Elder Law Update – At Large Edition October 2009 Vol I

Consider Adding Protection to Your Revocable Living Trusts

 

Old Trusts vs. Modern Trusts

Dear Client:

Old Trusts

Many of you have prudently chosen to create revocable living trusts during your lifetime.  Please recall that the motivations for creating these trusts were 2 primarily:

  1. Avoidance of estate tax; and
  2. Avoidance of probate.

 

These objectives for your trust, while still valid, may not be a primary concern any longer for the following reasons:

First, estate taxes no longer impact the majority of most Americans because the estate tax exemption is $3.5 million for 2009.  At the time your trust was created it could have been as low as $600,000.  Thus, the need for “AB trusts” as they were called, to minimize estate taxes may no longer necessary for most Americans.  Thus, a simpler, less complex trust may be available to you.

Second, probate can be easily avoided with upgraded trusts that I will discuss below plus many of our clients have the bulk of their retirement assets held in retirement type accounts such as IRAs and 401(k)s which if handled properly avoids probate by themselves anyway.

Modern Trusts

Therefore, I would suggest to you that you should consider upgrading your revocable living trusts to a more modern assets protection trust.  The reasons for using an asset protection type trusts are due to new possible threats and the needs that have emerged over a period of time:

  1. To protect your assets from a spend down due to long-term nursing home care;
  2. To protect your assets from your creditors and predators;
  3. Protection your trust assets from the creditors, predators and divorcing spouse’s of your adult children once you die;
  4. To protect yourself from the “new” Illinois Estate Tax regimen; and
  5. ROTH Conversions with IRA trust protection

 

After a significant discussion and lobbying, Illinois has joined 11 other states in enacting a state-qualified terminable interest property (QTIP) election separate and distinct from the federal QTIP election of I.R.C. Section 2044. 

After legislation authorizing state QTIP election was enacted, a properly drafted estate plan permits a married couple to leverage at both the federal level and the state level – that is, for federal estate tax purposes, the entire federal exemption is used by (1) a $2 million federal and state credit shelter trust and (2) a $1.5 million federal credit shelter trust that is, for Illinois estate tax purposes only, a QTIP marital trust that qualifies for the marital estate tax deduction. 

The Illinois QTIP election still requires that the estate tax plan only fund the non-marital trust with the lesser of the federal and state exemption, with the excess passing to a QTIP-able marital trust (i.e. one that pays mandatory income and discretionary principal only to the surviving spouse and does not give the surviving spouse a general power of appointment). 

Though it provides options for dealing with estate tax decoupling, the QTIP legislation does nothing to alleviate the need to review a formula or funding clause in an estate plan. 

2010 will be a year for Roth IRA planning and taxpayer, including high income taxpayers, to convert traditional individual retirement accounts (“IRA”) into Roth IRAs. 

2010 will be a popular year to convert to a Traditional IRA because barriers to conversion have been lifter.  Prior to 2010, there was an income limitation preventing taxpayers from converting to a Roth if their modified adjusted gross income exceeded $100,000.  Under the Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”), aka PL 109-222 (May 17, 2006), the income limitation was removed beginning in 2010.  Additionally, if taxpayers believe income tax rates will increase, sooner may be better timing for conversions, since converting to a Roth incurs a current income tax liability.

Upon a Roth conversion, the entire pretax balance of Traditional IRA (usually the entire IRA balance) will be subject to income tax.  Taxpayers converting in 2010 can split the income tax liability equally and report half in 2011 and the balance in 2012, with no income reportable in 2010.  If taxpayer’s think Congress will raise individual income tax rates in 2011 and 2012, taxpayers can elect to report all conversion income in 2010. 

A Roth conversion raises asset protection issues, beneficiary designation issues and estate tax apportionment issues.

When an individual moves funds from a qualified plan to an IRA, they leave the asset protection safe haven of an ERISA protected plan.  In some states the individual may still have creditor protection; however, in other states, the protection may be diminished. 

However, the laws of many states are not clears as to the asset protection afforded when one rolls over from an ERISA plan to an IRA and subsequently to a Roth IRA

The Preparation of proper beneficiary designations is critical to ensure separate shares and to maximize the opportunity for post-death stretch out.

An IRA left outright to a beneficiary has limited asset protection in many jurisdictions whereas an IRA left in a properly drafted trust provides the beneficiary with additional asset protection.

Generally, estate taxes should be apportioned away from Roth IRAs to allow the Roth IRA to continue to grow on an income tax-free basis.

Make sure that a client’s durable power of attorney will provide the attorney-in-fact the right to make any and all tax elections including an election to recharacterize the Roth IRA. 

Accordingly, both a client’s IRA trust and last will and testament should be modified to provide for the recharacterization decision. 

Therefore, we as elder law attorneys experienced with matters of long-term care planning, estate planning, asset protection planning as well as disability, Medicaid and Veterans Benefits planning can convert your revocable living trust into a trust that protects your assets from the more recent threats described above.  Contact us at 847-292-1220 and for Lori or Lisa to set up a consultation appointment. 

P.S.      Also, don’t miss our new workshop: “Don’t Go Broke in a Nursing Home”, on November 17, 2009 at 1:30 PM and 6:30 PM. 

Long Term Care Planning Attorneys

The “3 Phase” Lawyers

 

Legal Counsel Assisting You in the 3 Phases of Your Life:

 

–           Maturing Years – Will, Trust, Taxes, and Asset Protection

–           Senior Years – Long Term Care: Pre-Planning and Crisis Planning

–           Post Death Years – Estate, Probate, and Trust Administration

 

 

“Educate to Motivate”

 

Anthony B. Ferraro

Attorney-CPA

The Law Offices of Anthony B. Ferraro, LLC

The Estate & Trust, Elder and Asset Protection Law Firm

Columbia Centre I

5600 N. River Road, Suite 764 

Rosemont, IL 60018 

PH (847) 292-1220

FAX (847) 292-1221

Websiteabferrarolaw.com

Emailabferraro@abferrarolaw.com

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This document is for discussion purposes only and is not intended to be, nor should it be, considered as legal advice.  You should never attempt Medicaid planning, Estate Planning, Probate, or Estate and Trust Administration without the advice of competent legal counsel.