Advanced Planning

Life Insurance Choices

It is such a simple question when you are completing a life insurance policy application. Who do you want to receive the death benefit in the event of your death? But there are many pitfalls on the way to a "correct" answer. For example, if you are a single person when the policy is purchased (or coverage is first extended in the case of an employer's group term policy), are you going to remember to change it when you get married? I once had a case where, five years after the wedding, a man was sure that he had changed the "beneficiary card" at his place of work to replace his mother with his wife. After his tragic death in an accident later that year his widow discovered that the change had never been officially made and the card still listed her mother-in-law. After a lawsuit, she was only able to obtain (through negotiations) a small fraction of the death benefit. She settled out-of-court because there was a high risk that she would receive nothing. That should be an easy mistake to avoid. The more subtle mistake involves the parents of minor children who designate those children as contingent beneficiaries of hundreds of thousands of dollars of life insurance (with the spouse as primary beneficiary). In the event of the simultaneous death of both parents, there is no surviving spouse to receive the death benefits. However, the life insurance company cannot legally pay the money directly to a minor. It must be turned over to a conservator of the property to hold until the child reaches 18 years of age. During that time it can only be invested in bank deposits and government securities unless prior court approval is obtained. There are two things wrong with this picture. First, most parents would like to delay the receipt of a large inheritance until at least after a child has completed college. Second, the investment of the insurance proceeds in more productive investments might be appropriate so that it will grow significantly faster than the rate of inflation. Both of those objectives can only be achieved through the use of a trust, where written authority is given by the parent (either through a Will or through a trust agreement) to an individual and/or a corporate trustee to hold the property, invest it and use it for the benefit of the child, until a designated age when it is to be distributed in total or in installments. Such a trust for the children does not have to be a free-standing trust. It can be a testamentary trust that receives the death benefit either directly from the life insurance company (with a carefully drawn beneficiary designation), or from the executor of the estate (when the estate is the secondary beneficiary but the will directs distribution of the estate's property to the trustee). Life insurance can also add to a person's wealth sufficiently that they must worry about the federal estate tax, which starts at 46% on every dollar above $2 million that does not pass to a surviving spouse or charity. An additional increase in the "exempt amount" to $3.5 million is scheduled for January 1, 2009. The "smart money" is betting that the scheduled January 1, 2010 repeal of the federal estate tax will never take effect and the exempt amount will be fixed at $3.5 million. The estate tax avoidance for large life insurance policies is fairly straight forward, when married couples utilize tax-oriented trusts in their estate plan. Each spouse protects some property from such death taxes by leaving it in trust instead of outright to the surviving spouse. With the right contingent beneficiary designation and a series of disclaimers, all or some of the life insurance can go to the trust, of which the spouse is a trustee. At the death of the surviving spouse, that trust money is not subject to the estate tax and passes to the children at the appropriate ages chosen by their parents. Finally, when a person has what we might call "mega-wealth" and wants to maintain life insurance, the most "estate tax-efficient" method can be to establish an irrevocable trust which purchases and pays for that life insurance. The founder of that trust donates sufficient money to it each year for payment of the premiums. This is a fairly complex solution and should only be done with the assistance of an experienced attorney and life insurance agent.

