What Assets Pass Under My Will?

cassandra f. ceronThe foundation of most Georgia estate plans is a Will. Your Will is the legal document that dictates how your probate assets are distributed upon your death. But what are your probate assets? The easiest way to answer this question is to first define non-probate assets.

Non-probate assets are assets that pass outside of the probate estate to a named beneficiary (or beneficiaries) and independently of your Will. These are assets that pass by operation of law or under the terms of a contract.

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No Kids? An Estate Plan is Still Important

hoffmankimcolorThere are certain times in life where the need for a proper estate plan is so clear, its like the wail of a newborn at 3AM.  How will that child be cared for if something happened to you?

But what if you do not have children?  The answer may not be as clear, but it is no less important.

If you do not specify in a proper Will or Trust to whom and how your want your assets disposed of at your death, the State will do so for you.  Generally, the State will find your closest heirs and divide your assets among them.  Sound ok since that’s where you would send your assets anyway?  Then you should know that intestate (without a will) probate proceedings tend to be much more costly and time consuming than proceedings with a properly drafted Will.  The urgency is even greater when you do not want your brother and his kids to inherit your assets.  To direct otherwise requires an estate plan.

An estate plan is more than just a will though.  A Healthcare Directive and a well-drafted Power of Attorney are key components to a basic estate plan.  A Healthcare Directive names someone to make medical decisions for you in the event you cannot do so, it grants such person authorization to access your medical records under HIPAA, and it may include preferences for end of life care in the event of a terminal condition.  These directives make it much easier on loved ones to properly care for you in the event you can no longer communicate your medical preferences.  Anyone over the age of 18 needs a Healthcare Directive.  A parent no longer has automatic access to the medical records of their children after age 18, but so often an 18 year old is still under the care (financially, and otherwise) of their parent.

The last leg of the stool is a properly drafted General Power of Attorney.  These may be drafted to be “springing”; so that they spring into effect only upon incapacity.  Then, in the event of incapacity, you have previously named a trusted individual to manage your financial and personal affairs.  Should incapacity occur without a Power of Attorney in place, a court may appoint a Guardian or Conservator after an administrative process.

These Powers of Attorney and Healthcare Directives are essential documents, even for those individuals who do not feel a will is necessary because they have no children.  We, of course, still disagree with that notion, and we will be glad to discuss how each of these components of a good estate plan fit your specific needs.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

 

Estate Planning with Retirement Accounts

CassandraOne estate planning nuance is “beneficiary designation assets.”  These are assets that are distributed at death to the person named on a beneficiary designation form, and do not follow the direction of the will.  These assets may be life insurance, joint or pay-on-death bank accounts, joint or pay-on-death investment accounts and retirement accounts.  During the initial meeting, it is important to discuss the client’s assets and these accounts in particular.  If family dynamic has changed, be it from a divorce, death in the family or simply the fact that once small children are now adults, these beneficiary designations may need to be updated.  These assets pass outside of probate.  Essentially when the account holder dies, upon confirmation of death, the entity which holds the account simply distributes the assets to the named beneficiary.

Retirement accounts (IRAs, 401k plans and the like) are special, however, because they typically allow beneficiaries to prolong withdrawal if properly handled.  If the plan allows, beneficiaries may elect to use their own life expectancy in calculating the minimum amount of money which must be distributed each year (this is also called “minimum required distributions”).  This is beneficial because it allows a beneficiary to prolong to amount of time the money is in the retirement account, allowing additional potentially tax free growth.

While many individuals choose to leave their retirement accounts to an individual beneficiary, i.e. their spouse or children, there may be good reason to leave such assets in trust.  Trusts offer many benefits, including asset protection, especially with the recent Supreme Court decision in Clark v. Rameker, 134 S. Ct. 2242 (2014), in which the Court found that a non-spouse beneficiary’s inherited IRA was not exempt from the beneficiary’s creditors in his bankruptcy estate.

In order to fully take advantage of both the protection a trust offers and the beneficiary’s life expectancy, the trust must be carefully drafted.  Such trusts are referred to as “see-through” trusts because the language directs the retirement plan to look through the trust at the beneficiary individually to determine life expectancy.  If the trust runs afoul of the rules, however, the consequences are harsh.  The trust and its beneficiary’s life expectancy are disregarded and the “5-year rule” applies, requiring a full distribution of the retirement plan assets within 5 year.

