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​​​Law Office of Kathleen J. Masterton, P.C.




WILLS, TRUSTS AND ESTATES/ELDER LAW

   "Estate planning" is legal planning for future disability or death. It addresses financial decision-making, asset preservation, tax minimization, health care, and long-term care needs.  This checklist illustrates some of the important tools that every person should consider having.  For more information, contact the Law Offices of Kathleen J. Masterton, P.C.

 DO YOU HAVE......


 ____     A Durable General Power of Attorney?  Everyone should have a comprehensive durable power of attorney in favor of one or more trusted persons. This enables those you designate as your attorney-in-fact to make financial decisions on your behalf, if and when necessary. A durable power of attorney is a critical part of a plan to protect and preserve your assets, and to avoid a Guardianship proceeding, which can be time consuming, costly, and emotionally devastating. The power of attorney should grant the authority to make and disclaim gifts, sign tax returns, and apply for government benefits, and should provide for successor agent(s), which can be helpful in implementing tax-saving and other important strategies.

____       An Appointment of a Health Care Agent?  This document, sometimes called a "medical power of attorney," names a trusted person to make health care decisions for you if you cannot do so.  Only one agent may be appointed to act at a time.  It often is combined with an Advance Medical Directive.

____       An Advance Medical Directive? This document, also called a "living will," states your wishes as to life sustaining treatment if there is no reasonable prospect of your recovery and guides your appointed health care agent as to your desires regarding extraordinary life sustaining treatment.  (Those who in poor health who have elected to forego heroic medical measures also should direct their physician to write a "Do Not Resuscitate" order, which should remain with the individual at all times).
____       A Last Will and Testament?A Last Will provides for orderly administration of your estate and distribution, after your death, of the assets in your probate estate.  It should address (i) your decisions as to distribution of your assets, (ii) appointment of fiduciaries such as Personal Representative and Trustee; and (iii) tax consequences based on the value of your probate and non-probate assets.  A surviving spouse is entitled to ignore the provisions of the deceased spouse's will and instead take a specific share, set by statute, of the decedent's estate. If the surviving spouse is on Medicaid, the government may make a claim against the deceased spouses estate for Medicaid reimbursement.  In anticipation of this possible claim, each spouse could at the present time waive the right of election against the will. As in any legal decision, this has consequences both good and bad; one potentially bad consequence is that a waiver of the right of election may be considered a "transfer" under transfer-penalty rules for Medicaid nursing home care.

 
Every person should have each of the documents listed above, reviewed at least every three years.  If you were unable to check off all four documents, you should see a lawyer at once to obtain the missing documents.  But this is just the start of a coordinated estate plan.

Have you considered....

 
Many people want to pass wealth on to others in a way that is private (outside the realm of probate), reduces taxes, lets the person retain some control of the asset, protects persons who are disabled or who cannot manage their own affairs, and/or maximizes the ability to qualify for Medicaid.  So, a complete plan also may include any of the following popular instruments, depending on your own circumstances.

___     A Revocable Living Trust. A funded revocable living trust may ease asset management and financial decision making and avoid probate. You place your assets into the Trust, to be managed by Trustee(s) whom you choose (you, spouse and/or children, or others all may be chosen to serve as trustee), according to the Trust provisions. You may receive the income and/or principal from the Trust at your discretion; have direct access to its principal at any time; and retain a Power to alter, amend, or terminate the Trust at your sole discretion.  At your death, the Trust Estate is not subject to a probate proceeding of your will and is distributed according to your desires as stated in the Trust.  Reducing the assets that are subject to probate can save legal and filing fees and put assets into your loved one’s hands more quickly.  An RLT is especially useful for those who own real estate in more than one state; those who anticipate that the will may be contested; and those in poor health who want someone else to manage all their assets.  An RLT does not save on estate, inheritance or income taxes, nor may it be used to avoid creditors.

