1. FPA NYC – 9th Annual Financial Fitness Workshop MOVING BEYOND THE BASICS OF SIMPLE WILLS AND ASSET TITLING & THE POWER OF INVESTMENT TRUSTS
Daniel Timins, Esq., CFP®
The Law Offices of Daniel Timins
477 Madison Avenue, Suite 240
New York, New York 10022
(212)

2. Creator / Grantor / Settlor
Parties to a Trust
There are three (3) parties to every Trust: the Creator (also known as the Grantor or Settlor), the Trustee (and often Co-Trustees or Successor Trustees) and Beneficiaries (and often Contingent Beneficiaries if there could be any remaining Trust assets after the death of the Primary Beneficiaries).
Creator / Grantor / Settlor
> Creates the Trust
> Determines Terms of the Trust
> Funds the Trust
Beneficiaries
> Entitled to the property under the terms of the Trust
Trustee
> Manages the trust property
> Follows the Terms of the Trust
> Entitled to a Commission

3. Parties to a Trust There are three (3) parties to every Trust:
Creator (also known as the Grantor or Settlor)
Trustee (and often Co-Trustees or Successor Trustees) and
Beneficiaries (and often Contingent Beneficiaries if there could be any remaining Trust assets after the death of the Primary Beneficiaries).
A person can serve as all three parties at the same time A person can create a Trust, name themselves a Trustee during his or her life, and also be the sole Beneficiary during that time. This would be an Inter Vivos Revocable Trust with Grantor Trust Income Tax Rules.
The largest benefits of this arrangement are that the party may:
(1) amend or revoke the trust,
(2) if the Creator becomes disabled a Successor Trustee can continue to use Trust funds for the Creator’s benefit without requiring court approval, and
(3) upon the Creator’s death the Successor Beneficiaries can receive the remaining estate without the need of going through Probate and the associated publicity and expenses of this process.

4. Benefits of Trusts
Decreased Estate Administration costs (Avoids Probate & decreases attorney fees)
Continuity of control over property; faster distributions of estate funds
Minimizing or completely avoiding high Executor Commissions
Avoids the publicity associated with Probate
Trusts avoid the court fees and minimize legal fees associated with Probating a Will.
Trusts are private documents: Only the Creator, Trustee and Beneficiaries know about the Trust. Anyone can look at a Will held in the Surrogate’s Court.
Distributions for future beneficiaries is faster and easier than from Wills.
Trusts are continuous in nature: Distributions can be made over time for spendthrift beneficiaries.
Default Trustee commissions are lower than Executor commissions (though Trust commissions continue during the duration of the Trust term).
Trusts holding out of state real estate help avoid “ancillary administration”.
Trusts may held minimize taxes and help people get on government programs.

5. Inter Vivos versus Testamentary Trusts
A Trust can be established as a separate document or a section of another legal document. An Inter Vivos Trust is a separate document that is anywhere from six to forty pages. Inter Vivos Trusts rarely require Surrogate’s Court oversight.
A Testamentary Trust is a trust that takes effect only after a person passes away. Testamentary trusts are created by a Will (which is overseen by the county Surrogate’s Court through Probate). The benefit of a Testamentary Trust is that it still affords Beneficiaries the same protections as Inter Vivos Trusts (such as creditor protection), BUT if it is part of a Will (and therefore part of Probate proceedings) the Trust may require Surrogate’s Court supervision until the Trust terminates and all funds are distributed, which can last for years if even one Beneficiary is several years away from receiving his or her final distribution. An effective Testamentary Trust is better than no Trust at all, but can be more expensive and time-consuming to administer to than a Inter Vivos Trust.

6. Benefits Detriments Revocable Trusts Can be altered, amended revoked
Creator can transfer funds into and out of Trust whenever they want
Detriments
No savings on estate taxes
Have to “Fund” the Trust
A Revocable Trust can be revoked by the Creator, whereas an Irrevocable Trust is one that cannot. Revocable trusts can be altered, such as changing the terms of distributions to beneficiaries. They can be amended, such as changing beneficiaries or Trustees. Funds can be removed from the Trust at the discretion of the Trustee.
The Creator has not divested himself of any control over the assets held in Trust; the Trust is his alter ego.
Most Revocable Trusts do not need a separate tax identification number: Investment gains and losses in the Trust pass through to the Creator, even if they remain in the Trust, and are included on the Creator’s IRS Form 1040.
Because the Creator has complete control over the existence of the Trust, no funds in the Trust avoid Estate Taxes (unless there is an estate tax credit shelter provision, which only takes place upon the death of the Creator).
Trust funds can be used solely for the Creator’s and spouse’s needs during life, and pass to children at death

