Asset Preservation

I went to a seminar hosted by Len Tillem (of KGO and Len Tillem & Associates) and Michael Gilfix (of Gilfix & La Poll Associates LLP), both attorneys specializing in Elder Law.  There was a handout packet with some information, but it didn't include the slides that were shown.  I tried to take notes about the slides.  Please note, THIS IS NOT LEGAL ADVICE, I am just writing what I remember and what I wrote down during the presentation.  I very likely made mistakes.  You should check for yourself if you plan to take action on anything on this page.

Notes from the Presentation, Estate planning

Len started out with a joke; here's how I remember it.  I don't get it.
I was walking by a cemetary and I came across an older man at a grave site.  He was completely devastated, wailing and sobbing.  I asked him who died to generate such an outpouring of sorrow.  He replied that it was his wife's first husband.
As could be expected from listening to his radio shows, Len tended to go off on tangents, talking about anecdotes and stories.  He was enthusiastic about talking to the audience, getting questions.  Michael was also open to questions, but he also had an eye on the time, since there was a lot of material to go through.  He tended to say when 'last question' for a segment was.

Overall, I found the seminar useful, but it was a pretty hard sell to get you to go to their offices.  They do not offer free initial consultations.  The initial consultation is typically 1-1.5 hours, charged at their standard rate.  A cynical person might suggest that they tried to make everything sound complicated to scare people into just going to get their services.  A less (or is it more?) cynical person would say that other lawyers already made it complicated enough when they wrote the laws.

Revocable Living Trusts

The reasons to have a revocable living trust are


With a will, an attorney must do all the work to make sure a will is executed properly.  The fees for this are set by law at around 2-4%.  Thus, if you have a $100k estate, the fee is around $4k.  If you have $1million, it's around $25k.  The amount of work done by the lawyer is almost identical.   Probate reports are also in the public record.  Anyone can request a copy from the court and see exactly how big the estate was and how it was handled.  

By having your estate in a revocable living trust, you can avoid probate.  All the assets in the trust will be transferred to the trustees.  There are no (or significantly reduced) fees and the transfers/amounts are private.  It's still wise to have a will in addition to the trust so that, if there's anything that was forgotten or not put in the trust, it can be taken care of.  It's a 'Cover All' will, to automatically put things into the trust when you die.

There's no property tax reassessment if you put your house in a revocable living trust.  Anything you put in there is still under full control by you.  Any kind of liquid asset should be put in the trust, but (without specialized consulting) not things like IRAs or retirement funds.  

Illness management

Not much was said about this (that I caught).  You can put instructions about "Advanced Healthcare Directives" in your trust, or it's somehow related.  For example, you can say how you want to be treated if you're in a vegetative state.

Tax Planning

Again, little was directly said about tax planning in this segment.  It might be more related to the AB trusts below.  The basic idea is that you can structure your trusts and how your estate is set up to avoid or reduce estate taxes.  There's a lot on the web about the Bush Estate Tax Cuts.  The exemptions for estate taxes are at $2m in 2008, $3.5m in 2009, and fully exempt in 2010.  With no other work by Congress, it'll go down to $1m exemption in 2011.  Both lawyers felt this was unlikely.  They feel it will be at about $3.5m maximum, based on Senate resolutions.  However, the actions in the House make it uncertain.

AB Trusts

Above ground, Below Ground.  An AB trust is designed for (married?) couples.  Since each person has a $2m exemption, they could have up to $4m exemption if they work together properly (using 2008 numbers).

Without an AB trust, it's possible to lose the benefit of one of the $2m exemptions.  If he dies first, and leaves everything to her, then the entire estate is in her name.  When she dies, then she passes on the entire estate, but only has $2m exemption.   With the AB trust, when he dies, then she can split up the estate into his/her trusts.  It's important to note that this split happens when the first person dies.  That allows optimization of tax consequences at that time.  Some of the estate holdings are in his trust, some are in hers.  When she dies, then the estate passes on as defined by both trusts.  However, since there are two trusts, one from him and one from her, each trust gets the benefit of the $2m exemption, for a total estate exemption of $4m.

Family Protection, or Dynasty, Trusts

The idea with a FPT is to prevent your estate from being taken by the "rotten/controlling son/daughter-in-law", creditors, or estate taxes.  It's meant to be used so that your estate can be passed on to your children and grandchildren (and further).  In California, they can last for up to 100 years, serving 2-3 future generations.  Since it's specifically for your blood descendants only, your kids' spouses can't directly take or control the assets.  Also, the assets are protected if your kids get sued or go into debt.  The kids (or whoever you decide) can control all the assets inside the trust.  

