Testamentary Trusts

A testamentary trust is an estate planning tool whereby a trust is established through a testator’s will, and comes into effect when the testator dies.  In the past, absent a particular circumstance, clients were advised to avoid testamentary trusts for several reasons.  The Will would have to be filed for probate in order for the trust to take effect.  The court would then have continuing oversight of the testamentary trust, and the trustee was required to provide the court with annual accounts.  In order to avoid the ongoing administrative obligations and costs of probating an estate and managing a testamentary trust, most often estate plans would avoid testamentary trusts and instead include a “pourover trust”.  The testator’s will would provide for the estate to “pour over” into a separate trust over which the court would have no authority or supervision.  The pourover trust might contain essentially the same provisions as would the testamentary trust, but would be administered privately without the court’s involvement. 

Under the new Massachusetts Uniform Probate Code, testamentary trusts have come back into favor. The Court no longer has continued supervision over a testamentary trust, and the previous administrative obligations no longer exist.    With the relaxing of the former requirements, testamentary trusts will often be a more simple, direct and appropriate method for leaving estate assets in trust.

It should be noted, however, that although testamentary trusts may be a simpler yet equally effective method of trust planning, it will be necessary to file the will for probate in order for the provisions of the testamentary trust to be implemented.  If probate avoidance is an important component of a client’s wishes, a testamentary trust will not be the proper vehicle.  Rather, to avoid probate, all assets must be held in non-probate form, and the pourover trust will continue to play an important role in achieving the goal of probate avoidance.  Under the new MUPC, however, testamentary trusts have regained favor and are often the estate planning vehicle of choice.   

Postscript to January 7 Post "A Matter of Life and Death"

I recently wrote a long and heartfelt entry about the issues of end-of-life decisions and death with dignity.  Then I discovered that the topic, as often happens, has burst onto the scene, and discussions are everywhere.  

One resource I have recently learned about that I think is interesting is a website called The Conversation Project, www.theconversationproject.org.   According to their home page, their mission is "dedicated to helping people talk about their wishes for end-of-life-care". The Conversation Project began in 2010, when well-known and prolific writer Ellen Goodman and a group of colleagues, media, clergy and medical professionals realized the importance of initiating conversations about dying and encouraging people to discuss their wishes for what they want to happen when the time comes.  

I am certain there are many other organizations and websites which deal with the same topic, but The Conversation Project was called to my attention, and I thought it was worth sharing.  Let me know what you think.

Big Changes in the Mortgage Industry

The Consumer Finance Protection Bureau has substantially overhauled the compliance and disclosure requirements imposed on mortgage lenders, and established a new and more comprehensive set of requirements designed to better protect the consumer as they go through the mortgage process.  These new regulations went into effect in October, 2015.

There are two important components to the new regulations, known colloquially as “TRID” (TILA-RESPA Integrated Disclosure).  The new rules integrate the former separate disclosure requirements into one complete process.  These rules do not apply to all loan transactions, but generally they will apply to a conventional residential purchase money or refinance loan.

Under TRID, you will find that you will no longer receive a sheath of paper from the lender to wade through once you submit your loan application.  Instead, just two disclosure forms are involved.  The first is the Loan Estimate, which integrates the former Good Faith Estimate and the early Truth in Lending forms given to the borrower following application.  The new Loan Estimate combines the information on all prior forms into one more detailed and complete document, including an accurate disclosure of all closing costs.  The Loan Estimate must be provided to the applicant no later than three business days after a loan application is submitted. 

The second document is the Closing Disclosure (CD). This document integrates the former final Truth In Lending statement and the RESPA-required HUD-1 settlement statement.  The CD, in one comprehensive document, not only itemizes the final closing costs formerly shown on the HUD-1 form, but also states all of the other loan terms, rights and obligations in easy-to-understand language. The CD must also be provided to the applicant three business days before the loan closing.  If the final figures on the CD diverge from those on the Loan Estimate, the lender must explain why, and in some cases the divergence will require the lender to prepare and provide a new CD, also subject to an additional three day rule.  This gives the lender and other parties in the transaction incentive to get it right the first time.  And thankfully, gone are the days when an overworked and understaffed lender is scrambling to provide closing figures to a borrower just hours before a closing is to take place.   The new rule means the lender must be more organized ahead of time in order to meet the three-day rule requirement.

These are big changes, and there is a substantial learning curve still in process.  In my view, however, these rules will result in far better consumer protection, truth and transparency in the mortgage industry. 