7. Benefits Detriments Irrevocable Trusts
Estate tax benefits
Helps to qualify for Medicaid and other government programs
Detriments
Cannot be altered, amended revoked
Trust funds cannot be withdrawn for a non-beneficiary
Irrevocable Trusts have several intricacies:
All trusts become Irrevocable upon the death of the Creator. Therefore, a Revocable Trust becomes irrevocable upon the death of the Creator.
A Testamentary Trust is by its nature irrevocable since it isn’t effective until the Creator’s Will is submitted to Probate.
Irrevocable Trusts cannot typically be altered, amended, changed or revoked.
Property placed in these trusts cannot be withdrawn (though they may be substituted for other like-valued property).
The Creator is typically not the serving Trustee of these Trusts, as doing this may limit the benefits of the trust.
With all of these limitations and restrictions does come certain benefits, particularly in the Gift and Estate Tax arena, and an income tax deduction for certain charitable trusts.
Other trusts allow the beneficiary the ability to receive government benefits.

8. Four Types of Irrevocable Trusts
Estate Tax Saving Trusts
“ILITs” – Irrevocable Life Insurance Trusts
“GRATs & GRUTS” – Grantor Retained Annuity/Uni-Trusts
“QPRTs” – Qualified Personal Residence Trusts
Marital Trusts
“QTIPs” – Qualified Terminal Interest Property Trusts
“CSTs” – Credit Shelter Trusts
Medicaid / Disability Trusts
“SNTs” – Supplemental Needs Trusts
“IOCs” – Income Only Trusts (and “MAPTs” – Medicaid Asset Protection Trusts)
Charitable Trusts
CRATs & CRUTS” - Charitable Retained Annuity/Uni-Trusts
“CLATs & CLUTs” - Charitable Lead Annuity/Uni-Trusts

9. Reasons to Use Irrevocable Trusts
The government gives these trusts preferential tax treatment or favorable Medicaid / SSI considerations because the Creator has divested themselves of control over the assets.
If a Trust does not conform with specific governmental agency provision the Trust will lose this preferential treatment.
The Creator can’t reclaim the funds (the property is no longer the property of the Creator and he cannot change or revoke the Trust).
Unless a Creator has more-than-adequate assets, is aging, will eventually apply for government benefits such as Medicaid, or is highly inclined to transferring funds to another party in order to decrease his or her later estate taxes, an Irrevocable Trust should be avoided.
However, if a Creator’s situation does fit into any of these categories an Irrevocable Trust may be an option to consider.

10. Choosing Trustees Choosing a Trustee requires forethought.
The level of trust between the Creator and Trustee
Trustee’s competency to handle his or her job under difficult circumstances
Location of the Creator, Trustee and Beneficiaries
Some people name Co-Trustees as well as Successor Trustees in case the original agent requires assistance or is no longer available to serve.
All Wills and Trusts should name both successors and mechanisms for naming co-fiduciaries and allowing resignation to avoid future court involvement.
There is no requirement to name any specific person as any type of agent, though most spouses name each other as primary agent and fiduciary of all affairs; these designations must be made in each individual document.
Care must be given to the exact powers that fiduciaries can control: Giving complete discretion may lead to tax problems and lack of creditor protection.

11. Choosing Trustees: “Interested Trustees”
“Interested” (Beholden) Trustees
Spouses of the Beneficiary
Children of the Beneficiary
Employees of the Beneficiary
Siblings who are Trustees of each other’s Trust
Due to the wide range of powers available to Trustees special attention must be given to determining these powers in order to maintain creditor protections afforded to Trust assets.
Since the Grantor will typically name himself as Trustee of his Revocable Trust and has no creditor protection the focus should be on naming an appropriate Successor Trustee.
In order to avoid creditors from having a valid, enforceable claim against a Beneficiary one should be careful to avoid people considered “Beholden Trustees” to the Beneficiary.
Allowing a Trustee to name either a Successor Trustee or a Disinterested Co-Trustee (I.e. a person or institution with no interest in the Trust other than Trustee commissions) should avoid this consequence.

