Bryant - Course 6. Estate Planning. 7. Estate Planning Documents Flashcards

Question

What are a will's Typical Requirements?

Answer 1

**The law of each state governs the validity of will provisions, execution formalities, and other requirements**. * The requirements for one state may not be identical to those of another state. * But as a general rule, **there are some typical execution requirements for a valid will**. * In many states, if a will were found by a court to be invalid the state law of intestacy would govern the distribution of the decedent's estate.

Answer 2

The witnesses must: * Sign the will at the request of the testator, * Sign in the presence of the testator, and * Sign as a witness in the presence of the other witness(es). Some states may have a minimum age requirement for a person serving as a witness. For example, some states require that an individual must be at least 16 years old in order to serve as a competent witness. **States that have recognized holographic wills as valid may not have a witness requirement**. **Practitioner Advice: State law will also determine the minimum number of witnesses that are needed for the valid execution of a will**. * Many states have a two-witness requirement however, some states require three.

Answer 3

Wills are categorized according to the distinguishing features they possess. The respective features of the following wills are covered next: * Holographic wills * Joint wills * Simple wills * Pour-over wills * Tax-effective wills

Answer 4

**A simple will is a will in which the maker or testator leaves all separately owned assets outright to his or her heirs**. Frequently, it is used by one spouse to leave all property to the surviving spouse. Between spouses, this type of will may be referred to as an "I Love You" will. An example of a reciprocal will is when the husband leaves his property to his wife in his will, and the wife, in turn, leaves her property to her husband in her will. * **A mutual will is a will made in agreement with another to dispose of property in a previously agreed-upon manner**. A mutual will may **also be considered a reciprocal will and may be enforceable after the first decedent dies**. **Between spouses, a simple will leaves almost the entire value of the decedent's separately owned assets to the surviving spouse**. Many of your clients, regardless of the size of their estate, may have simple wills. Typically, when a young couple visits their attorney, a simple will is executed. Although the young couple may not have significant assets, **the will still allows the couple to select the executor of the estate as well as guardians for minor children**.

Answer 5

**A joint will is one document that serves as the last will and testament for two individuals**. * These are **typically used by married couples**.

Answer 6

Both I and II * Each of the statements point out important disadvantages associated with joint wills. * **Upon death of the first spouse, the survivor may not have the ability to change the terms of the will**. * **The first-to-die spouses property interests are commonly categorized as terminable interests and will not qualify for the marital deduction**.

Answer 7

A tax-effective will is a will in which **the estate tax exemption equivalent and/or the marital deduction and/or the charitable deduction are utilized**. * These **techniques are incorporated within the will in order to minimize or eliminate the decedent's estate tax liability**.

Answer 8

A holographic will is a **will handwritten by the testator**. * A few states allow such documents to be admitted to probate, but most courts are very reluctant to accept them.

Answer 9

People generally may dispose of their property on death as they see fit. **Will contests are initiated by a disenchanted or disinherited beneficiary who seeks a greater portion of the decedent's estate**. * In some states, **an omitted child can obtain their intestate share of the testator's property unless the omission was intentional, or the child is provided for outside of the will**. A child or a spouse not named in a decedent's will is referred to as a **pretermitted heir**. * **The law imposes certain limitations on the ability to disinherit a surviving spouse**. In the past, the common law provided dower and curtesy to give adequate protection to widows and widowers respectively. * **Most common law states now protect the spouse through "forced share" or "elective share" statutes**. These statutes allow the surviving spouse to: Take control of property per the testator's will, or Reject the provisions of the will and receive a share prescribed by statute. **This share is commonly either one-third to one-half of the estate, or the portion of the estate that would have passed to the spouse if the decedent had died intestate (without a will)**.

Answer 10

**The Uniform Probate Code (UPC) approach awards the surviving spouse an increasing percentage of the estate based upon the number of years that the decedent and the surviving spouse were married to each other**, up to a **maximum of one-half of the estate for marriages lasting fifteen years or more**. * If the surviving spouse elects to take the forced share, the estate is not rendered intestate. * The shares of property left to other heirs would be reduced, since the surviving spouse, by election, generally receives more than is provided in the will. * **An advantage is that the estate tax marital deduction is increased, which reduces dollar for dollar the estate taxes other beneficiaries may have to pay**. **In states that have adopted the Uniform Probate Code, the spouse's share is equal to a percentage of the augmented estate**. * The augmented estate includes probate property, the decedent's share of JTWROS property held with a non-spouse, life insurance with a non-spouse beneficiary, plus property transferred into a revocable trust within two years of the decedent spouse's death. **The decedent spouse will receive a marital deduction for the amount awarded to the surviving spouse under the elective share statute**. **Premarital or post-marital agreements that are validly executed can supersede state statutes**. * Therefore **they supersede will provisions for property interests left to the surviving spouse**. * **A surviving spouse with a pre or post-marital agreement cannot take an elective share in the property, since their property rights are subject to the provisions contained in the marital agreement**.

Answer 11

Will contests are usually brought on the following basis: * The testator of the will **was not of sound mind at the time** the will was executed. * The testator was **unduly influenced by another individual at the time** the will was executed, and this undue influence had a direct impact on the distribution of the estate. * The testator was **fraudulently deceived**, and as a result of the fraud, disinherited a person who ordinarily would have taken a greater share of the estate. * The testator **suffered from an insane delusion** at the time the will was drafted.

Answer 12

**An insane delusion differs from an unsound state of mind**. * To be of **unsound mind**, the testator may not know who he or she is, the extent of his or her property ownership, who the natural objects of his or her affection are, or that he or she is making a will and giving away his or her property. * An **insane delusion**, on the other hand, may be a situation in which the testator knows his or her heirs or family members but disinherits them because he suffers from an insane delusion that they are trying to kill him.

Answer 13

Will contests are usually based on one of the following grounds: * The testator of the will is not of sound mind, * Another has exerted undue influence over the Testator in the disposition of the estate assets, * The testator was deceived by fraud, or * The testator suffers from an insane delusion.

Answer 14

That the maker suffered from an insane delusion at the time the will was drafted. * An insane delusion differs from an unsound state of mind. To be of unsound mind, the Testator (creator of a will) must not know who he or she is, the extent of his or her property ownership, who the natural objects of his or her affection are, or that he or she is making a will and giving away his or her property. * In the case of Matt, he is fully aware of his identity that he is making a will, and giving away his property. He knows that Dona is his wife but disinherits her because he suffers from paranoid thoughts from his schizophrenia.

Answer 15

* Holographic will - Is a will written in the handwriting of the maker. * Noncupative will - Is a verbal (oral) will that bequeaths the decedent's personal property. * Joint will - Is one document that serves as the last will and testament for two individuals. * Reciprocal will - Is a will executed by two people who agree to leave their property to each other.

Answer 16

After completing this lesson, you should be able to: * Define incapacity and disability, * Describe methods of caring for incompetent individuals, their dependents, and their property, * Distinguish between types of powers of attorney - durable, non-durable, springing and health care, * Explain provisions of disability income insurance policies, * Define eligibility requirements for Social Security Disability benefits, * Describe the advantages of Special Needs Trusts and Standby Trusts, * Identify long-term care options including Medicaid planning and LTC insurance, and * Explain the purpose of Viatical settlements.

Answer 17

Individuals who become incapacitated need others to care for them in many ways. Very often family members want to become involved in making medical and personal care decisions for their loved ones, but they may not have the time or expertise to manage the incompetent person's finances, property, business, or legal affairs. **An individual who has not previously planned for these circumstances will have the courts appoint guardians and conservators for them, with resulting costs, delays, and ongoing court supervision**. * **Legal documents such as durable powers of attorney, health care powers of attorney, living wills, and standby revocable trusts** are designed to give individuals control over their circumstances should incapacity occur, without the need for court involvement. * **These documents name the appropriate individuals who can make crucial health, financial and business-related decisions, and they define the scope and authority that these decision-makers have**.

Answer 18

Many married couples believe that if one spouse becomes incapacitated, the other spouse will automatically care for them, and manage their property interests as well. * This is a serious misconception since **guardianship of person and property is determined by the probate courts**. * **Without proper legal planning, the courts will appoint individuals to care for an incapacitated person and their property**, who may or may not be their spouse, nor the person whom the incapacitated individual would have selected as guardian. **Legal documents such as a durable power of attorney and a health care power of attorney allow a person to choose an agent who will make medical and financial decisions for them, in the event of incapacity**. * The grantor of a funded revocable trust can also **name a successor trustee to manage his property interests if he is unable to do so**. * Planning for incapacity with proper legal documents allows a person to have control over their personal, financial, and business affairs without any court interference.

Answer 19

A proactive approach to incapacity planning saves families significant time, expense and anguish, and avoids the need for a guardian or conservator. All states have a court-supervised arrangement to provide for an incompetent person's personal care and to manage their property if the incompetent person made no previous plans to do so. States vary in the arrangements and terms they use, but **guardianship** is a general term used **to protect a ward's property interests, and oversee their personal care**. The three types of guardianship are: * **Guardianship** of the person provides for the ward's personal care. * **Guardianship or conservatorship of the estate** manages the ward's **property and financial affairs**. * **Plenary guardianship** **manages both the ward's property and personal affairs**.

Answer 20

The first step in the process of becoming a guardian or conservator **begins when an individual files a petition with the court, indicating that a person has become incapacitated**. The court hearing itself is a **public hearing at which oral and written testimony is submitted concerning the individual's physical and mental competency**. During the court proceedings, **a guardian is appointed to represent the ward and protect his or her rights**. This person is referred to as a **guardian ad litem**. At the close of the hearing, **the court makes a determination regarding the individual's competence**. If the court declares the individual incompetent, the court may appoint a guardian or conservator and will continue to exercise ongoing supervision and control. This is known as **living probate**.

Answer 21

* **Petition Filed**. A petition is filed with the court indicating that a person has become incompetent. * **Appointment of Guardian Ad Litem**. A guardian ad litem is appointed to represent the ward during the court proceedings and to protect his or her rights. * **Submission of Testimony**. During a public court hearing, oral and written testimony is submitted recounting the individual’s physical and mental competency. * **Court Appointment of Guardian**. The court makes a determination of the individual’s competence. If the court declares the individual incompetent, a guardian or conservator may be appointed. * **Ongoing Supervision by Court**. The court exercises ongoing supervision and control. **Practitioner Advice**: This is a costly process with fees payable for the court proceedings, the cost of the bond posted for the conservator, and payment for the frequent reports the conservator must submit to the courts. **Preplanning using Durable Powers of Attorney and funded revocable trusts will eliminate the need for these court-imposed arrangements**.

