Choose carefully when Naming a Trustee

December 21, 2021

When a revocable living trust is created, the grantor (person who creates the trust) names a successor trustee, the person who will take charge of the trust when the grantor dies. One of the biggest sticking points in creating a trust is often selecting a successor trustee. You need to choose carefully when naming a trustee. A recent article, “Be careful when choosing your successor trustee,” from Los Altos Town Crier explains what can go wrong and how to protect your estate.

When the grantor dies, the successor trustee is in charge of determining the value of the trust and distributing assets to named beneficiaries. If there are unclear provisions in the trust, the trustee is required by law, as a fiduciary, to use good judgment and put the interest of the beneficiaries ahead of the trustee’s own interests.

When considering who to name as a successor trustee, you have many options. Just because your first born adult child wants to be in charge doesn’t mean they are the best candidate. You’ll want to name a reliable, responsible and organized person, who will be able to manage finances, tax reporting and respects the law.

The decision is not always an easy one. The child who lives closest to you may be excellent at caregiving, but not adept at handling finances. The child who lives furthest away may be skilled at handling money, but will they be able to manage their tasks long distance?

A trustee needs to be able to understand what their role is and know when they need the help of an estate planning attorney. Some trusts are complicated and tax reporting is rarely simple. The trustee may need to create a team of professionals, including an estate planning attorney, a CPA and a financial advisor. Someone who thinks they can manage an estate on their own with zero experience in the law or finance may be headed for trouble.

If there are no family members or trusted friends who can serve in this role, it may be best to consider a professional fiduciary to serve as a successor trustee. An estate planning attorney may also serve as a successor trustee.

The next option is a financial institution or trust company. Some banks have trust departments and take on this role, but they often have steep minimums and will only work with estates with significant value. Fees are also likely to be higher than for a professional fiduciary or other professional. Be sure to inquire how they evaluate your needs and ensure quality of care, if you become incapacitated. What processes are in place to protect grantors?

Another alternative is to identify a nonprofit with a pooled trust that accepts trustee responsibilities for individuals with special needs and for others who would prefer to have a nonprofit in this role.

Choose carefully when naming a trustee. Your estate planning attorney will be able to help you identify the best candidate for this role, as you work through the creation of the trust. Don’t be shy about asking for help with this important matter. If you would like to read more about the role of trustee, please visit our previous posts.

Reference: Los Altos Town Crier (Nov. 17, 2021) “Be careful when choosing your successor trustee”

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Include Special Needs Child in Retirement Planning

November 16, 2021

Neglecting to update an estate plan is always problematic. However, failing to update an estate plan when the family includes a special needs child can lead to disaster. An article from Barron’s titled “Retirement Planning? Don’t Forget to Review Plans for Special Needs Children” explains how this can be prevented before problems arise. So how do you include a special needs child in retirement planning?

Decisions made in the past may no longer be appropriate, or even permitted. A grandparent may have been named as a guardian ten years ago and may have moved to another part of the country or died. A retirement plan based on selling the family home and downsizing to a small apartment may no longer be feasible. Healthcare insurance choices may be limited after retirement. In other words, life changes and estate plans need to change also.

Children with special needs who receive Supplemental Security Income (SSI) and Medicaid may not have more than $2,000 of assets in their name. If they are listed as beneficiaries on retirement plans or life insurance proceeds, they will become ineligible for these benefits. Money should never be left directly to a child with special needs, but it can be left through a Special Needs Trust. Parents may not realize how critical this is, or they may overlook changing beneficiary designations. Either way, the results can be financially devastating.

Talk with grandparents and any relatives who might want to leave something to a special needs child. Chances are they have no idea how an inheritance can impact a special needs family member.

Laws concerning funding a Special Needs Trust have changed. The ten-year rule on required distributions no longer applies to beneficiaries of qualifying Special Needs Trusts, so the SNT may be a beneficiary of a qualified retirement plan. A Roth IRA may be the best way to leave assets to an SNT, as there are no taxes due on withdrawals.

