I’m conducting two seminars this week on the topic of Income Only Trusts. The first one is a teleseminar for attorneys around the country who are members of the professional group ElderLawAnswers.  Entitled Using Income Only Trusts for Medicaid (and General) Asset Protection, this teleseminar is Thursday, Feb. 11, at 2pm Eastern. If you’re a member of ElderLawAnswers, you can click here to register for the Teleseminar, 

The other is a free seminar I’m teaching on Saturday morning for clients and potential clients, entitled How to Protect Your Assets from the Expenses of Probate and Long Term Care.  This will be held at the Tysons Corner Mariott, 1960-A Chain Bridge Road, McLean, VA 22012.  Please click here to register for the Saturday morning seminar. 

The answer to the question “How Can You Protect Your Assets from the Expenses of Probate and Long Term Care?” is, of course, to use the Living Trust Plus™ Asset Protection Trust, my highly-developed and proprietary income only trust that’s currently used by dozens of successful Estate Planning and Elder Law Attorneys across the country. 

 As stated by Elder Law Answers, “Income Only Trusts have been around since the 17th century, but have only recently gained in use and popularity, in large part due to the publications and educational efforts of our speaker and long-time ElderLawAnswers member, Certified Elder Law Attorney Evan Farr.”

What most Elder Law attorneys don’t understand is that income only trusts also provide clients with protection from lawsuits and other general creditors, and in the ElderLawAnswers teleseminar, I will be demystifying the income only trust, explaining how and why it works, and explaining to my fellow ElderLawAnswers Members the dos and don’ts of income only trusts so that they may properly serve clients in this exciting and growing practice area.

For middle class Americans seeking asset protection, the income only trust is the preferable form of asset protection trust because, for purposes of Medicaid eligibility, the income only trust is the only type of self-settled asset protection trust that allows a trust settlor to retain an interest in the trust while also protecting the assets from being counted by state Medicaid agencies.

 For my clients and potential clients in the Washington, DC Metro area, by coming to my FREE class on Saturday, you’ll learn what thousands of my clients already know . . .

- That a Will puts your assets through probate, and is a very poor estate planning document.
- That a regular living trust protects your assets from probate, but offers you no asset protection.
- That my proprietary Living Trust Plus^TM Asset Protection Trust protects your assets from the expenses of probate PLUS lawsuits PLUS the catastrophic expenses of nursing home care.

If you answer YES to any of the questions below, you need to attend this class:

 - Is someone in your household over age 65?
- Does someone in your household have a serious medical condition?
- Has someone in your household been turned down for long-term care insurance, or found it too expensive?
- Do you want to protect your assets for your family from the devastating expenses of long-term care?
- If you need long-term care in the future, do you want to receive the best possible care?

To learn all the details and find out if the Living Trust Plus™ is right for you, please register now at http://VirginiaElderLaw.com/seminars.html 

Protect and Prosper! 

–
Evan H. Farr, Certified Elder Law Attorney
Creator of the Living Trust Plus:  http://www.LivingTrustPlus.com
ALI-ABA Co-Author, Planning and Defending Asset-Protection Trusts (2009): http://www.ali-aba.org/bk64
ALI-ABA Co-Author, Trusts for Senior Citizens (2009): http://www.ali-aba.org/bk65
Farr Law Firm, 10640 Main St., Suite 200, Fairfax, VA  22030
Tel: 703-691-1888 | Fax: 703-940-9160
www.VirginiaElderLaw.com & www.VirginiaEstatePlanning.com
—————————————————————————————————-
NOTICE – Unless expressly stated otherwise, this communication: (1) is not legal advice absent an existing attorney-client relationship between us; (2) does not create an attorney-client relationship; (3) does not constitute an offer, acceptance, or contract amendment; (4) may contain confidential or legally privileged information protected by the attorney-client relationship and/or work product privilege; (5) is only for the use of the individual to whom it is intended by the sender to be sent, and if you are not such recipient, disclosure, copying, distribution or reliance upon this  communication is prohibited; and (6) is not intended, and cannot be used, to avoid tax-related penalties pursuant to treasury department circular 230.