Answer 22

**A guardian and conservator's source of authority is derived from the statutory laws of the state in which he or she serves**. A guardian is a **fiduciary**, like a trustee, but unlike a trustee, **a guardian does not have legal title to the property that is administered for the ward's benefit**. A guardian or conservator's scope of authority can be defined as comprehensive or limited in the following manner: * Guardians have the authority to **provide the ward with comprehensive continuing care and supervision**, similar to the rights a competent person has in managing his own care * **Limited guardianships can be awarded to manage only specific aspects of an incompetent person's care**, giving the individual some control over his circumstances. * **Conservators have the authority under the Uniform Probate Code to manage and distribute the ward's property for the support, education, care, or benefit of the protected person and his dependents**. Typically, the courts and state laws restrict a conservator to making only a limited number of conservative investments and require permission from the court to engage in most property transactions. Restrictions are also placed on the use of the ward's assets, and the ability to make gifts of the ward's property. Wills cannot be created for the incompetent individual. * **Limited conservatorships further restrict the management of property and the number of transactions a conservator can make on behalf of an incompetent individual**.

Answer 23

Individuals who do not plan for their incapacity or death risk having the probate courts appoint guardians, conservators and executors for them. **Typically when a parent dies, the surviving parent will become the sole guardian for the minor children**. If this parent subsequently dies without a will, the **probate courts will conduct a hearing to appoint a new guardian who is capable and willing to provide for the children's financial and emotional support**. The courts will also become involved in selecting a new guardian when deceased parents have named a guardian in their wills who is also deceased, or the named guardian is unwilling or unable to serve. **Financial Guardians**: When parents die, their children may inherit substantial amounts of property from life insurance policies, IRAs, investments, and real property interests. **The probate courts appoint financial guardians for children with expertise in financial management**. Financial guardians may not be the same parental guardian selected by the court. Financial guardians are **usually required to file a formal accounting with the court every one to two years, to file a bond, and to obtain permission from the court to engage in any substantial financial transactions**. **Discretionary Trusts**: P**arents can eliminate potential court involvement and public scrutiny by creating testamentary or inter vivos trusts for their children**. They **can name institutional trustees and/or financially astute individuals to manage the trust assets for their children**, and decide how long the trust should last. Parents **can also give trustees discretionary sprinkle or spray powers to determine which beneficiaries will receive trust income and corpus, what amounts will be distributed, and when these distributions will occur**. These trusts provide trustees with great flexibility in managing assets for children, in the event of one or both parent's incapacity or death. **Practitioner Advice**: It is of **paramount importance that parents of minor children create individual wills, and choose primary and contingent guardians to avoid having courts select unintended parental guardians for their children**.

Answer 24

**A power of attorney is a written legal document in which a principal (the person creating the document) gives authority to another (the agent or attorney-in-fact) to undertake some specific action on the principal's behalf**. The power of attorney assures the principal that, in the event of a serious illness or disability, the agent can conduct personal, business, and financial transactions on the principal's behalf. The two types of powers of attorney discussed in this lesson are **power of attorney over property for asset management purposes**, and **the health care power of attorney, also known as a health care proxy.** We will also briefly discuss the **living will, which states a person's wishes concerning prolonging their life if they become terminally ill**.

Answer 25

**Financial advisors need to be aware of what a power of attorney can accomplish, and what restrictions and limitations these documents have in their scope and in their use**. There are 3 types of Powers of Attorney over assets: * **Non-Durable POA**: The agent's **authority is limited to terms dictated in the POA document and ceases when the principal becomes incapacitated or dies**. * **Springing Durable POA**: Agent has no authority to act on behalf of the principal until the **principal becomes incompetent as certified by physicians**. It **stays in effect until it is revoked, or when the mentally incapacitated person dies**. * **Durable POA**: When the POA is created, the **agent has the authority to represent the principal before and after incapacity occurs**. Therefore, it is not revoked when the principal becomes incapacitated. **Any degree of legal power may be transferred to the agent to make business, financial or legal decisions for the principal**.

Answer 26

The advantages of the power of attorney are as follows: * Unlike a guardianship, which requires a court declaration that the disabled person is both legally and mentally incompetent, **a durable power of attorney is a private document that becomes effective immediately, without the public stigma of a declaration of incompetence**. * The power of attorney is relatively **inexpensive and simple to execute**. The document can be revoked and amended by the principal, if desired. * Generally, only one document needs to be drafted, and the agent may only exercise those powers expressly contained in the document. * There are no implied powers that may be inferred from the fiduciary role that the agent undertakes. This can be an advantage for the disabled principal, since the agent cannot undertake additional powers without the consent of the principal. However, **state law can expand or contract powers that are not clearly articulated or delineated within the power of attorney**. * If the power of attorney is durable, then the agent has the power to act if the principal becomes incapacitated. Therefore, the power is not revoked in the event the principal becomes incapacitated.

Answer 27

The disadvantages of the power of attorney are as follows: * **An agent may undertake only those powers expressly conferred by the document**. The lack of flexibility within the document may prevent the agent from exercising a power that needs to be exercised since it is not one of those powers contained within the document. For example, if the document is drafted so that the agent may enter into certain contracts relating only to personal property, but the needs of the disabled principal require that his real estate holdings be liquidated, the power of attorney may be of no benefit to the principal. * **In many states, the power of attorney is referred to as being durable, meaning that the document is binding at the time it is executed, even if the principal is not incapacitated at that time. The durable power of attorney will remain in effect in the event the principal were to become mentally incapacitated in the future, but a non-durable power will not**. * **Many lending institutions will not accept a durable power of attorney**. Furthermore, those institutions that do accept them may only do so if the power meets certain specific guidelines established by the institution itself. * **A bank or a brokerage firm may not accept a durable power of attorney because it is not current enough according to their standards**. **The principal should re-execute these powers periodically to keep them current while the principal is legally competent** since the power is not effective if the person signing it is mentally incompetent. * **Durable powers of attorney cannot be used after death to dispose of property omitted from a will**. * An agent or attorney-in-fact has a fiduciary duty to act in the principal's best interests but is not held to the same fiduciary standards as a trustee, since he or she does not hold legal title to the principal's property. However, the agent can be held liable for using the powers contrary to the principal's best interests.

Answer 28

A **durable power of attorney** simply means that **the power is NOT revoked even in the event the principal were to become mentally incapacitated**. * **In effect, it empowers someone to act as the principal's legal representative at the time the power is executed**. This means the agent has the power to act on the principal's behalf while the principal is competent and if the principal becomes mentally incompetent in the future. **The principal can set up the power of attorney so that any degree of legal and financial power is transferred**. * For asset management purposes, an agent can be given powers over retirement plans to exercise options, borrow from the plan, and change beneficiary designations. Agents can also be given the authority to take actions that reduce the principal's estate. Agents can make taxable and annual exclusion gifts to family members, transfer assets to spouses to equalize the estate, make disclaimers on the principal's behalf, and utilize asset management powers that qualify the principal for Medicaid assistance. **Practitioner Advice**: It is **not wise to give an agent broad gifting powers, such as the ability to make unlimited gifts to oneself**, since the IRS might construe the agent's powers to be general powers of appointment over the principal's property. **Instead, the agent could be given the authority to make gifts to himself/herself that is subject to a limited power of appointment**.

Answer 29

An outline of the general aspects of the covered principal’s affairs. * The powers of attorney should be very specific as to the aspects of the principal’s affairs that are covered.

Answer 30

**A standby trust is usually structured to take effect when the owner is no longer capable of managing his assets**. * Frequently, this occurs in situations where the **grantor has become incapacitated or where the grantor has left the country for a period of time** (for example, a three-year leave of absence to develop a business enterprise in a foreign country). The standby trust is usually revocable in nature. * In fact, **most standby trusts are revocable inter-vivos trusts, in which the grantor is also the trustee and beneficiary**. * **To plan for possible incapacity, the grantor names a successor trustee to manage his assets if he were to become incapacitated**, while the grantor continues to be the beneficiary of the trust. * If the trust is not funded when the grantor becomes incapacitated, then the agent of the grantor's durable power of attorney could transfer assets into the trust for the successor trustee to manage. * However, if the trust is already funded, this will avoid delays in locating, transferring, and managing the grantor's assets at a critical point in his life.

Answer 31

The **purpose of the health care power of attorney, also known as a health care proxy, is to grant an agent the power to make health care decisions for the principal in the event of incapacity**. **In contrast to the living will, which simply indicates the creator's intent with respect to utilizing heroic measures to be kept alive**, the health care power of attorney allows the principal to **more fully specify his or her health care wishes than a living will**. Health care agents can confer with medical professionals to make decisions concerning: * Where an individual should be treated * The extent of medical treatment that should be provided * Whether surgery should be performed * If medications should be administered * The types of life support systems that should or should not be utilized A principal can also limit the agent's authority and can specify under what circumstances the agent can act on the individual's behalf. **Practitioner Advice**: All documents which are old need to be updated. **A copy of the health care power of attorney should be given to the agent, while the original should be kept in a safe place to which the agent will have access**.

Answer 32

State statutes dictate provisions in living wills, and **living wills are not recognized in all states**. * A **disadvantage** of a living will is that it is **brief, and may contain vague language that is not written in medical terms**. * Consequently, it **may not be detailed enough to provide sufficient medical directives in particular situations**, and it may not address all treatment options available to the individual. * This lack of information can result in differing interpretations of the individual's wishes among family members and physicians.

Answer 33

**Practitioner Advice**: It is **very important that physicians and family members are informed in writing of the extent of medical treatment an individual desires before serious illness occurs**.

Answer 34

Durable Power of Attorney * Financial Decisions Plenary Guardian * Financial Decisions * Personal Care Decisions Health Care Power of Attorney * Personal Care Decisions Living Will * Personal Care Decisions

Answer 35

The **probability** of a **long-term disability**, defined as having a duration of **at least three months**, is **substantially greater than the likelihood of death until the age of 60**. * The financial consequences of a disability can be substantial. * In some ways, disability can be even more debilitating to a family than death, as income is reduced while expenses tend to increase. * The impact for a single person is worse than that of a married couple, as there is no second income to count on for help, nor is there a spouse who can assume the role of primary caretaker.

