Paul O. Dillon, Attorney at Law

Wendy Williams’ Guardianship

Former talk show host Wendy Williams is the subject of a docuseries about her ongoing health and financial battles, which focuses on the months following the start of her guardianship in May 2022. Williams is far from the only celebrity ever placed under guardianship. As an NPR article reported, “Wendy Williams’ guardianship is the subject of a new documentary. Here’s how it works.”

In late February, Williams’ care team announced she had been diagnosed with primary progressive aphasia and frontotemporal dementia. Aphasia affects the ability to speak and understand speech, while frontotemporal dementia leads to a loss of function in the frontal and temporal lobes of the brain.

A guardianship, also known as a conservatorship, is a legal process when an individual can no longer manage their own affairs because of an illness, injury, or disability. In some states, there are different types of legal guardianships:

• Article 17-A Guardianship is for adults 18 or older with an intellectual or developmental disability, whose guardians can make the most decisions for them.
• Guardianship of a Child is requested by a parent or individual to be granted when there is concern that one or both parents cannot care for the child.
• Article 81 Guardianship is a type of guardianship where a judge gives a guardian the power only to meet the needs of the person deemed incapacitated, including managing their finances, property, personal needs, or both.

Guardianship cases vary depending on the person’s circumstances and what a judge orders the guardian to do. In many states, they are reviewed on an annual basis. Guardians must keep detailed records of everything they do, from financial transactions to health care decisions.

While individuals don’t always have the choice to choose their guardian, they can sometimes recommend a person they would like to be appointed to the role. A family member is often named. However, there can be an institutional guardian, including a banker or a professional guardian.

There are other ways a person can give someone else decision-making power, including Power of Attorney, typically appointed by the person and made legal with an estate planning attorney. No court involvement is needed.

Supported decision-making agreements are community designations for specific individuals in a person’s life to help make major decisions.

A person or organization approved by the Social Security Administration can manage a person’s Social Security or Supplemental Security Income benefits is known as a Representative Payee.

The ideal situation is when the person and their spouse or family meet with an estate planning attorney before or shortly after a diagnosis to create a plan and the accompanying legal documents so they can be part of the decision-making process for their future, whatever it may bring.

Reference: NPR (March 1, 2024) “Wendy Williams’ guardianship is the subject of a new documentary. Here’s how it works”

Will New IRS Memo End the Decanting of Irrevocable Trusts?

The term “irrevocable trust” is not quite what it seems, says a recent article from The National Law Review, “Is CCA 202352018 the Death of Irrevocable Trust Decantings?” There are several mechanisms by which irrevocable trusts can be modified. Generally, they can be modified in one or two ways, depending on the state’s laws. In some states, an irrevocable trust can be modified with the consent of the beneficiaries and the trustees. Some states also require the consent of the settlor if they are living. This is referred to as a “non-judicial modification.”

In other states, an irrevocable trust can be modified by a decanting, a process where an authorized trustee exercises their independent discretion to “pour” over the property of the trust to a new trust with different terms—hence the term decanting.

However, the IRS’ Chief Council Advice Memorandum (CCA 202352018) (the “CCA”) may be the end of irrevocable trust decantings as they have been used for years. It’s all about the taxes.

Estate planning attorneys have been concerned that using a non-judicial modification to make changes with the beneficiaries' consent, such as removing a beneficiary, shifting beneficial interests, or diluting a beneficiary’s interest, might be considered a taxable gift by the beneficiaries. The concern wasn’t present for decantings, since they are effectuated by the independent act of an authorized trustee, who doesn’t have a beneficial interest in the trust without the beneficiaries' consent - until the CCA.

The CCA Memorandum reviewed a case where, in the first year, an irrevocable inter vivos trust is established for the benefit of a Child and the Child’s descendants, and the trustee may distribute income and principal for the benefit of the child according to the trustee’s discretion. When the Child dies, the remainder will be distributed to the Child’s issue per stirpes.

In year two, when the Child has no living grandchildren or remote descendants, the trustee petitions the state court to modify the terms of the trust. The Child and Child’s issue consent to the modification. Later that year, the State Court grants the petition and issues an order modifying the trust to provide a trustee of the Trust with the power to reimburse the grantor for any income taxes. The grantor pays due to the inclusion of the Trust’s income in the grantor’s taxable income.