I'm not exactly sure how it works, but the assets are not necessarily subject to estate taxes.  However, if the assets are generating income (dividends from stocks or interest from CDs), then that income will be taxed.  If there's more than about $10.6k in income inside the trust, then income tax consequences become convoluted (taxed at maximum income tax rate).  It's better to have the income be withdrawn from the trust and let the person withdrawing it pay income taxes on it (assuming they're not making >$300k/yr already).  Something about a schedule K1.

Special Needs Trusts

If there's a child or relative who is disabled or has other special needs, then the SNT is the best way to provide money for them.  Under normal circumstances, they must have assets at or below $2k in order to be eligible for public (govt) funded assistance.  If you directly give them or leave them money or assets in normal ways, then that will likely bring them above the $2k limit and the public assistance will stop.  To avoid this, a SNT is set up specifically with the goal of "supplementing the government benefits".  This means that the person will still have assets at or below $2k according to the govt and they will still get govt benefits.  But they will also have a pool of money that can be used to help out if they need extras.  

A SNT can be setup by one person, but then anyone in the family can add to it as desired.  It can be the beneficiary from any inheritance from a parent's death.  Often the "best way" to fund an SNT is via life insurance.   An example was given where a family set up a "Second to die, Single Premium" life insurance policy that would pay out into the SNT.  There was a single $60k premium at the start, and nothing else to be paid.  (They got a loan and other help for that part).  The policy is for $1m, and pays out after both parents die.  If only one dies, then the other is still around to take care of the special needs child, so the policy isn't needed yet.  The 'second to die' clause makes it cheaper.  The single premium means there's no ongoing costs (assuming you can get over the lump sum).  

Life Insurance

This was mostly talking about whole life insurance, not term.  The key point made was to never let a life insurance policy lapse.  If you don't want to continue to pay the premiums, there's ways to cash in on the value you've already bought.  The first example was a lady who had been paying $15k/yr(?) in premiums for a while and wanted to stop.  She had budgeted the $15k/yr a long time ago, and was capable of continuing the payments, but she wanted to stop.  It was a $1m policy.  Instead of just stopping, they had two suggestions for her.  She could do a Tax Free Exchange of Existing Policy.  The first option was to reduce premiums; in her case, she had already paid in enough that the new policy didn't need any premiums at all to keep the $1m payout.  The second option was to increase the payout.  She could keep paying the $15k/yr (which was already budgeted), and get at $2m policy instead.   This is because policies have become cheaper over time.  The other way to do it is to sell the policy.  Instead of returning a policy to the insurer for $30k, someone found they could sell the policy to a third party for $500k.  

For some reason, I wrote down "Convert estate taxable money into tax free money for heirs."  I don't remember exactly what this means, but it's something associated with the previous info.

1031 Exchange

You can do a 1031 Exchange when selling something with a large capital gain to avoid taxes.  You have to buy something comparable within a reasonable amount of time to avoid capital gains taxes.  Effectively, you're changing one asset for another of a similar value and type.  Google is your friend, for more info. Or is it 1035 Tax Free Exchange?  I thought I heard 1031, but 1035 is listed on other papers..

Estate Tax Planning

Some items were discussed about how to plan your estate to avoid paying excessive taxes.  While estate tax planning does cost some significant money, the savings in taxes could easily be 10x-30x, or even higher, depending on the size of your estate.  Saving even $100k of taxes on a large estate can pay for a lot of tax planning advice. There's tons of different trusts that you can use to protect your assets from taxes.  Every estate will be somewhat different.  There was a hard sell here to go see them.  Again, if your estate is big enough, then seeing them is trivial compared to the tax savings.

They emphasized the GRIT thing strongly without going into much detail about what it was.