Life insurance is often used to care for a special needs family member. A second-to-die life insurance policy can be used to insure both parents and pay to the SNT on the death of the second parent, when the money is needed most. If one parent doesn’t qualify because of health issues, their underwriting may be balanced by the good health of another parent, which may keep premiums reasonable. Make sure the laws of your state and financial institution permit the proceeds to be directed to an SNT.

An ABLE account is a tax-advantaged savings plan for individuals with disabilities. The account can be opened for an individual at any age, as long as the disability onset occurred before age 26. Talk with an estate planning attorney to ensure the individual will qualify for this type of account. The 2021 annual contribution limit is $15,000. However, there are many exceptions, so don’t do this without professional help. For instance, SSI may be suspended, if the account balance rises about $100,000. Be sure the amount in the ABLE account won’t put means-tested programs at risk.

It need not be overwhelming to Include a special needs child in your retirement planning. Consult closely with an Elder Law attorney as well as your financial advisor to ensure you have a solid plan. If you would like to learn more about special needs or retirement planning, please visit our previous posts.

Reference: Barron’s (Oct. 23, 2021) “Retirement Planning? Don’t Forget to Review Plans for Special Needs Children”

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The Estate of The Union Season 3|Episode 10

The Estate of The Union Episode 10

October 25, 2021

The Estate of The Union episode 10 is live!

In the newest installment of The Estate of The Union podcast, Brad Wiewel is joined by Melissa Donovan, Certified Elder Law Attorney and Director of Elder Law and Special Needs Planning to discuss ABLE accounts and how they work to protect the financial well-being of your special needs family member.

Families with loved ones with Special Needs have stresses and challenges that are difficult to measure. ABLE Accounts are a relatively new and innovative tool to use that can provide Special Needs loved ones with additional resources and help maximize their life style. The accounts allow eligible individuals to save money without putting their eligibility for government benefits at risk. The income from the account is not used for means testing for Social Security Income or Medicaid.

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insight into estate planning, making an often daunting subject easier to understand.

It is Estate Planning Made Simple!

The Estate of The Union episode 10 can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. Please click on the link below to listen to the new installment of The Estate of The Union podcast. The Estate of The Union Episode 9 out now. We hope you enjoy it.

Texas Trust Law/Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization.

Estate Planning for Special Needs Children

October 18, 2021

Part of providing comprehensive estate planning for families includes being prepared to address the needs of family members with special needs. Estate planning for special needs children comes with its own set of challenges. Some of the tools used are trusts, guardianship and tax planning, according to the article “How to Help Clients With Special Needs Children” from Accounting Web. Your estate planning attorney will be able to create a plan for the future that addresses both legal and financial protections.

A survey from the U.S. Department of Health and Human Services revealed that 12.8 percent of children in our country have special health care needs, while 20 percent of all American households include a child with special needs. The CDC (Center for Disease Control) estimates that 26% of adults in America have some type of disability. In other words, some 61 million Americans have some kind of disability.

Providing for a child with special needs can be expensive, depending upon the severity of the disability. The first estate planning step for families is to have a special needs trust for your children, created through an estate planning attorney with experience in this area. The goal is to have money for the support and care of the child available, but for it not to be in the child’s name. While there are benefits available to the child through the federal government, almost all programs are means-tested, that is, the child or adult with special needs may not have assets of their own.

For many parents, a good option is a substantial life insurance policy, with the beneficiary of the policy being the special needs trust. Depending on the family’s situation, a “second to die” policy may make sense. Both parents are listed as the insured, but the policy does not pay until both parents have passed. Premiums may be lower because of this option.

It is imperative for parents of a child with special needs to have their estate plan created to direct their assets to go to the special needs trust and not to the child directly. This is done to protect the child’s eligibility to receive government benefits.