12. Funding A Trust
The most important aspect of having a Trust become effective is both that:
(1) the Trust document itself is drafted, and
(2) that the Trust is named as the Owner of the property, which thereby “funds” the Trust, either with a Deed for real estate or as the named Owner of a bank or brokerage account.
Once these two steps have been accomplished the Trust becomes the Owner of the property, and the Trustee now administers the property under the terms of the Trust.
How to Name a Trust as Owner of Accounts &Real Estate
The owner of a bank or brokerage account is no longer Sam Smith, but is instead The Sam Smith Revocable Trust. Depending on the terms of the Trust, if Sam is the Trustee and the Trust names him as Beneficiary Sam can use Trust funds however he desires.
The Deed to your house or vacation home in Florida is no longer in the name of Cindy Jones, but is instead owned by The Revocable Trust of Cindy Jones. Again, based on the terms of the Trust, Cindy can live in the house as long as she wants, sell it, rent it out, etc., AND the Florida vacation home now avoids Ancillary Probate because it is transferred by a New York Trust.
Make sure to fund your Trust!
An estate plan that includes a Trust but has no property that is explicitly owned by the Trust is an ineffective shell; all of the property the Creator thought was owned by the Trust (and should have been distributed under Trust Administration) will be transferred via Will, Operation of Law or the laws of Intestacy.

13. What Transfers are NOT Taxable?
Transfers Between Spouses
A spouse may transfer and unlimited amount of money to the other spouse both in life and in death
Any US Person’s Health and Education Expenses
The expenses must be paid directly to the health care of educational institution
I.e. paying a student loan company is a taxable event
The Annual Exclusion
Gifts of $13,000 (in 2011) can be given to any and every US Person every year

14. Federal and New York Gift & Estate Tax
Fed v. NY
Federal Government
New York State
Gift Tax Exemption
$5,000,000
Unlimited
Estate Tax Exemption
$1,000,000
Fortunately, there are no New York state gift taxes. Hypothetically, a citizen of New York can gift an unlimited amount of property without assessing state gift taxes (though this person should be weary of federal gift taxes).
Remember that the Federal Gift and Estate Tax are unified: Depleting your lifetime reserve also depletes yours post-mortem reserve. After reaching $5,000,000 the IRS taxes both lifetime and post-mortem transfers at a 35% flat rate.
New York currently begins assessing a state estate tax starting at $1,000,000; the approximate rate of taxation starts at ~9.9% on every dollar over this amount, with the rate increasing rapidly. Additionally, these taxes are now merely a deduction against federal estate taxes (whereas they used to be a credit).

15. What is Included in Your “Gross Estate”?
EXAMPLE 1: Bob owns a house, car, boat, a Picasso painting and bank accounts all in his own name equal to $2,000,000. His Gross Estate is worth $2,000,000.
Property owned by the decedent or in which the decedent had an OWNERSHIP INTEREST AT DEATH
EXAMPLE 2: 2 years ago Mary transferred an existing $3,000,000 life insurance policy to an irrevocable and paid gift taxes of $1,000,000 on gifts she made to her children. At death her Gross Estate includes this $4,000,000.
LIFE INSURANCE on decedent’s life (if ownership is transferred within 3 years of death) and GIFT TAXES PAID (if paid within 3 years of the donor's death)
EXAMPLE 3: Bob gifts his $1,000,000 house to his children and continues living there for 20 years without paying them fair market value rent. At his death the house is work $4,000,000. His Gross Estate includes this $4,000,000.
Retained interests and gifts of property over which the decedent retained control of the income: USE, POSSESSION or ENJOYMENT of the property

16. What is Included in Your “Gross Estate”?
This takes place when the decedent “owned” a life insurance policy at death OR had “incidents of ownership” in the policy, such as the right to:
name or change the beneficiary
surrender the policy for its cash value
receive any policy dividends
borrow against the policy cash value
pledge the policy as collateral for a loan
assign the policy or to assign any of these named rights
revoke any assignment of the policy
Proceeds of LIFE INSURANCE policies on the life of the decedent, payable to the decedent’s ESTATE, or in which the decedent had any "INCIDENTS OF OWNERSHIP"
EXAMPLE 4: Bob creates a Trust for his grandchildren that allows him to Alter the beneficiaries’ percentages, (OR Amend the terms of the Trust OR Revoke the Trust). At Bob’s death the Trust assets are worth $1,000,000. His Gross Estate includes this $1,000,000.
Gifts over which the decedent retained the power ALTER, AMEND or REVOKE the transfer (either already made or in trust)
Spouses: 50% attributed to decedent, regardless of who contributed what amount.
Anyone Else: the ENTIRE VALUE is included in the decedent’s estate UNLESS there is proof of who contributed what amount.
Property held in joint tenancy with rights of survivorship

17. A Credit Shelter Trust [“CST”] is a provision of a Will or an Inter Vivos Trust that holds aside a pre- determined amount of money in Trust at the death of the Testator or Creator that qualifies up to the federal or state estate tax exemption.
The surviving spouse continues to spend his or her own funds and can invade the CST if needed. In the interim the funds in the CST grow. Upon the death of the surviving spouse all of the funds in the CST, including investment gains, pass to the contingent Beneficiaries (typically children or younger family members) estate tax free.
Most people with older estate planning documents have the federal estate tax exemption as the defining amount of their CST. As already discussed, New York domiciliaries may want this amount to be defined as the New York state estate tax exemption.
Also, since stating dollar amounts may lead to future estate tax inefficiencies (due to ever-changing estate tax exemption amounts) using a Formula Provision (“I leave the then-applicable state estate tax exemption in a credit shelter trust”) will allow for the optimum amount of desired funds to be transferred in a CST free of estate tax. .