Perils of Joint Ownership

In Shakespeares great play, KING LEAR, the title character discovered the danger of judging the love of his daughters by a willingness to make protestations of love in exchange for the advancement of their inheritance. Two daughters said all the right things, took the money he gave them and left him to die mad, homeless and penniless. He disinherited the third daughter who had remained silent, relying upon her acts of dutiful love to answer his question of how much she loved him. A case a few years ago in the Georgia Court of Appeals demonstrated similar, albeit less dramatic, perils that are possible from the careless creation of joint ownership of a financial asset. An elderly woman, Virginia Gray, named two of her daughters as joint owners with her on several certificates of deposit that totaled about $230,000. All of the money for the CD's came from Mrs. Gray. In 1996 she suffered a disabling stroke and later that year the daughters cashed in the CD's and used the funds as their own. Just as in KING LEAR there was a third daughter. She took nothing from her mothers accounts. A court-appointed guardian for Mrs. Gray successfully sued the daughters to recover the assets and was even awarded the attorneys fees and expenses incurred in bringing the suit. Georgia law draws the distinction between access to such jointly titled CD's and the actual ownership of them. "A joint account belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each to the sums on deposit, unless there is clear and convincing evidence of a different intent." Notice that the law speaks of "during the lifetime of all parties." Another problem from careless use of joint ownership arrangements occurs at the death of the true owner of the account. The decedent could have a last will and testament that benefits all of his or her children equally. Any joint asset, by the terms of the account agreement, will pass by way of survivorship to the other persons named on the account. It will not be part of the estate transferred in accordance with the will unless there is "clear and convincing evidence of a different intention at the time the account is created." By statute, Georgia prohibits a person from using his or her will to change the right of survivorship or "pay on death" provisions governing such an account. As I have written before, "probate" may be something to be avoided in other states such as Florida, California or New York, but it is not so in Georgia. With a well-drafted will, the administration of a decedents estate in Georgia can be as easy as settling that person's affairs through the much-touted "living trust." Joint ownership as a means of "avoiding probate" is the wrong tool being used for an unnecessary task. The same convenience of a joint account can be obtained through the use of a power of attorney for an account given by the elderly parent to the adult offspring. The financial institution will usually require a signature card signed by the account holder and the "attorney-in-fact." A word to the wise: even when there is a formal document establishing a power of attorney relationship, banks, and other financial institutions such as stock brokerage houses and mutual funds, have been known to require such signature cards or the execution of their forms before honoring any power of attorney designation. Another problem I have seen is the vulnerability of the joint account to the claims of the creditor of the adult offspring. A garnishment served on the bank by a judgment creditor will tie up the joint account for months if the "real owner" of the account wants to argue that his child does not have a legal interest in the account subject to a claim by the creditor. Most of the time it will be easier to pay off the money owed instead of fighting a court battle. The sloppy use of joint ownership can create a contentious situation where people may honestly differ over what was intended, or a golden opportunity for someone to steal a fortune and get away with it. If they spend it all before they are caught, a court judgment will be of little comfort. At a continuing legal education seminar I attended a few years ago, I heard a veteran estate planning attorney swear that he hated joint ownership arrangements. Now you can see some of the reasons why.

Saving for College

When I first wrote my newspaper column about "saving for college" it was August, the time for many students to leave for a new year in college. It was too late for those students to start a college fund to pay tuition costs for that year. However, there is always plenty of time for parents and grandparents of younger students to save money. One of the best methods for such savings is a tax-free saving plan commonly referred to as a 529 plan. Section 529 of the Internal Revenue Code was amended in 2001 to grant tax-free status to distributions from a Qualified State Tuition Program (QSTP). Any investment income earned on a QSTP account, if it is distributed for a qualified educational expense, is tax exempt. One feature that is easy to overlook is that there is no maximum age on who can start a 529 Account or who can be a beneficiary of an account. An adult can start an account for "later-in-life" education. There are basically two types of QSTP: a pre-paid tuition program and a savings program. All 50 states have passed laws to establish programs to administer their respective QSTPs. Pre-paid tuition programs are becoming less fashionable because of the lack of flexibility in comparison to the Section 529 savings plans. I am going to restrict my discussion to the savings plans. Georgia started its QSTP program in 2002. Its Web address is www.path2college529.com. The site allows for online enrollment and features such tools as a financial calculator to show how much can be gained by starting a savings plan account early in the child's life. There is a state income tax deduction of up to $2,000 of contributions and a taxpayer does not have to file an itemized return to be able to claim the deduction, which makes it appealing to all taxpayers. Aside from gift tax considerations, there is no annual contribution limit — only a cumulative contribution limit. When the total account balance of all accounts for the same beneficiary equals $235,000 no further contributions can be made. However, the account(s) reaching that "cap" can continue to grow due to investment performance. The beneficiary of a 529 account can use the funds for a qualified educational expense at a public or private institution anywhere in the U.S. The definition of "educational expense" is surprisingly broad and includes remedial, technical and post-graduate education. Withdrawals that are not used for a qualified educational expense are treated as taxable income and incur a 10% penalty. There are exceptions related to the death, disability of the beneficiary, or lack of need because of a scholarship. The best feature of 529 plans is that a contribution to a plan qualifies as a "present gift" for purposes of estate and gift taxes and is therefore eligible for the $12,000 annual gift tax exclusion (as of January 1, 2008). Under current federal law, five years worth of contributions can be made in one year and, if the donor survives the subsequent four years, all of the money will be protected from estate and gift taxes. It is thus possible for someone to fund all of a child's college education with a gift made when that child is an infant. The child does not have to be the owner of the plan at anytime (unlike custodial accounts that are turned over at age 21) and the account's owner (grandparent or parent) can change the account's beneficiary to someone else in the family for any reason (i.e. the original beneficiary does not pursue any education after high school). The investment performance on 529 savings plans varies from state-to-state. Each state chooses a plan administrator, which is usually a major national investment firm. Georgia selected a subsidiary of TIAA-CREF that manages many plans throughout the country. One indicator of the company's investment management skills: the performance since inception (May 1, 2002) of the "balanced fund option" was 7.95% (annual return) as of November 30, 2007. Another factor to consider is that the total investment management fees for the age-based investment options is capped at 0.78%, which compares favorably to the management costs in some other states. All of these figures are likely to change over time. Each person considering any investment should research the performance, competitiveness and management costs of Georgia's plan and any other plan under consideration. A would-be donor should research the investment performance and the flexibility of a program (such as ability to change investment portfolios). There are many investment options within each plan with some being more conservative than others. Only in hindsight will an investment choice look brilliant or stupid. The federal rules allow a once-a-year shift from one state's plan to another, or a once-a-year change in the account's investment strategy. This is not a vehicle for trying to time the market or make a killing. A good place for research of plans around the country is www.savingforcollege.com, which was founded by accountant Joseph F. Hurley. It has informative articles and ratings on all the 529 plans in the U.S. Some plans are better because of lower administrative costs or better investment performance, so research can really pay off. There is a rating system on the Web site that evaluates each state's program from the perspective of resident and non-resident taxpayers.