Family Limited Partnerships

They talked about FLPs a bit. The idea is that if there's a significant asset that is business related, or requires some amount of direct control, then it's possible to create a FLP to bypass estate taxes.  The example given was a $1m rental unit.  The unit requires direct control and management, so it's allowed.  If the father is the general partner, then the daughter would be the limited partner.  He would get 99% ownership of the asset, but he would give up direct control.  She would have 1% ownership, but would be the controlling partner.  In this case, he gets 99% of the income from the rental unit and she manages it.   He can no longer decide to just sell it though, he has to get her to do anything like that.  Since she has a 1% share, it's a small amount, so taxes don't really matter.   However, when he passes away, then the 99% share gets discounted, by maybe 50%.  Instead of being taxed on $990k, he's taxed on about $490k.  The reason is that since he's not the 'managing' partner (he has no control over what happens), his share doesn't have the full value.  It gets discounted, according to the IRS.  
The caveat is that the asset must be a business-type entity, or something that requires direct control and management.  A CD or savings account wouldn't qualify. Homes also do not qualify, since there's nothing to be managed.  

Notes from the Presentation, Medi-Cal information

The other part of the seminar talked mostly about Medi-Cal and how to structure your estate with it in mind.  

Medicare and Medi-Cal eligibility

Medicare does not cover custodial care  It is only for immediate health concerns, hospitalization, and short term benefits.  Medi-cal is the program to make sure that people who do not have money but need custodial care are taken care of.  I think they said Medi-Cal does not cover in-home care?  
A single person must have less than $2k in countable assets in order to qualify for Medi-Cal.  Assets that are exempt (not countable) include residences, retirement and burial accounts.
The rules are a little different for couples.  The base amounts are that the non-custodial spouse can have an asset limit of at least $104k and at least an income of $2610/month.  These are what the at-home spouse can have/earn and still have the other spouse be eligible for Medi-Cal.  These values are starting points, and can be increased by going to CSRA to get a court order to preserve (more) assets.

Deficit Reduction Act


The DRA of 2005 changed a lot of rules on how things with Medi-Cal happen.  It hasn't gone into effect in California yet, but it will be soon, possibly as soon as 2009.  Anything happening right now though still falls under the pre-DRA rules.

When applying for Medi-Cal, the govt will look at your assets to see if you qualify.  They will also look back up to 30 months (in CA) to see if you've given away any assets.  If you have, then they will count those assets as part of your estate when determining eligibility.  The govt has a calculated monthly rate for how much care costs.  Right now this is $5101.   If you gave away $50k a year ago, the govt would see that and add that $10k to your assets.  They would then say that you are ineligible for ($50k / $5101/mnth) or about 9 months until you 'spend down' that asset.  The plus side is that (pre-DRA), they start counting down from the time the gift was given.  That means, since the gift was 12 months ago, and the ineligible period is only 9 months from there, you would still qualify for Medi-Cal immediately.  On the other hand, if you give $100k a year ago, then that is equivalent to about 18 months.  You would still be ineligible for Medi-Cal for another 6 months.


After California implements the DRA rules, things change for the worse.  The lookback period is extended to 60 months, or 5 years.   Also, the period of ineligibility starts at the date of the Medi-Cal application, not the date of the gift.  Thus, in the example of $50k given away a year ago, you'd still be ineligible for Medi-Cal for 9 months after your application (even if your current assets are $0).

The DRA also changes eligibility asset exemptions.  Equity in a house is subject to a $500k or $750k cap.  So if your house is worth $1.1m, only the first $750k will be exempt.  With $0 in the bank, you'd still show as having $450k in assets to Medi-Cal, so you'd be ineligible.  This may force people to sell their homes, likely at a loss, to get the money necessary to 'spend down' the assets getting custodial care.  Things like mortgages or home equity loans aren't available since there's no income, and reverse mortgages don't work if you're not living in the house.  If the spouse resides in the house, then it's different and the house may be exempt.  

Not in the seminar

While not discussed in the seminar, I think Medi-Cal can also do "asset recovery".  This is where they go back (lookback period?) to recover the costs of the benefits that were paid out.  If a house was exempt, then they can do an 'Estate Claim' at death to get any remaining assets.  

Irrevocable Trusts

These trusts can be used to protect assets from Medi-Cal.  This would apply to both the eligibility and the 'Estate Claim'.  It could also eliminate capital gains taxes in some way.  The seminar was closing up, so this was touched on only briefly.  It sounded like there may be different kinds of ITs, and only some would provide the full protection.

Other Notes

These are just some other notes I jotted down, that don't really have much context.

Final notes

The folder that was given out has a lot of other papers describing a lot of what I mention above in greater detail.  I'd put more information up directly from these papers, but they have all these copyright symbols, and I really don't want to tick off any lawyers so early in life. Some papers actually don't have the copyright symbol, so I may type them up later.  Most of the information can probably be found on the Web.  Here's a quick summary of the items though: