The Supreme Court of the United States issued its landmark opinion in the case of Obergefell v. Hodges on Friday, June 26, 2015. The opinion covered a series of consolidated cases in which the petitioners brought suit challenging state bans on same-sex marriage. In an opinion written by Justice Kennedy, the Supreme Court ruled that 1) the Due Process and Equal Protection Clauses of the 14th Amendment require states to issue marriage licenses to same-sex couples and 2) that the 14th Amendment requires states to recognize same-sex marriages that were valid in the state in which they were performed.

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In our last blog on “Planning With GRATs”, we discussed how a Grantor Retained Annuity Trust (GRAT) can be an effective wealth transfer technique without incurring a gift tax or utilizing one’s lifetime gift tax exemption. A risk, however, with a long-term GRAT is if the Grantor dies prior to the expiration of its term. Death of the Grantor would subject the trust assets, including any income and appreciation, to estate tax. To reduce the mortality risk (especially for elderly clients or for those with health concerns), there is an estate planning technique that utilizes shorter-term GRATs.

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Grantor Retained Annuity Trust (“GRAT”) can be a powerful estate planning tool for transferring wealth to family members with little or no gift or estate tax cost. The Grantor creates an irrevocable trust and transfers assets to the trust in exchange for an annuity payable over any term of years. To the extent the trust assets grow at a rate greater than the IRS Section 7520 rate, the excess is transferred to the beneficiaries free of estate and gift tax at the end of the trust term. With historically low interest rates, now may be a great time to establish a GRAT using assets that are expected to appreciate in value. A GRAT can help reduce estate tax exposure, providing the Grantor outlives the trust’s term. 

In a traditional GRAT the value of the property contributed to the trust is reduced by the value of the annuity payments made to the Grantor during the trust term. The balance or “remainder” projected to be on hand at the expiration of the GRAT term, which is calculated based on the IRS Section 7520 rate at the time of transfer, is considered a gift and subject to gift tax.

To avoid a gift upon formation of the GRAT, the retained annuity is designed to equal the value of the assets transferred based upon the term of the trust and the IRS Section 7520 rate at time of formation. The annuity payments can be a fixed percentage of the initial transfer or a fixed percentage of the trust’s assets, recalculated on an annual basis. Since a GRAT is a “Grantor Trust”, the assets held are not eroded by income or capital gains tax. 

A “Zeroed-Out” or “Walton” GRAT is designed so the present value of the annuity payments is equal to the value of the assets contributed to the trust, so the present value of the remainder interest is zero. Any appreciation of the GRAT assets above the IRS Section 7520 rate pass to the beneficiaries gift-tax free.

The key to a successful GRAT is for the trust assets to generate returns that exceed the IRS Section 7520 rate. Historically, long-term investments yield higher average returns and therefore, longer term GRATs typically have a greater chance of outperforming the benchmark 7520 rate. Locking a GRAT in at a low rate also increases the chances of success. Many affluent individuals increase the savings by setting up multiple GRATs with varying terms.

If the GRAT asset performance is flat or decreases, the GRAT unwinds as if it had never been created. There is little downside since the grantor receives back everything in the form of annuity payments.

While GRATs offer no guarantee of success, they remain a relatively simple and effective wealth transfer strategy. Like any investment or planning technique, taking advantage of GRATs sooner than later offers more wealth transfer opportunity. Depending upon the age and health of the grantor, individuals may want to consider some form of life insurance to mitigate the adverse consequences of death during the term. At the Pierro Law Group we seek to maximize the benefits of any estate planning technique, whether a GRAT or otherwise. We work with clients, their families and trusted advisors to ensure a cohesive and comprehensive estate plan. Please contact us to learn more about GRATs and how they may play a roll in your estate plan.

On May 22, 2014 for the 19th Annual Elder Law Forum we will once again bring together virtually all of the stakeholders in Long Term Care (LTC) – providers, attorneys, financial advisors, caregivers, administrators, government staff and others – as we share the latest developments in this dynamic, ever changing field.  As of this writing there are 175 registrants for the Forum, with each discipline facing challenges as the ever-increasing “senior” baby boomer population continues to make its way into retirement years, turning 65 at a rate of 10,000 a day!

On the financing front, momentum may finally be on our side. There is a growing consensus that no one exclusive solution – public or private – is the answer for all people or all situations.  Medicaid Managed Care has finally made its way to us, and a big reason for the gravitation to that model is cost containment, seeking to capitate the State’s cost (see our prior blog entry on Medicaid Managed Care).