Answer 36

**Income insurance coverage is needed for maintaining one's standard of living at an acceptable level in case of disability**. * Disability income policies are designed to **provide monthly benefits to replace lost income when the insured is disabled** as a result of sickness or injury. * Disability coverage is marketed directly to individuals as well as through group plans.

Answer 37

Disability contracts typically define disability in one of three ways: * **An own occupation clause** deems the insured to be **totally disabled when they cannot perform the major duties of their regular occupations**. The insured can be at work in some other capacity and still be entitled to policy benefits. This is the **best definition to have**. * **Modified own occupation, with a time limit (e.g. two years) on "own occ" protection**. * **Any gainful occupation definition**, means that insureds are considered **totally disabled when they cannot perform the major duties of any gainful occupation** for which they are reasonably suited because of education, training or experience. **Practitioner Advice**: This level of protection is **essential for any specialist, e.g. a trial attorney, a commercial architect**. * Policies with "own occ" definitions are **difficult to find**, and there is an **increased premium for this protection, but it is definitely worth it**.

Answer 38

* Due to this "Own Occ" definition, he not only collected benefits while totally unable to work, but even after he started his teaching position. **Practitioner Advice**: This level of protection is **essential for any specialist, e.g. a trial attorney, a commercial architect**. * Policies with "own occ" definitions are **difficult to find**, and there is an **increased premium for this protection, but it is definitely worth it**.

Answer 39

Many insurers provide a partial disability provision as an optional benefit for their less-favorable occupational risks. * The typical partial disability benefit is **50 percent of the monthly indemnity for total disability and is payable for up to six months or, if less, for the remainder of the policy benefit period when the insured has returned to work on a limited basis after a period of compensable total disability**. * Partial disability customarily is **defined in occupational terms with reference to time and duties**.

Answer 40

It is common to include a **definition of presumptive disability in policies that provide benefits for total disability**. * Under the presumptive disability clause, **an insured is always considered totally disabled, even if he is at work, if sickness or injury results in the loss of the sight of both eyes, the hearing of both ears, the ability to speak, or the use of any two limbs**. * Usually, **the insurer begins benefits immediately upon the date of loss and waives the medical care requirement**. * The insured can work in any occupation and full benefits will be paid to the end of the policy's benefit period, while the loss continues.

Answer 41

* Partial Disability - Defined in occupational terms with reference to time and duties. * Own Occupation - The insured is totally disabled to perform the major duties of his or her regular occupation. * Presumptive Disability - The insured is always considered totally disabled, even if he or she is at work, if sickness or injury results in the loss of any body parts. * Any Occupation - The insured is considered totally disabled to perform the major duties of any gainful employment for which he or she is reasonably suited.

Answer 42

All insurers include a provision that is **related to the benefit period and that deals with consecutive or recurrent episodes of disability and identifies whether the company is dealing with a new or continuing claim**. * The typical provision states that the **company will consider recurrent periods of disability from the same cause to be one continuous period of disability unless each period is separated by a recovery of six months or more**. * Among the major insurers, the use of a 12-month recurrent provision is common in policies with benefit periods to age 65 or longer.

Answer 43

The **benefit period is the longest period of time for which benefits will be paid under the disability policy**. * Usually, the benefit period is the same for sickness and injury and is available for durations of two to five years, to age 65, and for life provided continuous, total disability begins before age 55 or age 60. **Most disabilities are of short duration**. * Roughly 98 percent of all disabled persons recover before one year has elapsed, and most disabled individuals recover within six months of the time disability began. **However, if the disability lasts beyond 12 months, chances of a return to productive work diminish markedly, particularly at older ages**. * For example, a 35-year-old worker, disabled for at least 90 days, can expect, on average, to be out of work for more than 3 years. **Practitioner Advice**: The effect of extended disability can be financially devastating. **Long benefit periods are more consistent with sound personal risk management principles**. The longer the benefit period, the higher the premium, with all other things being equal.

Answer 44

**Practitioner Advice**: Remember, deductibles and elimination periods are forms of risk retention on the part of the insured. The more risk retained by the insured helps to reduce the premium charged. When a need exists and affordability is important, choosing a less than optimal elimination period, monthly benefit amount, or benefit period can be a good decision.

Answer 45

The elimination period, sometimes called the **waiting period**, refers to the **number of days at the start of disability during which no benefits are paid**. * It is a **limitation on benefits that is somewhat like a deductible in medical expense and property insurance policies**. * It is meant to exclude the inconsequential illness or injury that disables the insured for only a few days and that is more economically met from personal funds. **Practitioner Advice**: Remember, deductibles and elimination periods are forms of risk retention on the part of the insured. The more risk retained by the insured helps to reduce the premium charged. When a need exists and affordability is important, choosing a less than optimal elimination period, monthly benefit amount, or benefit period can be a good decision.

Answer 46

**Disability benefits are generally stated as a monthly dollar amount paid over a period of time**. Disability policies vary in the amount of monthly benefits paid and the length of time that benefits are covered. Benefits may be paid for life but they are typically terminated or modified at age 65 to integrate with Social Security or retirement benefits. **The disability policy is intended to provide a percentage of income that the disabled worker earned prior to the disability**. * Insurers **generally restrict coverage to 60% or 70% of the insured's gross income up to maximum monthly limits of $3,000 to $4,000**, and they may further reduce coverage to 50% of income for higher wage earners. * **Benefits are reduced to encourage rehabilitation, to provide incentives to return to work, and to prevent moral hazards from occurring**, such as feigning an illness or exaggerating medical problems to receive monthly payments. **In some policies, Social Security benefits and disability benefits paid under a company plan may offset monthly benefits**. * For example, if Social Security disability pays $1,500 a month and the policy's benefit is $2,000 per month, the insured will only receive $500 per month. * This type of coverage is less expensive than a disability policy that does not reduce benefits through integration. * Other policies may cap benefits if a disabled individual's income from all sources exceeds a percentage of their pre-disability income.

Answer 47

70% * Insurers limit the amount of disability income coverage they will sell to an applicant so that the total of all monthly indemnity does not exceed 70% of earned income for disabled individuals with low annual income, grading downward to about 50% to 60% (or less) for those in higher income brackets.

Answer 48

The disability of a closely held business owner or key employee can be devastating to the successful continuation of a business. Family members or other employees may not have the skills or manpower to compensate for the loss of the disabled employee until a permanent or temporary replacement can be found. * **Some types of disability insurance policies for businesses are designed to replace lost revenue or to shift ownership and control of the business to other employees**. * **These policies include business overhead policies, which cover operational costs of the business while the owner is disabled, key person insurance, and business continuation agreements**.

Answer 49

Loss of Key Personnel If a business loses a key person by unplanned retirement, resignation, death, or disability, the effect may be felt in lost income. If several key employees are killed, disabled, or leave simultaneously, the results could devastate a firm. * **When the success of a business - or in some instances its existence - depends on one or more persons, the risk manager must identify these people and be ready to take steps to solve the problem if a loss occurs**. **Part of identifying the key-employee exposure is developing an estimate of where, at what cost, and how quickly a replacement may be hired and trained**. * **The cost of the replacement would give the firm an estimate of the value of its exposure to loss**. * Key employees should have well-trained subordinates when this is possible. * Key personnel may be identified using an organizational chart or a flow chart. * Estimating the cost of key-employee losses is difficult because finding and training a replacement is a function of the job market. **Practitioner Advice**: **Once key employees are identified, life insurance should be considered for them**. * In a Key Person policy, the **business pays the premiums and receives the death benefits**. * These funds can then be used to recruit and train a new person, as well as cover the income lost due to their death.

Answer 50

**A business continuation agreement is an arrangement for the disposition of a closely-held business interest if the owner dies, becomes disabled, retires, or withdraws from the business**. * **Stock-Redemption Plans are used by corporations** and **Cross-Purchase Agreements are used by individual business owners as a means of purchasing the business owner's interests if death or disability occurs**. * In a business continuation agreement, **the company or individual owners buy life insurance and disability insurance on a business owner's life**. * When an owner dies or becomes disabled, **the insurance proceeds are paid to the company or to the other business owners, who now have the necessary funds to buy the business owner's stock or partnership interests**. * **If the owner retires, the cash value of the policy is used to purchase the owner's interest**. This allows for: * Continuity of the business without outsider control, * Values the business for estate tax purposes when the policies are purchased, and * Assures the owner of a guaranteed conversion of his business interest into cash. Insurance proceeds are not included in the insured's estate unless the proceeds are paid to the shareholder's beneficiary. However, the owner's business interest, stock, or partnership interest is included in his estate at death.

Answer 51

As with group health insurance, **premiums paid by an employer for disability income insurance for employees are generally tax-deductible by the employer as a business expense and are not considered taxable income to the employee**. * **Employee contributions, on the other hand, are not tax-deductible by the employee**. Consistent with these two rules, **the payment of benefits under an insured plan or a non-insured salary continuation plan results in taxable income to the employee to the extent that benefits received are attributable to employer contributions**. * Thus, under a non-contributory plan, the benefits are included in an employee's gross income. * **Under a partially contributory plan, benefits attributable to employee contributions are received free of federal income taxation**, and benefits attributable to employer contributions are included in gross income (employees are eligible for a tax credit, however). * **In Stock Redemption Plans and Cross-Purchase Plans premiums paid are not deductible by the corporation or the individual owners**. * Premiums paid by the corporation are not taxable to the individual and the company owns the cash value of the policy.

Answer 52

**Individuals who become disabled may be entitled to receive Social Security disability benefits (SSDI)**. A person must be insured under the Social Security program before benefits can be paid to the individual and his family. * The Social Security Administration (SSA) **determines if an individual has insured status based on his earnings record and the covered credits earned**. * In general, **a person must be under age 65, and have at least 20 credits during a 40-quarter period**, ending with the quarter in which the individual is found disabled. * **Applicants cannot file disability claims if they continue to work at substantial gainful activity (SGA) levels earning more than $1,350 a month** (net of impairment-related work expenses) in 2022.

