Close Close

Financial Planning > Trusts and Estates > Estate Planning

The Details Matter In Estate Planning

Your article was successfully shared with the contacts you provided.

Financial professionals who have a grasp of key legal concepts affecting the senior population will be better able to serve their clientele, Cynthia Sharp told a focus session here at the annual meeting of the Million Dollar Round Table.

An attorney who practices estate planning and elder law with Sharp Bratton Attorneys at Law, Haddon Heights and Lawrenceville, N.J. zeroed in on some common mistakes she has seen in the estate planning arena. This was part of an extensive talk on asset protection planning, Medicaid qualification and Medicare.

Sharp did review estate plan basics with which MDRT members are already familiar–the will, the powers of attorney (e.g., the general durable power of attorney or a springing power of attorney), and advance health care directives (living will or health care power of attorney or both).

But she also covered another document with which some may not yet be familiar–the HIPAA release document. She said her firm routinely suggests that clients execute a HIPAA Authorization form as part of the estate planning “package.”

Not doing so could result in problems for not just the client but also for those who hold powers for the client, she indicated.

Here is why: Under the Health Insurance Portability and Accountability Act, health care providers are subject to federally imposed sanctions and monetary fines for unauthorized disclosure of private health information, Sharp pointed out. In response, many providers have clamped down on release of medical records and related information to anyone other than the patient, she continued.

But this has “made it more burdensome, and sometimes impossible,” for agents holding advance health care directives or durable powers of attorney for health care and trustees under revocable living trusts to carry out their duties, Sharp cautioned.

She illustrated this with a story about a women with Alzheimer’s disease.

When the woman could no longer manage her financial affairs, family members sought to have the trustee appointed under her living trust take over management of trust assets, Sharp said.

“However, due to the lack of the proper HIPAA documentation authorizing the release of the woman’s protected health information, the family was not able to get her doctors to issue a letter certifying the elderly woman’s mental incapacity.

“This was because the doctors felt that providing a certification letter without a HIPAA authorization would violate the provisions under HIPAA. This placed the family members and the successor trustee in a Catch-22. The woman did not have the mental capacity to execute a HIPAA Authorization form authorizing the release of her medical information, but without the form the doctors would not issue letters certifying the woman’s incapacity so that the successor trustee could take over the management of her affairs,” Sharp said.

“This dilemma forced the family members to petition the probate court to have the successor trustee appointed. The delay and cost of this probate court proceeding could have been avoided easily had an executed HIPAA Authorization form been available to give to the doctors,” she continued.

Sharp also reviewed some common mistakes in estate planning documents:

Inadequate power of attorney. She cautioned against relying on using standardized power of attorney forms downloaded from the Internet.

Those boilerplate documents, which are also use by many attorneys as well as consumers, often do not cover the client’s very specific issues, she warned. “Medical powers of attorney are not always included, nor are clauses about gifting, real estate transactions, or the ability to make asset transfers to affect Medicaid eligibility.

“If the appropriate clauses are not included, a guardianship proceeding may be necessary so that the agent may take action that needs to be taken,” she said.

Inappropriate tax allocation clause. One of the most important provisions in a will is the tax allocation clause, said Sharp.

This clause allocates a decedent’s estate or inheritance tax burden among the estate beneficiaries by specifying the source or fund from which the death taxes are to be paid, she explained, adding that allocation of taxes among beneficiaries is generally governed by a testator’s will, a nontestamentary instrument passing nonprobate property, or the default rules under applicable state law.

The tax allocation clauses can dramatically alter the dispositive provisions of a client’s estate plan, she noted. But practitioners who rely on general “boilerplate” tax clause provisions for all clients do not fully examine the impact that such clauses have on a plan, she said.

A tax clause contained in a will generally “charges the estate’s tax burden to the residuary estate or apportions the tax burden among the estate beneficiaries in proportion to their share of the estate tax liability,” Sharp explained. “Often, a boilerplate tax allocation clause commonly found in wills charges the testator’s residuary estate under the will with the burden of all taxes imposed on both probate and non-probate property.”

Such clauses can result in presumably unintended results, she indicated.

To illustrate, she referred to the estate of the late journalist Charles Kuralt. His will said all estate, inheritance, and other death taxes imposed by reason of death “would be paid, without apportionment, by his residuary estate,” said Sharp. The residuary beneficiaries included his surviving spouse and 2 children. However, a handwritten codicil, which was admitted to probate, left his Montana ranch to his longtime companion, said Sharp.

Since the terms of the will were that the taxes were to be paid from the residuary estate, “the residuary beneficiaries (his wife and kids) bore responsibility for payment of taxes attributable to the property that passed to the companion,” said Sharp.

Failure to establish special needs trust. If a potential beneficiary is entitled to government benefits such as Supplemental Security Income or Medicaid, consider establishing a special needs trust, said Sharp. Why? Direct receipt of funds will cause that individual to be disqualified, she said, so the funds will need to be spent down before the person can requalify. This is particularly harmful for those incurring substantial medical expenses, she added.

To illustrate, she described what could happen if Medicaid beneficiary in a nursing home receives an inheritance. This will disqualify the person from Medicaid, she said, so he/she must pay the nursing home bill directly until only $2,000 remains.

Failure to plan for state estate taxes. “Since the state death tax credit was repealed at the federal level through the 2001 tax act, many states have imposed their own estate tax,” Sharp pointed out. But the planning focus is often on the federal estate tax, with many erroneously believing tax planning is no longer necessary in light of the current federal estate tax exemption of $ 2 million. Her point: “State estate tax can be avoided in many cases, at least for married couples.”

Failure to update documents on a regular basis. Major events that can spur updates to the plan include marriage, new life partner, divorce, birth of a child, desire to change beneficiaries and desire to change who should handle the estate, said Sharp. However, many have failed to do the updates since enactment of the Economic Growth and Tax Reform Reconciliation Act of 2001, she said.

This is a mistake, she continued, and it “has caused many surviving spouses to unnecessarily incur state estate tax liability at the death of the first spouse.” Most states with estate tax legislation require computation of the state estate tax in accordance with the Federal estate tax in effect through 12/31/2001, she explained.