Avoid leaving Co-op Ownership to Heirs

January 25, 2023

If you own a co-op you might be tempted to include it in your planning. It is wise to avoid leaving your co-op ownership to your heirs. Here is a cautionary tale.

Parents bought a studio apartment in a New York City co-op for their adult son with special needs. He’s able to live independently with the support of an agency.

The couple asked the co-op board to let them transfer the property to an irrevocable trust, so when they die, the son will still have a place to live. However, the board denied their request.

An individual with special needs can’t inherit property directly, or he’ll no longer be able to receive the government benefits that support him. What should the parents do?

The New York Times’ recent article entitled “Can I Leave My Co-op to My Heirs?” explains that parents can leave a co-op apartment to their children in their will or in a trust. However, that doesn’t mean their heirs will necessarily wind up with the right to own or live in that apartment.

In most cases, a co-op board has wide discretion to approve or deny the transfer of the shares and the proprietary lease.

If the board denied the request, the apartment will be sold and the children receive the equity. Just because the will says, ‘I’m leaving it to my children,’ that doesn’t give the children the absolute right to acquire the shares or live there.

In some instances, the lease says a board won’t unreasonably withhold consent to transfer the apartment to a financially responsible family member. However, few, if any, leases extend that concept to include trusts.

The parents here could wait to have the situation resolved after their deaths, leaving clear directives to the executor of their estate about what to do should the board reject a request to transfer the property into a trust for their son. However, that leaves everyone in a precarious position, with years of uncertainty.

It is safer to avoid leaving your co-op ownership to your heirs. Another option is to sell the co-op apartment now, put the proceeds in a special-needs trust and buy a condo through that trust. The son would then live there.

Unlike co-ops, condos generally allow transfers within estate planning, without requiring approval.

While this route would involve significant upheaval, the parents would have more peace of mind.

However, before buying the condo, an experienced estate planning attorney should review the building’s rules on transferring the unit. If you would like to read more about leaving real property to your heirs, please visit our previous posts.

Reference: New York Times (Oct. 1, 2022) “Can I Leave My Co-op to My Heirs?”

Proper Asset Protection Can Avoid a Receiver

January 5, 2023

The role of the receiver is often poorly understood. Many asset protection plans fail to address situations involving receivers. The vulnerable point of an asset protection or estate plan is where the wish to protect assets meets the desire to retain control, creating a weakness a receiver can exploit, says a recent article titled “Understanding Receivers For Collection And While Asset Protection Planning” from Forbes. Proper asset protection can avoid the costly involvement of a receiver.

The receiver has three roles: an officer of the court, an agent for the debtor’s estate (aka, creditors) and an agent of the debtor.

Receivers are appointed by the court. Most must take an oath to the effect that the receiver will follow the instructions of the court and post a bond against any misconduct. The receiver has no power to do anything until authorized by the court, which is usually part of the original order appointing the receiver.

The receiver reports to the court and usually submits monthly reports detailing their activities, expenditures and collections.

When the receiver’s work is done, they apply to the court for an order of discharge.

The receiver is an agent of the debtor’s estate, similar to how a trustee is the agent of the debtor’s bankruptcy estate. The debtor’s estate includes assets available to creditors for collection – this does not include exempt assets.

When a receiver is appointed, the receiver obtains a tax ID number for the estate and opens a bank account for the estate. As assets are liquidated, they are deposited into the account. Payment to the receiver for fees and expenses are paid from the account.

The receiver is ultimately acting for the benefit of creditors, so the receiver could be said to be an agent of creditors, although only the court may give the receiver instructions.

Third, the receiver is the agent of the debtor. As the agent of the debtor, the receiver becomes the debtor for nearly all purposes and if authorized by the court, can take any legal action the debtor could take.

For example, the receiver may execute deeds using the debtor’s name, exercise voting rights as to shares of stock or demand redemptions of stock or cancel contracts. The receiver may demand bank statements from a bank or give the U.S. Post Office instructions to forward mail to the receiver at their address. The receiver can also demand the debtors credit card statements, utility bills and anything else.

With the permission of the court, the receiver can literally take over the business, liquidate the assets of the business and cause the entity to be dissolved.

The level of intrusiveness of the receiver is such that the average debtor will make the effort to settle with their creditors to stop the receiver’s actions.

As an agent of the debtor’s estate, the receiver is likely to coordinate with the creditor. However, the receiver can only act as instructed by the court.

Asset protection needs to be done properly to avoid any involvement with a court-appointed receiver. If you would like to learn more about asset protection, please visit our previous posts.