Parents of a child with special needs also need to consider who will care for their child after they have died, and have this clearly stated in their estate plan. A guardian needs to be named as early as possible in the child’s life, in case something should occur to the parents. The guardianship may end at age 18 for most children, but for an individual with special needs, more protection is needed. The guardian and their role need to be spelled out in documents. It is a grave mistake for parents to assume a family member or sibling will care for their child with special needs. The need to prepare for guardianship cannot be overstated.

The special needs trust will also require a trustee and a secondary trustee, if at some point the primary trustee cannot or does not want to serve.

It may seem easier to name the same person as the trustee and the guardian, but this could lead to difficult situations. A better way to go is to have one person paying the bills and keeping an eye on costs and a second person taking care of the individual.

Planning for the child’s long-term care needs to be done as soon as possible. A special needs trust should be established and funded early on, wills need to be created and/or updated, and qualified professionals become part of the family’s care for their loved one.

Having a child with special needs is a different kind of parenting. So estate planning for special needs children will also be different. A commonly used analogy is for a person who expected to be taking a trip to Paris but finds themselves in Holland. The trip is not what they expected, but still a wonderful and rewarding experience.

If you would like to read more about special needs planning, please visit our previous posts.

Reference: Accounting Web (Sep. 13, 2021) “How to Help Clients With Special Needs Children”

Estate Planning for Couples with Big Age Differences

August 31, 2021

Estate planning becomes more complicated for couples with big age differences. Seniors who are married to younger spouses have a special situation for estate planning, a situation that’s become more common, according to Barron’s recent article “Couples with Big Age Gaps Require Special Attention.”

This kind of family requires planning for the older spouse’s retirement needs and healthcare costs, while determining how much of the older spouse’s wealth should go to the children from any previous marriages while balancing the needs of a future child with a younger spouse. Beneficiaries for all financial accounts, last wills and all estate documents need to be updated to include the new spouse and child. The same goes for medical directives and power of attorney forms.

Social Security and retirement account considerations differ as well. The younger spouse may begin receiving their own Social Security at age 62, or a portion of the older spouse’s Social Security, whichever is greater. If the older spouse can wait to file for Social Security benefits at age 70, the younger spouse will receive more spousal benefits than if the older spouse claims earlier. Social Security pays the survivor’s benefit, typically based upon the older spouse’s earnings.

Pension plans need to be reviewed for a younger spouse. If the pension plan allows a survivor benefit, the surviving spouse will receive benefits in the future. IRAs have different beneficiary distribution rules for couples with significant age differences. Instead of relying on the standard Uniform Lifetime Tables, the IRS lets individuals use the Joint Life and Last Survivor Expectancy Table, if the sole beneficiary is a spouse who is more than ten years younger. This allows for smaller than normally Required Minimum Distributions from the IRA, allowing the account a longer lifetime.

Families that include children with special needs also benefit from trusts, as assets in the trust are not included in eligibility for government benefits. Many families with such family members are advised to use an ABLE Savings Account, which lets the assets grow tax free, also without impacting benefit eligibility. There are limits on the accounts, so funds exceeding the ABLE account limits may be added to special needs trusts, or SNTs.

A trustee, who may be a family member or a professional, uses the SNT assets to pay for the care of the individual with special needs after the donor parents have passed. The child is able to maintain their eligibility.

For same sex couples, revocable or irrevocable trusts may be used, if the couple is not married. Nontraditional families of any kind with children require individual estate plans to protect them, which usually involves trusts.

Trusts are also useful when there are children from different marriages. They can protect the children from the first marriage and subsequent marriages. Estate planning is more complicated for couples with big age differences. A wisely constructed estate plan can do more than prevent legal battles among children—they can preserve family harmony in the non-traditional family after parents have passed.

If you would like to learn more about estate planning for older couples, or those in second marriages, please visit our previous posts.