Answer 53

Individuals who receive disability benefits can have certain family members qualify for benefits on the wage earner's record as follows: * **An unmarried child as long as the child is under 18 or is under 19 and is a full-time high school student**. * An unmarried child 18 or older can qualify if the child has a disability that started before age 22. * A **spouse age 62 or older, or any age if caring for a child who is under 16 or is disabled**. * **Surviving spouses if the disabled widow or widower is 50 or older**, and the disability started before the wage earner's death or within seven years after death. * **A disabled ex-spouse who is 50 or older, if married to the wage earner for 10 years or longer.**

Answer 54

SSA defines disability as **an inability to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that has lasted or can be expected to last for a continuous period of 12 months, or result in death**. Once an individual is found disabled, an onset date of disability is established. This is important because it affects: * The computation of benefits, * The five-month waiting period before benefits are paid, and * The 25 month waiting period for Medicare benefits. **Disabled individuals should be encouraged to return to work if they are interested and able since SSA has work incentive programs that offer benefit protection for up to three years and nine months from the onset of work activity**. SSA conducts periodic reviews of beneficiaries' medical conditions, to ensure they continue to meet the eligibility criteria for SS disability benefits.

Answer 55

Under 24 and enrolled more than half-time in college. To qualify for Social Security Disability, an unmarried child may be: * Under 18. * Under 19 and a full-time high school student. * Age 18 or older with a disability that started before age 22.

Answer 56

**Disabled individuals who receive Social Security Disability Insurance (SSDI), Supplemental Security Income (SSI), and Medicaid benefits need to maintain these benefits that provide them with monthly cash payments and comprehensive medical insurance**. * Individuals who qualify for SSI have very limited financial resources and receive only small cash payments each month to cover their basic living expenses. * **SSI recipients also receive Medicaid benefits**, which pay for substantial medical services that are critical to their health and ongoing medical care. **Special Needs Trusts, or Supplemental Needs Trusts, are designed to use trust assets to enhance the quality of a disabled person's life while preserving their eligibility for public assistance programs, and insulating the trust assets from government claims**. * Trust assets are available to **provide services for disabled beneficiaries that are not covered by Medicaid, SSI, or other public assistance programs, which generally cover only the basics of food and shelter**. * **However, if a trustee pays for something that is already covered by a government program, then benefits may be reduced by this amount**. * Furthermore, **distributions made directly to a beneficiary are considered "income" which could exceed the government's income cap and affect benefits**. * Special Needs Trusts **should always be coordinated with public assistance programs since trust corpus should not be used to replace public benefits**.

Answer 57

Trust assets may be used to pay for: * Medical expenses not covered by Medicaid, * Supplemental attendant care, * Additional therapies, * Custodial care, and * Respite care for family caregivers. Assets can also be used to pay for travel and a companion, and to improve the beneficiary's living situation. The trust can pay for communication services such as computers, internet access, cable television and telephone services, and basic household furnishings. **Parents typically fund the trust with permanent or term life insurance including second-to-die policies, which may even be available to divorced parents**. * Institutional trustees are usually selected for trusts with large holdings but siblings can be named trustees or co-trustee and can become the ultimate trust beneficiary. * Pooled trusts can be established if assets are not substantial, but a portion of the assets may need to be donated to an organization. **Practitioner Advice**: **Special Needs Trusts should always be coordinated with public assistance programs, since trust corpus cannot be used to replace public benefits**.

Answer 58

Many societies are currently dealing with the issues associated with a rapidly aging population. Advances in medicine and a more health-conscious society have increased life expectancy. Illnesses and injuries that once resulted in death now can be treated to preserve life, allowing more individuals to live with illnesses. **We know that a substantial proportion of elderly persons will require care at some point.** **Estimates for the United States suggest that 40 percent of elderly people will require nursing home care at some point in their lives**. * By **age 70**, **the odds of requiring some form of long-term care increases to 60 percent**. * The average confinement is between one and two years, with about one-fourth lasting more than three years. * About 10 percent of the cases last more than five years.

Answer 59

**Medicaid is a joint federal and state entitlement program that pays for medical assistance to certain aged, disabled, and blind individuals, and families with low income and resources**. **Medicaid covers welfare recipients, those receiving SSI payments (Supplemental Security Income), low-income pregnant women, children under age six, and eligible Medicare recipients**. The **federal government establishes the regulations and eligibility standards** for Medicaid **while states administer the program and establish their own services and standards, which differ from state to state**. The government partially reimburses states for the Medicaid payments they make.

Answer 60

**Long-term care is an important provision of Medicaid that will be increasingly utilized by our country's aging population**. By 2023, it is estimated that 12 million Americans will require long-term care services and that 70% of seniors will be cared for by their family and friends. At age 65, seniors have a 40% chance of going into a nursing home, and more than 10% will stay there for longer than 5 years. **Many elderly individuals may wish to qualify for Medicaid benefits because the cost of paying for nursing home care with their own resources is often too prohibitive**. * According to the Genworth Financial 2022 Cost of Care study, the national average for nursing home care is currently $9,034 per month or approximately $108,405 per year. * **Well-off individuals may choose to impoverish themselves by transferring assets to their children or into a trust to receive Medicaid benefits**. * **In response to this practice, Congress imposed strict limitations on the transfer of assets when it passed the Deficit Reduction Act of 2005 on February 1, 2006**. The old law exempted an applicant's home from being counted as an "available resource" when determining financial eligibility for Medicaid. * **The new law exempts $828,000 in Massachusetts and $552,000 in Pennsylvania**. * The value of annuities is not counted if the state is named the irrevocable beneficiary, or if the spouse or disabled minor child is named the beneficiary with the state named as a contingent beneficiary. * **The value of any assets transferred to individuals or trusts within 60 months is considered an available resource for institutional and home-based Medicaid services**. * **In addition, the transfer is subject to penalty, which means Medicaid benefits will be denied for a period of months depending on the value of the property transferred**. * The penalty is **calculated by dividing the value of the transferred assets by the average cost of one month's nursing home care in the local area**. * The penalty will begin once the applicant is residing in a nursing home and all of his assets are depleted to the qualifying levels.

Answer 61

**Assets transferred to a trust within 60 months are also considered an available resource**. * This includes trusts created by the individual, his spouse, conservators, and trustees. * **In a revocable trust, all assets are available resources**. * However, assets that are personally transferred from the trust by the grantor to a donee will have the 60-month look-back period apply. **In addition, state Medicaid programs are required to attempt to recover any Medicaid payments from the estates of recipients**. This process is typically called **"estate recovery."** **Practitioner Advice**: Regarding the common practice among middle to upper-middle-income families **to plan to "qualify" for Medicaid, one thing is often overlooked. While such planning may make sense for a number of reasons, families must understand how Medicaid benefits work and the impact it will have on their loved one's quality of life**. Greed of family members should not blind them to what is truly important; **the proper and dignified care the elderly person deserves from the assets he or she worked hard to acquire**. Financial planning is not merely about numbers or "beating the system"; **it is also about achieving a desired quality of life for the entirety of one's lifetime**.

Answer 62

**Practitioner Advice:** * **Parents should be careful when transferring assets to adult children since they will lose control of the money or property and incur a potential gift tax on the transfer**. * Assets transferred to children to be gifted back at a later time could be lost due to a child's bankruptcy or divorce, or assigned to their creditors. * **Any assets transferred would not receive a step-up in basis, and the child would take the parent's adjusted basis in the property, thus triggering a potential capital gains tax when the assets are sold**. * Parents need to protect themselves by having sufficient funds to pay for any periods of Medicaid ineligibility, and to maintain their current lifestyle, and should not put their life savings at risk. * Financial planning is not merely about numbers or "beating the system"; it is also about achieving a desired quality of life for the entirety of one's lifetime.

Answer 63

The national average for nursing home care is currently $8,121 per month or approximately $97,500 per year. Assisted living facilities cost approximately $45,000 annually. **The cost of care has risen steadily every year with a compound annual inflation rate nearing 5%.** **Many elderly individuals may wish to qualify for Medicaid benefits because the cost of paying for nursing home care with their own resources is often too prohibitive**. * Since **individuals cannot have more than $2,000 in countable assets when applying for Medicaid long-term care services, some people will transfer assets to their children or into a trust in an attempt to qualify for Medicaid benefits**. * In response to this practice, Congress imposed strict limitations on the transfer of assets when it passed the **Deficit Reduction Act of 2005 on February 1, 2006**. **Practitioner Advice:** * **Parents should be careful when transferring assets to adult children since they will lose control of the money or property and incur a potential gift tax on the transfer**. * Assets transferred to children to be gifted back at a later time could be lost due to a child's bankruptcy or divorce, or assigned to their creditors. * **Any assets transferred would not receive a step-up in basis, and the child would take the parent's adjusted basis in the property, thus triggering a potential capital gains tax when the assets are sold**. * Parents need to protect themselves by having sufficient funds to pay for any periods of Medicaid ineligibility, and to maintain their current lifestyle, and should not put their life savings at risk. * Financial planning is not merely about numbers or "beating the system"; it is also about achieving a desired quality of life for the entirety of one's lifetime.

Answer 64

**States have resource standards to determine an applicant's eligibility for Medicaid**. * Resources are assets owned or available to an individual that are tested against threshold levels determined by each state within federal guidelines. * **Individuals whose resources exceed a certain amount will be ineligible for certain benefits like nursing home care**. Resources often include: * The income of the individual, and * Assets owned by the individual and spouse. **When a person applies for Medicaid to go into a nursing home for at least 30 days, the couple's resources are assessed to determine their combined countable resources**. * Generally, the community spouse may keep half of the couple's total "countable" assets up to a maximum amount. * These assets include savings, CDs, money market accounts, real estate other than the primary residence, stocks, bonds, and other investments. **The Deficit Reduction Act exempts up to $585,000 of home equity or up to $878,0000 in certain states, but amounts over these limits must be liquidated to pay for nursing home care**. * This provision does not prevent a person from using a reverse mortgage or a home equity loan to reduce the equity interest in the home. * **In all states, the house may be kept with no equity limit if the Medicaid applicant's spouse or another dependent relative lives there**. * **Other exempt resources include household goods, personal possessions such as clothing, furniture and jewelry, a car, and burial funds**. **To determine Medicaid eligibility, a Spousal Share assessment is made, which equals half of the couple's countable resources**. * The Spousal Share amount is **determined by subtracting a Protected Resource Amount from the couple's combined countable resources**. * The **remainder is considered available to the nursing home resident as countable resources**. * If the Spousal Share for the spouse residing in the nursing home falls below the state's resource standard, then the person is eligible for Medicaid.

Answer 65

The Protected Resource Amount (PRA) is the greatest of: * The Spousal Share, up to $148,620 in 2023. * The state spousal resource standard, which a state can set at any amount between $29,724 and $148,620 in 2023. The community spouse may keep the first $29,724 even if that is more than half of the couple's assets. * An amount transferred to the community spouse for support as directed by a court order; or * An amount designated by a state hearing officer to raise the community spouse's protected resources up to the minimum monthly maintenance needs standard.