And a (somewhat self-serving) P.S.:  TRID clearly states that the borrower may choose the attorney who will close the loan transaction; the lender may no longer refuse to work with the attorney of borrower’s choosing.  This means that if you are working with an attorney you like and trust, you may require that your attorney also close your loan.  I have written previously about the benefit to a buyer of using the same attorney for both the purchase and sale phase and the loan closing phase of the transaction. TRID now ensures that the consumer is entitled to that benefit, so you will be sure the entire transaction is handled by the attentive and competent lawyer you have selected.  Like me.

A Matter of Life and Death

I have been thinking a lot about death lately.

Being an estate planner, I suppose this might be nothing more than an occupational hazard.  After all, I spend much of my day counseling people about how to get their affairs in order in advance of their demise.   Yet despite my strong commitment to developing a relationship with clients and to providing supportive assistance as they navigate what can be a very emotional process, I confess that the process can become very clinical at times.   Day after day, I confront this topic, and at times I can find myself removed from the true meaning of the subject matter.

Lately, however, I have come to a very different, and very personal, place, which bears thought, and which I want to share.  There is much to think about here.

Last summer, I read the outstanding book, “Being Mortal”, by Dr. Atul Gawande.  Dr. Gawande is a practicing surgeon in Boston, as well as a prolific writer on a variety of topics relating to the practice of medicine.  With great candor and frankness, “Being Mortal” addresses the inevitable condition of aging and death, and advocates strongly that it behooves medical practitioners, as well as loved ones, to assess the quality of life on a personal level for infirm, aged and terminal patients and to ensure that these patients experience a “good death” with dignity to the very end.

Recently I had an epiphany.  When I work with clients on an estate plan, one component is a Health Care Proxy.  This document appoints an agent with the legal authority to make health care decisions on behalf of incapacitated and terminal patients who are unable to make such decisions themselves.  The form asks the client to “check the box” with respect to various types of medical procedures they want provided or withheld if they are unable to express those wishes themselves at the time decisions have to be made.  But in thinking about it,  I realized that this document is a limited, clinical document.  It addresses only the narrow issues of actual scientific medical procedures, but it does not allow the person to address not only the strictly medical matters, but also what else they may want as they near the end of their life, even before they are at the point of incapacity.  It is just as important, maybe more important, to take the time to understand that the patient is a person, with fears, and hopes, and preferences for how they wish to live out the rest of their days.  How do we address the common issues of loneliness, helplessness and fear?  How do we offer these patients opportunities that will create a better quality of life from day to day?  How do we determine what constitutes “quality of life “for each patient, which may be very different from person to person?  And how do we make life worth living at the end, when we are weak and frail and unable to fend for ourselves any more?  We should be paying attention to those feelings.  Regardless of the patient’s condition, they have the right to express what constitutes a life, and more importantly, a death, with dignity, and we have an obligation to honor those wishes. 

So what is the message here?  When a senior client signs a Health Care Proxy, I always tell them how important it is to have a discussion with the agent, and with their family, about the medical interventions they may or may not want at the end of life.  These are very difficult but very necessary conversations.  I have come to understand, however, that this discussion should not be limited only to the strictly medical matters.  The discussion must also include a conversation about other, non-medical aspects of the end of life.  We should also know what they consider “quality of life” as they near the end, what they fear, what they hope for, and how they want to die.  To me, it’s all about death with dignity.  And we are all entitled to that. 

[With reference and thanks to the following sources:

 “Being Mortal” by Atul Gawande

“Happier Endings: A Meditation on Life and Death” by Erica Brown

“Lets Have a Conversation”, a sermon by Rabbi Carl Perkins, September 23, 2015]

Durable Power of Attorney: Get Yours Today!

Have you executed a Durable Power of Attorney?  If not, call me right away to help you do so immediately.  Some would consider a Durable Power of Attorney (DPOA) to be the most important component of a complete estate plan.  A DPOA is a written document in which the principal appoints another person to act as agent (sometimes referred to as “attorney-in-fact”) who is vested with the legal authority to perform a variety of financial and business actions on behalf of the principal during the period when the principal is incapacitated and unable to manage those affairs.   DPOAs are desirable because they enable the principal to have his or her affairs managed privately and efficiently during a period of incapacity by a trusted family member or other individual.  The document may be general or limited.  A limited POA gives the agent the authority to act only in certain capacities, which the document must describe in detail.  A general power of attorney grants broader powers to the agent, authorizing him or her to act in a wide variety of financial, administrative and other such matters.