Reference: Forbes (Nov. 17, 2022) “Understanding Receivers For Collection And While Asset Protection Planning”

Benefits and Drawbacks of Family Limited Partnerships

January 3, 2023

Being able to transfer wealth from one generation to the next is a good thing, especially now, when a big change is coming to the federal estate tax exemption amount, says a recent article titled “The Pros and Cons of Family Limited Partnerships” from The Wall Street Journal. The are benefits and drawbacks to Family Limited Partnerships.

In 2022, estates valued at up to $12.06 million are exempt from federal taxes. However, on January 1, 2026, the exemption sinks to around $6 million, with adjustments for inflation. As a result, wealthy Americans are now re-evaluating their estate plans and many are turning to the Family Limited Partnership, or FLP, as a tax saving strategy.

An FLP can be tailored to suit every family’s needs. You don’t have to be ultra-wealthy for an FLP to make sense. An upper-middle class family owning a small business or real estate properties they’re not ready to sell could make good use of an FLP, as well as a real estate mogul owning properties in multiple states.

There are some caveats. The cost of setting up an FLP ranges from $8,000 to $15,000. However, it can go higher depending on the state of residence and the complexity of the partnership. There are annual operating costs, tax filings and appraisal fees. The IRS isn’t always fond of FLPs, because there is an institutional belief that FLPs are subject to abuse.

The FLP needs to be drafted with an experienced estate planning attorney, working in consultation with a CPA and financial advisor. This is definitely not a Do-It-Yourself project.

What makes these partnerships different from traditional limited partnerships is that all partners are family members. There are two kinds of partners: general and limited. The parents or grandparents are usually the general partners. They contribute the bulk of the assets, typically a small business, stock portfolio or real estate. Children are limited partners, with interests in the partnership.

The general partners control all of the investment and management decisions and bear the partnership liability, even though their ownership of assets can be as little as 1% or 2%. They make the day-to-day business decisions, including funds allocation and income distribution. The ability of the general partner to maintain control of the transferred assets is one of the FLP’s biggest advantage. The FLP reduces the taxable estate, while maintaining control of the assets.

Once the entity is created, assets can be transferred to the FLP immediately or over time, depending on the family’s plan. The overall goal is to get as much of the property out of the general partners’ taxable estate as possible. Assets in the FLP are divided and gifted to limited partners, although this is often a gift to a trust for the limited partners, who are the general partners’ descendants. Placing the assets in a trust adds another layer of protection, since the gift remains outside of the limited partner’s taxable estate as well.

To avoid a challenge by the IRS, the partnership must be conducted as a business entity. Meetings need to be scheduled regularly, with formal meeting minutes recorded properly. General partners are to be compensated for their services, and limited partners must pay taxes on their share of income from the partnership. The involvement of professionals in the FLP is needed to be sure the FLP remains compliant with IRS rules.

An alternative is to create a Family Limited Liability Company instead of a Family Limited Partnership. These can be created to operate much like an FLP, while also protecting partners from liability.

Partnerships are not for everyone. Your estate planning attorney will advise regarding the benefits and drawbacks of Family Limited Partnerships, and whether an FLP or an FLLC makes more sense for your family. If you would like to learn more about family limited partnerships, please visit our previous posts.

Reference: The Wall Street Journal (Dec. 3, 2022) “The Pros and Cons of Family Limited Partnerships”

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SLAT is Increasingly Popular for Married Couples

December 12, 2022

The most common estate planning technique used in 2020-2021, according to a recent article from Think Advisor, was the Spousal Lifetime Access Trust (SLAT). The SLAT has become increasingly popular for married couples at or above the current estate planning exemption level, as described in the article “9 Reasons This Popular Trust Isn’t Just for the Super-Wealthy.”

SLATs allow couples to move assets out of their estates and, in most cases, out of the reach of both creditors and claimants. Each spouse can still access the assets, making the SLAT a valuable tool for retirement.

In the past, SLATs were not used as often for clients with $1 million to $10 million in net worth. However, the SLAT accomplishes several objectives: optimizing taxes, protecting assets from creditors and addressing concerns related to aging.

Lock in Estate Tax Exemptions Among Uncertainty. SLATs are a good way to secure estate tax exemptions. Various proposals to slash the current estate tax exemptions before the sunset date (see below) makes SLATs an attractive solution.

Potential Restrictions to Grantor Trusts. There has been some talk in Washington and the Treasury about restricting Grantor Trusts. The SLAT eliminates concern about any future changes to these trusts.

Upcoming Change in Estate, Gift and GST Exemptions. When the 2017 tax overhaul expires in 2026, the gift, estate and generation skipping trust exemption will be cut in half. Now is the time to maximize those exemptions.

