Pennsylvania Trusts and Estates Blog

Surviving Spouse as Trustee

One of my pet peeves about estate planners is that they often announce their personal prejudices as if they were the law. (Of course, I never do that.) Who can be a trustee is one of those subjects on which the personal opinions of planners get in the way of what the law permits.

Do you remember The Lucy Show where Lucy Carmichael is begging, or trying to dupe, the banker, Mr. Mooney, trustee of her deceased husband's trust, into giving her more money? If you have, you know that who is trustee after a spouse dies is very important. Horror stories about heartless, tight-fisted, parsimonious trustees abound. Every family has a story about a trustee who won't let a beneficiary have "his" money. I put "his" in quotes, because, of course, it isn't the beneficiary's money. If it were, no trustee would be involved. Nevertheless, how a trustee handles his or her responsibilities can make a big difference in the quality of life of the beneficiaries.

In general, all lawyers would agree that the lawyer should not advise a course of action that provides the client little or no benefit and affects others adversely. Nevertheless, many estate planning lawyers routinely advise clients to implement estate plans that provide little or no benefit and, in fact, cause much heartache to the survivors such as spouses and children. Often, because of the "form" that is used, a one-size-fits-all document is used as a Procrustean bed for all clients. (In Greek mythology, Procrustes had an iron bed on which travelers who fell into his hands were compelled to spend the night. He stretched the ones who were too short until they died, or, if they were too tall, he cut off as much of their limbs as would make them short enough to fit the bed.)

A very common estate planning technique to reduce federal estate tax is for a married couple to divide assets between them and create estate plans with by-pass trusts. Taxation is avoided (not just deferred) by the first spouse to die placing assets up to the exclusion amount ($3.5 million this year) into a bypass trust. The trust income can be paid to the surviving spouse, and there are various rights to trust principal that the surviving spouse can be given depending on each individual situation.

These rights can include the right to invade principal in any amount if invasion is for "health, education, maintenance, and support." They may also include withdrawal for any reason up to an annual limit of the greater of $5,000 or five percent of the trust corpus. Neither of these rights has adverse tax consequences, even if the surviving spouse is the Trustee.

Who is to be the trustee of this trust? Many planners insist on a bank or trust company, either as sole trustee or as co-trustee with a family member. There may be advantages to a bank or trust company acting as trustee in some situations, but it is not a legal requirement. Some planners insist on only family members, usually adult children, as trustees. Again, while this may be a good idea in some situations, it is not a legal requirement. Some planners urge clients to appoint the planner's themselves as trustees - again, this may be appropriate, but it is not a legal requirement and probably should not be "sold" to the client because of the inherent conflicts of interest unless these are appropriately dealt with.

This trustee, whoever it is, is going to control up to $3.5 million in assets during the spouse's period of survivorship. He or she is going to have to deal with this trustee, possibly for a long time, and this trustee is going to be a huge factor in the surviving spouse's financial and personal life. The choice of who fills this position is very important.

The most obvious choice is for the surviving spouse to act as the trustee, yet this option is rarely presented to the client.

Henry M. Ordower wrote an article for the Real Property and Trust Journal called, "Trusting our partners: An essay on resetting the estate planning defaults for an adult world." Ordower points our that clients commonly assume that there is some standard for selection of trustees and will look to their estate planning lawyer for a recommendation. Rarely will the clients ask probing questions concerning the selection of a trustee. If they did, they would find out that there are no legal and tax constraints that limit choices unduly.

Ordower goes on to say that many estate planning lawyers remain uncertain as to the tax and legal impact of the designation of specific classes of trustee. The best choice of a trustee is someone whom the client believes will act as the client would if he or she were still living. Given that, a bank or trust company is not a very logical choice. An individual who knows and understands the decedent's thinking would be best. Who better than the decedent's spouse?

Surely sometimes the surviving spouse is not an appropriate choice, but as Ordower suggests, the spouse ought to be the "default setting."

If the client truly does not want the spouse as trustee, it is a signal to the lawyer of flaws in the marital relationship that may need to be addressed in another manner. For the estate planning lawyer, these flaws enhance the likelihood that the estate planning lawyer will have a conflict of interest in planning for the couple. For example: Wife wants to be trustee. Husband doesn't want Wife to be Trustee. Whom does the lawyer represent?

Increasingly, individual trustees are appointed in numerous estate planning structures. From a surviving spouse's perspective, however, the selection of an individual trustee may be more unfortunate than the selection of a corporate trustee. As humiliating as financial control by an impersonal trust department may be, control by a child, an in-law, or a personal friend of a deceased spouse is frequently worse.