In the absence of a DPOA, it would be necessary for someone to petition Probate Court to be appointed as Guardian of the incapacitated individual.  This is a costly and time consuming process and easily avoided by the creation of a DPOA. 

There are two types of DPOAs.  One is known as a “springing” power, because it takes effect only when the incapacity of the principal is determined.  The other, less common form in this context, is an “immediate” power, which takes effect as soon as the document is executed.   Whichever type of DPOA is used, the powers granted vest in the agent at the moment specified in the document, without any judicial proceedings.  Generally, the agent’s authority to act on behalf of the principal pursuant to a “springing” DPOA remains in effect only during the period of the incapacity of the principal.  If the principal regains capacity, the agent’s authority ceases.  Further, the principal, if competent, may amend or revoke the DPOA at any time.  DPOAs are valid only so long as the principal is alive, regardless of capacity or condition.  The document automatically terminates upon the death of the principal, at which time the named fiduciaries under the will or any trust will assume responsibility.

A DPOA is crucial to the orderly management of your affairs if incapacitated.  If you have not executed a Durable Power of Attorney, I invite you to contact me to implement this most important document.  

SERVICE DOGS AND EMOTIONAL SUPPORT ANIMALS

This post diverges somewhat from my usual practice areas, but the topic interests me and I hope it will interest my readers as well.

Many people suffer from conditions which require assistance.  Often, that assistance comes from animal support in the form of a service dog.  Your legal rights vary depending upon the status of your service animal. 

The Americans with Disabilities Act (ADA)  requires privately owned businesses that serve the public to allow people with disabilities to bring their service animals onto business premises in whatever areas customers are generally allowed. 

 The ADA defines a service animal as any guide dog, signal dog, or other animal individually trained to do work or perform tasks for an individual with a disability.  The task(s) performed by the animal must be directly related to the person's disability.   Service animals perform some of the functions and tasks that the individual with a disability cannot perform for him- or herself. People are most familiar with guide dogs for the blind, but service animals that provide assistance for any other disability meeting this definition are also considered service animals under the ADA.    The ADA does not require service animals to be licensed or certified by any governmental entity, nor does it require service animals to wear a vest, ID tag, or specific harness.  Business owners are not permitted to request any documentation for the animal, require that the animal demonstrate its task, or inquire about the nature of the person's disability.  They may ask only whether the service animal is required because of a disability, and what work or task the dog has been trained to perform.  People who use service animals may not be isolated from or treated less favorably than other patrons, and may not be charged additional fees due to the presence of a service animal.

 

Growing attention is being paid to the category of “emotional support animals (ESA).”     An ESA is not a service animal as defined by the ADA.  Rather, an ESA is a companion animal that has been prescribed by a licensed mental health professional for a person with a verifiable disability as part of a treatment program, and is meant to bring comfort and minimize the negative symptoms of a person’s emotional or psychological impairment.  A formal prescription letter from a licensed mental health professional is sufficient to categorize an animal as an ESA.   Unlike service dogs, ESAs do not need any specific task-training.  They are not required to perform any specific tasks for a disability, but are meant solely for emotional stability.   Their presence alone mitigates the symptoms for which they assist the owner.  Any domesticated animal (not only dogs) may qualify as an ESA.  Once again, ESAs do not need to be licensed or certified by any governmental entity, or wear a vest, ID tag, or specific harness.

ESAs, however, are entitled to fewer legal protections than those afforded to service animals.  The main difference is that with two exceptions, no public or private entity is legally required to permit an ESA access to their establishment, and their entry is not protected by law.  The proprietor of any establishment that does not permit pets has no obligation to grant access to an ESA.

There are two exceptions to this ESA policy.  First, under the Federal Department Air Carrier Access regulations, an airline must permit an ESA to fly with its handler in the cabin of an airplane without being charged a pet fee.   The carrier may require certain documentation, most customarily a letter from a mental health professional verifying the necessity of the ESA for emotional or psychological support. 

The other exception relates to housing.  The Federal Fair Housing Amendments Act of 1988 (FHA) requires “reasonable accommodations” in housing communities, even those that have a “no pets” rule.  An ESA is considered a reasonable accommodation and must be permitted by property owners and landlords without extra charge.  The FHA applies to most housing types, including apartments, condominiums and single family homes.  Certain types of housing are exempted.  For more specific information, see http://portal.hud.gov/hudportal/HUD?src=/program_offices/fair_housing_equal_opp/FHLaws/yourrights.

