Estate Planning 101 Why everyone needs an estate plan By: Bhavik R. Patel Sandberg, Phoenix & von Gontard, P.C.

Reasons for an Estate Plan Planning for Incapacity Avoidance of Probate Planning for Proper Disposition of Estate Estate Tax Planning Creditor Protection

Planning for Incapacity No Planning – Conservatorship – Guardianship Planning – Durable Powers of Attorney Financial Health Care – Revocable Trust – Living Will – Long Term Care and Disability Insurance

What is a Guardianship? A court process appointing an individual to take custody of and care for a minor child or an incapacitated adult. Not for assistance in financial matters. Must petition the court.

What is a Conservatorship? A court proceeding that appoints a conservator to manage the property and financial affairs (the “ estate ” ) of either minor or disabled adult. A conservator may be either an individual or a corporation. A conservator has authority to invest, administer and account for the financial assets of the minor or disabled adult. – Stringent requirements placed on conservator – Like running your own business

Incapacitated/Disabled An incapacitated person is one who is unable by reason of any physical or mental condition to receive and evaluate information or to communicate decisions to such an extent that he or she lacks capacity to meet essential requirements for food, clothing, shelter, safety or other care such that serious physical injury, illness or disease is likely to occur.

Incapacitated/Disabled A disabled person is unable by reason of any physical or mental condition to receive and evaluate information or to communicate decisions to such an extent that the person lacks ability to manage his or her financial resources. Legal Terms: – Guardianship = Ward – Conservatorship = Protectee

The Process The individual ( “ Petitioner ” ) seeking to be named guardian/conservator shall petition the court asking to be appointed. The petition would name the ward or protectee as the “ respondent ” – The court will appoint a guardian ad litem to represent the ward ’ s or protectee ’ s best interest Avoidance of scams, fraud, etc.

The Process, Cont. The court will hold a hearing to determine whether and whom to appoint. If non-contested situation: – Establish disability or incapacitation – The court will usually consider the petitioner as guardian/conservator If contested situation: – Much more complicated – Establish disability or incapacitation – Have multiple witnesses attest to best choice of guardian/conservator

The Process, Cont. With respect to minors, no appointment is necessary – Parents automatically are guardians/conservators – Wills naming guardians for minor children With respect to disabled adults, appointment is necessary for guardianships – Needed for conservatorships unless effective estate plan is in place

The Process, Cont. After being appointed: – Ongoing process Continual reporting both as guardian and conservator Inventory Annual settlement Final settlement – Limitations for conservators: Missouri Prudent Investors Act – No risky or aggressive investments – Federally backed securities (bonds, t-bills, etc)

Liability? Guardians and conservators do not incur personal liability for acting in their authorized capacity on behalf of the persons in their charge. – Fiduciary responsibility.

Termination? With respect to minors: – Automatically terminates upon reaching the age of majority – Final accounting, etc. With respect to disabled or incapacitated adults: – Ward or protectee declared to be competent – Death – Resignation

Avoidance of Probate No Planning – Time Delay in Distribution of Assets – Costs and Expenses of Probate Administration – Public Disclosure of Estate – Court Involvement in Estate Decisions Planning – Jointly Held Property – Beneficiary Deed – Transfer on Death/Pay on Death/Beneficiary Designations – Revocable Trust

Planning for Proper Disposition of Estate No Planning – Intestacy Statutes – Minors Receipt of Property – Conservatorships Responsible for the Person - Guardianships

Planning for Proper Disposition of Estate-Cont. Planning – Spousal Rights – Restrictions on Distributions to Spouse – Planning for Minor/Adult Children or Disabled Beneficiaries Testamentary Trusts or Revocable Trust or Irrevocable Gift Trust Family Trust Separate Trusts – Legally may receive funds at 21 – Delay until later ages or upon certain events – Incentive Trusts – Spendthrift Trusts Special Needs Trust – Third party special needs trust – Self-settled special needs trust/Medicaid payback trust

Providing for Persons with Disabilities The Basics of Common Public Benefits

Public Benefits Basics Benefits not based on financial need – Social Security – Medicare – Special Education Benefits based on financial need – Supplemental Security Income (SSI) – Medicaid – Food stamps, legal aid, and utility payment assistance – Housing subsidies (H.U.D. or Section 8)

Supplemental Security Income SSI is a federal program, administered by the states, and is based on sufficient evidence of disability and financial need SSI is intended to pay for the beneficiary's food, clothing, and shelter and nothing more. Two tests determine eligibility for SSI – Income test determines how much is received. – Resource test determines eligibility

Types of SSI Income Unearned Income Earned IncomeIn-Kind Support & Maintenance Includes gifts, payments from annuities and pensions, alimony & support payments, dividends, interest, rents, awards and payment from other benefit programs. Consists of wages, royalties, net earnings from self-employment, and any honoraria received for services rendered. Actual receipt of food, clothing, or shelter, or something that can be used to get one of these. All of these sources of income will reduce benefits to be received

Basics Of SSI Eligibility Resources Anything that can be converted to cash for support is a resource. If resources exceed $2,000 on the first day of a calendar month, the beneficiary's public benefits will be lost until resources are reduced. Assets that the beneficiary does not have the legal right to demand are not counted for SSI purposes. If qualify for SSI, then will qualify for Medicaid

BASICS OF SSI ELIGIBILITY Exempt Resources A home, if the beneficiary has an ownership interest and it serves as his/her principal residence. Household goods all together worth no more than $2,000 market value. One automobile is totally excluded regardless of value if, necessary for employment, medical treatment, modified for operation by or transportation of a handicapped person; or is necessary to perform essential daily activities. If no exclusion applies automobile is excluded to the extent current market value does not exceed $4,500. Life insurance policies with cash surrender value, if their total face values amount to less than $1,500, and all term life insurance. A burial plot, or other burial space, worth any amount

Social Security Benefit (SSDI) Basics A disabled child may be eligible for Social Security if a parent is eligible and the child's disability began before age 22 Benefits do not become payable until the eligible parent dies, retires, or becomes disabled. Social Security is not affected by the child's assets, but the child's income may result in an ineligibility determination.