The Chief Counsel finds the modification of the irrevocable trust with the consent of the beneficiaries may constitute a taxable gift from the beneficiaries. However, the CCA goes on to say, “[t]he result would be the same if the modification was pursuant to a state statute that provides beneficiaries with a right to notice and a right to object to the modification and a beneficiary fails to exercise their right to object.”

This additional comment from the Chief Counsel is seen as foreshadowing the IRS’ position concerning decanting, and it may prove problematic. Most states currently authorizing trust decanting by statute require the trustee to provide the beneficiaries with notice of the decanting and provide that unless the beneficiaries consent to an earlier effective date, the decanting is only effective after a period of time elapses following the beneficiaries’ receipt of the notice.

It remains to be seen whether this comment from the Chief Counsel will foreclose all possible options for decanting. Decantings are permitted by law in various states, and many estate planning attorneys include provisions in their irrevocable trusts allowing the trustee to decant the trust under the terms of the trust, using the language of an “internal decanting provision.”

Whether the IRS will issue further guidance on the intersection of decantings and gift tax implications remains to be seen. If you are exploring the possibility of modifying an irrevocable trust, it is always best to speak with an estate planning attorney to review options and possible risks.

Reference: The National Law Review (Feb. 29, 2024) “Is CCA 202352018 the Death of Irrevocable Trust Decantings?”

Do You Need a ‘Will Contract?’

A will contract is an agreement made with another person, often a spouse, and is more likely used in a second or later marriage where you legally bind yourself to a plan for how assets will be distributed. In case of death or incapacity, a will contract ensures that your spouse cannot change the plan you have, according to a recent article from Forbes, “Will Contract: Should You Have One?”

For example, Jim and Jane are in a second marriage with two children from prior marriages. They understand the importance of a new will but are concerned about their agreed deal. Jane’s children will receive 60% of the overall estate because she brought more wealth to the marriage. Jim’s kids will get 40%. If all goes as planned, Jane’s kids will each get 30% of their estate, and Jim’s kids will each get 20%.

However, what if Jane dies and the entire estate is left to Jim, who decides to give each of the four children an equal 25% share? Or did he cut out Jane’s children completely? Without a will contract confirming their agreement, Jane’s children have no protection. While Jane could have created a trust to protect her children, this may not fully protect her children if Jim decides to pursue an elective share of the entire estate, including trusts.

Both parties will sign a new will and perhaps trusts, implementing their agreed-upon plan. These documents may be attached to the will contract as exhibits. The agreement may require each of them to provide the other with advanced notice before any changes are made to estate planning documents. In the case of incapacity, you may agree on who should get the notice. You may even provide that if one of you is incapacitated, no changes may be made without the approval of an independent person named in the agreement.

A will agreement may limit or even prohibit either of the spouses from making any significant gifts without the other spouse's written consent and/or specified individuals. If this is not included, either one of the couple or their agents under durable powers of attorney could undermine the entire will contract by giving away assets while living.

Are there any downsides to a will contract? There are additional costs and complexities. However, they are likely worth the added protection provided to heirs. Creating the will contract will clarify the “what ifs” in the same way a pre-or post-nuptial agreement brings up all financial dealings that may not otherwise have been addressed.

Failing to have a will contract in situations of a second marriage, short-term marriages, or quirky, questionable circumstances may lead to significant estate or divorce issues. While they are not yet widely used, expect this kind of agreement to gain popularity.

As with many estate planning techniques, will contracts should be discussed with your estate planning attorney to see if your situation would benefit from making this part of your estate plan.

Reference: Forbes (Feb. 4, 2024) “Will Contract: Should You Have One?”

How Does a Revocable Trust Work?

A revocable or living trust is a document created by you while you are living, creating a separate legal entity to hold title to property or receive property by being the designated beneficiary of financial assets. Real estate is moved into the trust by recording a deed for the real estate into your trust, according to the article “What are the pros and cons to putting my home in our trust” from Coastal Point.

There are many benefits to having property in a revocable trust, including probate avoidance, especially when you use one trust to hold property in more than one state, thereby avoiding having the estate go through probate in more than one state. Trusts are also used to make the administration of an estate easier and maintain property in further trust for beneficiaries within the initial trust. Trusts are also used to maintain privacy, since a revocable trust is never a public record in most states, unlike a last will and testament.