 
____         An Irrevocable (Income Only) Living Trust. A funded irrevocable income-only trust may be used for asset management and financial decision-making.  It lets you put certain assets into the Trust to be managed according to the Trust provisions by the Trustee (s) whom you choose. You may receive income from the Trust but would not have access to its principal. You may keep a limited Power of Appointment, exercisable by you under your Will, to alter the ultimate disposition of the Trust assets, if you wish.  If you don't exercise this power, then at your death the Trust Estate is distributed according to your desires stated in the Trust.  The assets held in trust are not subject to a probate proceeding of your Will.  Reducing the assets subject to probate can save legal and filing fees and put assets into your loved ones hands more quickly. An ILT may save on estate or income taxes, and may be used to avoid creditors.

____       A Pour Over Will.  If you use a Living Trust, then your will should provide for your tangible personal property to pass directly to your surviving spouse or children, and the balance of any other assets outside of your Trust to be paid to the Trust for ultimate distribution in accordance with the Trust provisions.

____       A Supplemental Needs Trust:  Planning for the Supplemental Needs of a Beneficiary?  All or part of your estate may be placed in a supplemental needs trust established pursuant to your Will.  The Trustee, whom you may name in your will, may be given broad discretion to spend income and/or principal for the supplemental needs of a beneficiary, such as a disabled family member, without affecting the beneficiary's eligibility for governmental benefits, such as Medicaid.

____         A Spendthrift Trust. During your lifetime, or via your will, you can provide for establishment of a trust to benefit persons who may not be able to manage or handle the funds.  All or some of your assets/estate may be placed in a "spendthrift" trust established pursuant to your Will.  The Trustee, whom you may name in your will, can be given broad discretion to spend income and/or principal for the needs of the spendthrift, and in general such trust may not be reached by creditors to satisfy debts of the spendthrift.

 
____       A Testamentary Marital Trust?  Each spouse in the marriage may provide in his or her will for a testamentary marital trust, for the surviving spouse's benefit, during the surviving spouse's lifetime.  This lets trustee(s), who may be named in the will (i.e., children), manage the trust assets for the surviving spouse's benefit to supplement his or her care, while protecting the assets from creditors and/or Medicaid reimbursement should the surviving spouse receive Medicaid assistance and possibly saving on taxes.  Ultimate disposition of the trust assets is to those you have named in the trust instrument, such as your children.

 

PROTECTING YOUR PRIMARY RESIDENCE

Protecting the residence is an important part of the overall estate plan.  Popular techniques include outright transfer to another, transfer with a retained life estate, and funding a trust with your residence.  Each technique has advantages and disadvantages, from the perspectives of Medicaid eligibility, capital gains and other taxes, rights to live in or transfer the home, et al.

The foregoing is not intended as legal advice and is for general informational purposes only.  Choosing the best estate planning techniques depends on your specific circumstances and objectives. For a consultation to determine the best plan for you individually, call the Law Offices of Kathleen J. Masterton, Esquire, at 410-339-7111.

Equine Law.

 --Recently Kate Masterton was appointed by the president of the Maryland State Bar Association to the Organizing Committee of the new Animal Law Committee, an effort by Maryland attorneys to help focus attention and educational efforts on legal issues as they affect animals and their owners/users.  Ms. Masterton also heads the Recruitment Committee.

 What is Equine Law?
      Equine Law embraces many areas of law--such as business law, contract law, zoning and property law, and estate planning--which have a special impact on persons and organizations in the horse industry.  The practice of equine law requires an attorney who is well versed in a broad spectrum of legal subjects, common to business law, but who also speaks the language and understands the issues of the horse industry.  Kate Masterton is a life-long horsewoman, a former horse owner who holds an associate's degree in Equine Science from Cazenovia College, Cazenovia, NY and rode on the Cornell University Equestrian Team.  She has worked in many phases of the horse industry, first as a groom and trail guide, later training hunter and pleasure horses, teaching riding, managing a riding stable, and staffing a Thoroughbred breeding farm preparing horses for the Saratoga sales.  These experiences give her a unique perspective on the legal problems of horse owners, farm operators, and other equine enthusiasts. She maintains currency in these legal subjects by, among other things, attending the National Conference on Equine Law in Lexington, Kentucky.

