Protect Your Family From Divorce and Creditors

Money left to children can disappear for a host of reasons — divorce, bankruptcy, litigation, or bad investments, just to name a few. One way to protect family money is to set up a bloodline trust. The following article explains how these trusts work, using the fictitious example of Mary and John and their four children, Dennis, Judy, Paula and Frank.

Mary and John have four adult children, all with varying degrees of financial and personal success. Dennis, the oldest and most successful financially, has no need for financial support from his parents. Judy, next in line, unfortunately has been through a bruising divorce and is struggling to raise her son on her own. Paula and Frank are both married, but their marriages have had their ups and downs. Paula’s husband has been known to sink their limited resources into failed get-rich-quick schemes. And Frank has just borrowed a lot of money to start his own dentistry practice.

Parents never stop worrying about their children, and Mary and John are no exception. They are worried about more divorces, about whether Judy will have enough money, whether Frank’s business will flourish, or whether he may be sued by a patient. They’re also worried about there being enough money for their grandchildren.

These concerns are not without basis. Nationally, half of marriages end in divorce. In our litigious society, some 17 million lawsuits are filed every year. With health insurance tied to employment, the loss of a job can mean the loss of health insurance and the bankruptcy that can result from a devastating illness or injury. Mary and John can help their children as needed while they’re alive. But whatever they leave their children in their estate could go up in smoke if bad luck strikes or poor decisions are made. This is even true in the case of money left to Dennis, the most successful of the four. While he may have sufficient funds to weather any bad luck, he’s likely to have a taxable estate. Money left to him will be subject to a hefty estate tax before it passes on to the grandchildren.

So what can Mary and John do to make sure that what they leave actually helps their children and grandchildren?

The answer is a ‘Bloodline’ or ‘Dynasty’ trust. These are trusts that continue after the parents’ death through the life of the children and, if the grantor chooses, during the life of the grandchildren as well. The funds are left for the benefit of the children and grandchildren, but limits are placed on access to the trust funds. They’re there if needed, but cannot be spent down on a whim. This restriction provides the necessary protection.

The wealthy have always used similar trusts, often called ‘spendthrift’ or ‘generation-skipping’ trusts. Spendthrift trusts were designed to protect beneficiaries from themselves. The landed gentry could leave funds for ne’er-do-well sons, knowing it wouldn’t all be quickly lost at the casinos in Monte Carlo. Generation-skipping trusts were designed to prevent estates from being taxed twice, both when the parents die and when their children die.

But don’t those with less money have an even greater need to make sure it is protected?

Here are some of the benefits of a bloodline trust:

Creditors: The funds in a bloodline trust are protected from creditors in the event of bankruptcy.

Litigation: Like creditors, plaintiffs in lawsuits cannot invade bloodline trusts. Funds left to Frank will not be subject to claim if he is ever sued for alleged dental malpractice.

Divorce: While everything is generally on the table in the event of divorce, a bloodline trust will be treated differently from property in the name of a divorcing spouse. It will not be considered a marital asset.

Bad judgment: An independent trustee can protect a trust beneficiary from bad choices, whether they be risky investments or foolhardy spending. And the bad judgment may not be on the part of one’s children but come from their spouses, who may prevail upon them to take risks with funds that should be there for their retirement or for their children’s education. Paula will have a lot easier time saying no to her husband if her funds are in trust and not in their joint bank account.

Bad luck: While parents can’t protect their children from bad luck, they can create a cushion for them if it occurs. If a child becomes disabled or loses insurance and incurs large medical bills, he or she can qualify for Medicaid coverage without having to spend down all the funds in a bloodline trust, as would be necessary if the funds were in the child’s name.

So, with all of these benefits, what are the drawbacks of a bloodline trust?

Cost: Mary and John will have to pay their attorney a fee to set up the trusts, but it will be quite minimal compared to the potential savings. In addition, there will be continuing administrative costs after they die. These will include the preparation of an annual income tax return for the trust and, if there is a professional trustee, a management fee. 

Restrictions: Some trust beneficiaries will object to not having complete control and access to their trust funds. This is a trade-off. Do the benefits outweigh this disadvantage? Mary and John will have to decide.