Reference: Barron’s (July 27, 2021) “Couples with Big Age Gaps Require Special Attention”

Creating a Trust for a Dependent Adult

August 19, 2021

If you are the parent or guardian of an adult who depends upon you financially, estate planning is critical. There are things you need to know when creating a trust for a dependent adult. When you can’t care for your child, an estate plan which includes funding and guidance protects your dependent and ensures that they will receive the care they need, reports Parents in the article “Wills and Trusts for Adult Dependents.”

First, you need a will. This fundamental estate planning document lets you be very specific about what you want to happen after your death. It also nominates guardians for minor and adult children and pets. Wills can be used to manage decisions that apply to everyone. If there is no will, the laws of your state and a court make all of the decisions, not you.

If you have dependents, the will lets you choose who you want to serve as a guardian for your children. If you are already the legal guardian of a dependent adult, the will can be used to name the person to take over for you. Choose guardians who are up to the responsibilities that come with caring for a dependent adult.

The will is used to manage assets after your death. However, in the case of a dependent adult, you may also need a Special Needs Trust. If you pass assets directly to a dependent adult and they are receiving certain government benefits, the inheritance may make them ineligible for benefits and services.

A Special Needs Trust allows you to earmark a certain amount of money for their care. An estate planning elder lawyer will be familiar with this type of trust and help you create it.

If your dependent adult does not receive any means-tested benefits but is not able to manage an inheritance, then a trust can be used to hold assets to be controlled by a trustee, who might also be a guardian or caretaker.

A will and trusts are central to a well-prepared estate plan. Working with an estate planning attorney will give you the opportunity to consider how you want to distribute assets while you are living and after you have died. It also gives you the opportunity to name a personal representative, or executor, who will manage your estate after your death and be in charge of making sure that your wishes, as expressed in your will, are followed.

Creating a trust for a dependent adult can be more complex than wills and allow for a greater degree of control over assets. The trust is a legal entity to benefit others, and a trustee is the person named to be in charge of the trust.

Bear in mind that anything passed through a will has to go through a court process known as probate. The will has to be validated and the executor has to be approved by the court. Any assets in the trust are already outside of your estate and do not go through probate.

If you would like to learn more about establishing trusts for dependent adult children, please visit our previous posts.

Reference: Parents (July 7, 2021) “Wills and Trusts for Adult Dependents.”

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Who Pays Tax on a Special Needs Trust?

August 10, 2021

One of the reasons to use a Special Needs Trust (SNT) or open an ABLE account is to prevent federal or state benefits for a disabled person to be put at risk. The SNT is a way to hold property for someone without interfering with their eligibility. However, there are no tax advantages to the trust, according to a recent article titled “How To Factor In Taxes When Considering Special Needs Trusts, Accounts” from Financial Advisor. So who pays the tax on a Special Needs Trust?

Tax results depend on who creates the trust, the terms of the trust and how it’s administered. The trust pays no taxes on any income it earns, as long as that income is passed on to the beneficiary. Trust tax rates are generally higher than individual tax rates. The income to the beneficiary will be taxable at their income tax rate. In some cases, all of the income of a trust might be taxed to the beneficiary, while in others the parent or person who created the trust might bear a tax burden, or the trust itself may be responsible for the tax liability.

An ABLE account is also a tax-favored vehicle, similar to a 529 college saving account. For a person to qualify for an ABLE account, they must have a disability that began before age 26 or be a recipient of Supplemental Security Income (SSI) or Social Security disability insurance benefits or meet other disability requirements.

The ABLE account will not reduce the major part of SSI benefits under the dollar-for-dollar SSI direct support rules, and it won’t be counted as an asset. The disabled person may also use their ABLE account to save earned income. The ABLE account can be inherited, and new rules allow funds in a 529 college savings account to be rolled into an ABLE account.

You can only contribute $15,000 a year to most ABLE accounts, and if the account plus other resources exceeds $100,000, SSI benefits will be suspended. These accounts must be managed carefully to protect eligibility.