This is one of the many reasons it is important to have an attorney who is familiar with these rules to assist you with carefully drafting your estate plan.  We would be happy to work with you and your family to craft an estate plan which achieves your goals.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

Hoffman & Associates Announces its Newest Associate

CassandraAtlanta, GA, Oct 15, 2015 – Hoffman & Associates is proud to announce its newest associate, Cassandra Ceron.  Cassandra joined the firm in May 2015 and specializes in the areas of wills, trusts, estate administration and probate, and guardianship/conservatorship of incapacitated adults. Cassandra’s past experience in family and domestic  law enables her to assist blended families in navigating their estate plan. Cassandra graduated cum laude, and with pro bono distinction, from Georgia State University College of Law and has an undergraduate business degree, cum laude, from Kennesaw State University.

Cassandra is a member of both the Estate Planning & Probate and Family Law Sections of the Atlanta Bar Association and the Young Lawyers Division and the Family Law Section of the  Georgia Bar Association. Cassandra lives in Marietta with her husband and two young children.

About Hoffman & Associates

Hoffman & Associates specializes in estate planning for wealthy families, business and tax law for closely-held businesses, and tax compliance.  Expertise in these areas comes from a dedicated staff of both attorneys and CPAs delivering personalized service and sound legal guidance.  Established in 1991, Hoffman & Associates prides itself in having a standalone tax practice and attorneys licensed in Georgia, Florida, North Carolina and Tennessee.

Can You Afford $91,000 a Year for a Nursing Home?

CassandraGenworth, an insurance company that sells long-term care insurance, recently concluded their annual report surveying over 15,000 assisted living facilities, nursing homes and other long-term providers across the country.  The report found that the median cost for a private nursing home room has risen from $87,600 in 2014 to just over $91,000 per year.  While costs vary widely from state to state, the cost of care in a nursing home has risen at twice the rate of U.S. inflation in the past 5 years.[1]

Much of the aging population believes that Medicare will cover these expenses.  Not so.  “Medicare does not pay the largest part of long-term care services or personal care – such as help with bathing, or for supervision often called custodial care.”[2]   Medicare will pay for a “short stay” if the stay is following a hospital stay of at least three days, the individual is admitted to a Medicare-certified nursing facility and the individual requires “skilled care,” as in physical therapy or nursing services (up to 100 days, although Medicare will only pay 100% for the first 20 days, then the individual must pay a co-pay, currently $157.50 per day).[3]  Medicare will not cover long-term care when an individual is suffering from memory impairment or a degenerative disease that impairs the individual’s ability to care for themselves, i.e. bathe, get in and out of bed, etc.  Medicare will pay for hospice care, only if one is expected to live less than 6 months—if you have a prospect of a year, you’re on your own.  The bottom line is Medicare is not going to cover long-term care in a facility, nor will they cover around-the-clock care at home.

So where do you turn?  Long-term care insurance.  The difficulty with this is the expensive premiums if you wait too long.  The policies can cost upwards of $3,000 per year but max out at a total benefit of $164,000 with a daily benefit allowance of $150 for 3 years.[4]  This can help offset the Medicare premium following a hospital stay.

In the event long-term care insurance maxes out, the final option in long-term care is Medicaid.  It’s estimated that Medicaid pays for more than half of long-term care throughout the country.[5]  However, you must be eligible for Medicaid in order to qualify for assistance, which, in addition to other requirements, has a “resource limit” of $2,000 (although homes are exempt from this calculation).[6]  This has led to many elderly individuals depleting hundreds of thousands of dollars in a few short years in order to cover the expense.  Then, when they are down to their last $2,000, Medicaid will assist them.  These now impoverished individuals have no means for additional necessities aside from what the government offers through social security, disability, Medicaid, food stamps and other state government programs.  Additionally, Medicaid will seek reimbursement from the individual’s estate after their death, including their home, in some instances.