Answer 66

**Once resource eligibility is determined, any resources belonging to the community spouse are not available to the spouse in the nursing facility**. **Institutionalized spouses and community spouses can protect their savings by spending them on non-countable assets, such as**: * Paying off a mortgage, * Making repairs to a home, * Replacing an old car, * Updating home furnishings, * Paying for more homecare, or * Buying a new home.

Answer 67

**Nursing home residents must pay all of their income to the nursing home facility, minus certain deductions for their care**. * For Medicaid income eligibility purposes, a couple's combined income is not considered, since the community spouse's income is not counted towards eligibility- **only income in the applicant's name is counted**. A post-eligibility process determines how much the institutionalized spouse must contribute toward his/her cost of care, and how much of the income is protected for use by the community spouse. The following deductions are taken from the institutionalized spouse's total income: * **A personal needs allowance of at least $60 a month and higher**, depending on the state. * **A community spouse's monthly income allowance if he/she needs income support of $2,288.75 (higher in Alaska and Hawaii) in 2023**. This represents the amount of the institutionalized spouse's income that is actually made available to the community spouse. * **A family monthly income allowance**, if there are other family members living in the household. * **An amount for uncovered medical expenses and medical insurance premiums incurred by the spouse who resides in the medical facility**. After these deductions are taken, **any remaining income is contributed toward the cost of the medical facility care**. * If the community spouse has income, it is deducted from their monthly income allowance. * Similarly, any income of family members, such as dependent children, is deducted from the family monthly income allowance as well.

Answer 68

**The Deficit Reduction Act provides for a five-year "look-back" period to determine if any income and assets were transferred to individuals, charities, or trusts for less than fair market value**. * Transfers would include donations made to a church or other charitable organizations, gifts to family members, or payments made for a family member's education, wedding, down payment on a first home, etc. * Transfers made prior to the enactment of DRA on February 8, 2006 will only have a 36-month look-back period applied unless the transfer was made to or from a trust. Medicaid asset transfers may include: * **Any funds used to purchase a promissory note, loan, or mortgage**, unless repayments are made in equal amounts until death, with no deferral or balloon payments, or cancellation at death provisions. * **Purchase of a life estate interest in another person's home**, unless the buyer resides in the home for at least one year after the date of purchase. * **Immediate annuities purchased by or on behalf of an annuitant who has applied for Medicaid, unless the annuities are irrevocable and non-assignable**, and provide for payments in equal amounts during the annuity term, with no deferral or balloon payment provisions. **The value of annuities is not counted if the state is named the irrevocable beneficiary, or if the spouse or disabled minor child is named the beneficiary**, with the state named as a contingent beneficiary. **Transfers made to trusts within 60 months, which use at least some of the Medicaid applicant's funds, are considered available resources**. This includes trusts created by the individual, the spouse, conservators, and trustees for any purpose, regardless of the distribution arrangements, the trustee's discretion in administering the trust, exculpatory clauses, or use restrictions.

Answer 69

**Trusts are considered available to the individual for purposes of determining eligibility for Medicaid when**: * Payments are made to or for the individual. * Payments can be made to the individual, but are not actually made. * Amounts that could be distributed to the individual are paid to a third party. These amounts are treated as transfers of assets for less than fair market value. For example, all assets in a revocable trust are available resources, and assets that are transferred by the grantor to a donee will have the 60-month look-back period apply. * Amounts that cannot be paid to or for the benefit of the individual are also treated as transfers of assets for less than fair market value. **Certain trusts are not counted as being available to the individual, but those trusts must allow the state to receive any funds remaining in the trust when the individual dies, up to the amount of Medicaid benefits paid**. * In an irrevocable trust where the grantor can receive all income for life and the heirs will receive the principal at the grantor's death, the principle is not counted as an available Medicaid resource. * **The grantor can use the income distributions for his living expenses, but if he goes into a nursing home, then all of the trust income must be paid to the nursing home**. * **Medicaid annuity trusts convert savings, which could disqualify an individual for Medicaid, to income**. This type of trust helps to protect about half of the family's savings from being depleted by the cost of nursing home care. **Testamentary trusts created by a deceased spouse for the benefit of the institutional spouse can receive favorable treatment under Medicaid rules**. * This occurs when the trustee can make discretionary distributions to the Medicaid beneficiary which is not considered an obligation to pay for the beneficiary's support. * **Assets in these trusts are not countable assets, and the trust can pay for services that are not typically covered by Medicaid**. * Some examples of how the money can be used include **purchases of special equipment, and to pay for additional therapy, evaluations by medical specialists, legal fees, visits by family members, or transfers to another nursing home**, if necessary.

Answer 70

**Testamentary trusts created by a deceased spouse for the benefit of the institutional spouse can receive favorable treatment under Medicaid rules**. * This occurs when the trustee can make discretionary distributions to the Medicaid beneficiary which is not considered an obligation to pay for the beneficiary's support. * **Assets in these trusts are not countable assets, and the trust can pay for services that are not typically covered by Medicaid**. * Some examples of how the money can be used include **purchases of special equipment, and to pay for additional therapy, evaluations by medical specialists, legal fees, visits by family members, or transfers to another nursing home**, if necessary.

Answer 71

**Transfers for less than fair market value within the look-back period will incur a penalty**. * **The state will withhold Medicaid payments for nursing home care and home-based Medicaid services for a period of months depending on the value of the property transferred**. * This is known as the "penalty period." * **The penalty will begin once the applicant has been approved for Medicaid, is residing in a nursing home, and all of his assets are depleted to the qualifying levels**. * There is no limit to the length of the penalty period. **The penalty is calculated by dividing the value of the transferred assets by the average cost of one month's nursing home care in the local area**. * For example, a transferred asset worth $100,000 divided by a $5,000 average monthly private-pay rate, results in a 20 month penalty period. * A person who transfers $100,000 on March 1, 2020, moves into a nursing home on March 1, 2021, and spends down to Medicaid eligibility levels on March 1, 2022, will have the 20 month penalty period begin on March 1, 2023, and end on November 1, 2024.

Answer 72

Penalties are not applied for certain types of transfers: * **Transfers to a spouse**, or to a third party for the sole benefit of the spouse. * Transfers by a spouse to a third party, **for the sole benefit of the spouse**. * **Transfers to a blind or disabled child, or to trusts established for them**. * Transfers for a purpose other than to qualify for Medicaid (this is rare). * **Where imposing a penalty would cause an undue hardship**.

Answer 73

**State Medicaid programs are required to attempt to recover any Medicaid payments from the estates of recipients for nursing facility services, home, and community-based services, and related hospital and prescription drug services. ** * This process is called "estate recovery." * However, **no actual recovery is possible until the death of the surviving spouse**. * **States can recover funds from the Medicaid recipient's probate assets and have the option of recovering funds from some non-probate assets such as jointly held property, revocable trusts, and life estates**. * In many states where a life estate has been created, once the life tenant dies, and the house passes to the remainder beneficiary, the state cannot recover against the home for any Medicaid expenses the life tenant may have incurred. **States must place a lien on real estate that is owned by a Medicaid beneficiary unless a spouse or other dependent relatives are living in the home**. * This is to protect the recovery of Medicaid expenses if the house is sold during the beneficiary's lifetime. * The **lien is removed after the beneficiary's death**. * **A home placed into an irrevocable trust may be protected from estate recovery efforts because property cannot be removed from such trusts**. Many states have long-term care "partnership" programs that encourage the purchase of long-term care insurance. **These special long-term care policies allow buyers to protect their assets and qualify for Medicaid after the policy's benefit period ends**. **Practitioner Advice**: **Medicaid planning may require the assistance of qualified elder law attorneys**, since provisions of the Medicaid law are very complex to interpret and apply, and they differ from state to state. **Medicaid planning may also involve the use of trusts which can only be drafted by attorneys and may require tax and legal advice on asset transfers.**

Answer 74

The demand for LTC insurance (LTCi) is expected to grow as more and more people become aware of the extraordinary costs of LTC. **Long-term care insurance promises to pay expenses incurred if the insured is unable to perform essential Activities of Daily Living (ADLs) ADL assistance may be provided**: * At home by paid caregivers such as home health aids, * At home by unpaid caregivers such as spouses, family members or friends, or * In a nursing home. The typical policy **requires that the insured be unable to perform two of five or six ADLs depending on the activity**. Because LTCi contracts are not standardized, the policies can contain any of the following list of activities of daily living (ADL): * **Eating**, * **Bathing**, * **Dressing**, * **Toileting**, * **Continence**, and * **Transferring**. Some individuals can physically perform all ADLs and yet cannot be left alone safely. Thus, **LTC policies also include a cognitive impairment clause, which permits benefit payments with respect to those who cannot safely perform essential ADLs**.

Answer 75

**Policies often provide for three levels of nursing home care**. * They include **skilled nursing care, intermediate nursing care and custodial care**. * Formerly, most LTC policies required a hospital stay before admission to a nursing home. Also, the stay must have been certified "medically necessary." This is no longer the case. * **Skilled nursing care is the highest level of nursing care (i.e., 24 hour care) ordered by an MD & provided by an RN, licensed practical nurse, or licensed therapist**. * **Intermediate care** is similar to skilled nursing care except that the **patient neither receives nor needs 24 hr. attention**. Thus, it is effectively non-continuous skilled nursing care. * **Custodial care** is the most basic level of nursing care, typically taking the form of **assistance with ADLs**. Individuals providing non-medical care usually are not medical personnel. Most elderly are happier and healthier when they can maintain as much control over their own affairs and as much independence as possible. LTC policies usually provide benefit payments for those insured who require assistance but who are able to remain in their homes or communities. The benefits, usually stated as a percentage (such as 50 percent of the full nursing home benefit) are available for a variety of programs and services. **Practitioner Advice**: **Many LTC policies now offer a rider, for an additional premium, that increases the home care benefit to 100% of the daily benefit**. * This **gives the client more financial support to stay in their community, and makes the policy easier for them to understand**, e.g. "I will get benefits up to $200 a day, whether I get care at home or in a nursing home."