The ABLE account varies, depending on the requirements and rules of the state where it is established. Some states offer additional tax benefits, if the person uses the ABLE accounts offered by their home state.

Depending on the state where you open the account, there can be deductions for contributions to an ABLE account. Earnings in the account are generally not subject to taxes, but the funds in the ABLE account may only be used tax-free for qualified expenses that result from living with a disability. Those include education, housing, employment training and special assistance.

The ABLE account is a useful financial tool for disabled individuals, but it does not completely replace a Special Needs Trust or trust planning.

When there are substantial funds, such as those from an inheritance, litigation settlement or a major gift, most estate planning attorneys recommend that those funds go into a Special Needs Trust. So remember that the person creating the trust pays the tax on a Special Needs Trust.

If you would like to read more about special needs planning, please visit our previous posts.

Reference: Financial Advisor (July 12, 2021) “How To Factor In Taxes When Considering Special Needs Trusts, Accounts”

Episode 6 of The Estate of The Union is out now

July 23, 2021

Episode 6 of The Estate of The Union is out now! In this episode, Brad Wiewel is joined by attorney Melissa Donovan, Certified Elder Law Attorney with Texas Trust Law, to discuss the difficult and important task of coordinating care for loved ones with special needs. Melissa works with clients on special needs planning – helping individuals properly plan their estate to care for disabled loved ones.

Brad and Melissa cover the most common questions made by families with special needs. They provide the listeners with a broad understanding of the financial and estate planning strategies available to ensure your loved one is well cared for when you pass. In episode 6 of The Estate of The Union they focus on how planning differs between a minor and adult, and how easily errors can be made that could have significant consequences for your disabled child.

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insight into estate planning, making an often daunting subject easier to understand.

It is Estate Planning Made Simple!

The Estate of The Union can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. Please click on the link below to listen. We hope you enjoy it.

Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization.

How to Distribute Inheritance to Disabled Child

July 22, 2021

A father who owns a home and has a healthy $300,000 IRA has two adult children. The youngest, who is disabled, takes care of his father and needs money to live on. The second son is successful and has five children. The younger son has no pension plan and no IRA. The father wants help deciding how to distribute 300 shares of Microsoft, worth about $72,000. The question from a recent article in nj.com is “What’s the best way to split my estate for my kids?” The answer is more complicated than simply how to transfer the stock. How do you distribute an inheritance to a disabled child?

Before the father makes any kind of gift or bequest to his son, he needs to consider whether the son will be eligible for governmental assistance based on his disability and assets. If so, or if the son is already receiving government benefits, any kind of gift or inheritance could make him ineligible. A Third-Party Special Needs Trust may be the best way to maintain the son’s eligibility, while allowing assets to be given to him.

Inherited assets and gifts—but not an IRA or annuities—receive a step-up in basis. The gain on the stock from the time it was purchased and the value at the time of the father’s death will not be taxed. If, however, the stock is gifted to a grandchild, the grandchild will take the grandfather’s basis and upon the sale of the stock, they’ll have to pay the tax on the difference between the sales price and the original price.

You should also consider the impact on Medicaid. If funds are gifted to the son, Medicaid will have a gift-year lookback period and the gifting could make the father ineligible for Medicaid coverage for five years.

An IRA must be initially funded with cash. Once funded, stocks held in one IRA may be transferred to another IRA owned by the same person, and upon death they can go to an inherited IRA for a beneficiary. However, in this case, if the son doesn’t have any earned income and doesn’t have an IRA, the stock can’t be moved into an IRA.

Gifting may be an option. A person may give up to $15,000 per year, per person, without having to file a gift tax return with the IRS. Larger amounts may also be given but a gift tax return must be filed. Each taxpayer has a $11.7 million total over the course of their lifetime to gift with no tax or to leave at death. (Either way, it is a total of $11.7 million, whether given with warm hands or left at death.) When you reach that point, which most don’t, then you’ll need to pay gift taxes.