 
     Traditionally, the horse business has tended to shun formalized business transactions.  The consequences of this informal attitude are evident in the numerous disputes that arise among owners, buyers, sellers, farm operators, boarders, veterinarians and their clients, farm employees or independent contractors and stable owners, et al.  These can be avoided, often at minimal cost, by the preventive practice of law; by ensuring that all transactions are covered by comprehensive written documents signed by all parties to the transaction; and by early involvement of legal counsel when disputes do arise.

 
     The following list illustrates some of the equine legal matters handled by the Law Offices of Kathleen J. Masterton, P.C.:

 
--Assistance with selecting the  appropriate form for a prospective business entity based on personal, business, and tax considerations.

--Formation and dissolution of business entities such as corporations, limited liability companies, general and limited partnerships, family limited partnerships, and joint ventures.

--Negotiation, preparation, and review of contracts of every kind (including as appropriate reservation of a security interest in the subject of the contract), including purchase or lease of horses/ponies, personalty or realty; training agreements; license agreements; sales agent agreements; breeding and boarding agreements; employment contracts; transportation agreements; and equine auction sales files, and resolving disputes that arise from such agreements (or the lack of one).

--Farm-related real estate issues, such as land use designations, zoning et al; conservation, trail use,  and other types of easements; sale or leasing of real property.

--Equine insurance coverage issues, including prosecution and defense of equine medical and mortality insurance claims, loss of use claims,  and premises liability claims.

--Representation in administrative hearings of various kinds, including licensing and other regulatory matters (Ms. Masterton previously served as counsel to the Maryland Office of Administrative Hearings, the independent adjudicator of appeals from State agency decisions).

--Advice and counsel on employment issues, independent contractors, unemployment insurance issues, workers' compensation claims, and professional liability issues.

--Assistance in governmental relations with the Maryland Department of Agriculture, Department of Economic Development, and other parts of the Executive Branch of State government.

--Assistance in relationships with various governing bodies in the equine sports.



--Legislative advocacy.

--Mediation or arbitration of equine disputes, efficiently and effectively resolving disputes concerning horses and the horse business without resort to the cost, delay and acrimony of a protracted and often unsatisfactory court battle in an overloaded legal system that lacks the special expertise needed to handle equine-related disputes.

--Legal representation and creative problem-solving for equine business entities, owners, sellers, buyers, show and event management, trainers, riders, boarders, and others in the myriad issues that may confront anyone working, volunteering in, or simply enjoying Maryland's exciting horse industry.

--Estate planning geared to the equine enthusiast, ensuring that horses are provided for upon the owner's death; that assets are protected, wealth preserved, business continued, and estate and inheritance taxes minimized  through the use of appropriate legal devices including wills, trusts, family limited partnerships, et al.; and advance medical directives that recognize the dangers inherent in horse operations and provide for medical decisonmaking in the event the rider or trainer suffers a medical incapacity.

--Administration of decedent's estates involving horses and/or horse operations.

Tax Advantages of Conservation Easements

By Kathleen J. Masterton

(excerpted from a two part article published in 2005 in the Baltimore County Bar Association journal  The Advocate.)

          Many tax benefits are available to landowners by placing real property under conservation easements of various kinds.  Such easements have the added advantage of being available for first use on a post-mortem basis, adding another tool to the estate planner's tax-avoidance arsenal.

           Private landowners in Baltimore County voluntarily have placed more than 40,000 acres of additional land in easements.  The easements typically keep the subject properties from being developed, thereby preserving habitat for flora and fauna, conserving the Chesapeake Bay watershed, and preserving the visual beauty that characterizes so much our County.  Property owners may have conservation as their primary motive, but the tax advantages attending easement donation are an attractive incentive for their use.  Estate tax benefits can insure that lands remain in family hands, while income tax benefits and property tax savings can add to the cost effectiveness of land conservation.   Conservation easements are useful tools which deserve to be better publicized.
        A conservation easement is a voluntary land preservation agreement negotiated between a landowner and an easement holder in which the landowner gives up in perpetuity one right in the landowner's bundle of rights.  The easement may be sold (to a government or to a private conservation organization) at its full fair market value (FMV) or at a fraction of its FMV (a bargain sale), and/or may be donated.  While each easement is the subject of individual negotiations between the landowner donor and the conservation donee, the most commonly encountered terms include strict limits or outright bans on subdivision of the property; new residential structures; dumping of household garbage; billboards or large signs; surface mining or material alteration of the topography; and industrial and commercial activity except for agriculture, silviculture, horticulture, viticulture, aquaculture, equine activities, and businesses that can be conducted in permitted buildings (e.g., B&B; home office).