Answer 76

Individuals with relatively short life expectancies, due to a serious illness most likely will face unemployment and large medical and hospice bills. Many have no health insurance as well. * **If they are insured by life insurance policies, they may be able to sell their policies via a viatical settlement to a viatical settlement firm**. * The financially debilitating effects of terminal diseases such as AIDS, combined with continuing medical advances and increases in life expectancy, have focused individuals' attention on the possibility of incurring significant end-of-life expenses. **An individual may have adequate life insurance, and the life insurance may have cash values**. * However, the promise to pay the face amount on the insured's death may offer little solace at a time when major expenses are being incurred. * The cash surrender value could be helpful, as it could serve as collateral for a policy loan. Such a loan will be limited to the policy's surrender value, which may be minimal in comparison to the face amount if the policy is fairly new. **If the insured is expected to die within a short time period, the actuarial value of the death benefit promise of the policy will be greater than its cash value**. * This actuarial value will be quite close to the face amount if death is expected within a matter of months. **The assignment provision of the life insurance contract and the legal nature of property, which includes life insurance, allows the transfer of ownership through a transaction called a viatical settlement**. * Viatical settlement firms **purchase life insurance from individuals who have terminal illnesses in exchange for an immediate lump sum cash payment, which is a discounted percentage of the policy's face value**. * This cash settlement **represents the present-day value of the policy and is determined by considering the insured's estimated mortality (life expectancy) and the associated cost of premiums to keep the policy in force for that period of time**. * By selling a policy, many of these policyholders can provide the individual with needed funds to ease the financial burdens brought on by increased medical costs, and compensate for their loss of income due to illness.

Answer 77

The viatical settlement firm makes a purchase offer, to the policy owner interested in selling his insurance policy. **A policy owner may be offered anything between 50 and 80 percent of the face value of the policy**. **The offer amount depends primarily on**: * The **policy face amount**, and * The **insured's life expectancy**. The viatical settlement firm also takes into consideration several other factors before making the offer, such as: * **Likely future premium payments** that the viatical settlement firm will have to make, * **Outstanding policy loans**, and * **Prevailing interest rates**. The policy owner is not obligated to accept any viatical settlement offer. He or she must be aware of prevailing discounts and **may contact two or three viatical settlement firms to make sure that the offers are competitive**. * Some policy owners **may choose to use a viatical settlement broker to represent them and "comparison shop" for viatical offers**.

Answer 78

The viatical settlement firm **requires certification from a physician that the individual's condition can reasonably be expected to result in death within a certain time period**, though any life insurance policy or certificate can be used. **If the offer is accepted, the policy owner transfers ownership to the viatical settlement firm, via an absolute assignment**. * The firm names itself as a beneficiary. * **Upon the death of the insured, it collects the policy proceeds**. * Its hope is to garner a profit for the investors.

Answer 79

Terminally ill policy owners can use viatical settlements to relieve their financial strain. **On the other hand, for firms and investors who purchase the policy, viatical settlements have the potential for great profit**. Viators are sometimes so desperate, that they act quickly, without proper guidance and information. Often they are unaware of anything more than what viatical settlement firms or investors tell them. **Investors could take advantage of the desperate situation of viators by using high-pressure tactics, delay in making payments, and not disclosing all of the relevant details, leading to abuse of the viatical settlement service**. **The National Association of Insurance Commissioners (NAIC) defined regulations that reflect certain ethical concepts and behavior to which all parties involved in the viatical settlement must conform**. **These regulations were set forth in the Viatical Settlement Model Act, and serve to enable a viator to make a fully informed decision and ensure fair payments**.

Answer 80

Due to concerns over possible abuse of viatical settlement transactions, the National Association of Insurance Commissioners (NAIC) promulgated the Viatical Settlements Model Act and a companion regulation to guide the viatical settlement business. **The Viatical Settlements Model Act requires that certain disclosures be made to the viator**. These disclosures include: * The impact of the transaction on eligibility for government benefits, * Possible tax implications, * Rescission rights, and * Alternatives to viatical settlements. **The Act also covers the licensing of viatical firms and brokers, as well as offer guidelines that establish minimum prices as a percentage of the policy death benefit**.

Answer 81

* **Standby Trust**: **An inter vivos revocable trust created by a grantor to have a successor trustee manage his assets if he becomes incapacitated**. * **Disability Income Insurance**: Insurance coverage that provides income to disabled individuals to replace lost wages, which helps to maintain their standard of living when they are unable to work. * **Business Disability Insurance**: Disability insurance policies **insure key employees in the event of their disability, to protect a business from lost revenue**. Business overhead policies cover operational expenses of the business while the owner is disabled. **Business continuation agreements** allow partners or the corporation to buy out the disabled partner's business interest, to retain control of the business within the corporation. * **Social Security Disability Benefits**: **Government benefits paid to qualified disabled workers and their families, which also provides Medicare benefits after a 25 month waiting period**. Special needs trusts can be established for disabled individuals, to provide them with extra financial assistance that will not interfere with Social Security disability benefits. * **Medicaid Planning**: Medicaid is a joint federal and state entitlement program that **provides long-term care and nursing home benefits for qualified individuals**. Congress has imposed restrictions on the transfer of assets to prevent wealthier individuals from qualifying financially for this program. * **Long-term Care Insurance**: **Private insurance policies for individuals who wish to avoid the extraordinary costs of nursing homes and long-term care expenses**. Policies generally **require that the insured be unable to perform two of five or six activities of daily living (ADLs), to receive benefits**. Policies often provide for **three levels of nursing home care- skilled, intermediate, and custodial care**. * **Viatical Settlements**: Viatical settlement firms **purchase life insurance policies from individuals who have terminal illnesses for a lump sum cash payment**, which is a discounted percentage of the policy's face value.

Answer 82

Lending institutions may not recognize the authority of an agent under a durable power of attorney. Durable powers of attorney cannot be used after death to dispose of property omitted from a will. * Durable powers of attorney have limitations, such as **having third parties recognize an agent's authority**, and that the **power ends at the principal's death**. * It is a safeguard for the principal that the agent cannot exceed the powers contained in the power of attorney document, and is an advantage that the power cannot be revoked if the principal becomes incapacitated.

Answer 83

Own occupation definition * An own occupation clause **deems the insured to be totally disabled when they cannot perform the duties of their regular occupations**. * The insured **can be at work in some other capacity and still be entitled to benefits**. * Any gainful occupation definition means that insureds are totally disabled when they **cannot perform the duties of any gainful occupation** for which they are reasonably suited because of education, training or experience.

Answer 84

An inability to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that has lasted or can be expected to last for a continuous period of 12 months, or result in death. * Social Security Disability defines disability as an inability to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that has lasted or can be expected to last for a continuous period of 12 months, or result in death.

Answer 85

Bathing Walking Toileting * LTC insurance policies are not standardized, but most contain **ADLs such as eating, bathing, dressing, walking, toileting, continence, transferring and taking medicine**.

Answer 86

The extent of medical treatment that should be provided Where an individual should receive treatment Whether surgery should be performed What if any medications should be administered * Health care agents can confer with medical professionals to make decisions concerning the extent of medical treatment that should be provided, where an individual should receive treatment, whether surgery should be performed and what, if any, medications should be administered.

Answer 87

After completing this lesson, you should be able to: * Describe the different purposes for which trust arrangements can be used, * Compare revocable and irrevocable trusts, * Describe the features of marital trusts, * Distinguish between marital and nonmarital trusts, and * Describe Q-TIP trust and estate trust.

Answer 88

Trust arrangements can be used for a variety of purposes as given below: * **Reduction of potential estate tax liability after 2010 can be achieved through a combination of several trusts** (for example, if a client is married, marital and non-marital trusts can be utilized). **The marital trust reduces estate tax liability by taking advantage of the grantor's marital deduction amount, whereas the non-marital trust takes full advantage of the grantor's unified credit**. * **Distribution of income from a trust to specified beneficiaries (for example, children) with the remainder being distributed to a charity, a charitable remainder annuity trust, or a charitable remainder unitrust**. This type of trust is known as a **split-interest trust** * **Professional management of the assets by someone who is appointed to serve in that capacity, as Trustee**, by the Grantor of the trust. This is extremely useful if the Grantor knows that an heir, either the surviving spouse or other family members, has little professional investment or business experience. * **Provision of income to a specified beneficiary who cannot control money or is improvident and cannot manage money wisely**. This can be done by structuring the trust in such a way that **the beneficiary cannot transfer his or her interest in the income until it is actually received**. In the event an heir is incapable of spending money wisely, **the Trustee will protect this heir by distributing only income and preserving capital**. In this way, **the beneficiary's creditor cannot reach the trust or the income produced by the trust until the income is actually distributed to the trust beneficiary**. This is also known as a **spendthrift trust or a spendthrift provision**. * **Provision of income to one or more beneficiaries, where the trustee has the discretion to distribute income or corpus to the beneficiaries**. This type of trust is also known as a **sprinkle trust**. Since the income needs of the beneficiary are subject to change, **the Trustee may be in a better position to determine the actual needs of the beneficiaries than the Grantor, who may be deceased**. The Trustee can then distribute income as it is needed by trust beneficiaries and **in a manner that is least detrimental for the beneficiary's income tax liability**. * **Assistance to a family member who has suffered disability through an accident or who has been disabled since birth or childhood** (for example, a developmental disability) can be done by arranging a trust in such a way that it **enables the disabled beneficiary to receive assistance (in such a way that it does not disqualify the disabled person from receiving public assistance benefits, Medicare, or other forms of supplemental assistance)**. This is also known as a **special needs trust**. A properly drafted trust can achieve these objectives. In short, **a client can use a trust for any legitimate purpose that is not considered to be illegal or in violation of public policy**. Similarly, a public charitable trust that violates some provision of the law, for example, the Civil Rights Act, is an illegal trust if the effect of the trust is to discriminate against a class of beneficiaries on the basis of race, religion, national origin, or gender. Likewise, a trust that would require the Trustee to perform criminal or tortious acts, or a trust that would require the beneficiaries to commit tortious or criminal acts as a condition for receiving income or corpus, would be an illegal trust. **If a trust is considered illegal it will not be enforced.**

Answer 89

A properly drafted trust can achieve these objectives. In short, **a client can use a trust for any legitimate purpose that is not considered to be illegal or in violation of public policy**. * Similarly, a public charitable trust that violates some provision of the law, for example, the Civil Rights Act, is an illegal trust if the effect of the trust is to discriminate against a class of beneficiaries on the basis of race, religion, national origin, or gender. * Likewise, a trust that would require the Trustee to perform criminal or tortious acts, or a trust that would require the beneficiaries to commit tortious or criminal acts as a condition for receiving income or corpus, would be an illegal trust. * **If a trust is considered illegal it will not be enforced.**

Answer 90

It is difficult to quantify the various types of trusts that can be used as part of an estate plan. There are different types of trusts available to meet various client objectives. Various types of trusts may be taxed differently. The number of trusts available for use as part of an estate plan varies and will continue to vary. A brief description of the types of trusts used for estate planning purposes follows.

