Estate Planning

Owning a vacation home can create cherished memories for you and your family.  For many, these are thoughts of times together, playing in the sand at the beach, running after seagulls and the ringing bell of the ice cream truck.  For some it is the memories of carving fresh snow, gathering rosy cheeked around a crackling fireplace at the ski lodge to enjoy a warm beverage.  Whether yours is a beach front cottage or a ski cabin, the sentiments are likely the same.  The place holds sentimental value that is passed down from one generation to the next.

Unfortunately for some, a family cottage can also be the source of great conflict and hostility for successive generations.  When the two parents own the home, the chances for disagreement are minimal.  However, what happens when the two parents pass the house on to their seven children?  Suddenly, the house has seven owners instead of two.  If the house is ultimately passed down to the grandchildren, you may end up with twenty co-owners.  Can you think of any problems this might cause?

When multiple people inherit a home, they typically take the property as Tenants in Common.  This means that each owner has an undivided interest in the whole of the entire property so that even a 1% owner has the same right to occupy the entire property as a 99% owner.  Also, a tenant in common can sell, give or loan her interest to anyone she chooses.  If irretrievably upset about the management of the cottage or wishing the property was sold to pay his or her debts or pursue other dreams, an owner can file a partition action in court to force the sale of the cottage. Outright ownership by multiple family member is not ideal when the goal is to keep the cottage in the family as a source of happy memories.  Fortunately, most conflict can be easily avoided through use of an appropriately structured Limited Liability Company (“LLC”).

First, let me explain briefly some of the relevant background of LLCs.  The owners of an LLC are referred to as members.  The members can control the governing of an LLC by entering into an operating agreement, with written rules, obligations, restrictions and conflict resolution procedures.  LLC members can also appoint a manager of the LLC to centralize decision making and operating control in one person.

Let’s look at a few issues that arise with multiple owners of real estate and how using an LLC can resolve those issues.

Capital contributions

A house comes with recurring expenses, such as mortgage payments, maintenance costs, real estate taxes, and insurance.  What remedy is there when a co-owner refuses to contribute toward these costs?  Under a Tenancy in Common, you have little remedy if a co-owner decides not to pay an expense.  You cannot lawfully exclude a co-owner from use of the property for not contributing.  With an LLC, you can create rules that require a member to be current on capital contributions in order to enjoy use of the property and cause forfeiture of a member’s share for extreme delinquency after notice and a period of time to contribute.

Management

Who will be responsible for monitoring, cleaning and maintaining the house and yard?  Will that person be compensated?  A tenant in common owner cannot force other co-owners to do these tasks, and is not automatically entitled to compensation for performing them herself.  LLC members can assign responsibility for these tasks and decide in advance on a method to compensate the member coordinating these services.

Prime Time Use

What happens when all twenty co-owners show up to the cottage on the 4^th of July?  Under a tenancy in common, all owners have the legal right to use the cottage at all times.  By using an LLC, the members can spell out a fair method for dividing up and alternating use of the prime vacation times and prohibiting members from using the cottage outside of their allotted times.

Squatting owner

What can you do when a drug addicted co-owner loses his job, takes up permanent residence in the home with his destructive dog, and throws wild parties at the cottage?  You can do nothing under a tenancy in common.  All owners have the right to use the property at any time.  An LLC can restrict the length of time an owner can reside in the home and can also place restriction on pets, substance abuse and the number of guests allowed.

How can you keep the cottage in the family?  - What happens if a co-owner sells or gifts her interest to a non-family member?  What happens when a widowed in-law inherits the property then remarries, or worse, a disgruntled ex-spouse takes ownership through a divorce proceeding then remarries?  What happens if a judgment creditor takes possession of a co-owner’s share of the property?  Under a simple tenancy in common, these are common scenarios.  An LLC operating agreement can limit the transferability of a member’s interest to the other LLC members to prevent these occurrences.

Cashing out

What if a co-owner who wants to cash out her share?  What is the value?  Will there be liquidity to pay for the buyout?  What if the co-owners refuse?  A tenant in common owner can force the division and/or sale of the property in a legal partition action, which can be an expensive proceeding that often results in less than a fair market value return.  However, an LLC operating agreement can prevent a partition of the property and devise a fair way to value the interest of a member and compensate that member who wishes to cash out. The LLC operating agreement can discount the purchase price for family members who want to remain owners and keep the property in the family.

Discussing these issues with family members while the parents are alive can make it easier to resolve them before any conflict arises.  Ensure the future of your family cottage by contacting us to help you create an LLC today.

Each year brings a new set of important figures for Medicaid (also known as Title 19) in Connecticut.  The new figures will only have meaning, however, if you understand how they work.  We provide the new figures with an example so you can understand how Medicaid works in Connecticut in 2014.