The surviving spouse as trustee must respect the trust. That is, he or she cannot commingle assets, must invest the assets, keep books and file tax returns. Professional help from money managers to accountants is readily available for all of these things.

Consider all of the options: banks, trust companies, spouses, adult children and professional advisors. Understand the pro's and con's of each choice before making a selection.

Next week's column will review the functions, responsibilities and duties of a trustee.

"Near this spot are deposited the remains of one who possessed Beauty without Vanity, Strength without Insolence, Courage without Ferocity, and all the Virtues of Man, without his Vices. This Praise, which would be unmeaning Flattery if inscribed over human ashes, is but a just tribute to the Memory of Boatswain, a Dog."

                                                         Lord Byron

According to the Humane Society of the United States, sixty-two percent of U.S. households have a pet. Many pet owners treat these pets as true members of their families. They buy them special clothing, get them professionally groomed at day spas, buy gourmet pet food, and take their animals for frequent check-ups at the vet. As put by Henry David Thoreau, " It often happens that a man is more humanely related to a cat or dog than to any human being."

Small wonder, then, that these pet owners want to make sure these pets are cared for after the owner dies. Traditionally, the pets themselves could not be beneficiaries of the owner's will. The pet itself could be bequeathed to someone since the pet is tangible property, but any money for the pet's care had to be given to the new owner with the hope that it would be used to take care of the pet.

One solution was for the pet owner to set up a trust with the pet's caretaker as the beneficiary. The caretaker received trust distributions so long as the pet was living and the caretaker was taking adequate care of the pet. Another party acted as trustee to enforce the terms of the trust by managing the funds and by having the power to move the pet from one caretaker to another.

The Uniform Trust Code (UTC), adopted by Pennsylvania recently to be effective on November 4, 2006, introduces a new concept and makes it possible to make a trust for the benefit of a pet where the pet is treated as the beneficiary. Under the terms of the UTC, a trust may be created to provide for the care of an animal alive during the settlor's lifetime. The trust terminates upon the death of the animal or, if the trust was created to provide for the care of more than one animal alive during the settlor's lifetime, upon the death of the last surviving animal. The law provides that the trust property is to be applied only for the care of the animal. It is very important to make a gift of the remainder to some other person or charity. If the trust terms do not provide for remaindermen, the remainder interest will be distributed through a resulting trust to the settlor, if living, or the settlor's estate. There won't be any millionaire kitties eating out of crystal on silver trays. According to Marilou Gervacio, writing for UTC Notes, the average amount put into such trusts has been said to be about $25,000 per animal.

Who pays the income taxes on the trusts investments? If the caretaker is considered a beneficiary of the trust (which is the case for common law trusts, not pet trusts under the UTC) then the caretaker reports distributions from the trust as income on his or her personal 1040 to the extent they carry out trust income. Revenue Ruling 76-486 provides that if the pet is considered the beneficiary of the trust (which is the case in a pet trust under the UTC), the trust gets no deduction for amounts distributed for the pet's care and the trust must pay income taxes on earnings. Note that the trust does not qualify as a charitable trust even if the remainder beneficiary after the death of the pet is a charity.

Your pet needs care if you become incapacitated, too. Your power of attorney can include language directing the agent to care for the principal's pet and expend amounts necessary to provide such care. This could be important if the agent's actions are challenged as violating the duty of the agent to expend sums only for the benefit of the principal.

Professor Gary Beyer, of the Texas Tech University School of Law wrote an article called "Estate Planning for Non-human Family Members" in which he advises that in addition to setting aside funds for the care of your pet, you need to make sure the relevant people know what should be done with your pets if something happens to the owner suddenly.

Professor Beyer next recommends that the owner should prepare an "animal document." This document should contain information about the animals, their care needs, and who will take care of them, and perhaps additional details as well. This document is intended to be kept in the same location where the pet owner keeps his or her estate planning documents.

Finally, the owner can provide signage regarding the pets on entrances to the owner's home to alert individuals entering the home that pets are inside. The signage is also important during the owner's life to warn others who may enter the dwelling (e.g., police, fire fighters, inspectors, meter readers, friends) about the pets. The Humane Society of the United States supplies cards and signage alerting others of the existence of pets and information regarding their care.

How do you know the pet that is the trust beneficiary is still alive? Certainly, the pet needs to be identified. Beyer cites a report that "[a] trust was established for a black cat to be cared for by its deceased owner's maid. Inconsistencies in the reported age of the pet tipped off authorities to fact that the maid was on her third black cat, the original long since having died." Veterinary records and photographs are helpful. It has been suggested that the pet could be tattooed. Although this could later "cause problems" for the pet because a pet thief could mutilate the pet to remove the tattoo, such as cutting off an ear or leg, if the pet's primary function is breeding. (Indeed!)