            Agricultural structures usually are allowed, but may be subject to size or other restrictions.  There normally are specific protections for natural or scenic resources and provisions for inspection of the property by the easement holder to ensure that the agreement is honored.  There may be provisions for management of forest resources (commercial harvest is allowed) or other natural resources.

            People often have misconceptions about easements.  For example, many believe that once an easement is conveyed, the general public must have access to the property, that the landowner cannot farm, hunt, fish, or cut timber on the land, that the landowner cannot sell the land or pass it onto his heirs, that more structures or subdivisions are permitted on the property, or that the "Government" will take the land away.  There is no truth to these myths (although a landowner certainly is free to include any of these provisions in the easement agreement, if the landowner so desires).

            Potential tax benefits associated with donated conservation easements include federal and state income tax deductions, estate tax benefits, and property tax benefits.  The federal income tax deduction is limited to the value of the cost basis in the property, is equal to the easement value, and is subject to an annual limit of 30% of AGI per year if the property is a "long-term" capital asset (>1 year), or 50% of AGI per year if the property is a "short-term" capital asset (<1 year).  After 1 year the donor may elect to use the 50% rate.  Excess contribution may be carried forward for 5 additional years (allowing a maximum of 6 years).

 
            State law provides a tax credit of up to $5,000 per year against State income taxes when an easement is donated.  To qualify, the easement must be perpetual, must be conveyed to the Maryland Environmental Trust or the Maryland Agricultural Land Preservation Foundation, and must be approved by the State Board of Public Works.  The total credit may not exceed the appraised value of the easement, reduced by any payment received for the easement.  The maximum credit an individual may take per year is the smaller of $5,000 or the amount of State income taxes owed for that year.  An individual may take the credit for the year  the conservation easement is conveyed, and continue, at a maximum of $5,000 per year, for 15 more years, for a total of up to $80,000.  A taxpayer may not claim a State income tax deduction and a State income tax credit for the same conservation easement donation.


            When multiple individuals (owners) jointly donate an easement, each  is separately entitled to the tax credit of up to $5,000 per year.  For example, a husband and wife, even if filing jointly, may take up to $10,000 credit per year.  To calculate the total credit which an individual may take, multiply the appraised easement value by the individual's percentage of ownership of the property.  Easements donated before July 1, 2001 do not qualify for this credit.  However, a second easement, or amendment, that materially strengthens the conservation restrictions of the original easement may create a tax credit.

 
            Land subject to a conservation easement may qualify for two specific estate tax benefits: as much as 40% of the value of the land (up to a $500,000 cap) may be excluded from the estate, and the land use restriction will reduce the value of the remaining taxable estate.  At the time of donation, the easement must reduce the value of the land by at least 30% to qualify for the full 40% exclusion: for every 1% by which the easement has not reduced the value of the property by 30%, the exclusion is reduced by 2%.  Of tremendous benefit, the estate may make a post mortem election to donate the easement.  Thus, where a decedent either has not planned to avoid the impact of the federal and state estate taxes, or where a plan has gone awry for some reason (such as subsequent changes to tax laws, a situation often encountered since Maryland decoupled its estate tax in 2004), a conservation easement offers a real opportunity for heirs to reduce the value of the taxable estate.  Whenever an estate is facing substantial estate tax, the prudent attorney will determine whether the estate contains any real property that may be appropriate for an easement and will discuss with the Personal Representative the advantages and disadvantages of an easement as a post mortem planning tool.
 