As a Certified Elder Law attorney, one of my primary goals is to help preserve the dignity and enhance the lives of my elderly clients.  For many of my clients, remaining in their homes as long as possible is one of their highest priorities.  I have been a long-time fan of reverse mortgages because they help my clients do exactly that — remain in their homes as long as possible.  

Why? Because in order to remain in your home as long as possible, you will most likely at some point need some home care.  “Home Care” can be health care and/or supportive care provided formally in your home by health care professionals (typically referred to as home health aides) or by paid or unpaid family members or friends (typically referred to as caregivers).  Often, the term “home care” is used to mean non-medical care, or custodial care, which may be provided by persons who are not nurses, doctors, or other licensed medical personnel.  The term “home health care” typically refers to care that is provided by a licensed health care professional — most often a Certified Nurse Assistant (CNA).  However, the terms are often used interchangeably, and for simplicity in this article I will use the term “home care” to refer to both types of care.

The goal of home care is typically to to allow you to remain at home and age in place, rather than being forced to move to an assisted living facility or nursing home.  Home Care providers render services in your own home. These services typically include a combination of health care services and life assistance services.

Health care services may include services such as wound care, administration of medication, physical therapy, speech therapy, and occupational therapy.  Life assistance services typically include help with daily tasks such as meal preparation, medication reminders, laundry, light housekeeping, errands, shopping, transportation, companionship, and help with the activities of daily living (ADLs), which typically refers to six activities (bathing, dressing, transferring, using the toilet, eating, and walking). 

Although some home care is provided by family members for free, most family caregivers need to be paid, and these payment arrangements should always be made pursuant to a written caregiver contract (prepared by an Elder Law Attorney) between the caregiver and the care recipient.  Because home care is quite expensive, having the proceeds from a reverse mortgage is often one of the  only ways that elders can afford to pay for appropriate home care. According to The 2009 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs, the 2009 national average hourly rate for home health aides increased by 5.0% from $20 in 2008 to $21 in 2009. The national average hourly rate for homemaker/companions increased by 5.6% from $18 in 2008 to $19 in 2009. 

Most of my clients, when they start out needing home care, will typically start with receiving 4 hours of care 3 days a week, which costs about $1,000 per month and is easily affordable for many people.  But over time, most of my clients progress to the point of needing upwards of 12 hours per day of home care, costing over $7,000 per month, and very few people can afford to pay for this type of care without eventually tapping into their home equity via a reverse mortgage.

The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which completely protects your ability to remain in your home. So long as you pay your property taxes and homeowners insurance, and maintain your property, you can remain in your home forever. If the reverse mortgage lender fails, any unmet payment obligation to the borrower will be assumed by FHA. 

According to the Mortgage Professor’s article mentioned in my first paragraph, in 2009 about 130,000 HECMs were written, and feedback from borrowers has been mostly positive. In a 2006 survey of borrowers by AARP, 93% said that their reverse mortgage had a mostly positive effect on their lives.

For many of my clients, a reverse mortgage is the best way, and often the only way, for them to be able to afford to remain at home, despite the fact that reverse mortgages are expensive to obtain.  However, reverse mortgages are not for everyone, as there are other programs that may be able to help you remain in your home.  For instance, many of my clients are eligible for the Veterans Aid and Attendance benefit or for home-based Medicaid, or can be made eligible for these benefits through our process of Asset Protection. 

Whether you own your home outright or in a Revocable Living Trust or in my proprietary  Living Trust Plus^TM Asset Protection Trust, if you think a reverse mortgage might be the solution you need, please contact me for a free consultation so I can evaluate your specific situation and advise you as to whether a reverse mortgage is your best option for allowing you to live comfortably in your home.