A microchip can be implanted in the animal and the trustee can then have the animal scanned to verify that the animal the caretaker is minding is the same animal. But, an enterprising caretaker could surgically remove the microchip and have it implanted in another physically similar animal.

How far can this go? It is suggested that the best, albeit expensive, method to assure identification is for the trustee to retain a sample of the animal's DNA before turning the animal over to the caretaker and then to run periodic comparisons between the retained sample and new samples from the animal. (Whew!)

Is your retirement plan invested in your employer's company stock? If so, there is a tax strategy available to you that is often overlooked.

Normally, all withdrawals from a retirement plan are taxed as ordinary income, at ordinary income tax rates. However, if you take distribution of your employer's company stock from your retirement plan and hold it in a taxable investment account, you may be able to significantly reduce taxes on plan distributions. This strategy is called the Net Unrealized Appreciation ("NUA") approach. It is authorized by Section 402(e)4 of the Internal Revenue Code.

NUA is the difference between the cost basis of the stock inside the plan and the stock's current market price on the distribution date. Using the NUA approach, only the cost basis of shares is subject to tax at the time of the distribution from the qualified plan. The difference between the basis and the fair market value--the net unrealized appreciation--is taxed at long-term capital gains rates only when the stock is sold, regardless of the holding period. This can be a better result than rolling the stock into an IRA where all of its value will eventually be taxed as ordinary income when it is distributed to you or to your beneficiaries.

When the stock is sold, NUA is treated as a long-term capital gain, even if it is sold immediately after distribution. Any appreciation of the employer stock that occurs after it is distributed will be considered a short-term capital gain if the employer stock is held for less than one year. If the stock is held for at least one year after the transfer, it is then characterized as a long-term capital gain.

If you never sell the shares of stock with the NUA, when your beneficiaries sell the stock they inherit, they will owe long-term capital gain tax on the unrealized appreciation portion of any gain. However, since the stock receives step-up in cost basis on your death, any additional appreciation between the date of distribution and the date of your death is never subjected to income tax.

If you take the NUA approach, the shares of company stock are outside the plan and not in an IRA. They are in a regular investment account. There are no minimum distribution requirements. The higher your income tax bracket and the more the stock has appreciated, the more you may benefit from this strategy.

If you are considering this technique, ask your plan administrator for the cost basis of various lots of employer stock in your plan. It makes sense to take out shares with the lowest cost basis. You don't have to take out all the shares. You can rollover part of the shares - choosing the ones with a higher cost basis to rollover. The special NUA treatment is lost for shares that are rolled over into an IRA.

Unfortunately, many retirees and advisors assume that rolling a retirement plan distribution into an IRA is the only option available. On the surface, this seems like the standard operating procedure, but it could cost thousands of dollars in additional taxes that could have been avoided.

In order to use the NUA approach, the employee must elect a lump-sum, in-kind distribution from the plan (a complete distribution of all plan assets in a single calendar year). A lump-sum distribution can be received on the employee's death, on the employee's attaining age 59 l/2, on the employee's separation from service, or on the employee's becoming disabled. If there is company stock in your retirement plan when you die - your spouse or other beneficiaries can use the NUA strategy.

With capital gains rate at an historical low, the increased use of company stock in retirement plans, and the long-term gains of the stock market, using the NU approach makes good sense for many plan participants.

Spencer Fiduciary Services offers trust and estate expertise to law firms and banks

LANCASTER, PA - May 27 - BUSINESS WIRE - At a time when law firms are scaling back operations or completely dissolving, Pennsylvania-based trust and estates attorney Patti S. Spencer has taken the bold step of starting a new corporate entity.

Spencer Fiduciary Services (SFS, www.spencerfiduciaryservices.com) is a private consulting company dedicated to providing trust and estate services to law firms and financial institutions. Founding attorney Patti Spencer, head of Lancaster-based Spencer Law Firm (www.spencerlawfirm.com), saw a need in the market for outsourced trust administration and estate settlement services.

"Handling trust and estate matters for clients is a natural expansion opportunity for many law firms, but it requires specialized expertise that may not be available within a firm," says Spencer. 

SFS is designed to help Pennsylvania law firms and banks administer estates and trusts; value assets; and prepare and file inheritance, federal estate, or fiduciary income tax returns. SFS also helps clients comply with the Uniform Prudent Investor Act (UPIA), the Uniform Principal and Income Act (UPAIA), and the Uniform Trust Act (UTA).