There are some other trade-offs and choices Mary and John will have to make. These include:

Choice of trustee: The hardest decision in any trust is choosing the appropriate trustee. The best answer for a bloodline trust is an independent, professional trustee, such as a bank, trust company or law firm. But this has a cost to it and may increase a child’s disgruntlement about not having complete access to the trust funds. The child may feel more comfortable if another family member or family friend serves as trustee. Or each child can be trustee of his or her own trust. However, this means more risk and less certain protection. The child must follow the terms of the trust. If he doesn’t, the trust might be attacked at a later date as a sham. If the child sees the possibility of litigation or bankruptcy, he should resign at the earliest possible date and appoint an independent trustee. The choice for Mary and John is ironclad protection versus somewhat less certain protection but less cost and more control for their children.

Distribution rules: Mary and John also need to decide the rules for distributing trust income and principal to their children. It’s typical, though not necessary, to have all trust income, interest and dividends distributed annually. The parents can leave principal distributions to the discretion of the trustee or limit it to necessities for their children, such as food, clothing, health and education. This may make the children more comfortable with an independent trustee.

So, after Mary and John have set up bloodline trusts for their four children, they can rest assured that what they’ve worked long and hard to accumulate will be there for their children over the long term. But do they stop worrying about them? No. That’s just what parents do.

Beware of Non-Lawyers Offering Medicaid Planning Advice

In recent years a number of non-lawyers have started businesses offering Medicaid planning services to seniors. While using one of these services may be cheaper than hiring a lawyer, the overall costs may be far greater.

If you use a non-lawyer to do Medicaid planning, the person offering services may not have any legal knowledge or training. Bad advice can lead seniors to purchase products or take actions that won’t help them qualify for Medicaid and may actually make it more difficult. The consequences of taking bad advice can include the denial of benefits, a Medicaid penalty period, or tax liability.

As a result of problems that have arisen from non-lawyers offering Medicaid planning services, a few states (Florida, Ohio, New Jersey, and Tennessee) have issued regulations or guidelines providing that Medicaid planning by non-lawyers will be considered the unauthorized practice of law.

For example, in New Jersey, a non-lawyer may NOT provide legal advice on issues such as:

  • Medicaid eligibility, including provisions of wills and powers of attorney;
  • On the need for guardianships and the authority to transfer assets;
  • On nursing home laws;
  • On transfers of property;
  • On the impact of marriage and divorce; or
  • On estate administration and the elective share.

All of these issues can be important to a Medicaid applicant.

Only lawyers can provide advice on:

  • Strategies to become eligible for Medicaid;
  • Spending down resources;
  • Tax implications;
  • Guardianships;
  • Sale or transfers of assets;
  • Creation of trusts or service contracts and the like.

Applying for Medicaid is a highly technical and complex process. A lawyer knowledgeable about Medicaid law can help applicants navigate this process. An attorney may be able to help your family find significant financial savings or better care for you or your loved one. This may involve the use of trusts, transfers of assets, purchase of annuities or increased income and resource allowances for the healthy spouse.

Execute a Power of Attorney Before It’s Too Late

A durable power of attorney is an extremely important estate planning tool, even more important than a will in many cases.  This crucial document allows a person you appoint — your “attorney-in-fact” or “agent” — to act in place of you — the “principal” — for financial purposes when and if you ever become incapacitated due to dementia or some other reason.  The agent under the power of attorney can quickly step in and take care of your affairs.

But in order to execute a power of attorney and name an agent to stand in your shoes, you need to have capacity.  Regrettably, many people delay completing this vital estate planning step until it’s too late and they no longer are legally capable of doing it.

What happens then? Without a durable power of attorney, no one can represent you unless a court appoints a conservator or guardian. That court process takes time, costs money, and the judge may not choose the person you would prefer. In addition, under a guardianship or conservatorship, the representative must seek court permission to take planning steps that he or she could have implemented immediately under a durable power of attorney with gifting authority.

This is why it’s so important that you have a durable power of attorney in place before the capacity to execute the document is lost.

If you do not have someone you trust to appoint as your agent, it may be more appropriate to have the probate court looking over the shoulder of the person who is handling your affairs through a guardianship or conservatorship.

Because you need a third party to assess capacity and because you need to be certain that the formal legal requirements are followed, it can be risky to prepare and execute legal documents on your own without representation by an attorney. For assistance executing a durable power of attorney before it’s too late, contact the elder law and estate planning attorneys at Costanzo & Russom Law Group, LLC.