Medical expenses and educational expenses may be paid for another person, as long as they are paid directly to the educational institution or health care provider. This is not considered a taxable gift.

This person would benefit from sitting down with an estate planning attorney and exploring how best to distribute an inheritance to his disabled child after he passes, rather than worrying about the Microsoft stock. There are bigger issues to deal with here.

If you would like to read more about inheritance and related topics, please visit our previous posts.

Reference: nj.com (June 24, 2021) “What’s the best way to split my estate for my kids?”

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How to Manage a Special Needs Trust

June 28, 2021

Special-needs trusts have been used for many years. However, there are two factors that are changing and parents need to be aware of them, says the article “Special-Needs Trusts: How They Work and What Has Changed” from The Wall Street Journal. For one thing, many people with disabilities and chronic illnesses are leading much longer lives because of medical advances. As a result, they are often outliving their parents and primary caregivers. This makes planning for the long term more critical. Second, there have been significant changes in tax laws, specifically laws concerning inherited retirement accounts. With the changes that are occurring, it is important to understand how to manage a special needs trust.

Special needs planning has never been easy because of the many unknowns. How much care will be needed? How much will it cost? How long will the special needs individual live? Tax rules are complex and coordinating special needs planning with estate planning can be a challenge. A 2018 study from the University of Illinois found that less than 50% of parents of children with disabilities had planned for their children’s future. Parents who had not done any planning told researchers they were just overwhelmed.

Here are some of the basics:

A Special-Needs Trust, or SNT, is created to protect the assets of a person with a disability, including mental or physical conditions. The trust may be used to pay for various goods and services, including medical equipment, education, home furnishings, etc.

A trustee is appointed to manage all and any spending in the special needs trust . The beneficiary has no control over assets inside the trust. The assets are not owned by the beneficiary, so the beneficiary should continue to be eligible for government programs that limit assets, including Supplemental Security Income or Medicaid.

There are different types of Special Needs Trusts: pooled, first party and third party. They are not simple entities to create, so it’s important to work with an experienced estate elder law attorney who is familiar with these trusts.

To fund the trust after parents have passed, they could name the Special Needs Trust as the beneficiary of their IRA, so withdrawals from the account would be paid to the trust to benefit their child. There will be required minimum distributions (RMDs), because the IRA would become an Inherited IRA and the trust would need to take distributions.

The SECURE Act from 2019 ended the ability to stretch out RMDs for inherited traditional IRAs from lifetime to ten years. However, the SECURE Act created exceptions: individuals who are disabled or chronically ill are still permitted to take distributions over their lifetimes. This has to be done correctly, or it won’t work. However, done correctly, it could provide income over the special needs individual’s lifetime.

The strategy assumes that the SNT beneficiary is disabled or chronically ill, according to the terms of the tax code. The terms are defined very strictly and may not be the same as the requirements for SSI or Medicaid.

The traditional IRA may or may not be the best way to fund an SNT. It may create larger distributions than are permitted by the SNT or create large tax bills. Roth IRAs or life insurance may be the better options.

The goal is to exchange assets, like traditional IRAs, for more tax-efficient assets to reach post-death planning solutions for the special needs individual, long after their parents and caregivers have passed. Work closely with an Elder Law attorney who has experience educating clients on how to manage a special needs trust.

If you would like to learn more about special needs planning, please visit our previous posts.

Reference: The Wall Street Journal (June 3, 2021) “Special-Needs Trusts: How They Work and What Has Changed”

Category: Special Needs

Choose carefully when Naming a Trustee

Include Special Needs Child in Retirement Planning

The Estate of The Union Episode 10

Estate Planning for Special Needs Children

Creating a Trust for a Dependent Adult

Episode 6 of The Estate of The Union is out now

How to Distribute Inheritance to Disabled Child

How to Manage a Special Needs Trust

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