"We work behind the scenes or directly with a firm's clients to provide a wide range of estate and trust services," says SFS Director M. Yvonne Crouse. "The client always remains the attorney of record."

Law firms and banks that partner with SFS can maintain their client relationship while gaining in-depth tax knowledge, state of the art technology, and experienced staff.  Every client of Spencer Fiduciary Services receives a password-protected Internet portal for unlimited access to all account documentation.

When trust and estate disputes lead to fiduciary litigation or arbitration, Ms. Spencer is also available to serve as an expert witness in matters relating to fee disagreements, attorney malpractice, breach of fiduciary duty, failure to pay taxes, estate violations, or fiduciary investment management.

About Patti S. Spencer, Esq.

Patti S. Spencer is a nationally recognized trusts and estates attorney, author and educator. She is a peer-nominated Fellow of the American College of Trust and Estate Counsel. Her publications include "Pennsylvania Estate Planning, Wills and Trusts Library" (Data Trace, 2007), and "Your Estate Matters" (AuthorHouse, 2005). Her blogs include www.pennsylvaniafiduciarylitigation.com and www.pennsylvaniatrustsandestates.com.

Contact:

Margaret Grisdela

Legal Expert Connections, Inc.

On March 23, 2009 the IRS announced a new voluntary disclosure program for undeclared foreign accounts. The "amnesty" program is open for six months, closing on September 23, 2009. For qualifying taxpayers who come forward and report their undisclosed foreign bank accounts and pay back taxes for six years plus interest and some penalty, the IRS agrees not to bring criminal charges or assess the 75% fraud penalty.

IRS Commissioner Douglas H. Shulman said, "offshore accounts harbor billions of dollars, and people should take notice that the secrecy surrounding these deals is rapidly fading."

On June 30, 2008 a federal court authorized the IRS to serve a "John Doe" civil summons on UBS, demanding the names of approximately U.S. clients who hold off-shore bank accounts. On February 18, 2009, UBS entered into a Deferred Prosecution Agreement with the Department of Justice and agreed to pay $780 million to the U.S. and to disclose the names of between 250-300 of its U.S. clients who had maintained secret accounts at UBS. Now the IRS has sued to enforce the earlier John Doe summons seeking the disclosures of the owners of about 52,000 UBS Swiss accounts. It is estimated that these accounts hold some $17.9 billion in assets. The 52,000 accounts are just at one bank in one country. No one knows how many other accounts in other jurisdictions and financial institutions are unreported.

In addition, UBS has notified many of its U.S. clients that their secret bank accounts will be terminated. Closing the accounts is going to put the account holders in a tight spot. They have two choices: 1) transfer the money to banks in other "bank secrecy" jurisdictions which would create a paper trail discoverable by the IRS, or 2) repatriate the funds to the U.S and come clean with the IRS.

It is not illegal to have a foreign bank account in a bank secrecy jurisdiction (Switzerland, Liechtenstein and the Cayman Islands come to mind). What is illegal is failing to disclose the accounts and failing to report the income and pay income tax. In addition to disclosing the existence of the accounts on your 1040 and reporting the income, Foreign Bank Account Reports ("FBARs") must be filed by any U.S. taxpayer who has signatory or other authority over a foreign account or accounts that have a combined value of more than $10,000 at any time during the calendar year.

For taxpayers who "come clean" under the voluntary disclosure program, they will have to 1) pay back taxes due on the undisclosed assets for the last six years; 2) pay interest on the back taxes; and 3) pay a 20% accuracy penalty or a 25% delinquency penalty for each tax year at issue.

While this may seem like a tough position, it is far less than what these taxpayers will face if they are discovered by the IRS. Most importantly, the IRS will not pursue charges of criminal tax evasion against taxpayers who voluntarily disclose their offshore assets under this new policy. There is no guarantee of no criminal prosecution, but it is a mitigating circumstance in whether or not the IRS will recommend prosecution and, obviously, the amnesty program is not going to work unless the IRS sticks to its announced policy.

In addition, the IRS will not pursue other penalties against participating taxpayers, such as the fraud penalty of 75% of the unpaid tax or the statutory penalty for willful failure to file an FBAR, which is the greater of $100,000 or 50% of the foreign account balance. Both of these penalties apply annually to undisclosed accounts and assets during the relevant tax years.

Since a taxpayer's name may be discovered by the enforcement of the "John Doe" summons against UBS or in Congressional Hearings, it would be prudent for affected taxpayers to begin the process of determining whether the voluntary disclosure policy is available and appropriate for their particular circumstances. As IRS Commissioner Shulman forewarned, "having the IRS find you could mean a much heavier price than coming forward on your own."

