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.

Importance of Choosing a Funeral Agent

Although a morbid topic, choosing an agent to control your funeral and disposition of your remains is an important decision to be made in your Will. In New Jersey, if you do not select an agent to control your funeral and disposition of your remains, the following people will have the legal authority to do so:

  • Surviving spouse;
  • Majority of surviving adult children;
  • Surviving parent(s);
  • Majority of brothers and sisters;
  • Other next of kin based on their legal relationship to you.

While this may mirror what you want, in enough cases, it does not. In many families, for example, children do not get along or one child has not been in touch with the family in decades.

In one recent case decided in New Jersey (In the Matter of the Estate of Travers ), the decedent was unmarried and did not have children. His parents survived him but were divorced and did not agree on how to dispose of his remains. In this case, the Court decided which parent it felt was best able to articulate what the decedent would have wanted.

Any time the court is involved, however, costs escalate, issues take longer to resolve, and what you may have wanted to happen might not happen.

If you want to help your family avoid a battle about your funeral and disposition of your remains, you should appoint an agent in your Will.

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 an Estate Plan Saves You (Yes, You!) Money

People often focus on “how much” it costs to draw up an estate plan. In most cases, it’s more important to understand what it costs when you DON’T have an estate plan in place.

Every adult should have a Last Will and Testament, Power of Attorney, and Living Will in place. Depending on where you live, a consultation with an experienced estate planning attorney and a basic set of documents will probably cost less than $500.

But what will it cost if something happens to you without a plan in place? Here are a few of the “costs” you might not have considered:

  • Without a Last Will and Testament:

    • Your property passes to your intestate heirs. For most people, this is NOT the State. In New Jersey, it’s generally your closest living relatives. This might not be who you want to receive your assets (Do you have a blended family? Estranged child? Prefer to benefit someone else? Want to benefit a charity?);
    • Your next of kin will have to agree on who will administer your Estate. The administrator must be bonded. A bond, in this context, is like an insurance policy that the individual will properly administer the Estate. Bond premiums are based on several factors, including the size of the Estate and the administrator’s credit. Bonds must be renewed while the Estate is open. The bond requirement can be waived in a Will. This alone usually saves your family more money than the cost of a Will;
    • You won’t have nominated guardians for your minor children. The court decides;
    • Minors receive their inheritances outright at eighteen (18).
  • Without a Power of Attorney:

    • Your loved ones must seek court authority to manage your affairs during your lifetime if something happens to you. This process, even when uncontested, typically costs around $5,000 between attorneys fees and court costs. It can take several months to finalize. Court permission/approval is required for many things thereafter;
    • You don’t get to choose who manages your affairs during your lifetime.
  • Without a Living Will:

    • Your loved ones bear the burden of making end-of-life decisions for you;
    • Your decisions for end-of-life treatment aren’t memorialized;
    • You may be subjected to medical treatments that you would rather not endure.

Costanzo & Russom Law Group, LLC can help you put an estate plan in place to protect you and your family from these hidden “costs.” Call (732) 552-0900 to set up an appointment!