The revocable trust can be more expensive and time-consuming to set up initially. Nevertheless, they save the beneficiaries time and money after the death of the grantor (the person creating the trust). They can be a little more difficult for people to understand than the traditional last will and testament. However, the overall pros usually outweigh the negatives.

Probate is the process by which the court approves the validity of the will and the plan to distribute assets to beneficiaries. When someone dies, and their real estate and assets are not in a trust, the estate is probated, meaning an estate is opened at the Register of Wills in each state where the person owned real estate. The assets of the decedent are tied up for at least eight months, so any creditors of the decedent can submit claims against the estate. After the period of time required by each state, check with your estate planning attorney to find out about your state’s process. The estate can be closed, and assets can be distributed.

The main benefit of placing real estate in trust is to avoid probate. This not only saves time and expense but allows the property to pass immediately to the beneficiaries, be sold to a third party, or otherwise be disposed of following the instructions in the trust. Holding assets in trust also provides privacy and lets you be very specific about what you want to happen to those estates.

If the trust is revocable (as opposed to irrevocable), you also have a lot of flexibility. Changes can be made to the terms, contents and distributions as wished by the grantor. The trust can even be revoked entirely, if wished. A revocable trust remains private and is not part of the public record.

Be sure to fund the trust once it is created, either by retitling deeds or other asset ownerships. Knowing exactly how to title the property deed or make proper changes to account names is something your estate planning attorney can help with.

Reference: Coastal Point (Feb. 15, 2024) “What are the pros and cons to putting my home in our trust”

What Women Preparing for Retirement Need to Know

One woman’s story is a warning to everyone. Four months after Caroline S. married for the second time, she received a notice from the IRS about back taxes her new husband owed—$1,600 would be taken from her tax refund to make up the difference. Her new husband blamed his ex-wife, saying she hadn’t prepared their returns correctly. A few months later, the IRS put a levy on the couple’s new joint bank account and froze the funds because he was not paying withholding taxes.

As described in the article from Kiplinger, “What Every Woman Needs to Know Before Retiring,” it took two years and $50,000 of Caroline’s money to clear her debt to the IRS. There had been no sign of her second husband’s having financial problems and no reason for her to be concerned about the IRS until there was. Her advice: Keep your eyes wide open and your accounts separate.

Not knowing their household’s financial situation is among the biggest missteps women make. If they find themselves single, through divorce or death, the challenges can be daunting. Women tend to live more years in retirement and earn roughly 84 cents for every dollar men earn. Women represent 55% of all Social Security beneficiaries aged 60 and older, and their percentages rise as the population ages. The highest rate of divorces now involves couples between ages 55 and 64.

However, youth is no guarantee of financial security. One couple was in their mid-forties when the husband died. The wife, a self-proclaimed planner, had wisely addressed estate planning and legal issues when they were relatively young. There were living wills and trusts established, and life insurance policies purchased. The husband had gone to medical school after a successful career in engineering and had $100,000 in outstanding student loans, which were canceled because only his name was on the loans.

Even with all of their planning, this widow had a lot to deal with, managing trusts, bank and investment accounts, credit card transfers and the avalanche of paperwork and digital assets following the death of a spouse.

How to prepare? Have a complete team of advisors, including an experienced estate planning attorney, a financial advisor and an accountant. An estate plan should be integrated with tax planning and household budgets. This checklist can help:

• Have the money conversation before moving any relationship into serious waters. Make sure that you’re on the same page as your partner and get full disclosure of their financial status.
• Don’t leave financial matters for your spouse or partner to handle without being involved at all.
• Familiarize yourself with everything – all property, all accounts, all debts—and be a part of all decisions.
• Fully fund your own 401(k), IRA or other retirement account.
• Consider adding life insurance and long-term health insurance to cover future hardships.
• Make sure wills and other estate planning documents are current and update them periodically.
• Ask your estate planning attorney whether each person in the couple needs to have their own trust.
• Keep individual loans in separate accounts, so the surviving spouse will not be liable for the debt.
• Don’t mingle accounts and funds any more than absolutely necessary to run the household.
• Keep at least one credit card in your name only. An individual credit history can go a long way if you are divorced or widowed.