Before making a voluntary disclosure, each case should be considered by a qualified tax advisor, giving consideration to the particular circumstances of each case. Voluntary disclosure is not a guarantee of no criminal prosecution. Experts recommend that the taxpayer's attorney contact the local IRS district office. Without disclosing the taxpayer's name, the attorney should explain the facts and circumstances to the IRS to determine if the IRS will agree not to prosecute. This disclosure should only be done with a high-level IRS official or counsel.

Taxpayers with offshore noncompliance should take advantage of the amnesty and come forward. The situation is going to get worse, not better.

Unfortunately, all sorts of tellers, clerks, customer service representatives, brokers, account managers, and other employees of financial institutions give customers advice about how to title accounts and name beneficiaries. This wreaks havoc with many estate plans and causes problems.

New Account Forms at financial institutions routinely ask you to name a beneficiary. Do not feel that you have to name a beneficiary. In most cases you're better off leaving that section of the form blank. When the representative wants you to fill it in, say, "No, thank you. I have a carefully thought out will and estate plan which I intend to use to dispose of my assets."

Here is an example of what can go wrong: Mom visits her attorney and makes an estate plan. The estate plan provides that her estate should pass equally to children, and if a child is predeceased, that child's share goes to a trust for that deceased child's issue.

Later, a financial institution representative tells Mom that the could avoid probate by changing the title on her brokerage account to read POD (pay on death) in equal shares to children. A couple of years later, son dies, leaving 3 children of his own. Then Mom passes away.

According to the beneficiary designation on the brokerage account, it is now divided between the two surviving children, and the grandchildren, deceased son's children, get nothing. That is clearly not what Mom wanted; but thanks to the advice from the "expert" who advised the beneficiary designation, her wishes are not carried out.

Here is another example: A financial institution representative tells Mom that she could avoid probate by changing the title on her brokerage account to read POD (pay on death) to Number One Son, Baby Brother, Daughter One, and 3 grandchildren (sons of deceased Daughter Two). That's six beneficiaries. Mom passes away.

The broker says he needs everyone to agree on any sales or distributions from the account since all 6 are now co-owners. Number One Son is not on good terms with Baby Brother who blames Number One Son that nothing has been done in the three months since Mom passed away. Number One Son is executor but since this account is not probate property, the Executor has no authority over it, so it really is not Number One Son's responsibility. (But tell that to Baby Brother.) Daughter One is not speaking to any of her co-owners because she says the three grandsons (who are getting half of the account, one-sixth each) are getting more than their share. Daughter One says that the grandsons should only receive the one-fourth share that would have been Daughter Two's if she lived. After all, that's what Mom's will says. Of course, the will doesn't operate on the POD account thanks to the advice of the "expert."

The accountant says that since Mom died last year, the account's income and any sale proceeds should not be reported to Mom's social security number. That makes sense, but not one of the six named beneficiaries is willing to have the entire sale proceeds reported to him on a 1099-B; and the broker can only use one social security number for the transaction. Mom's lawyer, who is the other Co-Executor, is angry because the plan he designed is messed up, and it looks like the six beneficiaries of the brokerage account are going to have to be treated as a partnership comprised of the six beneficiaries for income tax purposes. The partnership's tax ID number then can be used for the 1099 instead of any one of the 6 beneficiaries. That will require a tax ID number, a partnership agreement, and federal and state partnership income tax returns - all very costly, time-consuming and unnecessary. Since some of the beneficiaries are unhappy and hostile to each other, getting them to understand and cooperate looks like many hours of legal work.

The three grandsons are begging for money. Since their mother died, they are in need of money to pay college tuition. They can't get financial aid because they have an asset that they must spend first. Each owns 1/6 of the brokerage account. One of them is under 18, and the brokerage house will not pay out anything to the minor nephew unless a legal guardian is appointed for them. Ironically, the probate proceeding required for guardianship is much more onerous and expensive than probate of a will.

If the brokerage account had not been POD or TOD, it would have passed under Mom's will. The 3 grandsons would have shared their deceased mother's one-fourth share. The Executors would have authority to sell the investments. Any income tax consequence would be reported and paid by the estate. The grandson could have received distribution for tuition. The payment could have been made to the college or to a custodian for the benefit of the minor. No partnership would have to be created, and no partnership income tax returns filed.

Certainly, for Mom in our example, avoiding probate caused many, many problems. The so-called "expert" who advised her really did not have any knowledge, training or experience in estate settlement and the various property law and tax issues involved. She should not have named beneficiaries.

Penn State Cooperative Extension-Centre County publishes the Central Pennsylvania Forestry blog.  This post, Newly Released Estate Planning Guide, announces a new resource for owners of timberland, who have there own unique estate plannign issues.  The guide comes from the U.S. Department of Agriculture, Forestry Service, Southern Reseach Station.