This is one of the many reasons proper, and early, estate planning is so crucial. With proper planning, an aging client can align assets in the event of an illness or hospitalization ensuring that:

(1)    They will have someone they trust making decisions for them, their previously designated health care agent;

(2)    They will have the proper long-term care insurance to assist in covering the cost of long-term care, in the event it’s necessary; and

(3)    They will have safeguards in place so that if they require Medicaid assistance, depleting all of their resources is not required.

However, in order for the estate plan to be effective, it must be structured early and prior to the onset of illness.  Each family has different goals which they hope to accomplish.  We can work with you to set up the most effective estate plan to accomplish you and your family’s goals.

Single Member LLCs for Asset Protection

IAN M. FISHERAt Hoffman & Associates, we advise many of our clients to form limited liability companies, known as LLCs, to hold and protect their assets. In general, an owner of an LLC interest, or a “member” of the LLC, will not be responsible for any debts of the LLC, which is a win-win situation for the client. Further, if the member gets sued for something related to the LLC, such as the actions of an employee of the LLC or product liability from a product produced by the LLC, the member’s personal property will be shielded from the person suing the LLC.

Additionally, if a member is sued for something unrelated to the LLC, the member’s LLC interest will be somewhat shielded from that judgment creditor. Often the remedy for a judgment creditor against a member of an LLC is what is known as a “charging order,” which means they cannot take ownership of the LLC, but will be entitled to any LLC distributions to that Member.

However, in a few limited instances, a court will look through the LLC to get to a Member’s assets, known as “piercing the veil” of the LLC. Generally, this is done in the case of an LLC with only one member, which is the situation numerous clients find themselves in – they do not have a partner to add or do not want to add a partner to their business. Even with this risk, many clients will want to own the whole LLC themselves, which is a very simple structure, since all of the LLC’s taxes would pass through to that single member.

Often, states are more likely to pierce the veil or not limit the remedy to a charging order in the case of single-member LLCs, or SMLLCs. In fact, only a handful of states limit action against a member of a SMLLC to a charging order. Delaware, Nevada and Wyoming are the popular states that offer this statutory protection. If a client is focused on asset protection and does not want an additional LLC member, forming the LLC in one of these three states is the best course of action.

Even in a state that limits a remedy to a charging order, a court can still pierce the veil of a SMLLC if the LLC member does not respect the structure of the LLC. In a recent Wyoming case, Greenhunter Energy, Inc. v. Western, 2014 WY 144, (WY S.C., Nov. 7, 2014), the Wyoming Supreme Court completely disregarded a SMLLC because the Member did not treat the LLC like a separate operating entity. There were numerous problems in this case, but they are easily avoidable with a proper Operating Agreement and by respecting the LLC as a separate entity.

Some clients desire more anonymity. Delaware, Nevada, and Wyoming all require a manager’s name to be filed with the state, which becomes an easily accessible public record. If a client also desires anonymity, one option would be to form an LLC in a state that does not require a manager’s name to be listed (such as Georgia) and have that LLC serve as the manager of the SMLLC.

Although the SMLLC can be ineffective if not formed and used properly, as shown in the Greenhunter Energy case, it can be a great tool for those clients who have asset protection goals, even if they do not want to bring a partner into their business. If this is you or someone you know, please contact Hoffman & Associates to discuss a single-member LLC to protect your assets.

For more information regarding this or any other business law concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

 

The IRS is at it Again

michael w. hoffmanFamily Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) have long been used for a variety of purposes, including centralized asset management, creditor protection, efficient legacy planning, and implementing legitimate discounting and freezing techniques for estate planning purposes. Our estate and gift tax system relies on accurately determining the fair market value of the property being transferred. Fair market value is to be determined objectively considering hypothetical buyers and sellers. Appraisers must take into account valuation discounts for lack of control and lack of marketability. When property is transferred to descendants or trusts, the value of the particular property being transferred is what is reported for gift tax purposes, and then the property with all future appreciation is excluded from the grantor’s estate.

The IRS began a campaign of attacking FLPs back in 1997. Court decisions have generally rebuffed various tactics and positions taken by the IRS in the family limited partnership area.

The IRS publishes its priority guidance plan each year to emphasize areas of the tax law that the IRS may issue additional regulations. Additional regulations affecting valuations in an intra-family transfer context has been on the IRS’ priority guidance plan for the last 11 years. Now, it has been elevated to a proposal set forth in President Obama’s Administration’s 2013 Green Book. The IRS recently announced that it could issue proposed regulations as early as September, which would severely restrict valuation discounts for interests in FLPs and other family entities.

