Donations of Property

Prohibited Substitution in Louisiana Last Will is Null

The Prohibited Substitution estate planning rules in Louisiana are a trap for the unwary. When someone writes a Louisiana last will and testament, or a trust, in a way that it contains a prohibited substitution, then the bequest is null.

So, what is a prohibited substitution? Well, here's an example of a provision in a Will that would be interpreted as a prohibited substitution, "I leave ownership of X to Person 1. I require that Person 1 preserve X and, when Person 1 dies, I require that Person 1 leave ownership of X to Person 2."

You cannot donate or leave something in full ownership to one person with a charge to preserve it and deliver it to a second person at the death of the first person. You would be depriving the first person from the power of testation.

A prohibited substitution might be something that I'd see in an olographic testament. Some people attempt to write their own wills in their own handwriting, but they mess up the provisions of the Will. People in Louisiana sometimes argue that they can write their own valid will, but they often fail to realize that the wording that they put in their will can make their loved one's lives miserable.

A prohibited substitution is null - it's as if it was never written. The bequest to the first person is not even valid.

There are a couple of alternative you can use if you want to leave an asset for the benefit of someone, and then when that someone dies, have the asset pass along to another someone. One way to do this is to use a trust - check with your estate planning attorney to help you do this the right way. Another option that might be feasible is to leave usufruct of an asset to someone, and name the naked owner to receive the asset at the termination of the usufruct. Again, check with your estate planning attorney to make sure that you understand the pros and cons of leaving things in trust or in usufruct.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450

Rules on an Irrevocable Trust and Nursing Home Medicaid

This post describes the regulations that exist regarding when assets in a trust are considered resources of someone who is applying for Long Term Care Medicaid.

Many Seniors are concerned about the cost of long term care, especially if it is necessary that they spend months or years in a skilled nursing facility.

Some Seniors explore getting assets out of their name timely to make themselves eligible for Medicaid. These same Seniors, however, are uncomfortable putting assets in their children's names for fear of losing control of the assets, and for fear of giving their children unwanted tax consequences.

Some people explore putting assets in trust for purposes of gaining future Long Term Care Medicaid eligibility. The Louisiana Long Term Care Medicaid Eligibility Manual (the "Manual") has specific rules regarding whether trust assets are considered a resource of the Medicaid applicant, rendering them ineligible for Medicaid benefits.

Regarding when the Medicaid applicant is a trustee of a trust, the Manual provides:

"Count the trust as a resource, regardless of whose funds were
originally deposited into the trust, if the applicant/enrollee:
 is the trustee, and
 has the legal right to:
- revoke the trust, and
- use the money for his own benefit."

Regarding when the Medicaid applicant is a Settlor of a trust, the Manual provides:

"Count the trust as a resource if the applicant/enrollee is the settlor
(created the trust) and:
 has the right to revoke it, and
 can use the funds for his own benefit"

Regarding when assets are not considered a resource and penalty periods apply to the transfer of the assets to a trust, the Manual provides:

Consider penalties under the transfer of resource policy (refer to
I-1670 Transfer of Resources For Less Than Fair Market Value) if
the applicant/enrollee:
 created the trust,
 does not have the right to revoke it, and
 cannot use the principal for his own benefit.

The traditional "avoid probate" revocable living trust clearly is a resource for a Medicaid applicant. Many people, however, create other trusts, and transfer assets to those trusts, which can enable a Senior to avoid the risks inherent in transferring assets during into children's names, while starting the five year penalty period and protecting assets from the nursing home spend down.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450

Children Donate Naked Ownership Interest Back To Surviving Parent

I've been working with a family recently. Dad passed away without a last will and testament ("intestate"). I explained to the family that since Dad died intestate, Dad's half of the community property would be inherited by Dad's children, subject to Mom's usufruct.

The children wanted to support Mom both emotionally and financially. The children wanted Mom to own everything so they asked me if they could donate their naked ownership interest back to Mom.  I told them that we would have to complete the Succession first in accordance with Louisiana law, and that Dad's half would have to go to the children, but then once the children were put "in possession" of the property, they could donate it back to Mom. Everyone felt good that Mom would own 100% of the property and the other Succession assets.