Before You Get Sick

Before you are admitted as a patient to a hospital the administrative personnel are required to ask you whether you have a healthcare power of attorney and/or a living will. They are not necessarily asking because, if you answer in the negative, they are going to pull out a form for you to complete. The purpose usually is to get a copy of such document(s) into the hospital files. Even if they did give you some blank forms, waiting to deal with the issue at the hospital is waiting too long. In this article I want to explore the medico-legal issues of healthcare directives so you can work out your personal solution long before you are sick or injured. I know of one case involving a woman in her 70's who had congestive heart failure. Her health had steadily declined for about a year. She concluded for very good reasons that the condition was eventually going to kill her and so, in the event of a heart attack, she did not want to be revived. Nevertheless, when she had a heart attack while at home and the emergency medical technicians arrived, no one had any sort of written health care directive in hand. If a document existed, it was not easily found during the emergency. The EMTs revived her and she was admitted to the hospital where she had several more heart attacks before finally succumbing to a fatal attack. Under Georgia law there are two different documents with statutory language addressing life, death and coma situations: the Healthcare Power of Attorney and the Living Will. They have two different purposes, but they should be prepared at the same time so as to be as consistent with each other in the areas where they overlap. The Healthcare POA authorizes a person (and one or more optional "back-ups") to stand in the shoes of the patient when he or she is unable to understand and communicate with the treating physician. The Living Will is nothing more than a letter of instructions from the patient to his or her doctors containing choices as to life support equipment, including feeding tubes, in life/death and coma situations. Before it has any effect there must be a certificate from two different physicians that the statutorily defined irreversible terminal condition or persistent vegetative state (coma) exist that warrant discontinuing artificial means of delaying the patient's death. There are many medical situations that are not life or death, but the patient is not able to make and communicate a decision as to treatment. That is where a Healthcare Power of Attorney can be absolutely essential and a Living Will is irrelevant. Consider the case of someone diagnosed with advanced Alzheimer's disease. The condition is neither terminal nor does it involve a coma. Without a Healthcare POA the legal alternative for dealing with the everyday decisions of both personal care and medical care is to obtain a court-appointed guardian of the person. As a practical matter a spouse of the patient might be able to get through many of those decisions without a formal legal document. But sooner or later a dispute with other family members or a reluctant health care provider will probably occur. Experience has shown that a Healthcare POA can be a springboard for serious reflection and discussion of the medical and ethical issues surrounding treatment of severely disabled or very elderly patients. Dr. Kevorkian exploited vulnerable people, some of whom did not have terminal conditions, in promoting his brand of euthanasia that bordered on murder. These are very difficult issues that involve a person's philosophical and religious beliefs. Family members of the patient can impose their beliefs upon the patient unless he or she executes a Healthcare POA and clearly expresses their own philosophy about life and death. It does not take a long search on the Internet to find fill-in-the-blank forms that address these issues. There are "healthcare directives" drafted by different medical institutions or foundations that go into excruciating detail about specific medical conditions and preferred treatment as to each. You can also find the Georgia statutory forms for a Healthcare POA and a Living Will. The American Bar Association's Commission on Legal Problems of the Elderly has published a tool kit for health care advance planning. I have a copy available for my clients. As of this writing it is also available at www.abanet.org/aging/toolkit/home.html. Using these forms in a do-it-yourself fashion is better than nothing. However, I suggest that going to an attorney who has experience in this field is preferable for several reasons. First, you are doing this for the first time, the attorney is not. He or she has had the opportunity to smooth over some of the rough spots in the statutory forms and add some refinements. Second, there are many questions that need clarifying, such as after death decisions, and directions that you may not be familiar with. Also, this can be part of preparing or revising your will. (You do have an up-to-date will reflecting the changes in the law or in your own life?)