18. Example of a Credit Shelter Trust in Action
Harvey and Wilma own an apartment worth $800,000 and investments worth $2,000,000. The Apartment and $1,000,000 of the investments are owned by Harvey’s revocable trust.
Upon Harvey’s death the apartment and $200,000 are held by his Credit Shelter Trust (equaling $1,000,000). His remaining $800,000 goes directly to Wilma free of New York and Federal estate tax (because spouses can transfer unlimited funds between one another).
Wilma continues living in the apartment and has unfettered access to the remaining $200,000 (though she should use these funds last).
When Wilma dies ten years later the Credit Shelter Trust property has appreciated to $1,500,000 and passes to her children free of estate tax. Her assets are worth $1,800,000, of which she is taxed on $800,000.
If no Trust existed and Wilma had received all of Harvey’s assets, Wilma would have been taxed on the additional $1,500,000.

19. Beneficiary & Creditor Protection
Protects beneficiaries from creditors. The Trustee will negotiate a settlement with the creditor (maybe 25 cents on the dollar, depending on the creditor) or else the Trustee will not transfer the funds (because funds are in the trust are not truly the beneficiary's money, unless the beneficiary is also the Trustee).
Spendthrift Provisions
If the beneficiary has a substance abuse issue, or likes to gamble to excess, special provisions can be inserted in the Trust allowing the Trustee to withhold distributions until these problems are cleared up. This is helpful for children who are well-intentioned but in the grasps of harmful addictive behavior.
Substance Abuse Provisions
Any gift or bequest a person receives is outside of the marital property that shall be split between the spouses during divorce proceedings. However, what typically happens is that one spouse will receive a bequest from a deceased parent and place the funds in a joint account. Once these funds have been “comingled” with the other spouse’s money it becomes nearly impossible to trace these funds and separate them. An Anti-Comingling Provision will better ensure these funds are distributed properly to avoid inclusion in the marital estate.
Spousal Anti-Comingling Provisions

20. Retirement Plans: Required Minimum Distributions
Age
Distribution Period 70
27.4* 93
9.6** 71
26.5 94
9.1 72
25.6 95
8.6 73
24.7 96
8.1 74
23.8 97
7.6 75
22.9 98
7.1 76
22.0 99
6.7 77
21.2
100
6.3 78
20.3
101
5.9 79
19.5
102
5.5 80
18.7
103
5.2 81
17.9
104
4.9 82
17.1
105
4.5 83
16.3
106
4.2 84
15.5
107
3.9 85
14.8
108
3.7 86
14.1
109
3.4 87
13.4
110
3.1 88
12.7
111
2.9 89
12.0
112
2.6 90
11.4
113
2.4 91
10.8
114
2.1 92
10.2
115+
1.9
Retirement plans have become one of the largest components of individual wealth. Because retirement accounts grow tax deferred income taxes will be owed on distributions, either during the life of the account Owner or after life based on the lives of the Beneficiaries in the form of required minimum distributions [“RMDs”]. The amount that must be distributed is determined by a standard factor set out in IRS life expectancy tables.
RMDs are based on a person’s life expectancy: The tables require a higher percentage of assets to be distributed to older recipients and lower amounts to younger recipients. A 70 year old has to withdraw 3.77% of her retirement funds (100 / 27.4*), and pay income taxes on this amount, whereas a 93 year old will have to withdraw 10.4% (100 / 9.6**) of her combined retirement account values. Some commonly used abbreviations to describe how the RMD process works include:
Applicable Distribution Period [“ADP”]: the period during which benefits can be distributed
Required Begin Date [“RBD”]: April 1st of the year following the year in which participant reaches age 70½
First Distributions Year [“FDY”]: Typically the year owner reaches 70½ at which time the distribution can be made by December 31st of that year. However, this can be postponed to April 1st of the following year. The RBD is the following year (because a distribution is “required” by then). Waiting for the RBD will lead to two years worth of distributions and income taxes (one for FDY and one for the RBD year)

