Probate & Estate Administration

Merry Christmas! December and all of the holiday celebrations that this month brings has finally arrived. My kids are bouncing off the walls already. Last night, I took each of them to the store to help them pick out presents for their siblings and mother. After we got them all wrapped back at home, our little girl asked if she was going to get to open them tomorrow. I told her, “No. We still have about 20 days before you can open them.” I couldn’t help but feel her pain as a drawn-out whimper of despair escaped her lips while she tried to comprehend the eternity of the next 20 days. Ahhh, waiting for Christmas morning. What torture!

December is also a big birthday month in my family. Last Saturday I had the chance to go with my nephew Talmage to Guitar Center to help him look for a new electric guitar that his parents wanted to get him for his birthday. Of course, my doing so wasn’t entirely selfless as I will jump at any opportunity to go to Guitar Center and play with the big boy toys that fill my dreams on these long winter nights.

It is not uncommon for my office to receive a call from a panicked family member of an elderly individual. The call may go something like this:

Caller: Hi, I'm calling to see how much it costs to get some estate planning done for my mom.

Paralegal: We'd be happy to help you if we can. Why don't you first tell me a little bit about your mom.

Caller: Okay. Well, mom's not doing too well these days. She's in an assisted living facility and mostly doesn't recognize us anymore. Although she sometimes has good days, most of the time she's confused and is asking for her husband who died three years ago.

Paralegal: Okay. What kind of property does your mom have?

Caller: Well, she has a home that's paid for. She has a brokerage account, a checking and savings account, some farm land in Tooele and I think she has some municipal bonds that she invested in once. But I'm not really sure.

Paralegal: Does your mom know what property she owns and does she understand its value?

Caller: Oh heavens no! She put me on her checking account years ago because she was so overwhelmed with trying to manage her finances. I don't think she has a clue how much she owns, nor could she keep it straight even if we told her.

Paralegal: I think we can help you, but you'll need to meet with an attorney to discuss some of the legal implications of your mother's situation.

Although this above excerpted conversation is a fictitious example, and a very abbreviated one at that, it illustrates a trap that many people fall into with regard to estate planning.

In May, we reported about the federal government’s efforts to decrease spending in 2011 by making sweeping cuts to numerous federally funded programs to avoid a government shutdown. Four months later, the focus on cutting Medicaid and Medicare benefits has gained momentum, despite documented evidence of the many benefits of Medicaid, as well as the huge detrimental impact cutting either program can have on individual states.

Proposed Cuts

As has been widely reported, the Obama Administration is offering to cut tens of billions of dollars from Medicare and Medicaid as part of the negotiations to reduce the federal budget deficit. The depth of the cuts depends on whether Republicans will accept any increases in tax revenues.

It appears that hospitals and nursing homes will be the unwilling recipients of some of the cuts, as Administration officials and those involved in the negotiations say that the cuts can come from health care providers like hospitals and nursing homes without directly imposing new costs on needy beneficiaries or overhauling either program. Some of the proposals being considered are:

• Gradually eliminating Medicare payments to hospitals for uncollectible patient debt. Medicare currently reimburses hospitals for 70% of debt resulting in patients failing to pay deductibles and co-payments and the hospitals have made reasonable efforts to collect.

• Reducing Medicare payments to teaching hospitals for the cost of training doctors, caring for sicker patients and providing specialized services such as trauma care and organ transplants.

• Reducing the federal share of payments to health care providers treating low-income people under Medicaid and the Children's Health Insurance Program.

Lawmakers opposed to the cuts say it would impair access to care for the poor and shift costs to the states that are already facing a huge expansion in Medicaid eligibility and enrollment beginning in 2014 under the terms of the health care reform legislation passed last year. Hospital executives say that additional cuts (besides the reduction in Medicare payments already part of the health care reform legislation) will result in hospitals discontinuing services and increasing charges to patients with private insurance.

The other day, my wife went over to her grandparents' home to help them make sure their trust was properly "funded." After her visit, she shared with me her grandparents' confusion about the funding process because they thought "everything was all taken care of" when they signed their trust document. This is such a common misunderstanding that I thought the topic of funding was worth revisiting today.

What Does It Mean to Fund a Trust?

Funding is the process of transferring ownership of assets from your individual name into the name of your trust (or making your trust a beneficiary of beneficiary-designated assets). The terms of your trust agreement will only control property that is actually owned by your trust. This is why funding a trust is just as important as setting it up.

I like to use the bucket analogy. Think of your trust as a bucket. Your trust document contains instructions on what to do with the things in the bucket. Funding is simply the process of putting things into the bucket.

 You've probably heard about the bill being hotly debated in Congress right now that would reinstate the federal estate tax (from it's current status of repeal) at a 35% rate on estates larger than $5 million ($10 million for married couples). Current reports are indicating that this bill will most likely pass. (Get more information about the bill here.)

What does this mean for you?

If the bill passes, and you and your spouse have an estate (real property, bank accounts, retirement accounts, life insurance, business interests, stocks, bonds, cars, boats, ATVs, etc.) that is less than $10 million, you will likely pay no estate tax if you die in 2011 and beyond (unless Congress decides to change things again). For married couples with estates larger than $10 million, you will be taxed at a 35% rate on everything over that number at the death of the second of you to die. This is good news for many of you.

If this bill does not pass, and you and your spouse have an estate larger than $1 million, you will be taxed at a 55% rate on everything over $1 million. Once you factor in the proceeds of life insurance and retirement accounts, most of you will probably find that your family will be facing a federal estate tax bill upon your death.

What is going to happen in the end? Your guess is as good as mine. If the bill passes, there are a number of my clients who will be very relieved as a result of the estate tax break that it represents.