One last caveat:  several creative entrepreneurs have established websites offering their services to register your service animal or ESA with official-looking organizations such as the “United States Dog Registry”, the “National Service Animal Registry” the “United States Service Dog” registry, and others.  Again, neither service dogs nor ESAs need be registered anywhere, so do not be taken in by these commercial websites who “facilitate” the registration of your animal for a sometimes substantial fee, and while they are at it, try to sell you a variety of equipment such as vests, tags and similar items which they suggest are necessary for proper identification of your service animal.  Those items are not required.  Do not be fooled by these sites. 

Irrevocable Life Insurance Trusts

Under federal and state estate tax laws, the face (payout) amount of a life insurance policy owned by an individual will be included in the taxable estate of such individual at death if the policy is owned in the name of the insured during his or her life.  If the life insurance policies have substantial payout amounts,  the decedent’s taxable estate may exceed the allowable estate tax exemption.  If life insurance policies represent much of the taxable estate, a Irrevocable Life Insurance Trust (ILIT) is a good tool for removing the face amount of a life insurance policy from the taxable estate of the insured. 

The ILIT is created to own the life insurance policies in its name, and is also named as the beneficiary of any policies owned.  Upon the death of the insured, the proceeds of the policies on the life of the insured will be paid to the ILIT and held by the ILIT in accordance with its terms.  Generally the ILIT requires that the proceeds of policies owned by the ILIT are held for benefit of the surviving spouse. Distributions may be made to the spouse only at the discretion of the Trustees.  Upon the death of the surviving spouse, the terms of the ILIT will govern the division and distribution of the assets in the Trust.  Most commonly, upon the death of the surviving spouse, the proceeds will be distributed to children according to the terms of the ILIT, though any successor beneficiary may be named if there are no children to receive a share.  By using an ILIT, the policy proceeds will not be included in the taxable estate of either the insured or the surviving spouse.

If you are applying for new life insurance and have established an ILIT, the application should be made by the ILIT rather than by the individual.  When the policy is issued, it will be owned by the ILIT, and In that event, the tax protections of an ILIT are immediately available.   If you transfer already existing policies into an ILIT, there is a three year waiting period before the transfer is deemed complete.  If the insured dies within that three year period, the proceeds of the ILIT will come back into his/her estate.

It is important to note that or an ILIT to be effective, the policy owner must give up all “incidents of ownership” in the policy. Thus, an independent third party trustee must be named to take active responsibility and control at inception.  it is important to name a trustee with whom the surviving spouse will feel comfortable since the Trustee controls the payout of trust assets.  It is prudent to name at least one successor trustee in the event the initial trustee is unable to serve.  Because of the potential length of time the ILIT may exist, it is prudent to select a younger person as trustee to ensure they will be able to serve for the duration, and to name a series of successor Trustees to avoid a complete vacancy in that office.

The Trustee will be responsible for all administrative duties.  One such duty is the payment of annual premiums on the policy.   When a premium is due, the insured may not pay the premiums directly. Instead the insured must make a “gift “ in the amount of the premium to the ILIT, and the Trustee will then pay the premium from that gift.   To comply with gift tax laws, the beneficiaries are entitled to withdraw a portion of the gift within a 30 day period after the gift is made.  These are known as “Crummey Powers”.  The trustee must send written notices to each beneficiary of the gift made and the right of withdrawal.

Although there are great advantages to using an ILIT to own life insurance policies, there are certain downsides:

1.       An ILIT is irrevocable. The insured surrenders all control over the policies and any other contributions made.  The settlor of the trust cannot change the beneficiaries, cancel the policies, borrow against the trust, or otherwise alter the provisions of the trust if circumstances change, nor can anyone compel the Trustee to do any of those actions.  

2.       If an existing policy is transferred to the Trust less than three years prior to the death of the insured, the ownership of that policy will revert back to the estate of the insured and the face amount thereof will be includible in the calculation of his or her taxable estate.

3.               The beneficiaries are given a mandatory withdrawal right which could result in the exercise of that right in opposition to your intent.

4.               The surviving spouse as beneficiary of the ILIT does not receive the policy proceeds free and clear, but instead must work with the independent trustee on matters of management and distribution of trust assets.

Notwithstanding these limitations, an ILIT it is widely considered to be a worthwhile tool in estate planning as a very effective way of reducing the size of a taxable estate, thereby reducing estate taxes by a substantial amount.