There were no gift or estate tax issues involved in the transaction since the estate tax exemption in 2018 is so high ($11.2 million). In fact, the children may benefit in the long run because when Mom dies many years from now, the children will benefit from the step-up in basis of Mom's entire estate as it passes to the children.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Is Estate Tax Owed on Living Trust Assets?

Assets that are either in your name or in your Living Trust are going to be included in your estate when you die for federal estate tax purposes. The federal government assesses about a 40% tax on the value of your assets when you die, but only if they exceed a certain amount.

Starting in 2018, as a result of our new tax law, an individual will be able to exempt $11.2 million of assets from the 40% estate tax. To take it a little further, married couples can exempt up to $22.4 million from the federal estate tax.

In fact, for most families, it is more advantageous for assets to be included in your estate for tax purposes than excluded. Assets that are in your estate, for tax purposes, get a step-up in capital gains tax basis when you die. This permits your heirs to sell assets after you die and pay no tax on the appreciation from the time of your initial purchase until the time of your death. This can save a load of tax.

In fact, since Louisiana is a community property state, we get to benefit from the special rule that says that all of the married couple's community property gets a step-up in basis at the first death, not just the deceased spouse's half. And if you set up your estate planning program the right way, the entire estate will get another step-up in basis when the surviving spouse dies. We call this the "Doube Step-Up." But it doesn't happen automatically, you have to actively work with the right estate planning attorney who can guide you through this.

It's worth mentioning at this point that the federal gift and estate tax are unified. Here's what that means. If, in 2018, you donate more than $15,000 to anyone, no one owes tax. By giving more than the annual exclusion amount ($15,000 for 2018), you simply start using up some of your $11.2 million estate tax exemption. That's right - no one owes taxes if a gift is in excess of $15,000 (unless, of course, you give away more than $11.2 million, but that would be one heckuva gift!

And note that based on the new tax law, the estate tax exemption is scheduled to revert back to $5 million (indexed for inflation), in 2026, unless, of course, Congress and the President change it again.

How a Surviving Spouse Owns Home After Inheriting the Intestate Louisiana Usufruct

Whenever a Louisiana married resident dies owning a home with their spouse, and they pass away without ever having signed a Will or Trust (they died "intestate", issues always arise.

I was working with a surviving husband whose wife had died a few weeks earlier. The surviving husband really wanted to own their home. He said that he may want to sell it in the upcoming months or years, he may want to create a home equity line of credit, and he also said that while he has no plans for remarriage, he would want to be able to provide a roof over a new wife's head if he dies before her.

When he came into my office he told he that she had never signed a WIll. He "assumed" that he would own the house since they bought it together and it was paid for. But his assumption was false. I had to tell him that since his wife passed away without any estate legal program in place, that he would continue owning his "one-half" of the house, and that he would be inheriting the "usufruct" of his wife's half of the home until the earlier to occur of his death or remarriage. I further told him that their children would inherit the "naked ownership" of her half of the house.

Some Louisiana folks mistakenly believe that when a married person dies without a Last Will, then half of the deceased's half would go to the surviving spouse, and the other half of the deceased spouse's half would go to the children. But this is an incorrect assumption.

The husband asked me how in the world could he get ownership of the house solely in his name. I told him that we would need to complete his wife's succession first. The succession will require that the home be re-titled so that their children are naked owners of his deceased wife's half of the home, and the surviving husband would own the usufruct of her half until he died or remarried.

Then, his children will sign the necessary paperwork to donate their naked ownership interest back to their father. This would enable the surviving father to have "full ownership" of the home. He needed the children's cooperation to obtain full ownership but the children were completely supportive of the concept of their father owning the home that he had acquired and paid for.

In order to avoid sticky situations when a family member or loved one passes away, it always makes sense to take care of this ahead of time and create an estate legal program that makes settling your estate easier and the right way.