            A final tax benefit is that if a landowner chooses to donate a conservation easement to the Maryland Environmental Trust, the landowner is not liable for property tax on the unimproved portions of the property for 15 years from the date of the donation.

            The process of donating a conservation easement is similar no matter which land trust is involved, but may vary slightly according to the specific land trust's procedures.  After locating an appropriate land trust and determining that the organization has interest in the subject parcel, a site visit is scheduled to determine if the  property has sufficient conservation potential.  If so, the organization's staff presents the proposed project to the governing body for approval or rejection.  In accordance with IRS regulations and with land trust monitoring guidelines, the current condition of the property must be established through a report consisting of maps, pictures and a narrative description of the parcel.  This baseline document is reviewed regularly by the easement holder to ensure that the terms of the easement are enforced. The landowner verifies that he/she has clear title to his/her property and that any liens or mortgages are subordinated to the easement.

            Once these steps are complete, a draft conservation easement is prepared by land trust staff or the landowner's attorney.  The  landowner should consult an attorney regardless of who drafts the easement.  Once the easement is in draft stage, the landowner and the land trust staff review the document to insure that the easement achieves the preservation of the conservation resources on the property.  Once a final agreement is reached by the landowner's attorney and the land trust attorney, the value of the easement is appraised.  It is wise to have the value of the entire property, subject to the easement, appraised as well (the difference in a property's value without a conservation easement and the same parcel with the easement  may be the difference that bumps an estate below the level at which State or federal estate taxes are due, or may significantly reduce the amount of such taxes for which an estate is liable).  Finally, the easement is signed, notarized, and recorded in the County Land Records.


            Ordinarily, for a real property-related donation to constitute a charitable donation warranting an income tax deduction, the owner's entire interest in the gifted property must be donated.  But when a landowner donates a conservation easement to an appropriate land trust, the easement constitutes a charitable gift.  According to Internal Revenue Code 170(h), an easement qualifies as a deductible charitable gift if it meets the following criteria: (1) a "qualified" real property interest is given to (2) a "qualified" organization, which is (3) exclusively for a "conservation purpose."  A property interest is "qualified" if the restriction on the use of the real property is in perpetuity, is a remainder interest, or is the entire interest of the donor other than a qualified mineral interest.  An organization is "qualified" if it has both a commitment to protect the conservation purposes of the donation and the resources to enforce the restrictions.
         Qualified organizations serving Baltimore County include local, state, and federal governmental agencies (Maryland Agricultural Land Preservation Foundation, Baltimore County) and charitable organizations (Maryland Environmental Trust, local land trusts, The Nature Conservancy).

           Some restrictions worth noting are that a deduction is disallowed if, even though the contribution would accomplish one of the enumerated conservation purposes, it would permit destruction of other significant conservation interests. 1.170A-14(e)(2).  Likewise, density reduction alone does qualify an easement donation for the income tax deduction.  The following example illustrates this point: H owns Greenacre, a 100-acre parcel of woodland, pasture, and orchards atop a mountain.  All of Greenacre is clearly visible from a nearby national park.  Under the strict enforcement of an applicable zoning plan, the highest and best use of Greenacre is as a subdivision of 25-acre tracts.  H wishes to donate a scenic easement on Greenacre to a qualifying conservation organization, but wants to reserve the right to subdivide Greenacre into 25-acre parcels with just one single-family house allowed on each parcel.  Random building on the property, even as little as one home for each 25 acres, would destroy the scenic character of the view.  Hence, no deduction would be allowed under this section. 1.170A-14(f).

       Other examples of "easement abuse" include an easement that merely reduces the density of development permitted under local subdivision/zoning rules; an easement protecting a small tract of open space in the midst of larger residential development where the conservation benefits are minimal and/or enjoyed only by the homeowners in the development; an easement on a private golf course that is an intensively altered landscape; an easement that does not contain appropriate riparian buffers, building envelopes, house size/siting restrictions, etc.  Land conservation organizations do not guarantee that the easements they accept will qualify for a federal charitable income tax deduction under 170(h).  Therefore, prudent easement donors should consult with a qualified tax advisor to determine the tax effect for each particular financial situation.

