Why Life Estates May No Longer Protect Farmland: In re Schmalz

If you own farmland, chances are you’ve heard about life estates. Maybe your land is already set up in a life estate, or maybe your neighbor has land in a life estate. Or, maybe you’ve been advised to create a life estate to protect your farmland from nursing home costs by someone you know. But this summer, the Minnesota Supreme Court handed down a decision that significantly changes the landscape for the owners of a life estate and may make life estates less effective than before.

First, what is a life estate? A life estate divides real property into two parts across time. A deed gives a gift of a future interest in the land, often to children or other heirs, and then reserves ownership in the land for the life of the current owner (or, in some cases, for the joint lives of two co-owners). The current owners, called the “life tenants,” continue to own the property and receive all the rent as before, but when they die their interest automatically transfers to the owners of the future interest, known as the “remainder persons.” This transfer at death qualifies for a step up in tax basis under the tax code as well, meaning if the land is sold at death no capital gains tax is owed.

Why are life estates important for long term care planning? Medical Assistance (MA), the program that pays for long term care costs in Minnesota (also known as Medicaid), has historically treated life estate property as unavailable to the applicant and their spouse. Because a life estate is considered unmarketable (would you want to buy an interest in property that could extinguish at any moment when the life tenant dies?), state guidance provided that the value of a life estate interest did not count toward an applicant or their spouse’s asset limit. So, an individual or married couple could continue to own farmland in a life estate and qualify for (MA) benefits. In addition, the life estate interest could be transferred to the healthy spouse so that all the rent payments could be retained by them instead of having to be spent on care.

But a new Minnesota Supreme Court case, In re Esther Schmalz, may have changed all that. In this case, Esther and Marvin Schmalz owned farmland in Renville County and transferred the land to their children, retaining a life estate interest for their joint lives. Esther went into a nursing home, and Marvin applied for MA benefits. Renville County initially determined that the value of the life estate interest counted against Marvin’s community spouse asset limit making Esther ineligible for benefits. They appealed their case all the way to the Minnesota Court of Appeals where the court sided with Esther and Marvin, holding that Minnesota law requires the county to disregard the value of life estate property. The Minnesota Department of Human Services appealed this determination, and the Minnesota Supreme Court reversed the decision of the lower court, holding that Minnesota statutes require the county to count a life estate interest owned by the non-MA spouse against that spouse’s community spouse asset limit.

What might this mean going forward? We know that if the non-applicant spouse (i.e. the healthy spouse) owns a life estate interest at the time of application, the value of the life estate will be counted against that spouse’s asset limit, which at present is $128,640. The applicant spouse will not qualify for MA if their spouse’s total assets exceed this limit. Could the non-MA spouse transfer their life estate interest to the MA-spouse and qualify? Perhaps, but consider that the owner of the life estate interest holds all rights to income from the property, which means that any rental income would have to be spent on nursing home care in most cases.

Life estates were already falling out of favor with Elder Law attorneys since the law changed on August 1, 2003 to allow the state to put an MA lien on the life tenant’s interest in life estate property when they die. (Prior to that date, there could be no estate recovery on life estates because, technically, a life estate ceases to exist on the death of the life tenant.) Since this new court ruling, life estates no longer protect the income from farmland for the non-MA spouse. Life estates may no longer offer much promise as a planning tool for the future.

If you currently own valuable real estate, like farmland, in a life estate arrangement, consider speaking to a licensed attorney with experience in MA planning to advise you about alternative options to protect your assets from the cost of long term care.

How and Why I Provide Client-Centered Legal Services

The other day, a new client said to me that before she called me she had spoken to a few other attorneys who provide similar services, but she decided to work with me for the simple reason that I called her back. The other law firms she called would only let her speak to a legal assistant and before she could even talk to the attorney she thought she might hire, she had to fill out a 20-page form and then wait for an appointment, all without knowing whether this was a person she wanted to work with or how much she could expect to pay.

“I hired you because you called me back.”

A typical estate plan can cost anywhere from $800 to $4,000 or more depending on the client’s needs and the attorney they are working with. This is a huge investment! But my experience with other firms is similar to my clients: They want to give you the service they want to give you, not the service you want to pay for. My client’s experience with other firms was not unusual. Most firms want to get all the information about you first and then decide if they want to work with you, and they don’t typically give you an opportunity to do the same.

All lawyers care about their clients. We’re all in this business to provide our clients peace of mind, to solve clients’ legal problems, and to leave them feeling satisfied. But not all lawyers know how to do this in practice. They focus on efficiencies that make sense to them, not necessarily to you. They know they need clients, but they don’t deliver client-centered legal services.

