Lexington Family Law

Here is an overview of an estate planning tool known as a Living Trust. It is often referred to as an inter vivos trust. Such estate planning tools target one or more of three issues in estate planning with the overall goal being wealth maximization. Those target areas include: minimizing estate and gift taxes, providing for long-term nursing care, and eliminating probate costs.

Those with individual estates in excess of one (1) million dollars need to plan to minimize or eliminate the federal estate and gift tax. I say one (1) million because that will be the exemption amount in 2011 unless Congress extends the repeal of the tax. Currently, the exemption is at two (2) million and increases to three and a half (3.5) million in 2009. In 2010 there will be no federal estate and gift tax. A married couple can plan carefully to combine their exemptions, but for those with smaller estates, planning around this issue is unnecessary.

Providing for long-term care takes two forms: obtaining long-term care insurance or decreasing assets and income so as to qualify for medicaid funding. Obtaining long-term care insurance can be too expensive to achieve if one waits until they are of an advanced age. Decreasing assets involves navigating complex and changing medicaid regulations which go beyond the scope of this overview.

While expected probate costs are often exaggerated, avoiding them and especially avoiding the aggravation for family members who are still grieving can be achieved at low cost. The most used tool for avoiding probate is the Living Trust. Where there are no estate and gift tax concerns, using a revocable trust is preferred. A trust is a legal vehicle where an individual transfers the ownership of their assets. The trust then owns the persons stocks, bonds, bank accounts and other property. Since it is revocable, the person setting up the trust (the grantor) can take those assets back out of the trust and cause the trust to no longer exist. The grantor can still receive the income and have use of the assets and property. Typically, when a person is using this as an estate planning tool they are becoming older or have health concerns and they will designate a trusted loved one to be the trustee who will manage the assets.

The difference between a trust and a will is that a living trust becomes effective immediately, while the grantor is still alive. A will, however, has no effect until the individual passes away. This is how a living trust bypasses probate. The assets are already transferred. When the grantor dies, the trustee has the power distribute the income or assets of the trust in the way the trust document prescribes. In that way, it serves the same function as a will. There is no need for court involvement or probate fees.

The Kentucky Court of Appeals addressed the issue of whether a parent with sole custody can reach into the other parents visitation time and direct that the child attend a specific church service. The Court in Wireman v. Perkins, 2006-CA-001981-ME (July 13, 2007)(to be published) found that “statutes like KRS 403.330 as according custodians, such as Wireman, the right to make the major decisions affecting the child’s education and religious training, but not as authorizing them to interfere permanently or unduly with the non-custodian’s visitation.” Id. at 5 & 6.

In this case, David Wireman had been awarded sole custody of his daughter, J.W. who was born in 1996. The original award had been for joint custody, but the mom, Lori Perkins, developed a bit of a drug problem and lost joint custody. Mom still had “reasonable” visitation, but apparently David and Lori could not agree on what reasonable meant from 2003 to 2005 when the trial court decided that it meant one evening a week and every other weekend. The Court notes that the parties were back in court SEVERAL times from November 2005 until September of 2006 making complaints of non-compliance on visitation. Apparently Lori, David or both disagreed with the trial judges definition of “reasonable” also.

In his bid to make Lori take J.W. to Fern Creek Christian Church, David relied on KRS 403.330 which states in part:

[e]xcept as otherwise agreed by the parties in writing at the time of the custody decree, the custodian may determine the child’s upbringing, including h[er] education, health care, and religious training, unless the court after hearing, finds, upon motion by the noncustodial parent, that in the absence of a specific limitation of the custodian’s authority, the child’s physical health would be endangered or h[er] emotional development significantly impaired.

The Court distinguished David’s demand for J.W. to go to his church EVERY weekend from prior cases that required the non-custodial parent to temporarily alter their visit for religious classes of a short duration. In this case, the burden upon Lori’s time share would be too great if she were ordered to take her daughter to David’s church every weekend and so the Court denied David’s appeal. David will simply have to find an alternate way of teaching his daughter about the love, forgiveness, peace and mercy of Jesus Christ then by dragging her mother into court and spending a great deal of time and money on the conflict in trying to control what the mom and daughter do during their visits. Does anyone else see the irony here?

The practical lesson from this case is for divorced, divorcing or separated parents to recognize that one cannot control every aspect of their child’s life anymore. Actually, one never could fully control their life, but the illusion of control is definitely shattered in these situations. Staying in turmoil and conflict with your child’s other parent will accomplish little than more pain. So, be very careful that the issue is important enough, find a lawyer that will help you discern this rather than automatically taking your case (and money), and then try to resolve it out of court first. Many issues will not be worth going that next step to court. Finally, setting an example by your behavior of the beliefs you want your child to adopt will, by far, be the most effective method of parenting.

Changes made to Medicaid from the Deficit Reduction Act of 2005 closed off significant estate planning routes. This excerpt from Kentucky’s Medicaid manual detail the changes:
MS 99753 TRANSFER OF RESOURCES

Most significantly, the look back period for ALL transfers from the date of application for Medicaid coverage for nursing home care is five years (60 months) for any tranfer made after 2/8/20067. Previously, you could transfer assets to a friend or relative and have only a three year (36 month) look back. So, if you owned a $200,000.00 house outright and wanted it to remain in your family, you could deed it to that person and hold your breath for three years, hoping you did not need long term care during that time. Two years have now been added on to that period. Since long term care averages around $4,500 per month (about $150 per day) in Kentucky, any substantial time in long term care could exhaust the estate you have worked your entire life to obtain.

Another significant change is that the transfered resource factor applied to transfers within that look back period will be a daily rate instead of monthly. This factor is based on the average private pay cost of nursing home care in Kentucky and is $4,584 per month for Kentucky in 2007. In previous years, any transfer within the look back period would be divided by the factor and rounded down. So, if you transferred $8,700 to a relative, then that would have been about 1.9 times the factor. Your penalty would be denial of Medicaid coverage for 1 month of care because the 1.9 would be rounded down. Now, with the factor being applied as a daily rate of $150.71, the same transfer would be 57 days. This overlaps with the final significant change. All transfers during the look back period are aggregated as a total amount prior to applying the factor. Careful giving to maximize that rounding down no longer works to shorten your penalty period.

What this all amounts to is that estate planning must be done relatively early in life and revisited with significant changes to Medicaid and to the tax code. However, even into ones 70s, 80s and beyond, estate planning can make differences. Essential to the process is holding in reserve enough assets to pay for private care during any penalty period expected from transfers of assets.