Find it here:  Estate Planning for Forest Landowners: What WIll Become of Your TImberland?.

"The publication contains 180 pages of practical estate planning techniques and estate tax laws and rules with many examples and applications specifically for woodland property. It is written to assist woodland owners and their advisors, ­attorneys, consulting foresters, tax preparers, financial planners, as well as state agency foresters and cooperative extension agents."

Senate Finance Committee Chair Max Baucus (D-MT) introduced the Taxpayer Certainty and Relief Act of 2009 on March 26, 2009. The tax bill includes a $2.3 trillion middle class tax cut package and also creates a freeze on estate tax rates and major estate planning modifications.  Read Greg Herman-Giddens blog post about it here.

In addition to freezing the exmeption from the federal estate tax at $3.5 million. the special use vlaution relief provsiosn is increased from $750,000 to $3.5 million.

Portability

As described in this excerpt from Greg's post:

 "A change that will require modifications to most large estate plans is the proposal to pass "marital deduction portability." If a surviving spouse passes away with an estate larger than the applicable exemption, he or she will be able to use the "aggregate deceased spousal unused exclusion amount.In order to use a portion of the first decedent spouse's exclusion, his or her executor must make an election on that estate tax return. If the "Spousal Unused Exclusion" election is made, the surviving spouse may then use the remaining unused exemption.

If this bill becomes law, the full estate could be transferred to surviving spouse and he or she will have an estate exemption of $7 million."

See Shirley L. Kovar, Esq.'s testimony before the Senate Finance Committee on Portability of the Estate, Gift and Generation-Skipping Tax, April 3, 2008.  Ms. Kosar is an ACTEC fellow and Chair of ACTEC's Transfer Tax Study Committee.  Ms. Kosar states: "In my view, portability may be the best estate tax planning idea for a surviving spouse since the unlimited marital deduction in 1981."  

Thank you to Julie Garber of Julie's Wills and Estate Planning Blog for her post alerting us to this NYT article:

Julie writes:  "Taxes Not Seen as Making the Rich Flee New York, so states an article by Nicholas Confessore that appeared last week in The New York Times. It seems that lawmakers in Albany have been toying with the idea of collecting an additional income tax on "rich" New Yorkers, and the gist of the article is that there is very little evidence to support the notion that when a state raises its income tax on the wealthy, they flee in droves to states where there is a lower income tax rate or no income tax at all."

I agree with Julie Garber -  if they asked estate planning attorneys they would know that taxes are very often the most importatnt consideration for folks changing their domicile.  Florida has no income tax.  And what is New York City's?  There is both a state income tax of up to 8.14% and a city income tax, up to 4.00%.   Come on -  you mean no one thinks about that?

A family caregiver agreement, sometimes referred to as a personal care contract or personal service contract, is a written contract between a parent and child (or some other family member) in which the child agrees to care for an elderly parent for a specified amount of money.

For an aging parent, the idea of being cared for at home by a family member may be attractive. For adult children who have time to devote to Mom or Dad, such contracts can provide a source of income.

Many children care for their parents out of the goodness of their hearts for years without any compensation. Caring for a parent can be a full-time job. Many adult children have to give up their jobs in order to care for parents. Unfortunately, this type of care-giving is usually unpaid work. In instances where the parent eventually needs nursing care, the senior must spend down essentially all of his or her assets. The end result is that they leave their family members no inheritance.

With a caregiver agreement, the child can be compensated for doing the work of caring for Mom and Dad. This can help family relations so the caregiver child does not feel unduly burdened compared to siblings who may live far away or are otherwise unable to help. The contract provides assurances to other family members about the cost and quality of care being delivered and sees that caregivers are compensated for the long hours they put in.

A family caregiver agreement can work better than leaving the caregiver child a larger portion of the estate. When children are not treated equally in an estate plan, whether there is a valid reason behind it or not, there are often allegations of undue influence and accusations that the caregiver child took advantage of Mom and Dad. The caregiver agreement is separate from the will where the children can still be treated equally. Caregiver agreements can also be a part of planning for Medicaid eligibility, helping to spend down assets so that the parent might more easily be able to qualify for Medicaid long-term care coverage, if necessary. Any Medicaid planning should be done only with the help of an attorney.

Payment to a caregiver must be considered as well. Payments to the caregiver are taxable income. If the caregiver is an employee (which is most likely), social security and other payroll taxes need to be withheld. A payroll service can take care of this. Even if the payments are for qualified long-term care expenses, payments to a spouse, lineal descendant, brother or sister cannot be deducted as medical expenses by the payor.