Answer 91

**A trust which takes effect during the grantor's lifetime is called a living trust**. * A trust which takes effect during lifetime is **one that is created and funded with assets by the Grantor**. * During the Grantor's lifetime, the Trustee is then charged with carrying out the provisions of the trust for the benefit of the trust beneficiaries. * **A living, or inter vivos, trust may be either revocable or irrevocable**. Whether the client utilizes a revocable or irrevocable living trust depends on all of the client's estate planning objectives.

Answer 92

A trust which **takes effect upon the death of the Grantor is called a testamentary trust**. * In other words, testamentary trusts are **trusts whose provisions are created during the Grantor's lifetime through the will, but only become funded with assets after the Grantor has died**. * The property interests **will be included in the grantor's gross estate at death, and are subject to probate**.

Answer 93

A **trust which can be terminated by the Grantor during his or her lifetime** is known as a revocable trust. The **advantages** of a revocable trust are given below: * **No gift is made when property is transferred** into a revocable trust. However, **distributions made from the trust to beneficiaries are subject to gift taxes if they exceed the annual exclusion amounts**. * It is **flexible**. The Grantor retains control over the terms of the trust and can amend, alter or revoke it in its entirety. * It provides the Grantor with the **flexibility to retain full control over all of the assets within the trust**. This is especially important if the assets within the trust are needed either by the Grantor or his family members. * Any assets placed within a revocable living trust during the lifetime of the Grantor **will avoid the probate process**. Disadvantages of a revocable trust: * The disadvantage of a revocable trust is that the **assets placed into the corpus of such a trust are included in the gross estate of the Grantor. As a result, there is no reduction in either the Grantor's estate or income tax liability**.

Answer 94

A trust that **cannot be revoked by the Grantor during the Grantor's lifetime** is known as an irrevocable trust. There are a number of **advantages** associated with irrevocable trusts. * The first is that **assets that are owned within the trust will not be included in the probate process**. * Second, the **value of the assets owned within the irrevocable trust will not be included in the gross estate of the Grantor**. * In other words, if the irrevocable trust is properly structured and funded with assets, upon the death of the Grantor, **no portion of the trust assets should be included in the Grantor's gross estate**. **Exceptions that would cause irrevocable trust assets to be included back in the Grantor's gross estate are**: * **Transfers of life insurance policies owned by the Grantor who is the insured, or transfers of policies that the Grantor retained any incidents of ownership over, within 3 years of the Grantor's death**, * Transfers of **property** over which the Grantor reserved a right to alter, amend or revoke or if the Grantor relinquished this right within 3 years of death, * **Transfers of property in which the Grantor reserved a lifetime right to use or enjoy the property**, or if the Grantor relinquished this right within 3 years of death, and * Transfers of property to an irrevocable trust whereby the Grantor **held a reversionary interest greater than 5%** or if the Grantor relinquished this right within 3 years of death. **Disadvantages** of irrevocable trusts: * A transfer of assets into an irrevocable trust is a **completed gift**. Therefore, **there may be gift tax liability on the value of the assets transferred to a trust**. * An irrevocable trust **lacks flexibility.** Once it is established and funded, **it cannot be altered or terminated by the Grantor, even in the event of a medical emergency**. * Special court orders would have to be obtained in order to revoke the trust, since the Grantor has terminated any ability to change, alter or revoke the terms of the trust. **An inter vivos, living, irrevocable trust is created and funded during the lifetime of the Grantor**. As a result, the provisions of the trust cannot be changed during the lifetime of the Grantor. On the other hand, **although a testamentary trust is revocable during the lifetime of the Grantor, upon the Grantor's death, it becomes irrevocable**. In other words, the Grantor is no longer alive to alter, amend or terminate the provisions of the testamentary trust.

Answer 95

Certain types of trusts, which are irrevocable by their nature, may still provide the Grantor with certain lifetime benefits. * Examples of these types of trusts, also known as **split-interest trusts**, are a **grantor-retained annuity trust (GRAT)** and a **grantor-retained unitrust (GRUT),** either of which may **provide the trust grantor with income from the trust assets**. CRATs and CRUTs are also examples. (CRAT and CRUT are the same as grantor trusts, but the C stands for **charitable**.) In a **GRAT**, payments received by the Grantor are structured as an annuity. In other words, **the amount of the income the Grantor retains is based upon a percentage of the value of the assets at a set point in time**, typically on the day the assets transfer into the trust. A **GRUT** is a trust where the **payments to the Grantor vary based upon the annual value of the trust assets**. **The portion of the gifted assets retained by the Grantor is not a completed gift**. The **value of the gift is the value of the remainder interest**. Therefore, transfers into split-interest trust vehicles give the Grantor the opportunity to **determine who will ultimately receive the gifted assets at a discounted gift tax value**. We will cover these types of trusts in greater detail in the trust section of this course.

Answer 96

The use of marital and non-marital trusts is an integral part of a combined estate plan for married couples. **Several of these trusts may be used in conjunction with one another to achieve the most effective estate plan possible**. Whether one or more of these trusts are appropriate in a given situation depends entirely on the client's estate planning objectives. **The marital/non-marital trust (also commonly referred to as the "A-B trust," or more currently the "A-B-Q trust") is an arrangement designed to give the surviving spouse full use of the family's economic wealth, while at the same time minimizing, to the extent possible, the total federal estate tax payable for a couple's combined estates.**

Answer 97

Power of Appointment Non-Marital Trust QTIP QPRT Estate Trust Marital Trust * All of the choices are major types of trusts used in estate planning for married couples. Recall, the **marital trusts include**: * power of appointment, * QTIP, * QPRT, and * estate trust.

Answer 98

The marital trust is sometimes referred to as the **A trust**. If the marital trust is a testamentary trust, then the trust only takes effect upon the death of the Grantor. The **marital trust consists of property that qualifies for the federal marital deduction**. * As a result, **during the lifetime of the surviving spouse, he or she MUST be the only beneficiary of this trust in order to qualify for the unlimited marital deduction**. **With a general power of appointment marital trust (GPA), the surviving spouse has either a lifetime or testamentary general power of appointment over this property**. * As a result, he or she has the ability to either use all of the assets during lifetime, or transfer the assets to anyone he or she chooses, either during lifetime or after death. **The key characteristic of a marital GPA trust is that the surviving spouse must be its only lifetime beneficiary**. The important features are given below: * The marital trust **can be structured so that it provides a stream of income to the surviving spouse for the spouse's lifetime**. Even though this trust provides income to the surviving spouse, he or she usually has the ability to invade the corpus of this trust for his or her needs. The income stream that is distributed to the spouse cannot be split with any other individual. * The surviving spouse must be the only recipient of this income, although once the income is received, the spouse is free to give the income to whomever he or she wishes. * The **income from this trust must be distributed at least once per year**. Other features of the marital GPA trust: * The **property placed in the marital trust qualifies for the federal marital deduction in the decedent's estate**. Therefore, the value of the **assets transferring into the marital GPA trust will be included in the gross estate of the decedent.** **The unlimited marital deduction will preclude the payment of tax.** * **The property transferred into the marital trust must be included in the gross estate of the surviving spouse**. Although the marital deduction avoids the payment of estate tax on the death of the first spouse, **the tax is POSTPONED until the death of the surviving spouse**, **unless consumed or given away by the surviving spouse during the spouse's lifetime or transferred to a charity**.

Answer 99

Although an unlimited federal marital deduction allows a decedent spouse to transfer assets to a surviving spouse without estate tax liability, the marital deduction only applies if the surviving spouse is a U.S. citizen. **The unlimited marital deduction will not apply to an outright transfer of assets at death to a non-U.S. citizen spouse**. The unlimited marital deduction also **does not apply to gifts made to non-citizen spouses** as well as transfers made to them at death. In the event that the surviving spouse is not a U.S. citizen, **the value of the decedent's assets in excess of the estate tax exclusion amount will be subject to estate tax**. However, **under IRC Section 2056, the decedent's estate will qualify for the federal marital deduction if assets transfer into a marital trust, referred to as a qualified domestic trust (QDOT)**. A QDOT **ensures that the assets will not ultimately leave the US without being taxed**. The citizen spouse **can establish the QDOT as a living trust or through their Will**. At the spouse's death, the **executor would designate the trust as a QDOT on the federal estate tax return (706)**. If the citizen spouse does not establish this trust **the non-citizen spouse can establish their own QDOT before the decedent's estate tax return is due**. The requirements for establishing a QDOT are: * The trustee must be a US citizen or a domestic corporation, or a US bank if trust assets exceed $2 million, * The **trust must retain sufficient assets to cover the non-citizen's spouse's estate taxes**, * The trust **must be set up as a QTIP trust or an Estate Trust**, and * **The trustee must approve all distributions of principal, and withhold estate taxes from principal distributions that are not subject to an ascertainable standard (HEMS)**. **A disadvantage to transferring assets into a QDOT is that the assets remaining in the trust at the non-citizen spouse's death are calculated and taxed as if they had been included in the citizen spouse's estate**. However, non-citizen spouses can use their applicable credit amounts to offset their own estate tax liability. **Non-citizen spouses can also become US citizens which makes them eligible for the unlimited marital deduction**. Withdrawals by a noncitizen surviving spouse from a QDOT established before 2010 will continue to be subject to the deferred estate tax provisions through 2023.

Answer 100

The Qualified Terminable Interest Property (Q-TIP) trust is **also referred to as the current income interest trust**. This trust is **used when the decedent wishes to provide the surviving spouse with a stream of income for life, qualify for the marital deduction, yet ultimately control who will receive the trust property upon the death of the surviving spouse**. **The property, or a portion of it, can be made to qualify for the marital deduction in the estate of the decedent (and must be included as an asset in the gross estate of the surviving spouse) even though the surviving spouse is only entitled to a life income interest**. * Therefore, **the taxable estate of the decedent can be reduced substantially by taking advantage of this trust**. * However, in order for such property to qualify for the marital deduction, the executor of the decedent's estate must elect to treat the property as qualifying for the marital deduction on the federal estate tax return. **If the executor fails to make the election on the estate tax return, the property in this trust will not be treated as Q-TIP property and may be subject to estate tax liability** in the decedent's estate.

