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”

Assets not Covered by a Will

May 12, 2021

A last will and testament is one part of a holistic estate plan used to direct the distribution of property after a person has died. A recent article titled “What you can’t do with a will” from Ponte Vedra Recorder explains how wills work, and the types of assets not covered by a will.

Wills are used to inform the probate court regarding your choice of guardians for any minor children and the executor of your estate. Without a will, both of those decisions will be made by the court. It’s better to make those decisions yourself and to make them legally binding with a will.

Lacking a will, an estate will be distributed according to the laws of the state, which creates extra expenses and sometimes, leads to life-long fights between family members.

Property distributed through a will necessarily must be processed through a probate, a formal process involving a court. However, some assets are not covered by a will and do not pass through probate. Here’s how non-probate assets are distributed:

Jointly Held Property. When one of the “joint tenants” dies, their interest in the property ends and the other joint tenant owns the entire property.

Property in Trust. Assets owned by a trust pass to the beneficiaries under the terms of the trust, with the guidance of the trustee.

Life Insurance. Proceeds from life insurance policies are distributed directly to the named beneficiaries. Whatever a will says about life insurance proceeds does not matter—the beneficiary designation is what controls this distribution, unless there is no beneficiary designated.

Retirement Accounts. IRAs, 401(k) and similar assets pass to named beneficiaries. In most cases, under federal law, the surviving spouse is the automatic beneficiary of a 401(k), although there are always exceptions. The owner of an IRA may name a preferred beneficiary.

Transfer on Death (TOD) Accounts. Some investment accounts have the ability to name a designated beneficiary who receives the assets upon the death of the original owner. They transfer outside of probate.

Here are some things that should NOT be included in your will:

Funeral instructions might not be read until days or even weeks after death. Create a separate letter of instructions and make sure family members know where it is.

Provisions for a special needs family member need to be made separately from a will. A special needs trust is used to ensure that the family member can inherit assets but does not become ineligible for government benefits. Talk to an elder law estate planning attorney about how this is best handled.

Conditions on gifts should not be addressed in a will. Certain conditions are not permitted by law. If you want to control how and when assets are distributed, you want to create a trust. The trust can set conditions, like reaching a certain age or being fully employed, etc., for a trustee to release funds.

Work with an experienced estate planning attorney to fully understand what assets are covered – and not covered – by a will; and whether further planning, such as a trust, is right for you.

If you would like to learn more about wills and how to distribute assets, please visit our previous posts.

Reference: Ponte Vedra Recorder (April 15, 2021) “What you can’t do with a will”

Protect your Special Needs Child’s Benefits

April 28, 2021

Planning for a child with special needs can be especially tricky. Well-meaning relatives may not understand that putting a family member with special needs in their will could put your family member’s lifestyle and future at risk, says the article “Benefits for children with special needs from Hoosier Times. You need to protect your special needs child’s benefits. Planning ahead is your best defense.

Individuals with special needs are eligible for a variety of government benefits and local programs that help with housing, medical needs, specialized equipment, independent living, job training and a variety of other services. Most of these programs are means-tested, that is, they require participants to qualify for benefits. If your loved one has no income and few assets, that’s not a problem.

However, when relatives, especially grandparents, include individuals with special needs in their estate plans or make them beneficiaries of insurance policies or retirement plans, they could put all of these benefits at risk.

Hopefully, relatives will keep you informed of their plans. You’ll need to be appreciative but firm and explain just how badly their generosity could backfire, if their gifts are not structured properly.

There is a way to leave bequests or make gifts to a special needs child that will not put their benefits at risk: a Special Needs Trust (SNT), either one that has been created already or one created for their gift. A SNT is designed to help people with special needs use financial gifts for different purposes, while maintaining their eligibility for services.

There are two types of SNTs:

First-party SNT—An individual with Special Needs, their legal guardian, or the court may establish a first party SNT funded by the individual’s own assets, either through earnings or an inheritance or a personal injury award. The first party SNT includes a “payback” rule: the trust must pay back the state for certain benefits, when the individual with special needs dies.

Third-party SNT—A relative other than the individual wishes to include them in an estate plan, so the relative or other person sets up a third-party SNT. The third-party trust is funded with assets from the relative or other person and no payback provision is required.

An SNT is excellent instrument to protect your special needs child’s benefits. There are many issues involved in establishing an SNT, so the best person to set one up is an elder law estate planning attorney. You’ll also want to involve anyone in the family who might contribute to the trust, so they know what to expect and how they can participate, if they wish to do so.

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

Reference: Hoosier Times (March 4, 2021) “Benefits for children with special needs

Understanding How Special Needs Trusts Work

April 12, 2021

A trust of any kind is a document that expresses your wishes while you are alive and after you have passed. The need for a dedicated trust for loved ones differs with the situations or issues of the family. It is vital to have an understanding of how Special Needs Trusts work. Getting this wrong can lead to financial devastation, explains the article “Take special care with Special Needs trusts” from the Herald Bulletin.

A Special Needs Trust or supplemental trust works to provide protection and management of assets for specific beneficiaries. The trustee is in charge of the assets in the trust during the grantor’s life or at his death and distributes to the beneficiary as directed by the trust.

The purpose of a Special Needs or supplemental trust is to help people who receive government benefits because they are physically or mentally challenged or are chronically ill. Most of these benefits are means-tested. The rules about outside income are very strict. An inheritance would disqualify a Special Needs person from receiving these benefits, possibly putting them in dire circumstances.

The value of assets placed in a Special Needs trust does not count against the benefits. However, this area of the law is complex, and requires the help of an experienced elder law estate planning attorney. Mistakes could have lifelong consequences.

The trustee manages assets and disperses funds when needed, or at the direction of the trust. Selecting a trustee is extremely important, since the duties of a Special Needs trust could span decades. The person in charge must be familiar with the government programs and benefits and stay up to date with any changes that might impact the decisions of when to release funds.

These are just a few of the considerations for a trustee:

How should disbursements be made, balancing current needs and future longevity?
Does the request align with the rules of the trust and the assistance program requirements?
Will anyone else benefit from the expenditure, family members or the trustee? The trustee has a fiduciary responsibility to protect the beneficiary, first and foremost.

Parents who leave life insurance, stocks, bonds, or cash to all children equally may be putting their Special Needs child in jeopardy. Well-meaning family members who wish to take care of their relative must be made aware of the risk of leaving assets to a Special Needs individual. These conversations should take place, no matter how awkward.

An experienced elder law estate planning attorney will be able give you an understanding of how Special Needs Trusts work for the individual and for the family.

If you would like to learn more about Special Needs issues, please visit our previous posts.

Reference: Herald Bulletin (March 13, 2021) “Take special care with Special Needs trusts”

Category: Special Needs Trust

How to Distribute Inheritance to Disabled Child

How to Manage a Special Needs Trust

Assets not Covered by a Will

Protect your Special Needs Child’s Benefits

Understanding How Special Needs Trusts Work

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