Social Security Eligibility Upon the disability or retirement of the parent, an eligible disabled child will receive an amount equal to 1/2 of the parent ’ s benefit Upon the death of the parent, an eligible disabled child will receive an amount equal to 3/4 what the parent ’ s SSA benefit. Example – Helen has been disabled from birth, and is receiving $720 in SSI monthly – Helen ’ s father, Earl, retires and receives $1,000 a month. Helen begins to receive $500 per month – Receipt of the SSA is unearned income which reduces Helen ’ s SSI by $480. Helen now receives $240 SSI and $500 SSA

Medicare Benefit Basics Medicare is a federal health insurance program for people over 65 and people under 65 who have been receiving Social Security based on disability for two or more years. Persons can be eligible for both Medicare and Medicaid. Medicaid is payor of last resort and covers long term care costs.

Providing for Persons with Disabilities Pitfalls to commonly used strategies

Common Pitfalls Gift to Minor Act Accounts Unstructured Beneficiary Designations – Beneficiary of insurance – Beneficiary of retirement plan Disinheritance No planning at all Gifts from non-parents (other friends or family members)

Missouri Transfers to Minor Act Once the child takes control of the account, the child may then use the money for purposes other than education – regardless of the custodian's wishes. If your family is applying for need-based financial aid, having an MUTMA may reduce the size of the benefits package or result in a finding of ineligibility. MUTMA accounts are considered available resources for purposes of SSI eligibility

Unstructured Beneficiary Designations Designating a retirement plan, insurance policy or annuity directly to an SSI or Medicaid recipient will cause a reduction or elimination of public benefits Many IRAs or 401K s have as default that the employees children are beneficiaries.

No Planning at All Dying intestate (without a will or trust) will usually leave all or a portion of the estate to the decedent's children. Any child on SSI or Medicaid will lose eligibility until the inheritance is either spent down, converted to a exempt resource, or placed in a Medicaid Payback Special Needs Trust. A Medicaid Payback Trust differs from an estate planning Special Needs Trust because – the trust must be established by a parent, grandparent, legal guardian or court, – there is a lien upon death for any Medicaid used by the beneficiary, and – if the trust is established by a court, then the courts will often require costly court accounting.

Providing for Persons with Disabilities Special Needs Trust Basics

Elements of a Special Needs Trust A Trust is a contract to control property for the benefit of a beneficiary to meet some objective A special needs trust is drafted specifically so trust assets are considered not to be "available resources" in calculating the disabled person's resources.

Elements of a Special Needs Trust The Social Security Administration describes a discretionary trust as “ a trust in which the trustee has full discretion as to the time, purpose and amount of all distributions. ” If the beneficiary has no discretion over the distributions, the trust is not counted for SSI eligibility. The funds in the trust may be used to supplement the beneficiary ’ s needs not covered by public benefits without a reduction or elimination of SSI or Medicaid.

Planning for Particular Assets Retirement Assets – Spousal Rights – Taxation – Designated Beneficiary Real Estate – Who will use it? – How will repair and maintenance costs be allocated? – Should it be sold? – Partnerships, LLCs, Trusts Businesses – Will the family need to cash out of the business? – Where will the funds come from? – How will the business be valued? – Who will run/own the business? – Buy Sell Agreements, Stock Purchase Agreements, Key Man Insurance, Business Succession Plan, ESOPs

Estate Tax Planning No Planning – Estate Tax Exemption 2008 $2,000, $3,500, No Tax 2011 $1,000,000 – Estate Tax Rates %

Estate Tax Planning No Planning – First Spouse to Die ’ s Exemption Amount Wasted Marital Deduction Planning – Utilizes Exemption of Both Spouses

Future Cost Savings Example 1: H & W with $200,000 – No Estate Plan Must go through probate Statutory fees for personal representative and attorney = $11,825 – With Estate Plan-Avoiding Probate Flat Fee Quote of $1,500 – SAVINGS = $10,325

Future Cost Savings Example 2: H & W with $2M estate. – No Estate Plan Must go through probate Statutory fees for personal representative and attorney = $85,100 – With Estate Plan-Avoiding Probate Flat Fee Quote of $2,000 – SAVINGS = $83,100

Future Tax Savings Example: H & W with $2.5M estate (in H ’ s name) – No Estate Plan Upon 1 st spouse to die-$0 tax-unlimited marital deduction of $2.5M Upon 2 nd spouse to die-$2.0M exempt due to estate tax exemption – Remaining $500,000 taxed at 46% = $235,000 – With Estate Plan Upon 1 st spouse to die-$0 tax-$2.0M exempt due to estate tax exemption and $500K due to marital deduction Upon 2 nd Spouse to die-$500K (as a result of the unlimited marital deduction) passes to children by using part of 2 nd spouse ’ s estate tax exemption amount- $0 tax – TAX SAVINGS = $235,000

Questions?