21. Spousal Treatment for RMDs
There are several rules regarding RMDs for non-account owners.
Spouses have very preferential RMD treatment:
they can either keep the funds in the deceased account-owner’s IRA (and take RMDs based off the deceased spouse’s life expectancy), or
Do a spousal roll-over of the funds to his or her own IRA.
Always Name Your Spouse as Primary Beneficiary
It is almost always preferable to name a spouse as Primary Beneficiary of a retirement plan, even if estate tax issues are involved. Spouses receive preferential RMD treatment – unlike other beneficiaries, spouses do not have to take immediate RMDs unless they too are 70 ½.
The spouse can either:
“Roll over” the plan to his or her own IRA, or
Create an “Inherited” IRA, or
Disclaim the funds, allowing the plan to be transferred to the Contingent Beneficiaries.
If the contingent beneficiaries are children it is preferable to name a See-Through Trust as the contingent beneficiary, and name the children as beneficiaries of the Trust.
The children will receive the benefits of holding funds in Trust, such as creditor protection, while simultaneously maintaining a favorable RMD based on their longer life expectancies.

22. First Year of Distributions
RMDs for Non-Spouses
RMDs: Death BEFORE RBD
RMDs: Death AFTER RBD
If NO Designated Beneficiary
(on Beneficiary Designation form)
First Year of Distributions
All IRA money must be distributed by 12/31 of year of 5th anniversary of Owner’s death – this is an income tax nightmare!
RMDs over Owner’s remaining life expectancy w/out recalculation
Subsequent Years
RMD is calculated by reducing Owner’s life expectancy by “1”
If a Legitimate “Individual” Designated Beneficiary IS Named
RMDs made over bene’s life expectancy from the Single Life Expectancy Table IF the bene commences distributions by 12/31 of the year after the year of Owner’s death
RMD for designated bene uses bene’s life expectancy for his age on his birthday in the year following the year of the Owner’s death
RMDs may be made over the longer of:
the Owner’s remaining life expectancy, or
the bene’s remaining life expectancy
RMD calculated by reducing bene’s life expectancy by “1” from the IRS tables
RMD calculated over bene’s life expectancy from the Single Life Expectancy Table

23. Thoughts on Children & Retirement Plans
Suggestions for Naming Children as Primary or Contingent Beneficiaries to a Retirement Plan
Split up IRA accounts so each child is a contingent beneficiary of her own account for RMD purposes (this can be done instead of using See-Through Trusts, and can be done after life)
Younger beneficiaries are able to “stretch” RMDs for longer periods of time due to their increased life expectancy, allowing for a longer period of tax deferral.
If a child needs the funds now and the retirement plan does not have a Trust as the beneficiary RMD rules won’t matter – they need the money now, so they will take it.
If the account Owner’s estate shall be subject to substantial Income in Respect of a Decedent consider (1) converting the plan to a Roth IRA to minimize future income taxes, and (2) having desired charitable legacies paid for out of the retirement plan.
Name a “See-Through Trust” as the beneficiary of the plan (more on this later).
RULE: The younger the designated beneficiary, the lower the required minimum distribution
RULE: Even if the non-spousal “inherited” IRA is a Roth IRA the beneficiary MUST begin taking RMDs, even if they are under 70 1/2.

24. Requirements to Make a Trust The Beneficiary
Qualified / “See Through” Trusts
Qualified / “See Through” Trusts: With these trusts the beneficiary is treated as the beneficiary of the retirement account for purposes of determining whether there is a Designated Beneficiary. This is the most desirable outcome for a parent to child transfer, especially if the child is still a minor, since RMDs will take place at the rate of the child beneficiary. In order for a See Through Trust to accomplish this end the following requirements must be met:
Conduit Trusts
With a Conduit Trust all distributions paid to the trust are immediately distributed to the beneficiary and not accumulated for future distributions to the successor beneficiaries. This language must be written into the trust in order for it to be effective. In addition, make sure there are separate trusts for each beneficiary in order to take advantage of favorable stretch RMD distributions for the younger beneficiaries..
Accumulation Trusts
Accumulation Trusts are good if the Settlor / plan participant wants to withhold principal and income from the initial trust beneficiaries, thus it is the opposite of a Conduit Trust. However, these trusts receive the worst RMD treatment as they must use the life expectancy of the oldest beneficiary, even if he or she is only a contingent beneficiary, and even if there is an extremely low probability that beneficiary will collect the funds.

25. Life Insurance in Trusts
There are three parties to a life insurance policy: The Insured is the measuring life for the policy paying out upon death, the Owner can trade the policy and name or change the beneficiary of the policy, and the Beneficiary receives policy proceeds upon the insured’s death. Each has a different power and purpose relating to tax matters.
Remember that while life insurance typically passing free from income tax, it typically does NOT transfer estate tax free.