Congress has had nine years to prevent this from happening, but has failed to act. Under the provisions of a Bush-era tax-cut bill enacted in 2001, the estate tax exemption has been gradually raised over the past eight years while the tax rate on estates has been reduced. For estates of those dying in 2009, only assets worth $3.5 million or more were subject to estate taxed, at a rate of 45 percent. But now, for the year 2010, the estate tax has disappeared entirely, only to be restored in 2011 at a rate of 55 percent on estates of $1 million or more, which is exactly where things stood before the 2001 change.

Everyone — lawyers, politicians, and political commentators — has expected for the past 9 years that this law would be “fixed” before the end of 2009, but it wasn’t.  According to some commentators, the Republicans concluded that it was in their interest to let the estate tax repeal occur; and the Democrats apparently don’t agree among themselves as to what they think the estate tax law should be, as Democrates have differing opinions over what the tax rate and the exempt amount should be. Senate Democrats tried to persuade Republicans to extend the 2009 estate tax law for a couple of months until a more permanent solution could be devised, but even that effort failed.  Accordingly, there is currently no tax on the estates of those dying during 2010. Congress could reinstate the tax retroactively in 2010, perhaps as part of broader tax reform, but this is not likely according to many commentators.

As the law stands, a few thousand very wealthy families have great financial incentive to hope that their loved ones die this year.  On the other hand, tens of thousands of taxpayers of more modest wealth may have great incentive to keep their loved ones alive into 2011, because if their loved one dies in 2010 and they inherit an appreciated asset, they may have pay capital gains on that inherited asset, and someone acting as an executor will face additional and confusing administrative burdens.

Loss of Step-Up in Basis May Be Quite Expensive for Many Taxpayers

For most people, the main concern with the law as it now stands is not that the estate tax is repealed for 2010; a bigger problem for many is that it’s replaced with a 15 percent capital gains tax on inherited assets that are later sold.  Previously, someone inheriting an appreciated asset (for example, a house that had greatly appreciated in value over the lifetime of your parents) upon a loved one’s death got a “step-up in basis” in the property. A step-up meant that heirs could sell the inherited, appreciated asset right away without owing any capital gains taxes, because the tax “basis” in the property was “stepped-up” to the value of the property at death.

If you inherit an asset now (in 2010), only the first $1.3 million in assets gets a step-up in basis. Anything over the $1.3 million in assets (plus $3 million for assets transferred to a surviving spouse) will not get a step-up in basis.  Instead, when you sell the property you’ll have to pay capital gains taxes based on the original cost basis (typically the price paid for the asset). This raises an additional concern — having to determine what the cost basis of the asset was.  This in itself could be quite expensive, not to mention time-consuming in trying to ascertain the original price paid for assets, including any renovations or improvements made to real estate over the years.

The capital gains tax rules can be quite complicated, but let’s look at a relatively simple example:  a client called me a few days ago with a home worth approximately $1 million and 40 acres of commercial land that her father gifted to her prior to his death, now worth approximately $2 million. The home was originally purchased by my client for $8,000 in 1961 and she put a $40,000 addition on the home in 1982, so her tax basis in the home is $48,000. Her father originally purchased the 40 acres of land around 1943, for $1,000; at the time of his death in 1992, the 40 acres was worth about $600,000.  Had he left the land to his daughter upon his death, she would have taken a stepped-up basis under the old law, but because he gifted it to her prior to his death, she took over his cost basis of $1,000.  So now her two parcels have a total cost basis of $49,000.  If my client had died last year, then her heirs would have received a step-up in basis, meaning if they sold the properties for their current value of $3 million, they would pay no capital gains tax.  Under today’s law, if my client dies this year, in 2010, her heirs will inherit her cost basis of $49,000, meaning that if her heirs then sell these properties for their current value of $3 million, they will pay a 15% capital gains tax on $1,651,000 ($2,951,000 – $1,300,000), or $247,650 in tax.

