LEGAL SERVICES, EXECUTOR, TRUSTEE AND GUARDIAN

The services of an attorney are critical for the estate plan to work properly. Family and financial circumstances dictate how simple or complex the process of planning one’s estate will be. The client with modest assets and a few adult beneficiaries may need nothing more than a properly drawn will. Levels of complexity are added by the need to deal with minor children, for estates with sufficient assets to cause federal estate tax to be due, for plans for the disposition of a closely held business, for problems of children with special needs, and concerns about preservation of assets from nursing home costs. Each of these problems, and the many others that can arise, cause the cost of estate planning to become higher. Without exception, the cost involved in proper planning is very small compared to the cost incurred if the estate is not planned. The person who does not adequately plan for asset preservation when nursing home care becomes necessary could find all of his or her assets lost to the nursing home care. This is in spite of the fact that substantially all of the assets might have been protected with proper planning. Similar disasters may befall the younger couple when one spouse dies and it is learned that only part of the estate will pass to the surviving spouse, with the rest going to the children.

LEGAL SERVICES EXECUTOR

An attorney’s role in an estate administration begins with the probate of the will. This is a process in Surrogate’s Court which may be fairly simple or very complex, depending upon the age of children, possible mental incapacity of a necessary party or objections which may be filed to the will. Its purpose is to have the court declare the will as valid. Other tasks undertaken by the lawyer include obtaining release of assets, preparing the decedent’s final income tax returns, filing of estate income tax returns, handling the sale of real estate, preparation of federal and state estate tax returns, preparing a final account of the executor for the beneficiaries, and settlement of the estate. Because the amount and complexity of the work may vary so greatly from one case to another, it is not possible to apply a simple formula to determine what the fees will be. Once all of the circumstances of the estate are determined, typically in a first meeting, it may be possible to fairly accurately estimate the costs and what disbursements will be needed (such as filing fees, etc.). As with all legal services, it is good practice to have an understanding of how the fee will be set, even though it may not be possible at the outset to determine exactly how much it will be.

Executors

The duty of an executor is to obtain the probate of the will, marshal the assets, pay the decedent’s bills, file all necessary tax returns and then carry out the distributional scheme contained in the will. An administrator who is appointed when there is no will has the same duties, except that the distribution at the conclusion of the estate is provided by the law rather than by will. It is most common for one of the primary beneficiaries to be designated as executor. The advantage of this is that a major beneficiary is less likely to claim the statutory commission he or she is entitled to. This can represent a major savings. For example, an executor of an estate of $250,000 is entitled to $11,000 in commission.

An inexperienced executor would usually not be capable of carrying out all of the duties involved, but the function of the attorney includes guiding him through each step, to a prompt and proper conclusion of the estate. Banks with trust powers may also be designated as executor under a will, as can other individuals or advisors. This is most useful when there is no appropriate beneficiary to act, or when friction is expected among the beneficiaries. Since the executor’s duties are relatively short term, investment expertise is not as important. An executor is typically liquidating investments or distributing them in kind to the beneficiaries.

Trustees

A trustee, unlike an executor, looks forward to long-term duties. A trustee might be appointed to handle the funds for minor beneficiaries, and the trust could go on for many years. A trust might even run for the entire lifetime of a beneficiary. Investment expertise becomes more of a concern in such cases. A will or trust agreement can provide that a trustee has authority to hire investment advisors or otherwise obtain outside expertise. It is more common, however, to see a bank appointed as trustee than as executor. In addition to investment decisions, a trustee may be called upon to decide when distributions of principal should be made to the beneficiaries. Such a decision is better made by a family member, so the appropriate choice might be to name both a bank and a family member as co-trustees. The bank’s investment expertise and the individual’s knowledge of the family could then be combined for the best result.

Guardians

When one has underage children, a major concern in making a will is the designation of guardian. A surviving parent who is able would almost always act as the child’s guardian. If both parents are deceased the court will appoint someone to act in that capacity. It is very important, therefore, that the parent’s preference be contained in the will. There are two aspects to guardianship. One is guardianship of the property of an infant.

This would involve the management of funds which the child owns in his or her own name. A child under the age of 18 may own property in New York, but has no capacity to take charge of it. A guardianship of the property is a very cumbersome and expensive way of handling a child’s funds. A large part of the estate planning process involves avoiding any funds being left in the control of the guardian of the property.

The creation of a trust under the will for minor children substitutes a method of handling such funds which is far superior. The other aspect of guardianship is called the guardianship of the person. The guardian of the person is charged with taking the child into his or her home and acting as substitute parent. In choosing a guardian to designate in the will, it is very important that the person have child rearing skills and attitude compatible with the parent’s philosophy. The responsibility of a guardian is substantial, so it advisable that the designation be discussed with the person in advance. While the same person may hold the position of executor, trustee or guardian, one may also choose a different person for each. This allows the greatest skills to be applied to each of the jobs.

Alternatives for Gifting Property

If you desire to transfer property in order to assure qualification for Medicaid in the future, there are a number of alternative ways of proceeding. Each alternative has advantages and disadvantages to you. Generally, as the level of retained control over the assets transferred increases, the risk of possible attack on the transfer increases. On the other hand, the safest transfers leave you without any control of the transferred assets. Let us assume the expected nursing home patient is the parent and the recipient of the gift is the child. Here are some of the alternatives:

1. OUTRIGHT GIFTS ADVANTAGES

  1. Simple and inexpensive to accomplish.
  2. Safe if at least 60 months separate gifts from Medicaid need.

DISADVANTAGES

  1. Parent must part with absolute ownership of gifted assets. Very few individuals find this acceptable.
  2. Child receives capital assets at parent’s income tax basis. When later sold, substantial capital gain tax might then be incurred.
  3. Child might die or lose the gifted property to his own creditors or in a matrimonial break-up. If child represents that he will keep the property and give it back as needed, this promise may become impossible to fulfill.
  4. Children who have been paid their inheritances in full tend not to be as attentive as those who have only a expectancy.
  5. If a child has college age children and is applying for financial aid, the assets gifted from the parent and the income produced may limit the financial aid.
  6. If residence is transferred without retained life use, a senior or veteran’s exemption from real estate tax would be lost.

2. GIFT OF HOUSE WITH RETAINED LIFE USE ADVANTAGES

  1. Parent is assured continued occupancy of the house for life.
  2. Parent is not parting with an asset which would typically be used for other purposes than shelter.
  3. Because property given with a retained life use is includable in the parent’s estate for estate tax purposes, the income tax basis on the property is stepped up at death, thus eliminating capital gain problem.
  4. If the property is sold prior to parent’s death, at least part of the capital gain exclusion on personal residence may still be available.

DISADVANTAGES

  1. If parent decides to move to another area of the country it may be difficult or impossible to sell the property and reinvest the proceeds in another residence because of the child’s involvement.
  2. There is a completed gift at the time the deed is delivered. This requires gift tax returns. The value of the gift is complicated by the retained life use. If a husband and wife own the house together, two sets of gift tax returns may be required (one for each spouse).
  3. This transaction can be more expensive to carry out than the outright gift of cash or securities.
  4. Disability, death, insolvency and marital problems of the child can affect the title.
  5. If the parent enters a nursing home and qualifies for Medicaid, the Department of Social Services may claim the right to income from the property rental. If the property is sold, they will want a portion of the proceeds of sale which represents the value of the remaining life use.
  6. If the property is sold while parent is alive, part of the proceeds, passing to children, would be subject to capital gains income tax.

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