26. Irrevocable Life Insurance Trusts
Owner of Policy:
The ILIT
The Trust
Beneficiary:
The insured life
Insured:
Life insurance is more often than not included in the insured’s gross estate for estate tax purposes if that insured is the owner of the policy.
The most frequent way to avoid estate taxation on life insurance proceeds is to not have the insured own the policy either personally or through a revocable trust. An Irrevocable Life Insurance Trust [“ILIT”] names an irrevocable trust as both the owner and the beneficiary of a life insurance policy and almost always does not name the insured as the trustee. ILITs are one of the preferred methods of transferring wealth free of estate taxes, since they:
(1) avoid income taxes for the beneficiary,
(2) are not included in the gross estate of the insured, thereby avoiding estate taxes, and
(3) the Settlor of the trust can dictate the terms of the trust, provided those terms comport with IRS rules.

27. MEDICAID TRUST INTRO: Types of Medicaid
The type of Medicaid benefit you receive determines “look back” periods (I.e. the penalty for transferring assets)
Community Care
Personal care, physical therapy, home health care and home health aid services; clinical or out-patient basis; includes physicians, dentists, pharmaceutical, nursery
Institutional
Hospitals, Medical Facilities,
Nursing Homes

28. MEDICAID: Financial Eligibility Requirements
Eligibility is based on people who are “Medically Needy,” “Categorically Needy” and “Legal US Residents”
Medicaid is “Means Tested,” meaning the recipient must have limited financial means
ASSETS
$13,800 in the recipient’s name
EXCEPTIONS:
“Burial Allowance” of $1,500
Life Insurance: $1,500 cash value
Personal Property (unlimited)
Your House (ONLY for Home & Community Care)
Supplemental Needs Trusts
Income Only Trusts
Retirement Plans (IRAs) are exempted from assets if they are in “payout status” (Required Minimum Distributions or Separate and Equal Periodic Payments if recipient is under age 59 ½), in which case payments are included in Income
MONTHLY INCOME
HOME CARE: $767 per month
Any excess income must go to the recipient’s “SPEND DOWN”
INSTITUTIONAL (at a Nursing Home): ALL of the recipient’s monthly income in excess of $50 must be paid to the NH to offset Medicaid payments

29. Transfer Penalties Home & Community Care Nursing Home
Department of Social Services and Medicaid impose a “Look Back Period” for transferring assets outside of the proposed recipient’s name
Home & Community Care
1 MONTH Look Back
One Strategy:
Transfer all financial assets (except $13,800) to a non-spouse, wait one month for bank statements to be updated, then apply for Home Care.
DOWNSIDE: If the recipient needs Nursing Home care the 5 Year Look Back rule applies.
Nursing Home
5 Year Look Back Period, and the Homestead can be attached by Medicaid
EXAMPLE: In January, 2007 Mary transfers her Coop and most of her assets to her son Joe (total of $280,000), and applies for Home Care. In March 2011 Mary goes to a Nursing Home. She failed to make the 5 year Look Back (4 years & 2 month). Nursing Home Care is Rockland equals approximately $10,105 per month.
$280,000 (amount gifted) = MONTH
$10,105 (monthly benefit) “Penalty Period”
Medicaid will not pay Mary’s Nursing Home benefits for almost 28 months. ..and Joe is liable for the payback
Joe should have paid for Mary’s care for 10 more months to get through Mary’s Look Back Period.

30. Types of Supplemental Needs Trusts
FIRST PARTY: The Beneficiary’s money is used to fund the Trust
Upon death trust funds MUST be used to pay back Medicaid before remaining funds are transferred to desired contingent beneficiaries
Individual Trusts:
The individual’s excess assets and “spend down” income can go into this Trust
To avoid Transfer Penalties:
(1) the funding Beneficiary must be under 65 years old,
(2) individual must be “Disabled” under Social Security Laws,
(3) must be established by a parent, grandparent, legal guardian or court order, and
(4) there MUST be a payback provision to Medicaid.
Pooled Trusts: Available to people who are over 65 and have no one to establish the Trust (#3 above)
THIRD PARTY: An outside individual’s money funds the Trust
Upon the Beneficiary’s death any remaining funds go to the contingent beneficiary.
NO Medicaid Payback is required (because the Trust was never the Beneficiary’s property).
HOWEVER, a Spouse cannot avoid support obligations.