The chief tax counsel for the House Ways and Means Committee estimates that continuing the estate tax at its 2009 rates would have affected about 6,000 people, but the new capital gains provisions that we now have will affect more than 70,000. And, in general, these 70,000 will be far less wealthy than the heirs who would have been affected by a continuation of the estate tax.

Couples With Credit Shelter Trusts at Risk

The new world of no estate tax places at particular risk certain couples who have built in “Credit Shelter” trust provisions (also called ”Bypass Trust” or “Family Trust” provisions), that are designed to allow both spouses to take advantage of their estate tax exemptions. These are common arrangements used in estate planning for married couples. With the estate tax gone, one possible problem is that the wording of some of these trusts could cause all assets to completely bypass the surviving spouse when the first spouse dies, meaning a surviving spouse might get nothing without the expensive process of claiming her “elective share.” For a more detailed explanation of this potential problem, click here.

Why Did This Happen?

The House passed a bill in early December permanently extending the 2009 estate tax rules, which would have brough in an estimated $25 billion for 2009 by imposing the 45 percent rate on estates over $3.5 million (or $7 million for a couple). The Senate’s Democratic leadership wanted to pass a similar bill and put it on President Obama’s desk before the estate tax expired at the end of 2009, but they were blocked by united Senate Republicans who prefer a lower tax rate of 35 percent and a higher exclusion amount of $5 million ($10 million for couples).

“Republicans who claim to have accomplished something by blocking an extension need to explain why raising taxes on the middle class while lowering them for the very rich is something to be proud of,” the Los Angeles Times editorialized.

For more on the implications of the disappearance of the estate tax, see CBS MoneyWatch’s “Estate Tax: What You Need to Know for 2010,”SmartMoney’s “The Federal Estate Tax Is Dead: Now What?,”and Kiplinger’s “FAQs on the Death of the Estate Tax.”

Everyone — Especially Married Couples — Should Have Their Estate Planning Reviewed ASAP

Because of these somewhat unexpected tax changes, a review of your existing estate planning documents is essential.  If you are a member of the Farr Law Firm’s Estate Plan Protection Program or Lifetime Protection Program, you are entitled to a free review (and, if necessary, a free modification) of your existing estate planning documents every year, and you should call us to take advantage of this annual review as soon as possible.  Most of our trusts will not need to be modified because of special language we inserted in the document, but changes to some trusts may be required.  If your estate planning was done by a different attorney, you should consider going back to that attorney for a review; alternatively, please feel free to contact our office and we will be happy to do a free review of your estate planning documents, determine if any changes are required, and quote you a fee for us to prepare the necessary revised documents.

I’d love for you to attend if you’re able to make it, and bring your friends and family! Tuition for both sessions is $25.  To register, please call the church at 703-591-3120 ext. 105.  I hope to see you there!

Here’s an article written about Evan’s seminar and about the income-only trust: http://tinyurl.com/l3qc7q.

This is the 2nd national teleseminar that Evan Farr has done for NBI on this topic. Evan has also done a similar national teleseminar for ALI-ABA (American Law Institute – American Bar Association), in connection with two recent scholarly publications for the legal profession published by ALI-ABA, with Evan Farr as the lead author, entitled Planning and Defending Asset Protection Trusts and Trusts for Senior Citizens.

If you’d like to attend a similar seminar for consumers, we still have openings for our 2 lunch seminars this week — on Tuesday and Thursday at noon. To register, please click the link to the right or call 703-691-1888 and speak to Jeannie.

For more information about the Income Only Trust, and about Evan Farr’s Living Trust Plus™ Asset Protection Trust (which is Evan’s highly-developed and perfected Income Only Trust, used by dozens of attorneys across the country), please visit http://www.livingtrustplus.com.

Every day, our firm helps clients protect significant assets through the use of the Living Trust Plus™ Asset Protection Trust and still qualify for Medicaid. Our Firm specializes in Asset Protection and Estate Planning for clients concerned about the devastating expenses of long-term care. To begin the process, please call us today at 703-691-1888.