Two Biggest Louisiana Estate Planning Misconceptions

Everyday I'm faced with Louisiana residents' misconceptions about certain areas of estate planning. If I can use this post to help just a few folks eliminate these misconceptions, it will make my life and the lives of many others much better.

Misconception #1: If you have a Will, you avoid probate. Countless times over the years a spouse has passed away and the surviving spouse has sat with me at the conference room table. The surviving spouse typically says something like this, "I thought that since my spouse had a last will and testament, that the probate (or as we often call it in Louisiana, a "Succession") was avoided. I thought I could just produce the Last Will and Testament and everything would be put in my name."

Sorry folks. No can do. A Will names an executor whose job it is to guide and nurture the family and heirs through the court process, and the Will also tells a judge who to make sure the remaining assets get disbursed to after all of the delays and costs and procedures have been met. But a Will does not avoid probate.

The second biggest misconception that I face on a daily basis is that most people think that if they give more than $14,000 to their kid, then taxes are owed. Wrong again. Everytime I hear someone tell me that taxes are owed if they give more than $14k to someone , I give them this example, which they seem to understand.

I say, "Let's assume you give $114,000 to your kid. You gave $100,000 more than the allowable amount. But no one owes taxes. By making a gift of $114,000 to your kid, you just used up $100,000 of your estate tax exemption. So now, when you die, your estate can only leave $5.35 million free of estate tax, rather than $5.45 million."

To which they respond, "Oh. That's not an issue for me because I don't have an estate that exceeds $5 million."

What other estate planning misconceptions are out there?

Should I Donate Property? Or Let Children Inherit It When I Pass Away

Several people in the last few days have asked me whether they should donate a piece of property to their child, or whether they should let the child inherit the property from the parent. 

There are several factors to consider when determining whether to donate property, or to leave to a child or other heir through your Will or Trust. Here's a few of the factors:

(1) Capital Gains Tax. If you purchased a piece of property for $50,000, and it is now worth $200,000, and you donate the property during your lifetime, the donee (the person you give the property to) will receive a "carry-over" basis. When the donee sells the property, they will pay capital gains tax on what they receive in excess of $50,000. If, however, the child inherits the property from you through your Will or Trust, the inheritor will enjoy the benefits of the "stepped-up" basis. The inheritor's basis will be the value of the property on the date of death. For this reason, many elect to hold on to their appreciated property and let the child(ren) inherit it.

(2) "I Don't Want Them To Sell It. Some people own family property and they do not want it sold after it has been transferred either through gift or inheritance. Perhaps that may be a factor that would warrant you keeping the property for your lifetime, and then allowing the inheritor to own it when you die - perhaps when they are more mature and more likely to abide by your wishes to keep the property in the family.

(3) The Property Generates Income. If the property generates timber or rental or mineral income, this may be a factor as to whether your keep it or donate it. Perhaps you want to continue to receive the income because you want it or need the income, or perhaps your child who may be in a lower income tax bracket may pay less tax if they receive the income.

(4) "I Just Him To Have It." Some people simple want their child or children to own the property - now. If that is really what you want - for whatever reason - then give it to them. Just make sure it is an informed decision in light of all of the other factors that come into play.

(5) Estate and Gift Tax. Because individuals have a $5.49 million gift and estate tax exemption that they can use by making gifts during their lifetime or by leaving assets to others when they die, the estate and gift tax should not be afactor for most people who are contemplating making gifts of property. If a gift is made that is larger than the annual exclusion amount (currently $14,000), no tax is due  - the Donor simply used up some of their $5.49 million estate tax exemption.

(6) Future Medicaid Eligibility. If there is a concern that the parent may need the Louisiana Long Term Care Medicaid benefit if they go into a nursing home in the future, this may be a factor that warrants making the donation now. If the parent holds onto the property and needs nursing home care in the future, the parent would not qualify for Medicaid until after he or she sold the property and used all of the proceeds of the sale on long  term care  nursing home expenses.