31. Income Only Trusts (a “Medicaid Qualifying Trust”)
These Trusts are used to distribute income or hold property (including a primary residence) in Trust to avoid Medicaid from attaching assets.
The Creator chooses the residuary beneficiaries
The Creator can be the recipient, spouse, the recipient’s Power of Attorney or an Administrative body
The Beneficiary and his/her spouse can ONLY receive income (NO principal) from the Trust
The 5 Year Look Back DOES apply if the recipient needs nursing home care, so these may not be a good idea if Nursing Home care is imminent
The Trust is Irrevocable / cannot be amended

32. Annuity Trusts & Unitrusts
Certain irrevocable trusts can be used to minimize estate taxes while allowing the Grantor of the Trust the ability to utilize certain aspects of the Trust. These trusts utilize two aspects:
(1) a measurement of time, and
(2) either a fixed amount or variable rate of distributions.
These trusts are called Retained Interest Trusts, and are popular with people who have wealth.
Annuity Trusts pay out a fixed amount payable every year to the initial recipient
The Grantor is betting that his investment returns will outpace the annuity payment
Unitrusts pays a fixed percentage determined by the IRS on a monthly basis
The Grantor is betting that the unitrust payment is sufficient enough to sustain the Grantor’s needs (investment return is irrelevant: The same portion goes to the Creator and later bene).
If the Grantor lives the amount of time he or she had anticipated there will be an estate tax saving.
If the Grantor of an Annuity Trust chose a 20 year period of the Trust, lives the full 20 year period while also taking distributions from the Trust, and makes a good rate of return a large portion of the remaining Trust property will transfer to the Grantor’s beneficiary gift and estate tax free (the longer the period the greater the savings).
Conversely, if the Grantor dies before the period is over the entire amount of trust property is included in his gross estate for estate tax purposes.

33. GRATs
Grantor Retained Annuity Trusts [“GRATs”] allow the Grantor to place funds in trust, take out an amount of funds every year for personal use, and let the remainder grow. As with all investment trusts, the goal is to make as large of an investment gain as possible. The longer the term of the Trust the greater the amount that is sheltered from gift tax.
EXAMPLE: Grantor transfers property of $250,000 to a 2 year GRAT and retains the right to receive an annuity payment each year of 54% (the then -determined IRS rate equaling $135,000) of the value of the property transferred. If Grantor dies prior to the two year period his estate gets the rest of the trust (and is all estate taxable). If the Grantor lives the full period and the rate of return was assumed at 10%, after the two year period Grantor’s child receives $17,000 free of gift tax.
On the downside, if the gift underperforms the income interest the Grantor may pay greater taxes upon death: A GRAT MUST make fixed payments, no matter what the investment return.

34. GRUTs
Grantor Retained Unitrusts [“GRUTs”] require the grantor to withdraw a certain percentage of the Trust every year.
This percentage is determined every month by the IRS, and is applied annually to recalculate the payout.
Because the interest rate varies throughout the life of the GRUT the Grantor and child have the same interest (their fixed proportional share remains the same provided the Grantor survives the period).
The goal, again, is to determine the best time to create these trusts.
One downside to GRUTs is that, unlike GRATs (which require the same distributions amount no matter what), GRUTs require annual valuation, an additional expense that may diminish attractiveness.

35. CRATs and CRUTs
Charitable Remainder Annuity Trusts [“CRATs”] allow the Grantor to place funds in trust, take out an equal amount of funds every year for personal use, and leave the remainder interest to his or her choice of charitable entity.
The older the Grantor, the larger the income payments.
The Grantor receives an income tax deduction upon funding the Trust.
Charitable Remainder Unirusts [“CRATs”] are base the periodic payout on the periodic value of the Trust.
This has the benefit of adjusting for inflation: Much like GRUTs, the Grantor’s income payments vary as the account value varies.
Again, a portion of the proceeds are income tax deductible during the time of funding.

36. CLATs and CLUTs
Charitable Lead Annuity Trusts [“CLATs”] and Charitable Remainder Unirusts [“CRATs”] take the opposite approach of CRATs and CRUTs:
The Charity receives income during the life of the Grantor, then pass the asset to the Grantor’s choice of beneficiary.
An income tax deduction can be claimed if the Trust is a Grantor Trust, but income taxes will be owed by the Grantor even though the charity is receiving income (if not a Grantor Trust, no deduction or income tax liability).
Again, estate taxes are minimized by the amount of the actuarial amount going to the charity.
In low interest rate environments a long-term CLAT proves to be very attractive, provided:
(1) the Grantor lives the term of the trust, and
(2) investment performance outpaces the payments to the charity.