What are client-centered legal services? Authors Aaron Street, Sam Glover, Stephanie Everett, and Marshall Lichty in a recent book define client-centered legal services as the creation of a “client experience that shows that you care about [the client], that you understand who they are and what they need, and that you [the lawyer] are the right person to take care of them.” This involves making adjustments in four key areas:

Pricing,

Accessibility,

Communication, and

Feedback.

Here’s what this means for my practice and my clients.

First, my clients always know what something is going to cost. I frequently offer flat-fee options for estate planning and basic business documents, meaning that you will pay X and receive Y. That way, you know upfront what something is going to cost. When I offer my hourly rate, I provide an estimate so that there are no surprises going forward, and I keep fees as part of the conversation going forward to make sure the client is comfortable with what they’re spending. Even before you hire me, you’ll know what you can expect to spend on this major investment.

Second, I meet clients where they’re at. No driving downtown and dealing with confusing parking and traffic situations or meeting your lawyer at a stuffy office. I’m happy to meet clients at their business or home instead. And to make sure everyone feels safe during the pandemic, I’m primarily meeting clients by video conference or phone, which is not only safer but also saves everyone a lot of travel time and headache.

Third, I communicate with clients directly. When you call, you’ll never get a legal assistant or some other gatekeeper. I offer a 15-minute free consultation so that you can get to know me first before you hire me. I gather as much information as I can from our phone call and I only ask you to provide additional documents if it is absolutely necessary to achieve your goals. My job is to make this process as painless as possible so that you can stop worrying about your legal issue.

Finally, I will ask for your feedback. I want to know if the services I’m providing to you meet with your expectations (and hopefully exceed them!). And if they don’t meet your expectations, I want to know how I can do better. Client-centered services are about constantly improving my processes to better meet your needs and the needs of folks like you. If I can do better, I want you to tell me how.

Where does your Facebook Account go when you die?

As an estate planning attorney, I’m used to talking with clients about how to dispose of their assets when they die. The types of assets I’m usually talking about are real estate, cars, bank accounts, retirement accounts, investments, and maybe heirlooms — things we can generally assign a dollar amount to. But what we usually don’t talk about are the assets that you probably use and think about almost every day, every time you sit at your computer or pick up your phone. I’m talking about social media accounts, email accounts, digital password managers. I’m talking about websites you go to almost every single day that hold some of your most valued possessions — your passwords, your personal data, your public or private writings, your photos. Each of us today is our own content creator, blasting out new posts, creating new emails, and generating new website profiles on an almost daily basis. But where does that stuff go when you die?

Just a few years ago, there was really no good answer to this question. When people died, their social media pages lingered on, some becoming makeshift memorials and others becoming eerie reminders of the person who once was, like the occasional birthday reminder I still receive each year for a college friend who passed away several years ago. But recently, websites have taken a more proactive role in addressing this issue. In a recent PCMag article, author Eric Ravenscraft provides instructions on how to add a trusted person to convert your social media and email accounts to legacy or memorial accounts and to make sure that the right person can access your passwords so that you don’t become “the guy who locked cryptocurrency exchange customers out of $250 million after his death because only he knew the password.”

I recently went through this process with my own accounts. I use a password manager to organize all of my passwords in one easy-to-access place. I only have to memorize one password and it unlocks access to all of my other passwords, making it easier for me to have more effective (and harder to remember) passwords for better internet security. (There are lots of options out there, including Keeper, 1Password, Dashlane, and LastPass, to name a few — I highly recommend you get one if you don’t have one.) Turns out, it was easy to add an emergency contact to my account just by clicking “Emergency Access” in the menu bar and entering the email address of the people I trusted to manage my passwords in case something happens to me.

I also added a “legacy contact” to my Facebook profile. You can find these settings by going to your Facebook page and clicking the down arrow in the upper-righthand corner, and then click “settings.” Under general settings, you’ll find the “memorialization settings,” where you can select one of your Facebook friends to manage your account when you die. You can also ask that Facebook delete your profile upon your death.

And if you use Google for email, you can set up Inactive Account settings. This allows you to give another person access to your Google account (which may include not just email, but your calendar, photos, contacts, and anything else you may have saved in one of Google’s many apps) when you haven’t logged into your account after a certain period of time. You can also limit that person’s access to only certain Google content, and you can designate up to 10 people. You can also set up an auto-responder message when your account goes inactive.

Think about what other websites you use frequently and whether someone would be able to access that website if they needed to in case of emergency or death. Some websites, including LinkedIn and Instagram, have their own policies about how to deactivate the accounts of deceased people, while others (like Twitter) are still in the process of figuring this out. Also, think about what information people would need to have about you that is only stored on the web. Are you into trading stocks online? Do you have cryptocurrency investments? Is your bank online and you don’t get paper statements? How will your survivors know how to find these assets? Save your family the headache of trying to hack into your email accounts or phone to locate all your financial assets and make sure they have some way to get at that information, whether it’s a digital or paper password keeper or some other method that will work for you and them.

