Published in The Post Standard, March 2002
If you are like most Americans over sixty, you have worked and saved a lifetime and have amassed quite a nest egg. Many families have 401-K accounts, IRA's and other investments.
With a little planning now, you can protect these assets against the high cost of court administration of the estate after your death, safeguard these assets from total loss to a nursing home and minimize any estate taxes.
Court administration of the estate would entail either probate or estate administration. The probate of an estate refers to the process by which a person's assets are distributed after his death according to the wishes contained in the Last Will and Testament. If there is no Will, then the assets are distributed in a process called "estate administration".
If a person dies without having a Will this is referred to as dying intestate. Since there is no Last Will and Testament to tell us how the house and the money should be distributed we have to look to the laws of intestacy. Generally, the laws of intestacy provide for the distribution of the assets to close family members.
If you do not want certain family members to share in your estate, then it is wise for you to have a Will. In either case, in New York, the court involved in the probate process or estate administration is called the Surrogate's Court.
The Surrogate's Court will require certain legal paperwork in order to distribute the assets to the heirs. It is this legal paperwork that causes the probate or estate administration process to be both costly and time consuming.
Even if you have signed a Will that states who receives your assets after your death, there still may be nothing to distribute should you have substantial debts or if you become ill and go to a nursing home.
A properly drafted irrevocable trust that takes into account the Medicaid laws can save your assets from the high cost of nursing home care. A trust is a way of holding property.
Your property includes, but is not limited to, money, bank accounts, certificates of deposit, stocks, bonds and real estate (such as your house). The person who creates the trust is called the grantor. A trust names a trustee or trustees who hold the property for the benefit of a beneficiary or beneficiaries.
For example, if Mr. and Mrs. Robert Smith have two children, John Smith and Thomas Smith, they might create while they are alive "The Mr. and Mrs. Robert Smith Irrevocable Living Trust" and name John Smith and Thomas Smith as trustees. Mr. and Mrs. Robert Smith are the grantors of this trust. The Smiths could have named just one of their children to be the trustee. Or they could have named a friend to be the trustee. There is no requirement that the trustee be one of their children. It is important to name someone in whom you have confidence to be your trustee.
The Irrevocable Living Trust does not allow the grantor any power to revoke or alter the trust. The major advantage of the properly drafted Irrevocable Living Trust that takes the Medicaid laws into account is that such a trust removes one's assets from consideration when calculating your eligibility for Medicaid.
Another advantage of the irrevocable trust is that it is a private document. This is in contrast to a person's Last Will and Testament which becomes a public document that can be read by others once it is filed in court. A further advantage of the irrevocable trust is that it avoids court administration of your estate. Court administration of your estate is expensive and it delays the actual passing of property.
The Will or the irrevocable trust that we have discussed do not avoid taxes. Under both the New York and federal law, people can leave up to one million dollars to their heirs and pay no estate or inheritance taxes. Your life insurance, even if paid to a beneficiary, will count toward this one million dollar exemption.
If you are a married couple and have two million dollars, there is a way to leave the two million dollars to your heirs and still pay no estate or inheritance taxes. This is because both the husband and the wife can each give one million dollars to their heirs. Through the use of a special trust created in their Will, they can plan their estate so as to take advantage of the husband's one million dollar exemption and the wife's one million dollar exemption which combine to allow them to leave two million dollars tax free to their heirs.
People often procrastinate with regard to their estate plan, but you should not leave everything to chance. If you plan now you can protect your assets against costly court administration of the estate after your death, preserve your assets from loss to a nursing home and minimize any estate taxes.
Stephen T. McMahon is an estate planning attorney at the McMahon Law Firm in Camillus, New York. Mr. McMahon is a graduate of the University of Notre Dame Law School and a member of both the New York and California bars. For more information call or write to: Mr. Stephen McMahon, McMahon Law Firm, 3 Henry Beach Dr., Camillus, NY 13031-2300 800.391.9987. You may visit the law firm's website at stevemcmahonlaw.com or you can e-mail your questions to Mr. McMahon at Email me.