A Possible Planning Tidal Wave. There may be a big movement to act as 2026 draws closer and SLATs become a tool of choice. Before the wave hits and Congress reacts, it would be better to have assets protected in advance.

SLATs Work Well for Married Couples. Each spouse contributes assets to a SLAT. The other spouse is named as a beneficiary. The assets are removed from the taxable estate, securing the exemption before 2026 and assets are protected from claimants and creditors.

You Might Meet the Estate Tax Threshold in the Future. Even if your current estate doesn’t meet the high threshold of today, if it might reach $6 million in 2026, having a SLAT will add protection for the future.

Income Tax Benefits. A trustee can distribute funds and income to a beneficiary in a no-tax state, saving state tax income tax, or if the trust may be formed in a no-tax state and possibly avoid the grantor’s high home state income tax.

Asset Protection Planning. Many people don’t think about asset protection until it’s too late. By starting now, when assets are below $10 million, the asset protection can grow as wealth grows.

Shrinking the Need for Other Trusts. Depending on their financial situation, a couple may be able to use a SLAT trust and avoid the need for other trusts requiring annual gifts and Crummey powers. The SLAT may also eliminate the need to have a trust for their children.

While SLATs are becoming increasingly popular for married couples, it is important that you speak with your estate planning attorney to learn if a SLAT is appropriate for your family, now and in the near and distant future. These are complex legal instruments, requiring skilled professional help in assessing their value to your estate. If you would like to learn more about SLATs, please visit our previous posts.

Reference: Think Advisor (Nov. 16, 2022) “9 Reasons This Popular Trust Isn’t Just for the Super-Wealthy”

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Prenup is a Useful Tool in Estate Planning

November 30, 2022

A Prenup is a useful tool in your estate planning. Forbes’ recent article entitled “Prenuptial Agreement: What Is A Prenup & How Do I Get One?” explains that a prenup contemplates the end of the marriage, so the couple can divide assets with an objective mindset. A prenup can even help protect a business.

Prenups allow you to determine if alimony will be due if the marriage ends, as well as the amount and terms of those payments. A prenup can also say what kind of bequests you leave to each other in your will. It can also be good for couples trying to keep separate significant pieces of personal property, including future inheritances and other anticipated income. This is common for couples with a significant age or wealth difference and among older or remarrying couples.

Prenups Aren’t Just for the Very Wealthy. A Prenup can be a useful tool for almost everyone’s estate planning.

Protect Family Heirlooms. If you have a family heirloom and want to make sure that if your marriage ends, you’ll get to keep it, you can draft a prenuptial agreement that states the family heirloom is yours.

Pass Property to Children from Prior Marriages. A prenup can be used to establish property rights for second marriages. If you have children from a previous marriage, you can protect their interests in your assets and property.

Clarify Financial Rights. Prenups can help you decide now how assets will be split up instead of waiting until divorce proceedings. While divorce may never come, determining the financial distribution now saves time and headache.

Debt Protection. Prenups also provide debt protection. Some people enter a marriage with substantial financial debts or student loan debt. For couples in this situation, they can sign a prenup and clarify that those debts remain the separate responsibility of the spouse who incurred them. They can also decide how debts incurred during the marriage will be handled.

Avoid Emotional Arguments. The end of a marriage and divorce is emotional. It can be an overwhelming and upsetting process. When you’re negotiating with your spouse about assets, tempers can cloud your judgment about asset distribution. Contemplating these items with a clearer head is better for all.

Take time to consider how you want to craft a prenup. It can have a significant impact on your assets and your goals for your heirs. If you would like to read more about prenups and other forms of asset protection, please visit our previous posts.

Reference: Forbes (Oct. 24, 2022) “Prenuptial Agreement: What Is A Prenup & How Do I Get One?”

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Frequently Asked Questions about Series I-Bonds

October 31, 2022

With series I bonds in the news lately, it is worth considering if they are beneficial to your estate planning. Kiplinger’s recent article entitled “What Are I-Bonds?” compiled answers to some frequently asked questions about series I bonds.

How is the interest rate determined? The composite rate has two parts: (i) a fixed rate that stays the same for the life of the bond; and (ii) an inflation rate based on the consumer price index (CPI). Each May and November, the U.S. Treasury Department announces a new fixed rate and inflation rate that apply to bonds issued during the following six months. The inflation rate changes every six months from the bond’s issue date.