Answer 101

The features of the Q-TIP trust are given below: * The Q-TIP trust **must provide a stream of income to the surviving spouse**. * The income stream on this trust must be **distributed at least annually**. * The income from this trust must be **paid only to the surviving spouse and to no one else**. * **The surviving spouse can be the Trustee of the QTIP and have control**, for example, convert non-income-producing assets into income, change the investments to generate a greater income stream, and have limited principal distributions for health, education, maintenance, and support (HEMS). * **The surviving spouse may be given a limited power of invasion over the corpus of a Q-TIP trust**. This power of invasion is **similar to that provided to the surviving spouse in a nonmarital trust**. Therefore, the **surviving spouse may withdraw the greater of $5,000 or 5% of the trust corpus annually if the trust gives the spouse this power of withdrawal**. It should be noted that this power of invasion is not cumulative and is **lost if not exercised in the current year**. **Practitioner Advice**: Keep in mind that the surviving spouse as Trustee of QTIP is not specific to QTIP marital trusts; the surviving spouse may also be the Trustee of a GPA marital trust.

Answer 102

Sometimes a client and his or her spouse have accumulated a substantial amount of wealth in their lifetimes so that the surviving spouse does not need lifetime income or corpus from a trust established by the decedent. In situations like this, an estate trust may be appropriate. **An estate trust is a trust established by the decedent which accumulates its income rather than distributing it to the spouse**. The trustee, in his or her discretion, may distribute a part of the income to the surviving spouse during the spouse's lifetime. **However, the primary characteristic of the estate trust is that its income is accumulated**. **Upon the death of the surviving spouse, the spouse's estate exercises a general power of appointment over all of the trust assets and determines who ultimately receives the property**. The estate trust **may be thought of as a marital trust that does not provide the surviving spouse with an income stream**. Upon the death of the surviving spouse, **that spouse's will determines who receives the property**. The property transferred into an estate trust **qualifies for the marital deduction in the estate of the first decedent spouse who dies**. However, **the full value of these assets will be included in the estate of the surviving spouse**. * Estate trusts are not the most common form of marital trust for marital deduction purposes.

Answer 103

A non-marital trust **called a Bypass trust or a credit shelter trust is funded with the decedent's exemption equivalent amount**. * The exemption amount is $12,920,000 in 2023. * The assets in this trust **will be included in the decedent's estate if he/she dies but the unified credit of $5,113,800 will shelter this exemption amount from federal estate taxes**. **The spouse and children can be the beneficiaries of the trust, but since the spouse will only receive income or corpus as needed, the assets in this trust will "by-pass" the surviving spouse's estate.** * The **assets will not qualify for a marital deduction in the decedent's estate because the spouse does not have complete control over the trust assets**, as in an "A" trust. * The decedent may want to provide the surviving spouse and/or non-spouse beneficiaries with a stream of income. * The decedent wants to provide either the surviving spouse or non-spouse beneficiaries with some corpus from the trust. * The decedent **wants to fully use the amount of available unified credit for his or her estate**. * The decedent wants to reduce estate tax liability by preventing over qualifying the property for the marital deduction in the surviving spouse's estate. In other words, **the decedent wants to remove from the estate of the surviving spouse the value of the decedent's estate tax exclusion amount ($12,920,000) as well as the appreciation on this amount**. A surviving spouse can utilize the unused portion of a decedent spouse's exclusion. **The deceased spouse's unused exclusion amount (DSUEA) is added to a surviving spouse's basic exclusion amount (BEA) to reduce gift and/or estate taxes on their combined estates**. * If a surviving spouse had more than one deceased spouse, then **only the most recent spouse's DSUEA can be used**. To take advantage of the DSUEA, **an executor must file a timely estate tax return, and make an irrevocable election to utilize the DSUEA**.

Answer 104

* Through the DSUEA election, the $3,340,000 of his unused exclusion is transferred to Judy, who now has an exclusion of $16,260,000 (her $12,920,000 basic exclusion plus Mark's unused exclusion of $3,340,000.) * Judy can use this $16,260,000 exclusion against taxable gifts made in her lifetime and/or apply it towards her taxable estate. Note that any unused portion of Mark's GST tax cannot be transferred to Judy. To take advantage of the DSUEA, an executor must file a timely estate tax return, and make an irrevocable election to utilize the DSUEA.

Answer 105

The number of trusts available for usage as part of an estate plan varies based upon: * The Grantor's needs, * The size of the Grantor's gross estate, * The amount of estate tax the Grantor would pay, and * The specific identifiable objectives of the client. Major types of trusts used in estate planning for a married couple are: * The marital trust * The nonmarital trust * The **primary advantage of a revocable trust is that the terms of the trust can be amended, altered, or revoked** in their entirety by the Grantor during the Grantor's lifetime. * The primary advantage of **irrevocable** trust -is that as long as it is properly structured and funded, **no portion of the assets within the trust will be included in the Grantor's estate**. * The primary feature of a **marital trust is that it qualifies for the marital deduction** even though the surviving spouse has not received the assets outright. * **Q-TIP trust** is used when the **decedent wishes to provide the surviving spouse with a stream of income and control over who is the ultimate beneficiary of the assets, yet also wishes to qualify the property for the marital deduction in the estate**. * The primary feature of the **estate trust** is that its **income is accumulated yet allows the assets to qualify for the marital deduction**. * The primary feature of the **bypass trust** is that the trust is **funded with the maximum exemption equivalent amount- $12,920,000 in 2023, and since the surviving spouse has a terminable interest, trust assets will "by-pass" the surviving spouse's estate**.

Answer 106

False * Since all testamentary trusts are, by nature, irrevocable (since the Grantor has passed away when the trust takes effect and cannot be changed), the term “irrevocable” can be applied to trusts that are established at the Grantor's death or during the lifetime of the Grantor. * Contrast that with a revocable trust which must be established only during the Grantor's lifetime. A revocable trust becomes irrevocable upon the Grantor's death.

Answer 107

Q-TIP trust Nonmarital trust * A nonmarital trust or Q-Tip trust is appropriate when the decedent (in this case, Ralph) wants to provide the surviving spouse (Clara) with a stream of income that terminates upon the survivor's death and if the decedent wants to determine who the ultimate beneficiaries of the property will be upon the death of the surviving spouse.

Answer 108

Estate trust * An estate trust is a trust established by the decedent which **accumulates its income rather than distributing it to the spouse**. * The other trusts mentioned here provide the surviving spouse with a stream of income. They do not accumulate income.

Answer 109

* **Powers of attorney** legal documents that name agents to conduct transactions for others in the event of their absence or incapacity. * **Disability income insurance** for individuals and businesses provide for payments of lost wages or lost revenue to disabled individuals and businesses. * **Social Security Disability and Medicaid**: Government and state entitlement programs that provide disability and long-term care benefits to qualified individuals. * **Long-term care insurance and viatical settlements**: provide the elderly and the terminally ill with benefits or payments to ensure proper medical care and attention at the end of their lives. **Trust arrangements can be used for a variety of purposes**: * **Reduction of potential estate tax liability**. * Distribution of income from a trust to specified beneficiaries. * Professional management of the assets. * Provision of income to a specified beneficiary who cannot control money or is improvident. * Provision of income to one or more beneficiaries. * Assistance to a family member who has suffered disability through an accident or who has been disabled since birth or childhood. * The primary advantage of revocable trust is that the terms of the trust can be amended, altered or revoked in their entirety by the Grantor if the Grantor finds that the terms of the trust are not fulfilling his or her estate planning objectives. * The primary advantage of **irrevocable** trust is that as long as the Grantor establishes an irrevocable trust, retains no incidents of ownership over the property, and retains no powers over the corpus of the trust that could be construed as ownership, then the assets placed into such a trust will **escape inclusion in the gross estate of the Grantor**. * The primary feature of **marital trust is that the surviving spouse has postmortem control over the property**. * The primary feature of a **Q-TIP trust is that the surviving spouse possesses no postmortem control over the property**. * The primary feature of the **estate trust is that its income is accumulated**.

Answer 110

Plenary guardianship * Plenary guardianship manages both the ward's property and personal affairs.

Answer 111

the probate courts * If parents die without a will, the probate courts will conduct a hearing to appoint a new guardian who is capable and willing to provide for the children's financial and emotional support.

Answer 112

Durable Power of Attorney * When a Durable POA is created, the agent has the authority to represent the principal before and after incapacity occurs. Therefore, it is not revoked when the principal becomes incapacitated. Any degree of legal power may be transferred to the agent to make business, financial or legal decisions for the principal.

Answer 113

Permanence Advantages of a Codicil * Convenient * Simple * Inexpensive For these reasons, codicils are frequently used to make minor changes to a will at a lower cost.

Answer 114

An outline of the general aspects of the covered principal’s affairs. * The powers of attorney should be very specific as to the aspects of the principal’s affairs that are covered.

Answer 115

Both I and II * Most standby trusts are revocable inter-vivos trusts, in which the grantor is also the trustee & the beneficiary.

Answer 116

Q-TIP Trust * The Qualified Terminable Interest Property (Q-TIP) trust is also referred to as the current income interest trust, is used when the decedent wishes to provide the surviving spouse with a stream of income for life, qualify for the marital deduction, yet ultimately control who will receive the trust property upon the death of the surviving spouse.

Answer 117

five-year * The Deficit Reduction Act provides for a five-year "look-back" period to determine if any income and assets were transferred to individuals, charities, or trusts for less than fair market value * Transfers made to trusts within 60 months, which use at least some of the Medicaid applicant's funds, are considered available resources.

Answer 118

GRUT * A GRUT is a trust where the payments to the Grantor vary based upon the annual value of the trust assets.

Answer 119

laws of intestacy * In the absence of a will, it is the laws of intestacy in the decedent's state of domicile that will determine how and to whom separately owned assets would transfer. * Real property is distributed according to the laws of the state where the land is located, which is known as its situs, and personal property is distributed according to the laws of the state of the decedent's domicile.

Answer 120

residuary clause * A residuary clause directs the testator's property that was not disposed of through other will clauses, to pass outright to others or to an existing trust. Property acquired after the will was executed is subject to intestacy if not disposed of through a residuary clause. * Thus, the residuary clauses prevent partial intestacy of property after payment of debts, taxes, expenses, and specific bequests are addressed.

Bryant - Course 6. Estate Planning. 7. Estate Planning Documents Flashcards

(152 cards)