If the parent cannot afford care, there may be other sources of funds. For example, some long-term care insurance policies will pay a family member to provide covered services in the home. Some caregivers may qualify to be paid for their work through benefits from the Veterans' Administration.

If a parent doesn't have cash to compensate a child, the parent may transfer the parent's house to the caregiver child. The parent can transfer the house outright and retain a life estate for him- or herself, or the parent could make the child a co-owner of the house. If the caregiver child has lived with the parent for at least two years, there can be Medicaid planning advantages to transferring the home. Transferring a house can have serious tax and other consequences. Always consult an attorney before undertaking this.

Another option for compensating a caregiver is to take out a life insurance policy or name the child as beneficiary on an existing life insurance policy.

In part 2 we will give drafting suggestions for family caregiver agreements.

Perhaps there are secrets we should take to the grave, but computer passwords are not among them. An increasing amount of critical personal and work-related information is stored on computers instead of in file cabinets. Many people are revising their estate plans to include complete lists of online accounts and passwords.

As Liz Pulliam Weston writing for MSN Money points out that "[t]here's no question that online banking, electronic bill payment and personal-finance software make our lives easier.

But could we be creating a digital mess for our heirs when we die?"

Check out Liza Weiman Hanks' blogpost, Preserving your Online Life (and All Those Annoying Passwords) where she tells about Legacy Locker.

Online financial accounts are not the only items to consider. The family could also lose access to photographs, music collections, calendars, address books, e-mail accounts, security and net-working software, and membership organizations. Personal security must be balanced with the needs of your survivors.

Who can access your online info is not only important in the event of death. it is also important in the event of illness or incapacity. If you are injured in an accident or have a stroke and, even if you have a power of attorney appointing an agent to act on your behalf, if information is not accessible, there could be serious repercussions. Unpaid bills could bring down your credit scores, insurance policies could lapse for non-payment of premiums checks could be bounced, and investment accounts could be neglected.

Eventually, your agent or executor should be able to get information about accounts, at least those they know about. But it could be very difficult and time-consuming, not to mention expensive. Even if the deceased once allowed another person to log into a computer account, that person doesn't necessarily have permission forever. According to Keith Novick of Garder Wynne and Sewell, disregarding the legal rights of the deceased and their estates could even result in a criminal prosecution under the federal Computer Fraud and Abuse Act. Executors can take legal action if they find anyone else has entered secured accounts and made changes.

Don't let this be a problem for your family. Make your addresses and passwords known to your executor or anyone who will need the information after your death. Make a list of user names, passwords, and accounts, and seal it in an envelope and marked "To Be Opened Upon My Death." You can keep it in your safe deposit box with your other estate planning documents. The list must be updated on a regular basis because passwords and user names change, and new services or accounts are opened. If a file contains sensitive information you wish to keep confidential, make arrangements to have your executor delete it after your death. You can avoid creating bitter memories for your family by making sure any embarrassing digital photos, secret accounts or other items are deleted after your death.

There are other approaches. A software product called Deathswitch is an automated system that regularly prompts users for a password. If the user fails to respond timely, the system assumes that he or she is dead or critically disabled and e-mails pre-scripted messages. Each person can pick the frequency of the prompts and the maximum time to respond. These time-frames can range from one day to one year.

There is a growing industry in "cracking" passwords. Doug Bedell, writing for The Dallas Morning News, reports that there is sophisticated software available that can decipher passwords for all sorts of files. One program, for example, scans a hard drive for all data and creates a "dictionary" of every word typed by the user. By examining the most often used words or combinations of letters and numbers, forensic experts usually can deduce favorite passwords of the deceased. Patterns can also be gleaned from the record of websites visited, experts say, because people often create passwords out of quirky words used in their favorite avocations.

"Near this spot are deposited the remains of one who possessed Beauty without Vanity, Strength without Insolence, Courage without Ferocity, and all the Virtues of Man, without his Vices. This Praise, which would be unmeaning Flattery if inscribed over human ashes, is but a just tribute to the Memory of Boatswain, a Dog."

                                                                                               Lord Byron

 

According to the Humane Society of the United States, sixty-two percent of U.S. households have a pet. Many pet owners treat these pets as true members of their families. They buy them special clothing, get them professionally groomed at day spas, buy gourmet pet food, and take their animals for frequent check-ups at the vet. As put by Henry David Thoreau, " It often happens that a man is more humanely related to a cat or dog than to any human being."

Small wonder, then, that these pet owners want to make sure these pets are cared for after the owner dies. Traditionally, the pets themselves could not be beneficiaries of the owner's will. The pet itself could be bequeathed to someone since the pet is tangible property, but any money for the pet's care had to be given to the new owner with the hope that it would be used to take care of the pet.