Prepare Your Business and Estate Plan for COVID-19

The global coronavirus pandemic has turned our world upside down. It is the only thing anyone is talking, writing, or thinking about, and with good reason. We are all vulnerable and we are being told that most of us will contract the virus, it is only a question of when. Postponing illness through social distancing and self-quarantine are essential to ensure that those who do get sick can receive care when they need it. But being under quarantine, for many of us, has become a time to think about the things that matter most to us and also a time reflect on life’s fragility.

So, if you have been putting off thinking about your personal estate plan, now is a good time to think about it. And if you own a business, think about what would happen if you become sick. Who will manage your business or personal affairs if you need to be hospitalized? What will happen to your assets if you pass away, and who will be in charge of administering your estate or running your business? These are important questions that feel particularly salient in this tumultuous time.

Even though we’re under quarantine, that does not mean you have to postpone making changes to your business or estate planning documents. Much of the work can be done by phone or video conference. And many essential documents, like trusts or contracts, do not require special witnessing or notarization. For documents that require notarization, Minnesota law authorizes the use of remote notaries who can electronically notarize your documents using a video conferencing service on your computer, tablet, or smartphone. As of right now, will signings still require two witnesses to be in the physical presence of the testator, but the witnesses can still maintain a safe 6-foot distance from the testator and each other. And the Minnesota State Bar Association is working on proposed legislation to lift this requirement as well.

In uncertain times like these, it can help tremendously to take proactive steps to feel in control. There is little we can control in this moment, but one thing you can do to get some peace of mind is to make sure there is a plan in place if you become sick. Make sure you have a health care directive so that someone you trust can make healthcare decisions for you in case you’re unable to do so. Make sure you have a power of attorney so that someone can access your accounts in case you need to be hospitalized or quarantined for a long period of time. Make a plan for who would manage your assets or take care of your children or pets if you were to pass away. Taking these proactive steps will help you feel ready to face whatever comes next.

New Year's Resolutions for Your Estate Plan

The beginning of a new year is an invitation to review what you’ve accomplished the prior year and to think about what things you might like to accomplish this year. As your make your 2019 New Years Resolutions, I’d like to suggest that you take some time this year to think about your estate plan.

If you don’t have a plan yet… consider making one! Keep in mind that just because you haven’t done any formal planning doesn’t mean you don’t have a plan. Without your own plan, the government will make decisions for you. State laws govern what happens to your assets when you pass away, and in some cases state laws govern who makes decisions for you if you need help doing so. But these default rules are set aside if you make your own plans and turn those plans into legal documents. So, if you don’t yet have a plan, make a resolution in 2019 to sit down with an estate planning attorney and discuss your wishes and make a plan. If nothing else, make sure you get a health care directive if you don’t already have one.

If you already have an estate plan… consider reviewing it to make sure it’s still consistent with your wishes. Ask yourself whether there have been any major life changes since you last did your estate planning documents. Have you moved? Has a spouse, child, or other beneficiary or person named in your documents passed away? Have minor children reached adulthood? Did you give or loan money to a beneficiary, and you want that beneficiary’s share reduced to reflect that? Were you or your spouse diagnosed with a long-term, serious illness that may require long-term care? Was a beneficiary diagnosed with a permanent disability? Have you acquired real estate? Do your assets now total more than $3 million? Did you or a beneficiary go through a divorce? Do your documents simply not make sense to you anymore? If you answered “yes” to any of these questions, you should talk to an estate planning attorney about whether your documents need to be updated or changed.

Estate planning doesn’t have to be expensive or complicated, and knowing that you have a plan in place provides significant peace of mind for both you and your family. Contact me or one of our estate planning attorneys at FMJ to discuss options for your estate plan in the new year.

Happy new year!

What's the One Document Everyone Needs?

I’m often asked what are the essential legal documents that everyone needs. While it’s true that most people need to put an estate plan in writing and most will need to decide between a will or a trust plan, there is really only one document that everyone needs, and it’s not a will or a trust. It’s a health care directive.

If you are reading this and you don’t have a health care directive, get one. Anyone over the age of 18 needs a health care directive. Why? While a health care directive can do a number of important things, the most important thing it does is nominate someone else to make health care decisions for you if you cannot. If a serious illness or accident happens and you become brain dead but remain on life support, do you have someone with the legal authority to make the decision to remove life support? Or if you have a terminal condition, is there someone who can decide for you whether to pursue treatment or palliative-only care? As some people like to say, who can “pull the plug” without having to go to court to get a court order to do it? If you don’t have a health care directive, then then answer is, no one.

You might think that, if you’re married, your spouse can make these decisions. But, there is no law in Minnesota that makes your spouse the default decision-maker for your healthcare decisions. If you want your spouse to be able to make those decisions without question, then you need to have a health care directive.

