Tuesday, August 12, 2008

Symposium on trusts and estate planning

I mentioned a small law firm that does trusts on my June 11, 2008 entry here. I went to a symposium and learned more about the subject.

A living trust substitutes for the person while he or she still lives and then continues to “live” after death. That gives the “person” the ability to control the disbursement of inheritance to heirs with a “metering-out” process that may depend on the heir’s behavior, or it simply be timed to provide income. The speaker demonstrated the concept by using a wooden tray as a "trust" and placing toy objects (like a toy house and car, and play money) in the tray.

The colloquial name for the supervision of an heir after death through a trust is “the dead hand.” The problem has been covered in the movies (sometimes comedies about marriage or in one case a drama about having to provide a male heir) and sometimes in novels, especially in Britain. In some cases courts may nullify requirements that violate “public policy,” such as requiring that a spouse of an heir be of a particular race. So it’s easy to imagine future litigation or challenges in this area as social values change.

Parents may feel very strongly that they want some very personal aspects of their wishes, reflective of their marriage, honored. So the law gives them considerable latitude to do this. However, there may be some wishes that would be wrong to implement, such as trying to suppress of change the person’s basic sense of identity.

Living trusts can have much more “benign” objectives. One is to manage complicated situations with several children in various life situations.

Another is simply that, even with a will, probate in many states is a time-consuming and expensive process, taking up to eighteen months and costing about 5% of the value of the assets. Even when a person dies intestate, the state has an “estate plan” for him or her: probate.

In simpler situations, aging parents sometimes place an adult child’s name on their bank accounts so that the child can pay their bills if they become incapacitated. The adult child must be trustworthy, of course, but one danger is that the accounts could become fair game if the adult child is sued and ordered to pay a judgment based on his own activity. In many states, that still might not be the case if the child can show that he or she has never used the parent’s co-named account for personal purposes. But it is safer to place the money in a trust, and then allow the adult child to have the proper legal authority to sign for the checks. The bank goes by signature cards on the check, not by legal ownership on the account.

Trusts can also own life insurance policies (that doesn’t make them the payers). Then the trust can pay the beneficiaries according to the rules of the trust. There are complicated rules, changing each year (because of a complicated Congressional political compromise), about what is subject to estate tax, which is not necessarily what is subject to income tax when paid out. With real estate, there are issues of cost basis and appreciation.

There was also a short segment on long term care insurance. It’s possible to vary the number of symptoms (usually 2 or 3) of impairment that must be present before the patient is eligible for benefits, and usually the “deductible” refers to the number of days of self-paid care. Long term care insurance may not make sense to families with few assets and likely Medicaid eligibility, but adult children should be careful about impoverished parents, because states may start enforcing filial responsibility laws in the future, although they could probably be challenged in court. Another topic, not covered tonight but discussed before in this blog, is the “look-back” period.

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