As you can see, several factors go into whether you should keep property or donate it before you pass away. Make sure your decision is fully informed - a mistake could cost your family plenty. For more help, call us at 866-491-3884.

"If I Give More Than $14,000 To My Daughter, She Will Have To Pay Tax," Says Everyone - Incorrectly!

I was having a conversation a few days ago with a man who wanted to preserve as much as he could for his family - and as little as he could from the government. It was a difficult conversation to have because - in spite of his confident nature - everything that came out of his mouth was wrong.

While he was on the topic of gifting, he said, "I want to put some things in my daughter's name, but if I give her more than $14,000 in any year, she will have to pay tax on it."

We hear this often. And every time we hear it, it's wrong.

The Technical Side of Gifting

Here's the technical side of gifting. Each year a person can donate $14,000 (or whatever the present interest annual exclusion amount is - it gets adjusted for inflation) to as many people as they want and there are no TAX CONSEQUENCES to that donation. Most people understand this.

But where most lay people misinterpret the law is the following. Any gift, regardless of the value of the gift, is exempt from income tax both to the donor (the person making the gift) and the donee (the person receiving the gift). That's right. If Dad gives $114,000 to Daughter, no one pays any income tax. 

So, what's the catch?

The $114,000 gift described above is a TAXABLE GIFT. But no one pays any income tax. Here's the only tax consequences. You see, Dad has an estate and gift tax exemption of $5.49 million. By making a $114,000 taxable gift, no one owes any tax. Dad must report to the IRS (on a Gift Tax Return - IRS Form 709) that he made a taxable gift. But no one owes any taxes. Dad simply used up $100,000 ($114,000 - $14,000) of his gift and estate tax exemption. Now, when Dad dies, instead of being able to exempt $5.49 million free of the 40% estate tax, Dad can only exempt $5.39 million of assets from the 40% federal estate tax. 

When Dad learns this he exclaims, "I'll never have anywhere near an estate of more than $5 million so making a taxable gift really doesn't matter in my circumstances." Congratulations Dad! You now understand that making gifts in excess of the present interest annual exclusion amount (currently $14,000 for gifts made in 2017, but subject to increase) causes no one to pay any tax.

Gifting can be tricky. If you're gifting, you can make some big mistakes if you don't take into account all of the income tax, capital gains tax, property tax, estate and gift tax, and other nontax considerations that result from making gifts. Some families benefit from giving cash, while others may benefit from giving appreciating assets. Some families lose out when they donate appreciated assets. So get some expert help and have a good estate and tax legal program in place for your family to preserve and protect what you have.

Louisiana Family Supportive After Parent Dies Intestate Requiring Probate

I was contacted by a family recently that had a number of estate planning and administration issues that needed to be addressed.

Mom had died unexpectedly a few years ago. Mom died intestate - which means she had no Will or other estate planning legal documents in place when she died. Mom and Dad had accumulated a fairly significant estate by the time she passed away - including homes, mutual funds, stock, bank accounts, vehicles, and other assets.

Dad is planning on getting married again. Normally, this causes problems between the children of the first marriage and the new step-mom - but not here.

The children were super-supportive of their father. They said, "Look Dad, you raised us, bought us cars, paid for our college education, and you've been a great father. You and Mom don't owe us anything. We want you to have it."

Now that's support from children back to their father! The children realized that they could kick Dad out of his house on the day that he marries Step-Mom - but the kids are better than that.

But we still have legal work to take care of. We will complete Mom's Succession. And then after that, the kids will sign legal documents donating their share of their inheritance from Mom back to Dad. Dad will wind up being the 100% owner of everything. 

Dad is now establishing a new legal plan to support his new wife and his children the right way, and making things easy for them to inherit in the future.

If you live in Louisiana, and are in a situation like this, and would like to find out how easy it is to get all of this straight (and how much of a mess it will be if you don't address it), give my office a call at 866-491-3884, and we'll have a discussion about the easiest way to get all of it straight.

Basic Gifting Concepts To Avoid Estate and Gift Tax

Gifting may only be necessary for people who have large estates. With the estate tax exemption for deaths occurring in 2016 at $5.45 million, it may not be appropriate for most Louisianians to make gifts annually.