            A taxpayer who claims a value in excess of $5,000 for a charitable gift must have a "qualified appraisal" conducted by a "qualified appraiser" to support the claimed value.  The appraisal must be completed not more than 60 days prior to the donation and prior to the due date of the tax return in the year in which the charitable donation is claimed.  The value of a conservation easement equals the property's FMV with development rights minus its FMV without the donated development right (CE = FMV w/ DEV FMV w/o DEV).  The IRS prefers the "sales comparison" valuation approach and, if there are enough comparable easement sales, requires that this approach be used.  The "before and after" valuation approach is used in the great majority of cases, and compares the property values "before" and "after" the easement donation.
        The amount of the deduction when the easement covers a portion of the property owned by the donor and the donors family is the difference between the FMV of the entire contiguous parcel before and after the granting of the easement 1.170A-14(h)(3)(I).  If the easement increases the value of any other property (contiguous or non-contiguous) owned by the donor or a related person, the value of the contribution shall be reduced by the amount of the increase in value 1.170A-14(h)(3)(I).

Kathleen J. Masterton gratefully acknowledges the information provided by the Valleys Planning Council and its staff members, Adair Bonsal and Anne Jones, for this article.

Kathleen J. Masterton was for many years the Assistant Attorney General for the Maryland Transit Administration, serving as in-house business and corporate general counsel.  She handled a wide variety of legal matters, including contract negotiation, preparation, review, and enforcement, real estate and land use issues, labor and employment issues and claims, administrative law, police issues, environmental law, licensing issues, civil rights defense, disability rights issues, finance matters, and many others.  She presently represents numerous Maryland small business operations.  Earlier, in the Washington, D.C., law firm, of Donelan, Cleary, Wood and Maser, P.C., she handled extensive regulatory and appellate work  on behalf of such entities as the National Industrial Transportation League, Boise Cascade, Owens Corning Corp., Eureka X-Ray Tube, Inc., McGraw-Edison Company, Cargill, Inc., and the  Iowa Power and Light Company.   Kathleen J. Masterton has many years of experience in all phases of  business law.

The Law Offices of Kathleen J. Masterton, P.C.,  currently provides legal services for business entities in the following areas:

    --Assistance selecting the  appropriate form for a prospective business entity based on personal, business, and tax considerations.
    --Formation and dissolution of business entities, including incorporation (C and S corporations and non-profit, 501(c)(3) corporations), sole proprietorships, general partnerships, limited partnerships, limited liability partnerships and limited liability companies, and family limited partnerships, and joint ventures.



--Negotiation, preparation, review, and enforcement of contracts and other instruments, including sales and leases, contract to perform services, cooperative agreements, license agreements, agency agreements, employment contracts


.
      --Government  relations, including licensing, zoning, and other matters and representation in the Maryland Tax Court.

  --Advice and counsel on a range of general business legal problems, including labor and employment issues.
   --Business-related real estate issues, such as land use designations, zoning et al.
  --Representation in administrative hearings of various kinds, including licensing and other regulatory matters (Ms. Masterton previously served as counsel to the Maryland Office of Administrative Hearings, the independent adjudicator of appeals from State agency decisions).

  --Advice and counsel on employment issues, independent contractors, unemployment insurance issues, workers' compensation claims, and professional liability issues.

     --Assistance in governmental relations.

     --Assistance in relationships with various governing bodies.

     --Legislative advocacy.

     --Mediation or arbitration of business disputes, efficiently and effectively resolving disputes without resort to the cost, delay and acrimony of a protracted and often unsatisfactory court battle in an overloaded legal system.

     --Estate planning geared to the business owner, ensuring that  assets are protected, wealth preserved, business continued, and estate and inheritance taxes minimized  through the use of appropriate legal devices including wills, trusts, family limited partnerships, et al.;

     --Administration of decedent's estates involving business operations.