How does interest accrue? They earn interest monthly from the first day of the month of the issue date, and interest is compounded semi-annually. Interest is added to the bond’s principal value. Note that you can’t redeem an I-Bond in the first year, and if you cash it in before five years, you forfeit the most recent three months of interest. If you check your bond’s value at TreasuryDirect.gov, within the first five years of owning it, the amount you’ll see will have the three-month penalty subtracted from it. As a result, when you buy a new bond, interest doesn’t show until the first day of the fourth month following the issue month.

How many I-Bonds can I buy? You can purchase up to $10,000 per calendar year in electronic bonds through TreasuryDirect.gov. You can also buy up to $5,000 each year in paper bonds with your tax refund. For those who are married filing jointly, the limit is $5,000 per couple.

How are I-Bonds taxed? I-Bond interest is free of state and local income tax. You can also defer federal tax until you file a tax return for the year you cash in the bond or it stops earning interest because it has reached final maturity (after 30 years), whichever comes first. You can also report the interest every year, which may be a good choice if you’d rather avoid one large tax bill in the future.

If you use the bonds’ proceeds to pay for certain higher-education expenses for your spouse, your dependents, or yourself, you may avoid federal tax. However, you must meet several requirements to be eligible. Among them, the bond owner must have been at least 24 years old by the issue date and have income that falls below specified limits. Discuss these frequently asked questions about series I bonds with your estate planning attorney. If you are interested in learning more about bonds, and other retirements planning options, please visit our previous posts.

Reference: Kiplinger (Oct. 11, 2022) “What Are I-Bonds?”

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College Kids Need an Estate Plan

October 27, 2022

When it comes to estate planning, we usually think of older adults. However, even college kids need an estate plan.

WDIO’s recent article entitled “Estate planning is for college students too” reminds us that there’s a number of documents you can put into place in the case of an emergency.

Power of Attorney. There are two types of POAs. The financial power of attorney allows a named agent to make financial decisions on behalf of the college student, in the event they are unable to do so. A medical power of attorney names a healthcare agent.

These can have HIPAA language written into them that authorizes their medical provider to release information about them. Remember, if your student travels away from home for college, you may need a POA for that state.

Will. A typical college student might not have a lot of money. However, they do have their own stuff, and someone needs to make the decision regarding what happens to that stuff. Ask the student to name the parents as the executor of his or her will.

FERPA Waiver. FERPA stands for the Family Educational Rights and Privacy Act. Without this waiver, a parent has no authority to call the college and request information about your student if they’re over 18. With a waiver, you can request a transcript and student loan information.

HIPAA Waiver. A HIPAA waiver allows an adult child’s health information to be disclosed. It’s usually for medical facilities, doctors, schools, or any other person where they are in possession of the health information of a person where that individual authorizes the release of the information to a designated person.

Even college kids need an estate plan and it does not have to be complicated. If you already have planning done for yourself, sit down with your estate planning attorney to discuss how you can begin the process for your college age student. If you would like to learn more about estate planning for young adults, please visit our previous posts.

Reference: WDIO (Sep. 28, 2022) “Estate planning is for college students too”

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Include Your Business in Estate Planning

October 19, 2022

Have you made the decision to include your business in your estate planning? Forbes’ recent article entitled “The Importance of Estate Planning When Building Your Business” says that every business that’s expected to survive must have a clear answer to this question. The plan needs to be shared with the current owners and management as well as the future owners.

The common things business owners use to put some protection in place are buy-sell agreements, key-person insurance and a succession plan. These are used to make certain that, when the time comes, there’s both certainty around what needs to happen, as well as the funding to make sure that it happens.

If your estate plan hasn’t considered your business interests or hasn’t been updated as the business has developed, it may be that this plan falls apart when it matters the most.

Buy-sell insurance policies that don’t state the current business values could result in your interests being sold far below fair value or may see the interests being bought by an external party that threatens the business itself.

If your agreements are not in place, or are challenged by the IRS, your estate may find itself with a far greater burden than anticipated.

Your estate plan should be reviewed regularly to account for changes in your situation, the value of your assets, the status of your (intended) beneficiaries and new tax laws and regulations.

There are a range of thresholds, exemptions and rules that apply. Adapting the plan to make best use of these given your current situation is well worth the effort. Talk to an experienced estate planning attorney about your plan.

Include your business in your estate planning. This will provide valuable guidance in terms of how best to set up and manage your broader financial affairs.

Financial awareness can not only inform how you grow your wealth now but also ensure that it gets passed on effectively. The same is also true of your business.

A tough conversation about what happens in these situations can be a reminder to management that over dependence on any key person is not something to take for granted. If you would like to learn more about business succession planning, please visit our previous posts.