You might also think that, if you’re a young person, your parents can make health care decisions for you. Again, not necessarily. For people over 18, your parents no longer have legal authority to make healthcare decisions for you. So again, if you want your parents to have this ability, you need to sign a health care directive. If you have a child who just turned 18, I strongly recommend you have them sign a health care directive in case something were to happen to them.

In addition to nominating someone to make health care decisions for you, a health care directive can also state your wishes regarding organ donation and final disposition of your remains. There are many different forms available for health care directives, and some are quite short while others go into great detail regarding your wishes for your health care (a popular one is called the “Five Wishes”). Most physicians and clinics can also provide you with a health care directive form. You can choose any form you like, but it must have the following components to be valid in Minnesota: It must be dated and signed by you, it must nominate at least one person to act as your health care agent, and it must be either witnessed by two people or notarized. If you use witnesses, at least one cannot be a healthcare provider, and none can be your agent (or agents). Also, keep in mind that your spouse or close family member cannot notarize your documents based on legislation passed last year.

If you need a health care directive or have questions, contact me or one of my colleagues at FMJ.

GRATs Make the News -- But What Are They?

As an attorney, I’m always a bit tickled when a relatively obscure estate planning device makes the national news. Just a couple years ago, the untimely passing of Prince (legendary Minnesota musician and personal favorite of mine) brought the importance of estate planning to the national stage. Even more recently, the passing of Aretha Franklin, another great talent who neglected to make a will, has reiterated the point. Even so, the statistics reveal that the vast majority of Americans do not have any estate plan in place. But this post is not about celebs who failed to plan, but rather celebs who planned quite well, and what we can learn from them.

In a recent investigation by the New York Times, reporters revealed that President Trump’s father, Fred Trump, a billionaire in his own right, used something called a “GRAT” to pass his fortune onto his children. The Times revealed that, using this GRAT, Trump’s estate paid far less in estate taxes than it otherwise might have had to do. So, what is a GRAT?

A GRAT is a grantor retained annuity trust. It has its origins in an estate tax loophole in Internal Revenue Code Section 2702. Section 2702 was enacted in 1990 to eliminate what were called grantor retained income trusts (or “GRITs” — see, isn’t this fun?). Congress wanted to stop people from being able to transfer assets to their children in a trust while retaining the income to themselves and using the income to offset the transfer taxes that would ordinarily be owed to the government. While the law outlawed “GRITs”, it continued to allow a very similar arrangement so long as the grantor received a fixed amount of income, or an annuity, instead of a variable income stream. Thus, the GRAT was born.

The advantage of a GRAT is its ability to freeze the present value of an asset for transfer tax purposes even though the asset continues to appreciate. Suppose you have an asset that you know is going to grow in value in a big way — say stock in a closely held company that’s about to go public. Later on you might want to gift the stock to your children, but by then the stock will be so valuable you might have to pay gift or estate tax on it; but you don’t want to give the stock to your children now before it appreciates. If you create a GRAT, you can transfer the stock to the GRAT, the GRAT will pay income to you for a fixed term (2-10 years is typical) based on the present day value of the stock, the annuity income can zero out the transfer tax obligation you would otherwise have, and your children will later receive the stock after it has grown in value, tax free. In short, you transfer an asset to the GRAT, the GRAT pays you pack the initial value of the asset upon the date of transfer, and then your children receive the appreciated asset later on, tax free (or tax reduced).

You might be thinking that you have lots of assets — stocks, real estate, etc.—that are likely to appreciate, so why aren’t we all using GRATs? First, because most people today will never owe any estate or gift tax. The current federal estate tax exemption is $11.2 million per person. That means a married couple can transfer $22.4 million combined tax-free. If you’re wealth is below this figure, a GRAT probably isn’t for you. Second, if your asset fails to appreciate as expected, there’s no advantage. The assets in the GRAT have to appreciate at a rate greater than a rate established by the IRS under Internal Revenue Code Section 7520, and that can be hard to predict in the real world. Third, if the grantor dies before the end of the GRAT annuity term, the whole thing is included in the grantor’s gross estate for the calculation of the estate’s tax obligation. That’s a lot of “what ifs”!

Last, there are alternatives to GRATs that most people should consider. If you live in a state, like Minnesota, that has a state estate tax exemption that is much lower than the federal exemption, you could still have to worry about estate tax even if you don’t have a Trump-sized portfolio. For these folks, an irrevocable life insurance trust (ILIT) or charitable giving may be a more appropriate, less risky, and less complicated alternative.

So, while GRATs aren’t for everyone, estate plans are. Borrow a play from the Trump family play book and contact a lawyer today to get started on your estate plan. An attorney like me or my colleagues at FMJ can help you find the right plan for you.