Reference: Kiplinger (Feb. 24, 2024) “What Every Woman Needs to Know Before Retiring”

How to Protect Your Spouse when Diagnosis Is Dementia

Few illnesses are as terrifying as dementia, for which there is no cure. If estate planning is in place, it may need to be adjusted to address new, more imminent issues. Reviewing the family situation from a legal and financial aspect is critical, and there is no time for delay, explains a recent article from Morningstar, “’I don’t want my wife to lose everything’: I’ve been diagnosed with dementia –I suddenly could not spell or write legibly.”

There are a number of steps to be taken to smooth the path ahead. First is to update your will and create a financial power of attorney. Don’t try to do this without the help of an experienced estate planning attorney.

This may also be the time to reassess your investment portfolio based on your new financial plan and risk tolerance.

An Advanced Healthcare Directive will inform doctors what actions you want them to take when you cannot make those decisions for yourself. You may want to list your wife as your healthcare proxy to carry out these decisions, but be mindful of the pressures put on a marriage when serious healthcare issues occur. Your spouse will need emotional support as well, and you’ll want to have a successor to your spouse for both the healthcare and POA documents.

Share your situation with trusted family and friends to create a team–a community of people who can provide support, part of which will be updating beneficiaries. Now would also be the time to record instructions for access to devices, documents, and even daily habits.

Long-term care insurance will help with expenses and should serve as an example for anyone reading this article. Policies should be purchased early in life when they are relatively affordable to help alleviate the financial burden of nursing home costs.

An estate planning attorney and financial advisor will help you take an accounting for assets, expenses, and projected long-term care costs. You’ll want a team approach to provide as much guidance as possible.

When to put your long-term care policies into payout status is a difficult decision. You’ll need to time this with a Medicaid plan, which your elder law estate planning attorney will be able to help with.

Now may also be the time to create a trust and divest assets to make it through the five-year Medicaid look-back, using your long-term care policy in the next five years.

There are exceptions to the five-year look-back rule for Medicaid eligibility. They include paying off debts, buying medical devices, or making home improvements to improve accessibility. However, eligibility depends upon income and other assets.

Some states, including Florida and New York, have rules exempting homes from assets calculated by Medicaid under certain circumstances. California eliminated an asset limit this year, making a person’s home automatically safe from Medicaid while they are living, but this does not mean it’s exempt from the Medicaid Estate Recovery Program.

Working with a team of professionals, including an estate planning attorney, and having the support of family and trusted friends will be important as time goes by and the disease progresses.

Reference: Morningstar (Feb. 25, 2024) “’I don’t want my wife to lose everything’: I’ve been diagnosed with dementia –I suddenly could not spell or write legibly”

Common Questions Concerning SECURE Act 2.0

A webinar from Trusts & Estates presented a discussion on SECURE Act 2.0 and the many planning opportunities it made possible, as well as proposed IRA regulations, which was reviewed in Wealth Management’s article, “SECURE Act 2.0: Q&A,” covered a number of commonly asked questions about SECURE Act 2.0.

Charitable Remainder Trusts (CRT)

In the case of a trust for a disabled or chronically ill beneficiary, a charity permitted to receive qualified charitable distributions (a registered charity other than a donor-advised fund), which is a remainder beneficiary, will be treated as a designated beneficiary. This allows an IRA owner to create a trust for a disabled or chronically ill beneficiary and name a charity as a remainder beneficiary while qualifying for the life expectancy stretch.

For a disabled beneficiary of an IRA, are CRTs and Special Needs Trusts Eligible for Stretch Distributions?

Because a CRT is tax-exempt, it can take the IRA benefits all at once and then make annual or more frequent payments to one or more individuals, usually for their lifetime. Payments are treated as first-in, first-out. They are considered ordinary income until the payments cumulatively equal the amount of the IRA benefits considered. After that, the nature of the payments depends upon the nature of the trust’s investment income. This effectively replicates the stretch that had previously been available. A disabled or chronically ill beneficiary or (if there’s no beneficiary who isn’t disabled) a trust for the beneficiary or a disabled or chronically ill person may stretch distributions over the life expectancy of the disabled or chronically ill person.