How Likely Are You to Need Long-Term Care?

Planning for retirement and deciding whether to buy long-term care insurance would be a lot easier if you knew your odds of needing long-term care, as well as at what age and for how long. Unfortunately, there’s no definite answer. On the other hand, some statistics do provide a bit of guidance.

The Numbers

In 2012, there were about 1.2 million nursing home residents over 65 years old in the United States. Of these, 18 percent were 65 to 74 years old, 32 percent were between 75 and 84, 41 percent were between 85 and 94, and 9 percent were 95 or older. Of course, there are fewer of us in each age cohort, so the likelihood of needing nursing home care rises even more steeply with age than these percentages indicate. While these numbers do not reflect other types of long-term care, the need for home care, assisted living, or care provided by family members probably rises at similar rates.

According to the American Association for Long-Term Care Insurance, in 2012 64 percent of long-term care claims were made by those over age 80 and only 9 percent were from those in their 60s. Meanwhile, according to the association’s figures for 2008, 44 percent nursing home residents stay less than a year, 30 percent stay between one and three years, and only 24 percent spend more than three years in a facility. Updated numbers would likely indicate even shorter stays as more seniors receive care at home or in assisted living facilities. Those who move to nursing homes do so when they are older and sicker, meaning that they stay for a shorter period of time than in the past. According to one reported statistic, only 40 percent of seniors spend any time in a nursing home.

Interpreting the Numbers

So, what do all of these statistics mean in terms of your planning? First, the odds are that you will not need care until you are at least 80 or 85. Second, if you do need nursing home care, there’s a 44 percent chance it will last less than a year (either because you will return home after a period of rehabilitation or you will not survive more than a year) and only a one-in-four chance that your stay will last three or more years. Of course, if it does, your costs will become prohibitive. However, since only 40 percent of seniors spend any time in a nursing home and only a quarter of those stay longer than three years, this means that statistically you have only a one in 10 chance of needing more than three years of nursing home care.

Unfortunately, these statistics are somewhat dated and are just statistics. How do any of us know whether we are part of the 60 percent of seniors who will never enter a nursing home, the 30 percent who will spend less than three years there, or the 10 percent who will spend more than three years? We don’t, but we can modify the statistics based on our own circumstances, especially with respect to certain factors.

Key Factors

Family History: Did your parents live to a ripe old age with no cognitive impairment or become demented at 72, requiring continuing care for another 10 years? While we do not have our parents’ exact genes or live their same lifestyle, there are likely to be some similarities.

Health and Fitness: Do you have any illnesses or conditions that could lead to future impairments or are you in good health and take good care of yourself? Are you overweight or obese, which can lead to illness and disability? Of course, in terms of long-term care, health can cut in both directions. Bad health can lead to the need for care or it can cause an early death, eliminating the need for care. Good physical health can delay the need for care but in the event of cognitive challenges mean that you live a long time with impairments.

Family Situation: If you do need assistance in the future, do you have a spouse, children or other family members who could provide care? Or would you need to pay for it whether at home, in assisted living or in a nursing home?

We have statistics on the need for nursing home care because nursing homes are highly regulated. We know how many people are in them at any one time and how long they stay. We don’t know for sure how many seniors are receiving care at home or in assisted living facilities. But let’s assume for the sake of argument that for every person living in a nursing home, there’s another receiving care at home or in assisted living. Then we can assess the average likelihood of needing care as follows:

No Need for Care  22%

 0 – 1 Year  35%

 1 – 3 Years 24%

 More than 3 Years 19%

Then, you can adjust these numbers up or down based on your health, family history and family situation. For instance, if you are in excellent health, you might add 10 percentage points to the likelihood that you will not need any care, reducing the likelihood of needing 1 to 3 years or more than 3 years of care by 5 percentage points each. If, on the other hand, one of your parents needed a decade of care due to Alzheimer’s disease, you might add 5 percentage points each to the longer levels of care, taking 5 percent off of both the “no need” and the “less than one year” categories. Statistically, men are more likely to receive assistance from their wives, than women from their husbands, in large part because women live longer on average.

While this is far from perfect, by developing your own table you will have a better idea of how to protect yourself and your family’s finances should you require long-term care.  Costanzo & Russom Law Group, LLC can help with this planning, explaining your options and the steps that can be taken now to prevent financial devastation later.