The private LTC Insurance industry has struggled as well.  Underestimations of the percentage of people keeping their policies over the long term, and the ongoing low interest rate environment have led, by extension, to higher than expected claims experience.  The result for consumers has been higher premiums than we’ve ever experienced (on both new policies and some of those that have been in force for some time), tougher underwriting standards that have prevented some people from being able to qualify for LTC Insurance, and a less profitable product that has led some carriers to exit the market.

Also, carriers are moving toward “gender-specific” pricing for their products.  That means that women – especially single women and women who apply with a spouse or partner but only the woman is approved for coverage – will pay higher rates than before when rates were the same for men and women.

In spite of all that perceived (or real?) negativity, there are signs of some bright spots in New York State.  Although we saw the exodus of a few carriers in recent years, we’ve seen some stability in the remaining carriers in the last 12-24 months.  Many people believe the market is going through a similar evolution to the Disability Income Insurance market in the early to mid-1990s.  The result of that shift has been a more stable DI market.

In addition, unlike most of the other states in the nation, at least as of press time, here in NY there is currently only one carrier that has rolled out gender-specific pricing.  So, there is still time for women to lock in lower rates before the other carriers follow suit. 

The other factors affecting rates – interest rates and persistency rates – have also seen a “bottoming out.”  Interest rates, for good or for bad, can’t get much lower, lessening the potential susceptibility of policies issued now to future rate increases of the magnitude we’ve seen in some instances.  And, the premiums for LTC Insurance now incorporate higher persistency rates, further insulating them – though not protecting them completely – from the possibility of future increases.

Importantly, here in the state of NY, the NYS Partnership for Long Term Care recently enhanced its program with significant results.  The Partnership, as you may know, rewards New Yorkers who plan in advance by purchasing a Partnership-certified policy, by providing Medicaid asset protection for those policyholders who exhaust policy benefits and still need care.

The New York State Partnership made two important recent changes that make it possible for a higher percentage of New Yorkers to afford coverage.  They rolled out a 2-year plan, and an optional 3.5% compound inflation rider, so that policyholders can purchase a policy that provides total asset protection while keeping the premium affordable.  No other state has anything close, and combined with New York’s 20% income tax credit policies are far more affordable now for many people.

Finally, newer generations of products have evolved whereby one can combine life insurance and long-term care insurance into one policy.  Doing so may ensure that policyholders have long-term care protection, while also ensuring that the premiums paid – and then some – come back to the policyholder’s heirs in the event the policy is not needed for long-term care.  The so-called “Hybrid” policies can offer life insurance benefits, indemnity payments for LTC and a guaranteed return on investment that has attracted a variety of new policyholders, including the affluent, who did not buy traditional LTCI.

We’ll examine what ALL these changes mean to us, as well as to the clients, patients and constituents we serve on May 22 – don’t miss it!

By: Louis W. Pierro, Esq. and Bob Vandy, CLU, ChFC, LUTCF, CLTC – V.P. Marketing at New York & National Long-Term Care Brokers

Pierro, Connor & Associates – Monday, February 03, 2014 

Preparing a Will is a great way to begin any estate plan, but for the reasons expressed below it pays for many to take the plan to the next level and establish a Revocable Living Trust as well.  

Every Will must be offered for probate and found to be valid by the local Surrogate’s Court before the named executor can be appointed, the debts of the deceased and expenses of the estate paid and the assets distributed.  The length and cost of the probate process varies but is almost always significantly lengthier and more expensive than the administration of a Revocable Living Trust. 

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Paul Walker, an actor who starred in popular movies such The Fast and Furious, died tragically in a car accident at the age of 40. Walker was unmarried at the time and had one daughter with former girlfriend Rebecca Soteros. Walker’s entire estate, which has been reported to be about $45 million, is left to his 15 year old daughter Meadow. Walker’s father has filed the will with court and has been appointed executor of his estate. There is some controversy over the fact that Walker requested that his own mother be appointed guardian of Meadow, and not Soteros. There is likely to be a court battle among Walker’s parents, Meadow’s mother, and Walker’s recent girlfriend, Jasmine Pilchard-Gosnell, who was left nothing in his estate plan and was helping to raise Meadow. 

Are there lessons to be learned from the Walker estate in planning our own estates? 

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