So You're The Executor or Trustee Of Your Parents' Estate?

I'm sorry to hear that your parents have passed away. Odds are that the principal (or only) heirs of the estate are you and your siblings, and that you're now in one of two situations: By virtue of being an only child or having mature siblings, you have a general agreement about how to carry out your parents' wishes. Or you're dealing with one or more of your siblings who are not being reasonable, perhaps due to their emotional state, perhaps due to mental illness, perhaps due to sheer greed, perhaps for some other reason.

If you're in the first situation, consider yourself lucky. You and your siblings may even be able to distribute the estate without retaining a probate lawyer, particularly if the estate falls under your state's rules for small or simple estates. If your parents took their more significant assets out of the estate through the use of a living trust, designating beneficiaries on their financial accounts, or other similar measures, it's quite possible that not much will be left in the probate estate and that even if you retain a lawyer for the probate matters the legal fees will be quite reasonable.

On the other hand, you may be dealing with a situation in which one or more of your siblings is being unreasonable. What should you do? Odds are you were picked to be the executor or trustee because you're "the reasonable one", the sibling your parents viewed as being the person most capable of navigating the needs, demands and emotions of your siblings. You may be tempted to believe that if you simply try to reason with your sibling, or if you give them a bit of time, they will calm down and become reasonable. But even if there's a chance that your sibling (or siblings) will come around, I'm going to suggest that you be proactive.

Find and consult a good probate lawyer, and get a sense of your duties as administrator or trustee. You may decide after the consultation that it would be wise to retain the lawyer. You may decide to wait a while, but even if you do wait you are much better positioned to bring the lawyer into the case if things get out of control. Ideally, even if it means paying the attorney for an extensive consultation, you'll have a sense of how to proceed with your duties - how to dot the i's and cross the t's, keeping everything legal, above-board and properly documented.

What you cannot afford to do is to compromise your own position in order to appease a sibling. Your brother needs money now, now, now, not in a few months after notice has been sent to creditors and the estate is ready for distribution? The answer is "No, not until we have observed the required notice periods, have inventoried the estate, and agree on how the assets are going to be distributed". If you are not comfortable asserting that position to your sibling, bring in the lawyer and have the lawyer explain things. Take the heat off of yourself, send the message that you're not going to bend the rules, and also let your siblings know that if they are going to be unreasonable they are also going to run up legal fees. (Sad though it may be, with some people it's only that last part that inspires them to stop making unreasonable demands.)

There's something else that you can do, well in advance, that can help with trust and estate administration. If your parents, still of sound mind, have expressed wishes that are not consistent with their formal estate plan, help them get to an estate planning lawyer so that they can update their estate plan. If they have heirlooms or items with sentimental value, see if they want to specify beneficiaries for those items or designate a method for how they might be distributed with a minimum of conflict.

If your parents have valuables stashed away, make sure they leave instructions about what they are and where they are. On the one hand there are stories about the parent who had hundreds of thousands of dollars in a mattress that a child discarded as trash, on the other hand there are the siblings who are obsessed with the belief that their parents had hundreds of thousands of dollars in a mattress and accuse the administrator of theft when the mattress turns out to contain only stuffing.

If you follow the law, and follow the letter of the estate plan, you may make some of your siblings angry. But if you bend or break the rules to appease them you cannot count on their becoming happy - my experience suggests the contrary, that no matter what you do to appease an unreasonable sibling he'll simply want more. Some will even point to what you did at their request as evidence that you violated your fiduciary duties and should be removed from your role as administrator or trustee. So I urge you to follow the rules, get legal representation for the trust or estate as needed, and take a firm, sympathetic line with your siblings, "I am sorry that I cannot help you with that, but I have to do what the law requires."

But Somebody Does Care About the Deficit

Following up on Paul Krugman's observation that balancing the budget is a low priority for most people, it's reasonable to note that there's every indication that Krugman himself supports a balanced budget. He pictures that being achieved through estate taxes and a national sales tax.

I'm personally not opposed to estate taxes, although ideally we would see a lower tax rate with fewer chances at avoidance and evasion - fewer ways to avoid the tax, resulting in a significantly lower tax rate while maintaining revenues. Why don't I get into a tizzy about "death taxes"? Because, as they say, "You can't take it with you." Given the choice with paying more taxes while I'm alive or paying some percentage of my estate to the taxman after I die, I'm going with door number two.

I'm not a huge fan of a national sales tax. No, actually, I think it's a bad idea. Even assuming the tax were structured such that the wealthy could not easily avoid it, what do you believe will happen when a future Congress is deciding which tax to raise to help balance the budget? Capital gains, inuring largely to the wealthy? Income taxes, primarily hitting middle and upper SES Americans? Or a national sales tax, hitting everybody but most affecting those who don't have the luxury of saving part, most or all of their income - that is, I find it difficult to believe that the most regressive tax won't be raised first. And I also find it difficult to believe that a significant national sales tax won't affect consumer behavior, largely to the detriment of small and local consumer-oriented businesses.

Krugman speaks of a "modest VAT" - I can see a VAT starting out that way, but I simply cannot imagine it staying "modest". I don't believe that a VAT is necessary to balance the budget, now or in the future, and thus would just as soon not put it on the table.