37. QPRTs
Qualified Personal Residence Trusts [“QPRTs”] are similar to GRATs and GRUTs
The Grantor places his or her Personal Residence in the Trust.
The Grantor is entitled to live in the residence during the term.
Provided he or she lives the term, the residence is transferred to the Grantor’s beneficiaries at the end of the term estate tax free.
QPRTs often do not make financial sense in a downward real estate market (better to fund a GRAT).

38. Intentionally Defective Grantor Trusts
The term “Grantor Trust” means that the Creator of the Trust (the “Grantor”) is allowed to use his or her personal income tax rates when determining the rate of income taxation on Trust assets.
Part or all of the income, deductions and credits are passed through to the Owner for income tax purposes
WHY DO IT?
Income tax rates for Trusts are accelerated much faster than personal income tax rates:
Trusts reach the top income tax rate of 35% at $10,450,
Individuals reach this same bracket at $349,700 of AGI.
This “loophole” exists because the tax rates used to be the opposite (Trust income tax rates were lower), but the Internal Revenue Code has not changed to correct this discrepancy.

39. Intentionally Defective Grantor Trusts

40. Intentionally Defective Grantor Trusts
Grantor Trust Rules are different than Estate Tax rules
Grantor Trust IRC Sections deal with Income Taxes
You WANT a power to apply because (favorable) individual income tax rates will apply instead of (unfavorable) irrevocable trust income tax rates.
Estate Tax IRC Sections deal with Estate Taxes
You do NOT want a code section to apply because the property will be included in your gross estate for estate tax purposes.
A Grantor is considered the “owner” of a Trust for income tax purposes if he has any of the powers on the next page of these materials reserved to him by the terms of the Trust.
Notice how several of these powers also make the property in the Trust included in the gross estate for gift and estate tax purposes (earlier in these materials). An important exception is “certain administrative powers” that is held by the Creator.

41. Intentionally Defective Grantor Trusts
Trust is considered a “Grantor Trust” for income tax purposes
Reversionary Interest of 5% of the trust or greater
Power to control beneficial enjoyment
Power to revoke a gift in trust
Power to distribute trust income
Certain administrative powers

42. Intentionally Defective Grantor Trusts
QUESTION: How can I get the best of both the income tax and estate tax rules?
ANSWER: Have the Trust give the Grantor administrative powers to substitute property of equal value with the Trust
EXAMPLE: A Grantor created an Irrevocable Trust 10 years ago; the Trust explicitly gives him the power to transfer property of equal value between himself and the Trust. This IS a Grantor Trust due to this administrative power and there is NO corresponding law regarding Estate Taxes, Here, a “Grantor Trust” IRC Section DOES apply (good), and a Gross Estate IRC Section does NOT apply (also good). Thus the Grantor’s gross estate will NOT be increased by the value of the Trust assets at his death.
This is known as an Intentionally Defective Grantor Trust – the Grantor got the best of both worlds: Lower income tax rates on the Trust during his life, and no estate taxes assessed on the Trust upon his death.

43. Family Limited Partnerships (“FLP”s):
Family Limited Partnerships [“FLPs”] allow the child / recipient as the General Partner control the businesses’ operations even if the parent / donor is the majority owner as a Limited Partner.
Arrangements like this allow for significant estate tax reduction.
FLPs are meant to transfer family wealth to family members as the donor wishes it to be transferred.
The “Donor” (usually a parent) contributes 99% of the capital to the FLP and names themselves as a “Limited Partner” (a passive investor)
Children (who contribute 1% of the capital) serve as “General Partners” (active managers of the FLP).

44. Family Limited Partnerships (“FLP”s):
Minority Ownership Discount
The IRS allows a discount to the owner of a minority interest in property for two reasons:
(1) Lack of liquidity (because a minority owner can’t sell without the other owner’s approval)
(2) Lack of marketability (because few people want to buy a minority interest and be bullied by the majority owner)
Tenants-in-Common Discount
When a person owns a property as a “tenant in common” with another person (as opposed to “jointly”) he or she does not receive the full benefit of the property (because the person is sharing a part of the whole).
The IRS will allow a discount on your estate taxes for property held as Tenants in Common, particularly if you hold a “minority interest”.
The business MUST be a legitimate business to receive discounts
Merely owning stock, bonds, etc. is NOT acceptable
Rental / investment real estate IS acceptable

45. Family Limited Partnerships (“FLP”s):
When taking advantage of both a minority discount valuation and a tenants in common discount, a family can decrease the owner’s taxable property by as much as 30% (potentially more).
Here, for example, the owner of a
premier brownstone used as a rental
Property and valued at $10,000,000
would still transfer this amount to her
Family, but would only be taxed on
$7,000,000, thereby transferring an
additional $1,000,000 to the family.

46. Family Limited Partnerships (“FLP”s):