Reference: Forbes (Sep. July 12, 2019) “The Importance of Estate Planning When Building Your Business”

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The Difference between Revocable and Irrevocable Trusts

October 13, 2022

A living trust can be revocable or irrevocable, says Yahoo Finance’s recent article entitled “Revocable vs. Irrevocable Trusts: Which Is Better?” And not everyone needs a trust. For some, a will may be enough. However, if you have substantial assets you plan to pass on to family members or to charity, a trust can make this much easier. There is a difference between revocable and irrevocable trusts.

There are many different types of trusts you can establish, and a revocable trust is a trust that can be changed or terminated at any time during the lifetime of the grantor (i.e., the person making the trust). This means you could:

Add or remove beneficiaries at any time
Transfer new assets into the trust or remove ones that are in it
Change the terms of the trust concerning how assets should be managed or distributed to beneficiaries; and
Terminate or end the trust completely.

When you die, a revocable trust automatically becomes irrevocable and no further changes can be made to its terms. An irrevocable trust is permanent. If you create an irrevocable trust during your lifetime, any assets you transfer to the trust must stay in the trust. You can’t add or remove beneficiaries or change the terms of the trust.

The big advantage of choosing a revocable trust is flexibility. A revocable trust allows you to make changes, and an irrevocable trust doesn’t. Revocable trusts can also allow your heirs to avoid probate when you die. However, a revocable trust doesn’t offer the same type of protection against creditors as an irrevocable trust. If you’re sued, creditors could still try to attach trust assets to satisfy a judgment. The assets in a revocable trust are part of your taxable estate and subject to federal estate taxes when you die.

In addition to protecting assets from creditors, irrevocable trusts can also help in managing estate tax obligations. The assets are owned by the trust (not you), so estate taxes are avoided. Holding assets in an irrevocable trust can also be useful if you’re trying to qualify for Medicaid to help pay for long-term care and want to avoid having to spend down assets.

But again, you can’t change this type of trust and you can’t act as your own trustee. Once the trust is set up and the assets are transferred, you no longer have control over them.

Speak with an experienced estate planning or probate attorney to help understand the difference between revocable and irrevocable trusts. If you would like to learn more about trusts, please visit our previous posts.

Reference: Yahoo Finance (Sep. 10, 2022) “Revocable vs. Irrevocable Trusts: Which Is Better?”

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A Life Estate can help Protect your Property

October 12, 2022

If you are concerned about your loved ones losing control of the family home, a life estate can help protect your property. A life estate is a type of property ownership that divides the control and ownership of a property. The person who creates the life estate for their home and assets is known as the “life tenant.” While a tenant retains control of the property, he or she shares ownership during their lifetime with the remainderman (the estate’s heir).

Quicken Loans’ recent article entitled “What Is A Life Estate And What Property Rights Does It Confer?” explains that while the life tenant lives, they’re in control of the property in all respects, except they can’t sell or encumber the property without the consent of the remaindermen. After the life tenant passes away, the remainderman inherits the property and avoids probate. This is a popular estate planning tool that automatically transfers ownership at the life tenant’s death to their heirs.

The life estate deed shows the terms of the life estate. Upon the death of the life tenant, the heir must only provide the death certificate to the county clerk to assume total ownership of the property.

Medicaid can play an essential role in many older adults’ lives, giving them the financial support needed for nursing facilities, home health care and more. However, the government considers your assets when calculating Medicaid eligibility. As a result, owning a home – or selling it and keeping the proceeds – could impact those benefits. When determining your eligibility for Medicaid, most states will use a five-year look-back period. This means they will total up all the assets you’ve held, sold, or transferred over the last five years. If the value of these assets passes above a certain threshold, you’ll likely be ineligible for Medicaid assistance.

However, a life estate can help protect elderly property owners by allowing them to avoid selling their home to pay for nursing home expenses. If your life estate deed was established more than five years before you first apply for benefits, the homeownership transfer would not count against you for Medicaid eligibility purposes.

To ensure you’re correctly navigating qualifying for Medicaid, it’s smart to discuss your situation with an attorney specializing in Medicaid issues. If you would like to learn more about life estates, please visit our previous posts.

Reference: Quicken Loans (Aug. 9, 2022) “What Is A Life Estate And What Property Rights Does It Confer?”

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Category: Asset Protection

Avoid leaving Co-op Ownership to Heirs

Proper Asset Protection Can Avoid a Receiver

Benefits and Drawbacks of Family Limited Partnerships

SLAT is Increasingly Popular for Married Couples

Prenup is a Useful Tool in Estate Planning

Frequently Asked Questions about Series I-Bonds

College Kids Need an Estate Plan

Include Your Business in Estate Planning

The Difference between Revocable and Irrevocable Trusts

A Life Estate can help Protect your Property

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