See Protecting Your Pet in the Event of Your Disability or Death by Audrey Buglione, Esq. at Pennsylvania Animal Law Blog. 

One solution was for the pet owner to set up a trust with the pet's caretaker as the beneficiary. The caretaker received trust distributions so long as the pet was living and the caretaker was taking adequate care of the pet. Another party acted as trustee to enforce the terms of the trust by managing the funds and by having the power to move the pet from one caretaker to another.

The Uniform Trust Code (UTC), adopted by Pennsylvania recently to be effective on November 4, 2006, introduces a new concept and makes it possible to make a trust for the benefit of a pet where the pet is treated as the beneficiary. Under the terms of the UTC, a trust may be created to provide for the care of an animal alive during the settlor's lifetime. The trust terminates upon the death of the animal or, if the trust was created to provide for the care of more than one animal alive during the settlor's lifetime, upon the death of the last surviving animal. The law provides that the trust property is to be applied only for the care of the animal. It is very important to make a gift of the remainder to some other person or charity. If the trust terms do not provide for remaindermen, the remainder interest will be distributed through a resulting trust to the settlor, if living, or the settlor's estate. There won't be any millionaire kitties eating out of crystal on silver trays. According to Marilou Gervacio, writing for UTC Notes, the average amount put into such trusts has been said to be about $25,000 per animal.

Who pays the income taxes on the trusts investments? If the caretaker is considered a beneficiary of the trust (which is the case for common law trusts, not pet trusts under the UTC) then the caretaker reports distributions from the trust as income on his or her personal 1040 to the extent they carry out trust income. Revenue Ruling 76-486 provides that if the pet is considered the beneficiary of the trust (which is the case in a pet trust under the UTC), the trust gets no deduction for amounts distributed for the pet's care and the trust must pay income taxes on earnings. Note that the trust does not qualify as a charitable trust even if the remainder beneficiary after the death of the pet is a charity.

Your pet needs care if you become incapacitated, too. Your power of attorney can include language directing the agent to care for the principal's pet and expend amounts necessary to provide such care. This could be important if the agent's actions are challenged as violating the duty of the agent to expend sums only for the benefit of the principal.

Professor Gary Beyer, of the Texas Tech University School of Law wrote an article called "Estate Planning for Non-human Family Members" in which he advises that in addition to setting aside funds for the care of your pet, you need to make sure the relevant people know what should be done with your pets if something happens to the owner suddenly.

Professor Beyer next recommends that the owner should prepare an "animal document." This document should contain information about the animals, their care needs, and who will take care of them, and perhaps additional details as well. This document is intended to be kept in the same location where the pet owner keeps his or her estate planning documents.

Finally, the owner can provide signage regarding the pets on entrances to the owner's home to alert individuals entering the home that pets are inside. The signage is also important during the owner's life to warn others who may enter the dwelling (e.g., police, fire fighters, inspectors, meter readers, friends) about the pets. The Humane Society of the United States supplies cards and signage alerting others of the existence of pets and information regarding their care.

How do you know the pet that is the trust beneficiary is still alive? Certainly, the pet needs to be identified. Beyer cites a report that "[a] trust was established for a black cat to be cared for by its deceased owner's maid. Inconsistencies in the reported age of the pet tipped off authorities to fact that the maid was on her third black cat, the original long since having died." Veterinary records and photographs are helpful. It has been suggested that the pet could be tattooed. Although this could later "cause problems" for the pet because a pet thief could mutilate the pet to remove the tattoo, such as cutting off an ear or leg, if the pet's primary function is breeding. (Indeed!)

A microchip can be implanted in the animal and the trustee can then have the animal scanned to verify that the animal the caretaker is minding is the same animal. But, an enterprising caretaker could surgically remove the microchip and have it implanted in another physically similar animal.

How far can this go? It is suggested that the best, albeit expensive, method to assure identification is for the trustee to retain a sample of the animal's DNA before turning the animal over to the caretaker and then to run periodic comparisons between the retained sample and new samples from the animal. (Whew!)

Thank you to Grant Griffiths for his suggestion for this post.

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There is some talk from PA state legislators about repealing the PA inheritance tax.  See Neil Hendershot's blog post here.

ACTEC (American College of Trust and Estate Counsel) maintains a chart showing the death taxes in all 50 states:  2009 State Death Tax Chart.  States with death taxes are in the minority, but not overwhelmingly so.  It seems a very remote possibility that the PA Legislature would do away with this source of tax revenue in the current economic climate.