Here are the Connecticut Medicaid figures that apply in 2014:

*          Changes every July 1^st

**       Changes every October 1st

Let’s take an example. Teresa, age 70, and Todd, age 69, live in Mystic, CT.  Teresa is out walking her dog, Skittles, and collapses from a heart attack.   Skittles starts barking and saves the day.  Todd comes running.   Teresa goes to the hospital on January 15, 2014, and stays for 4 days.   She is discharged to Overlook Nursing & Rehabilitation Center, a nursing home, which costs $14,000 per month.  They can’t afford this, and must apply to The Connecticut Department of Social Services (DSS) for Medicaid assistance.  

First, DSS will evaluate Teresa and Todd’s combined assets to determine if they are financially eligible.  Teresa and Todd have the following assets:

1.    A jointly owned home (with $300,000 equity),

2.    A joint checking account with $1,000,

3.    Todd has a bank certificate of deposit (CD) with a balance of $50,000,

4.    Teresa has a deferred annuity with a cash surrender value of $65,000.   

Total = $416,000 net worth

The house is an exempt asset under Medicaid as long as the spouse resides in it. Accordingly, they only have $116,000 in countable assets after excluding their home.  Unfortunately, even though Todd and Teresa have countable assets less than the maximum Community Spouse Protected Amount (CSPA) of $117,240, they cannot keep all of their countable assets.  DSS will divide Todd and Teresa assets in half and limit Todd to one-half of the countable assets.   This one-half the spouse gets to keep can be no more than a maximum of $117,240, and no less than the minimum of $23,449.80. 

Thus, under our facts Todd is limited to keeping $58,000 in countable assets in his name calculated as follows: Countable Assets (1,000 + 50,000 + 65,000) ÷ 2 = $58,000. Teresa can keep $1,600 in her name, which is the asset limit for an individual receiving Medicaid.  Between them they can keep $59,600.  To become eligible for Medicaid, Teresa and Todd must spend down $56,400 on eligible expenditures.  

Todd wants to know how much of Teresa’s income will go to the nursing home.   Todd has $1,750 of monthly gross income and Teresa has $1,500 of monthly gross income.  They have a mortgage payment of $500/month, real estate taxes of $500/month, and homeowners insurance of $200/month.  Connecticut gives Todd, the community spouse, a Community Spouse Allowance, which is determined by subtracting the community spouse's monthly gross income from what is known as the community spouse's Minimum Monthly Needs Allowance (MMNA).The calculation of Todd’s MMNA is shown in the following table.

Since the amount calculated above is greater than the maximum Monthly Maintenance Needs Allowance of $2,931, Todd’s MMNA is $2,931. From that, we subtract Todd’s monthly gross income of $1,750 to arrive at his Community Spouse Allowance of $1,181. Because Teresa’s monthly gross income of $1,500 exceeds Todd’s Community Spouse Allowance of $1,181, Todd can keep $1,181 of Teresa’s income.  That leaves $319 per month for Teresa.  Teresa receives her personal needs allowance ($60 as of 7/1/13) and the remaining amount ($259) is applied to outstanding bills for Teresa’s medical care or her nursing home costs.

If Teresa goes home and applies for the Medicaid under the Connecticut Home Care Program for Elders, she will also have to meet the Medicaid income requirements.  For 2014, Teresa can have no more than $2,163 in monthly income to qualify for Medicaid at home.  Fortunately, her income is only $1,500 so her income does not exceed the income limit.

In another twist, Teresa gave $20,000 to her daughter, Lori, 3 years ago to help her buy a home.  Teresa is going to be ineligible for Title 19 for 2 months after she applies for Title 19 because she transferred assets to Lori within the 5 year look back period.  The penalty period is calculated as follows: $20,000 ÷ average monthly cost of care in Connecticut ($11,581) = 1.7 months. The penalty will not start to run, though, until she applies for Title 19 so she might as well go ahead and apply once she spends down to the $1,600 asset limit.  She may have to borrow money from Lori or other family members during the penalty period to pay the nursing home.

Your mother told you that she named you in her Will as Executor of her estate.  She trusts your judgment on financial and family matters.  Now your mother has died and you ask, "Why me? I have never been an Executor before."  Where do you begin? As Connecticut estate planning and probate lawyers, we prepared a handy list of what to do in the first week after someone dies.

1.  Handle the care of any dependents and/or pets

This first responsibility may be the most important one. Usually, the person who died (“the decedent”) made some arrangement for the care of a dependent spouse or children. You or others may need to take them home temporarily if they cannot continue living in the decedent’s home.  Decedents frequently overlook the care of pets upon their death.  Go to the house as soon as possible to check their condition. Find a good home for them even if it is temporary. The Estate can pay expenses related to dependents and pets so keep good records of all expenditures for them.

