is not subject to estate taxes on the death of the first spouse, and the trust takes full advantage of the first spouse’s estate tax credit. Special language in the trust provides limited control of the trust assets to the surviving spouse which prevents the assets in that trust from becoming subject to federal estate taxation, even if the value of the trust goes on to exceed the exemption amount by the time the surviving spouse dies. Even if an estate might not be exposed to estate taxes, a credit shelter trust is often used to provide protection from creditors and the remarriage of the surviving spouse.

    Q: What is a Qualified Personal Residence Trust (QPRT) and how does it work?

    A: Our homes are often our most valuable assets and hence one of the largest components of our taxable estate. A Qualified Personal Residence Trust, or a QPRT (pronounced “cue-pert”) allows you to give away your house or vacation home at a great discount, freeze its value for estate tax purposes, and still continue to live in it. Here is how it works: You transfer the title to your house to the QPRT (usually for the benefit of your family members), reserving the right to live in the house for a specified number of years. If you live to the end of the specified period, the house (as well as any appreciation in its value since the transfer) passes to your children or other beneficiaries free of any additional estate or gift taxes. After the end of the specified period, you may continue to live in the home but you must pay rent to your family or designated beneficiary in order to avoid inclusion of the residence in your estate. This is may be an added benefit as it serves to further reduce the value of your taxable estate, though the rent income does have income tax consequences for your family. If you die before the end of the period, the full value of the house will be included in your estate for estate tax purposes, though in most cases you are no worse off than you would have been had you not established a QPRT. An added benefit of the QPRT is that it also serves as an excellent asset/creditor protection vehicle since you no longer technically own the property once the trust is established.

    Q: What is an Irrevocable Life Insurance Trust and how does it work?

    A: There is a common misconception that life insurance proceeds are not subject to estate tax. While the proceeds are received by your loved ones free of any income taxes, they are countable as part of your taxable estate and therefore your loved ones can lose over forty percent of its value to federal estate taxes. An Irrevocable Life Insurance Trust keeps the death benefits of your life insurance policy outside your estate so that they are not subject to estate taxes. There are many options available when setting up an ILIT. For example, ILITs can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage. You can also provide for distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child.

    Q: What is a Family Limited Partnership and how does it work?

    A: A Family Limited Partnership (FLP) is simply a form of a limited partnership among members of a family. A limited partnership is one which has both general partners (who control management) and limited partners (who are passive investors). General partners bear unlimited personal liability for partnership obligations, while limited partners have no liability beyond their capital contributions. Typically, the partnership is formed by the older generation family members who contribute assets to the partnership in return for a small general partnership interest and a large limited partnership interest. Then the limited partnership interests are transferred to their children and/or grandchildren, while retaining the general partnership interests that control the partnership. The FLP has a number of benefits: Transferring limited partnership interests to family members reduces the taxable estate of the older family members while they retain control over the decisions and distributions of the investment. Since the limited partners cannot control investments or distributions, they can be eligible for valuation discounts at the time of transfer which reduces the value of their holdings for gift and estate tax purposes. Lastly, a properly structured FLP can have creditor protection characteristics since the general partners are not obligated to distribute earnings of the partnership.

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At Shimoda Stewart, we understand that you care about your loved ones, and we know that you are looking for information to help you make the right decision.

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