Pennsylvania Trusts and Estates Blog

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."  

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!)