However, if an individual has or will have an estate exceeding these thresholds, it may make sense to do some gifting if one of the primary objectives is to preserve the estate for the family and minimize or avoid estate tax at death.

Individuals can donate up to $14,000 annually to as many people as they want to without incurring gift and estate tax consequences. If an annual gift exceeds this annual exclusion amount, then typically, no tax is due, but the donor will begin using his or her $5.45 million gift and estate tax exemption.

A person can donate cash, stock, property, an interest in a business, or any other asset having value. People should be careful, however, when they donate appreciated assets because it may result in extra capital gains tax when the asset is later sold or disposed of. When appreciated assets are donated, the done/recipient receives the assets at a "carry-over" basis. But when an individual inherits appreciated assets, the heir/recipient enjoys a "step-up" in basis.

Gifts can be either outright or in trust. Gifts are often made in trust when the donor does not want the donee to have complete control of the gifted asset. But if you donate in trust, you have to make sure the gift in trust meets the requirements of the "present interest annual exclusion," so that the beneficiary of the trust has a "present interest" in the gift.

Gifting to avoid estate tax can be complicated. Rabalais Estate Planning, LLC, has attorneys and office locations all around south Louisiana, including Baton Rouge, Metairie, Lafayette, Mandeville, Lake Charles, and Houma. Our website is www.RabalaisEstatePlanning.com. Our phone number is 866-491-3884. You can also email me at paul@rabalaisestateplanning.com.

Forget About The Estate Tax. Capital Gains Tax Is The New Sexy Tax To Avoid

Face it. Most families simply won't have to worry a lick about the federal estate tax. That's because about 99% of unmarried people don't have an estate that exceeds $5.45 million. And more than 99% of married couples don't have a combined estate of $10.9 million. So, for most families, no worries about trying to avoid the 40% federal estate tax.

But almost every family who engages in estate planning has assets that have appreciated in value. That means there is the potential for capital gains tax at both the federal and state level when those appreciated assets are sold.

Example: Let's say Dad bought stock in ABC Co. for $5 per share over the years. Now, that Dad is 76 years old, ABC Co. stock sells for $60 per share. That means that there is $55 of gain in each share of stock that Dad owns. If Dad sells the stock during his lifetime, he'll get hard with a capital gains tax.

Now let's say that Dad wants to beat the system so he decides to put that stock in his children's names before he goes into a nursing home (to avoid nursing home poverty) and before he dies (to avoid probate and to avoid death tax). So, he puts the stock in his kids' names. Voila - Dad thinks he beat the system. But after the transaction is complete, the stock goes up even more (let's say to $100 per share) and the kids decide to cash in and sell the stock. What no one realizes is that when Dad transferred the stock during his lifetime to the kids, the basis of the stock "carried over" to the kids, so when the kids sell the stock, they will have to pay capital gains on everything they receive in excess of the $5 per share. So, $95 per share will be subject to a 20BUT +% capital gains tax at the federal and state level.

Perhaps if Dad would have put the stock into the right kind of Grantor Trust, he would have removed the stock from his name for probate and nursing home purposes, BUT HE WOULD HAVE PRESERVED THE STEP-UP IN BASIS AT THIS DEATH. So, when Dad dies later when the stock is worth $100 per share, and then the kids sell the stock for $100 per share, the total capital gains tax bill for the sale will be $0 or zilch. Even though Dad kept the stock in his taxable estate by transferring it to a Grantor Trust, there will be no estate tax due to Dad's estate being valued at less than $5.45 million.

Many a "Do-It-Yourself" estate planner have mistakenly believed that they beat the government or beat Uncle Sam by putting stock or other appreciated assets in their kids' names while they are alive. But what they don't know is that Uncle Sam is laughing at them from a distance knowing that when the asset is later sold, Uncle Sam will collect a bundle because the children, unfortunately, receive a "carry-over" basis in the stock, as opposed to a "stepped-up" basis in the stock.