Long-Term Care vs. Medical Costs

Nicholas Kristof relates the story of a friend who divorced her husband in order to avoid having to contribute to his long-term care costs.

If M.’s husband required long-term care, the costs would be catastrophic even for a middle-class family with savings.

Eventually, after the expenses whittled away their combined assets, her husband could go on Medicaid — but by then their children’s nest egg would be gone, along with her 401(k) plan. She would face a bleak retirement with neither her husband nor her savings.

A complicating factor was that this was a second marriage. M.’s first husband had died, leaving an inheritance that he had intended for their children. She and her second husband had a prenuptial agreement, but that would not protect her assets from his medical expenses.

It should be noted that although we treat long-term care costs in many ways as medical costs, they're a somewhat different creature. Absent Medicare or Medicaid coverage, long-term care is generally not covered by even the goldest of gold-plated health insurance. Instead, it's separately insured as (surprise!) "long-term care insurance".

My wife was recently offered the opportunity to buy long-term care coverage as a benefit at work. The price was reasonable, due to her age, but coverage was not available for anybody else in the family. The limits on raising premiums were big enough to drive a truck through - with the cost of insurance also jumping considerably at various age thresholds. It was nice of her employer to make the effort, but it wasn't a good deal for her. As with any choice not to carry insurance, we're playing the odds.

Kristof's friend and her husband made two mistakes, the first of which may have been consistent with the odds at the time the decision was made: they chose not to obtain long-term care insurance, and they chose not to engage in estate planning that would have involved both protecting separate assets and intended inheritances, as well as preparing for possible disability and Medicaid eligibility. Kristof is arguing that, as a rule, society should pick up the cost of long-term care. And that can be part of the current debate - whether long-term care should be included as a basic benefit in health insurance plans. But as it stands, if you don't insure for long-term care, you can expect to pay for a good portion of it - and the trend is for states to be more aggressive in pursuing the assets of people receiving Medicaid benefits, not less so.

But let's not forget, somebody is paying for long-term care. If it's not the recipient of the care, or that person's family, then it's the taxpayer. It's not at all unreasonable as a public policy for the taxpayers to say, "You need to contribute significantly to your own costs of care before we step in." It's possible to increase the exemptions for long-term care, such that the effect on somebody like M. is less pronounced, but why should a taxpayer in effect subsidize her children's inheritance - paying for her husband's care so that her kids can inherit more money?

It should also be remembered that we're talking about more than long-term care for the elderly. We're talking about any recipient of Medicaid or government disability benefits, at any age. There are young people who don't marry because, as one or both of them are disabled, they would have their benefits cut as a result of their combined marital income. There are parents who either don't leave money to disabled children, or who construct special needs trusts that control how the money can be used, in order to keep the inheritance from being taken by the state as reimbursement for the cost of Medicaid. An argument can be made in each of these contexts that the care or benefits should be provided without respect for need, but again there's a countervailing argument that people who can afford to pay for their own care should do so before asking the taxpayer to take over.

The current situation does create absurd outcomes. People do marry in a church but without getting a marriage license, while others live together as spouses, living lives every bit as committed as those in "real" marriage but flying under the government radar. Some, like M., are divorced "in name only", continuing to live with and care for their spouse. But here's something to remember - as long as we impose any income or asset threshold on government benefits, the same "unfairness" will continue to exist. If we raise the threshold we reduce the number of people who are asked to pay for part or all of their own care, or to experience a reduction in their benefits due to their total household income, but we increase the burden on the taxpayer.

If Kristof is trying to make the argument that 100% of long-term care costs should be paid out of tax revenues, it's a perfectly legitimate argument to make - but he doesn't quite come out and say that. I suspect he would concede that some people are wealthy enough that they should pay at least part of that cost. I don't personally see any way to provide universal long-term care insurance, with no means testing, without a significant increase in tax revenues or deficit spending.

If your goal is to stay with the spouse you love, while still protecting your separate assets and preserving inheritances you intended for children from a prior marriage, consult a good estate planning lawyer. (Kristof's tale suggests that when M. married her husband she had considerably more money than him, hence the prenuptial agreement that protects her in divorce but not in his illness. A prenuptial agreement is not an estate plan.)

A Statutory Special Needs Trust?

The Washington post describes proposals for tax-free savings accounts for the disabled:

Several pieces of legislation have been introduced in Congress to create tax-free savings accounts for people with disabilities....

Although they differ in some details, these measures would allow parents, other family members or those with disabilities themselves to put money into special accounts; the savings would grow tax free and would not be taxed when withdrawn to pay for qualified expenses.

The Post sees a potential danger:

The account proposals provide that money deposited in the accounts not count against eligibility. The trick is to permit parents to provide some extra help for children with disabilities without encouraging wealthy people who could easily pay for health care and other needs to sock away large sums in these accounts while moving family members onto government benefits.

Of course, the wealthy can already take full advantage of "special needs trusts". There is no reason these accounts would need to be more generous than existing special needs trusts, either in terms of how much they can hold or the circumstances under which money may be paid out, save perhaps for a cap on tax-exempt contributions. With a decent law, people who lack the resources or sophistication to engage in special needs planning will simply be able to open a statutorily defined disabilities savings account, and get a similar set of benefits to those already enjoyed by the wealthy.