Can a Minor Child be Named as a Beneficiary of the CRT to Get the Stretch Benefit?

No. The actuarial value of the CRT has to be at least 10% of the value of the trust, and the payments to the beneficiaries must be at least 5% of the trust each year. Both of these requirements cannot be satisfied if the individual beneficiary is a minor. An estate planning attorney will need to run the numbers on any beneficiary under age 30 or so who might start payments. The solution is to do a term-of-years CRT for the maximum 20-year period. This will likely be less than the young beneficiary’s life expectancy, but it’s double the ten-year stretch maximum.

What about a non-spouse who inherits an IRA from an owner who had been taking Required Minimum Distributions (RMDs), and the IRA owner died before the rule changes under the SECURE Act of 2019?

The ten-year rule does not apply to this specific instance. However, if the primary beneficiary was taking life expectancy distributions and dies after 2019, their beneficiary (the successor beneficiary) will be subject to the ten-year rule. Under this ten-year rule, the successor beneficiary must continue taking life expectancy distribution (using the life expectancy that the primary beneficiary was using) and must fully distribute the account no later than ten years after the primary beneficiary’s death.

The changes created by SECURE Act 2.0 have a wide range of impacts on IRAs, certain types of charitable gifts, and estate plans. Your estate planning attorney will be able to address your unique situation, making the SECURE Act 2.0 regulations work for your own family’s distribution of assets.

Reference: Wealth Management (Feb. 13, 2024) “SECURE Act 2.0: Q&A”

Brian Wilson’s Case Highlights Need for Secondary Agent

Beach Boys co-founder Brian Wilson has been diagnosed with a “major neurocognitive disorder” just about two weeks after his wife, Melinda, who had been his caretaker, died. Melinda, who died at age 77 on January 30, was also his agent in his advance care directive, reports an article from Market Watch, “Beach Boys’ Brian Wilson’s conservatorship case highlights an important—and sometimes necessary—estate planning tip.” Simply put, having one person responsible for your future health is not enough.

Wilson’s family filed for conservatorship with the Superior Court of California on February 14, and documents stated the musician, age 81, could not manage his everyday needs. Documents were filed because Wilson had not named a successor to his late wife, and a conservator now needs to be appointed.

The petition is for conservatorship of the person only, not the estate to manage the finances. Documents state Wilson is not able to provide informed consent to medical treatment, and the co-conservators would manage the care for his neurocognitive disorder.

Having a successor to the principal agent named in estate planning documents, typically a healthcare proxy or healthcare power of attorney can keep issues like this out of court and away from needing a conservatorship. Individuals may name one or more successor agents to step in if the primary agent is unable or unavailable to take on the role.

The family issued a statement explaining their decision to go forward with a petition for conservatorship. Their goal was to protect Brian from any major changes to the household and allow him and the children still residing in the home to remain there and continue to be cared for by a team of people who have cared for the family for many years.

The family told a reporter they had named family representatives LeeAnn Hard, Wilson’s business manager, and his publicist and manager, Jean Sievers, to serve as co-conservators. Hard is not asking to be conservator of the estate because Wilson’s assets are held in a trust, and she is a trustee. She is also his agent under a Power of Attorney.

The plan for the future is for Ms. Sievers and Ms. Hard to serve as co-conservators of Wilson, and if and when appropriate, they will file a petition for a substituted judgment to establish a new irrevocable Advance Health Care Directive for Wilson, which would terminate the need for a conservatorship of the person.

The Wilson case comes shortly after comedian Jay Leno filed for conservatorship of his wife, Mavis Leno, to carry out estate planning on her behalf.

Celebrities have been in the news for their lack of estate planning or leaving behind controversial documents, but Wilson did have some documents in order. The court hearing is scheduled for April.

The lesson here is to include successor agents in any plan concerning health, well-being, and property. Your estate planning attorney will be able to help you determine who the secondary and perhaps tertiary representative should be.

Reference: Market Watch (Feb. 16, 2024) “Beach Boys’ Brian Wilson’s conservatorship case highlights an important—and sometimes necessary—estate planning tip.”

When Should Gift Tax Return Be Filed?