Articles are now appearing which are encouraging estate planners and clients to get ahead of these likely new rules. It is likely that the IRS position will be that any new rules will be effective upon the publication of the proposed regulations, even though they will not become “final” regulations until a much later date.

Earlier this summer, we sent messages to clients who are in the midst of their estate planning that they may want to expedite the process, before the IRS can issue proposed regulations which greatly curtail the legitimate discounting and freezing techniques that we’ve implemented with countless clients. One would think that only Congress can change the law with respect to re-defining the value of property for gift and estate tax purposes, but the Obama Administration has an historical edict of affecting change by more government regulation. The IRS, no doubt, is feeling very confident in their power to limit valuation discounts by way of their regulatory authority.

If you have put off further estate planning, time may be of the essence. If your planning should include the many benefits of FLPs and FLLCs, or if you have an FLP or FLLC and gifting may be appropriate, you may want to get with your advisor sooner, rather than later. If we can help, give us a call.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

Term Insurance or Permanent Insurance?

Hoffman19Many of our clients wrestle with the decision to purchase term insurance or permanent insurance.  The premiums for term insurance are cheap, particularly when you’re young, while permanent insurance generally provides a level premium with more certainty that a death benefit will be paid.

Term insurance seldom pays a death benefit.  The reasons for this are simple.  Most people live to, or close to their life expectancy.  By the time they have reached their life expectancy, the premiums on term insurance have increased to the point where the insurance is dropped, or the individual has reached an age or health condition that is deemed uninsurable by the insurance company.

For this reason, term life insurance is best for temporary needs such as support for a surviving family (particularly when you are young), funding a buy/sell arrangement for a closely held business, providing cash (key man insurance) for transition of business, and for the repayment of debts.

I often tell clients to load up on term insurance when they are young, partly because it’s so cheap, and partly because their financial “security” needs are so great when their families are young.  Of course, the premiums for term insurance are lower because it seldom pays a death benefit.  The only usual financial “winners” for term insurance are the insurance agent and the insurance company.

As we get older, financial obligations (except retirement) tend to decrease.  Many of us begin to look at permanent insurance as a permanent feature or category of assets that we are accumulating during our lifetime.  Most of us want to have a certain portion of our insurance that is ongoing.  The insurance can provide liquidity to our heirs, cash to pay estate taxes, a fund to provide for the maintenance of a second home, or a mechanism to equalize the estate where certain hard assets (such as farm, business or vacation home) is necessarily directed to one particular heir, while the other child receives cash.

Permanent insurance generally falls into three categories: whole life, universal life (including universal blends and indexed products) and variable life.  Whole life is the most expensive, while universal life is generally the most inexpensive permanent insurance policy.  Variable life has more stock market investment features inside an insurance policy wrapper.

Universal life is popular among our clients as it provides guaranteed lifetime coverage at the lowest level of permanent insurance premiums, and generally level premiums can be pre-paid or lowered by lump-sum or higher premiums in early years.  Generally, with universal life policies, guaranteed cash accumulation for retirement income or other purposes is not a significant objective.  The goal is to lock in a death benefit while keeping premiums as low as possible.

By far, our estate planning clients buy mostly universal life products.  While there are many varieties, studies show that the internal rate of return on universal life products is generally positive, where as the internal rate return on any term policy, if clients live to or close to their life expectancy, is significantly negative.  In other words, with term insurance, we have thrown our money away unless we die prematurely.

Most term insurance lapses before death.  This is fine if the reason for the insurance no longer exists.  However, many policy owners want to extend the coverage of their insurance while their health is still good, because they know that the risk of their health changing increases with age and health changes can happen suddenly.

Be aware that term policies can carry a conversion right.  This is important, even though it might marginally increase the premium cost, because a client might otherwise become higher risk or uninsurable prior to the expiration of the term policy and be unable to get other insurance.

Generally, our clients are rarely content to allow their insurance policies to lapse when they reach the end of the coverage period.  The older we get, the more we see the value of “investing” in insurance as one of our many buckets of asset categories that we are accumulating and tending to during life.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.