2.  Monitor the home

Keep an eye on the decedent’s home, answer phone messages, collect mail, discard food, and water plants.  If you do not live near the decedent’s home, ask a friend or relative to handle this task. If necessary, change the locks. Don’t give away any personal property in this first week. Keep current all essential utilities like heat and electricity. Save all receipts and create a spreadsheet with all expenses to be reimbursed.

3.  Notify close family and friends

Ask someone to contact others to tell them of the decedent’s passing. Find the decedent’s address book and look for their e-mail contacts.  Send cards to those who do not use e-mail regularly.

4.  Arrange for funeral and burial or cremation

Search the decedent’s papers to determine whether they have a prepaid funeral contract or burial plan. Ask a friend or family member to go with you to the mortuary. Decide how you will pay for the funeral and memorial service. Unless the decedent made you the joint owner of a bank account, you and close family will need to front these costs and get reimbursed from the estate. With respect to burial instructions, the Will is not controlling. Look for a document entitled Disposition of Remains which is on our web site. This document expresses a decedent’s wishes regarding what is to be done with their body.

5.  Prepare the funeral service

In some religious faiths, the funeral service occurs soon after death.  Find any directions from the decedent in this regard.  Our Personal Affairs and Funeral Arrangements Checklist, or a similar document, should provide you with this information.  If there are no such directions, gather close family members and create an outline of the service.  Visit with the clergy member to review the service.  Prepare remembrances and gather photos for the wake and the funeral reception.  Contact the restaurant or other venue at which you want to hold the reception. If appropriate, a eulogy for a funeral or memorial service may also be warranted.  Feel free to delegate this task if you know others who could handle this delicate assignment as well or better than you.

6.  Prepare an obituary

It will mean a lot to the family if you take the time to prepare an obituary well.  Send the obituary to the local newspaper.  If the decedent retired to another city and state, send the obituary to the newspaper there as well.

7.  Order Death Certificates

Get at least 10 original death certificates.  The funeral home will usually order these certificates for you.  Executors need original death certificates to apply for admission of the Will in Probate Court, change the ownership of joint accounts, and obtain date of death values of investments for preparing the estate tax return.

8.  Find Important Documents

Those documents include the Will, any Trust Agreement, the latest bank account statements, investment statements, deeds, birth certificate, marriage certificate, divorce decree (if any), Social Security information, life insurance policies, certificates of title to vehicles and keys to the safe deposit box or home safe.

9.  Get a Court Decree Appointing You as Executor

Hire a Connecticut probate lawyer or law firm that focuses their practice in the area of trusts & estates.  Ask for a copy of the law firm’s probate information form so you know what information they will request to probate the estate. See our Estate Settlement Data Sheet as a sample. Get waivers of notice and hearing from each heir of the decedent. See the attached General Waiver for this probate court form. Heirs include a spouse and all children. Use e-mail to get waivers especially if the decedent had many children living in different states. Have your lawyer prepare the Application for Probate and file the Application and waivers with the Probate Court in which the decedent resides.

10.  Call the Employer

Call the decedent’s last employer if he or she was working or received pension or health insurance benefits from the employer. Request information about the amount of benefits, the successor beneficiary of those benefits, and any pay due. Ask whether there was a life insurance policy through the employer.  If the company provides life insurance, ask for an IRS Form 712 and the beneficiaries of the policy.

Most people who have adult children figure it is easiest to give an inheritance to your children outright with no strings attached. It is simple and clean. But there are downsides to giving to your adult children in a simple manner. Your grandchildren may never receive it. It could pass to the child’s spouse, the spouse could remarry, and all of the inheritance you gave to your child could go outside your family to the new mate of your child's spouse.

There is a better alternative. Why not give property to adult children in a Transparent Trust? A Transparent Trust holds property for the life of a child. The child is the Trustee of the trust. The child takes his or her inheritance and puts it in a trust account at a financial institution. The child could spend the funds for his or her support in reasonable comfort, maintenance in her or his accustomed manner of living, education, and health. The child would show any income from the trust on Schedule E of the child’s income tax return. The child could appoint the property at any time to his or her children. At the child’s death, all of the property goes to the child’s children (your grandchildren).

The benefit of a Transparent Trust is that it requires the child to keep the funds in a separate account as Trustee and spend it only for the child’s or grandchild’s health, education, maintenance and support. If a spouse of a child wants to spend it, the child can say, “I am sorry that money was given to me by my parents for my benefit and after I die for the benefit of our children.” The child controls the trust accounts so the account remains subject to claims of creditors. But the result would have been the same as when you give an inheritance to your son or daughter outright.

If you want to protect your grandchildren while giving your adult child complete control of the funds, consider using a Transparent Trust.