Gift tax returns may be the most misunderstood and overlooked part of estate planning. The first mistake people make, according to the article “Know The Most Misunderstood Part Of Estate Plans: Gift Tax Returns” from Forbes, is not knowing when they do or don’t have to file a gift tax return. Even if a gift you make is tax-free, you might have to file a return anyway. And there are times when you aren’t required to file a gift tax return, but it’s still a good idea to do so.

The gift tax return is IRS Form 709, which can be downloaded from the IRS website at no cost.

In most cases, the IRS can’t take action on an incorrect gift tax return once more than three years have passed since it was originally filed. There are exceptions for fraudulent returns or if a return is either missing information or substantially misstates information.

However, there’s no statute of limitations if you fail to file a gift tax return, and the IRS can raise questions about the transaction at any time. This includes coming after your heirs or your estate after you’ve passed. At that time, your heirs or executor may not have the evidence to prove you complied with the tax law. The IRS would be within its rights to assess not only the gift tax but also penalties and interest for all the years from the date of the gift tax filing to the current date.

For this reason alone, it’s a good idea to file a gift tax return if there’s even the slightest question of whether it’s necessary.

Form 709 has a section for reporting “non-gift transactions.” Some estate planning attorneys recommend taking advantage of this to start the statute of limitations clock ticking and prevent the IRS from recharacterizing your gift years later as a taxable gift.

Consider this especially when you sell assets to a trust or shift assets from one irrevocable trust to another, known as “decanting” a trust. Consider also filing a gift tax return for a non-gift if you take advantage of the generation-skipping transfer tax exemption through a trust.

Another common mistake is not realizing that certain actions are considered gifts by the IRS, whether in the general sense or not. Let’s say you sell an asset to your children at less than market value. The difference between the selling price and the market value is a gift. So is forgiving or making a loan at a below-market interest rate.

If parents pay bills for adult children, this might be considered a gift if the gifts are valuable or if you also make significant gifts of money or property to the same person in the same year.

A gift tax issue the IRS pays close attention to is valuation. There’s not much question about the value of a publicly traded security, but for many other assets, there’s a lot of room to question the correct value, and the gift tax is based on the asset value at the time the gift is made.

While spouses may make unlimited gifts to each other tax-free, there are times when gifts between spouses must be reported. One time is when the gift is defined in the tax code as a “terminable interest.” Another time is if one spouse is not a U.S. citizen. Gifts to that spouse from the other spouse exceeding a certain amount during the year must be reported on IRS Form 709.

It’s always a good idea to check with your estate planning attorney about when a gift tax return should be filed to protect yourself and your heirs.

Reference: Forbes (Feb. 16, 2024) “Know The Most Misunderstood Part Of Estate Plans: Gift Tax Returns”

How Should a Single Person Create an Estate Plan?

The short answer is singles should be doing the same things as people who are married and have families, except their situation may require some additional steps, says an article from Kiplinger, “Estate Planning for Singles.”

The most important thing is having a Durable Power of Attorney, naming someone as your agent so they can make financial decisions if you become incapacitated. Similarly, you should also appoint a Health Care Proxy to handle medical decisions.

If you don’t have a will, your state’s law will determine how your assets will be distributed, but no state will have a list of people to make financial or health care decisions for you.

Adult children often fill these roles, but it’s fine to look for other people to serve in these roles. A trusted friend whose judgment you trust completely and who is good at managing financial and legal matters could also serve in this role.

If the person you name to be your representative dies or becomes incapacitated, you’ll want to have a plan for someone else to take on the role.

Consider the age of the person you may want to serve in their role. If they are your age, can they take on these tasks if and when needed? A younger, trusted person may be a better choice, although there are no guarantees of age determining their availability.

If you don’t know anyone who could manage these roles, you could hire a professional, either an estate planning attorney, a trust company, or, in some states, someone licensed as a “professional fiduciary.”

What about your pets? An estate plan can also deal with issues of special concern to singles who own pets. You can use your will or create a pet trust to name a guardian and provide financial support for a furry or feathered friend.

Lastly, certain states have estate taxes, which have far lower exemptions than the current federal estate tax of more than $13 million. Some state estate taxes kick in on estates valued at $1 million. Married couples can delay estate taxes until the second spouse's death, but singles need to plan for tax liabilities, which is part of an estate plan.

Reference: Kiplinger (Feb. 17, 2024) “Estate Planning for Singles”