How to Title Real Estate

Before you are admitted as a patient to a hospital the administrative personnel are required to ask you whether you have a healthcare power of attorney and/or a living will. They are not necessarily asking because, if you answer in the negative, they are going to pull out a form for you to complete. The purpose usually is to get a copy of such document(s) into the hospital files. Even if they did give you some blank forms, waiting to deal with the issue at the hospital is waiting too long. In this article I want to explore the medico-legal issues of healthcare directives so you can work out your personal solution long before you are sick or injured. I know of one case involving a woman in her 70's who had congestive heart failure. Her health had steadily declined for about a year. She concluded for very good reasons that the condition was eventually going to kill her and so, in the event of a heart attack, she did not want to be revived. Nevertheless, when she had a heart attack while at home and the emergency medical technicians arrived, no one had any sort of written health care directive in hand. If a document existed, it was not easily found during the emergency. The EMTs revived her and she was admitted to the hospital where she had several more heart attacks before finally succumbing to a fatal attack. Under Georgia law there are two different documents with statutory language addressing life, death and coma situations: the Healthcare Power of Attorney and the Living Will. They have two different purposes, but they should be prepared at the same time so as to be as consistent with each other in the areas where they overlap. The Healthcare POA authorizes a person (and one or more optional "back-ups") to stand in the shoes of the patient when he or she is unable to understand and communicate with the treating physician. The Living Will is nothing more than a letter of instructions from the patient to his or her doctors containing choices as to life support equipment, including feeding tubes, in life/death and coma situations. Before it has any effect there must be a certificate from two different physicians that the statutorily defined irreversible terminal condition or persistent vegetative state (coma) exist that warrant discontinuing artificial means of delaying the patient's death. There are many medical situations that are not life or death, but the patient is not able to make and communicate a decision as to treatment. That is where a Healthcare Power of Attorney can be absolutely essential and a Living Will is irrelevant. Consider the case of someone diagnosed with advanced Alzheimer's disease. The condition is neither terminal nor does it involve a coma. Without a Healthcare POA the legal alternative for dealing with the everyday decisions of both personal care and medical care is to obtain a court-appointed guardian of the person. As a practical matter a spouse of the patient might be able to get through many of those decisions without a formal legal document. But sooner or later a dispute with other family members or a reluctant health care provider will probably occur. Experience has shown that a Healthcare POA can be a springboard for serious reflection and discussion of the medical and ethical issues surrounding treatment of severely disabled or very elderly patients. Dr. Kevorkian exploited vulnerable people, some of whom did not have terminal conditions, in promoting his brand of euthanasia that bordered on murder. These are very difficult issues that involve a person's philosophical and religious beliefs. Family members of the patient can impose their beliefs upon the patient unless he or she executes a Healthcare POA and clearly expresses their own philosophy about life and death. It does not take a long search on the Internet to find fill-in-the-blank forms that address these issues. There are "healthcare directives" drafted by different medical institutions or foundations that go into excruciating detail about specific medical conditions and preferred treatment as to each. You can also find the Georgia statutory forms for a Healthcare POA and a Living Will. The American Bar Association's Commission on Legal Problems of the Elderly has published a tool kit for health care advance planning. I have a copy available for my clients. As of this writing it is also available at www.abanet.org/aging/toolkit/home.html.