Category: Special Needs Trust

understanding how irrevocable trusts work

Understanding how Irrevocable Trusts work

However, below the surface of estate planning and the world of trusts, things get complicated. Revocable trusts become irrevocable trusts, when the grantor becomes incapacitated or dies. It is just one of the many twists and turns in trusts, as reported in the article “What’s the difference between a revocable and irrevocable trust” from Market Watch. If you are considering trusts as an option in your planning, understanding how irrevocable trusts work is vital.

For starters, the person who creates the trust is known as the “grantor.” The grantor can change the trust while living, or while the grantor has legal capacity. If the grantor becomes incapacitated, the grantor can’t change the trust. An agent or Power of Attorney for the grantor can make changes, if specifically authorized in the trust, as could a court-appointed conservator.

Despite the name, irrevocable trusts can be changed—more so now than ever before. Irrevocable trusts created for asset protection, tax planning or Medicaid planning purposes are treated differently than those becoming irrevocable upon the death of the grantor.

When an irrevocable trust is created, the grantor may still retain certain powers, including the right to change trustees and the right to re-direct who will receive the trust property, when the grantor dies or when the trust terminates (these don’t always occur at the same time). A “testamentary power of appointment” refers to the retained power to appoint or distribute assets to anyone, or within limitations.

When the trust becomes irrevocable, the grantor can give the right to change trustees or to change ultimate beneficiaries to other people, including the beneficiaries. A trust could say that a majority of the grantor’s children may hire and fire trustees, and each child has the right to say where his or her share will go, in the event he or she dies before receiving their share.

Asset protection and special needs trusts also appoint people in the role of trust protectors. They are empowered to change trustees and, in some cases, to amend the trust completely. The trust is irrevocable for the grantor, but not the trust protector. Another trust might have language to limit this power, typically if it is a special needs trust. This allows a trust protector to make necessary changes, if rules regarding government benefits change regarding trusts.

Irrevocable trusts have become less irrevocable over the years, as more states have passed laws concerning “decanting” trusts, reformation and non-judicial settlement of trusts. Decanting a trust refers to “pouring” assets from one trust into another trust—allowing assets to be transferred to other trusts. Depending on the state’s laws, there needs to be a reason for the trust to be decanted and all beneficiaries must agree to the change.

Trust reformation requires court approval and must show that the reformation is needed if the trust is to achieve its original purpose. Notice must be given to all current and future beneficiaries, but they don’t need to agree on the change.

The Uniform Trust Code permits trust reformation without court involvement, known as non-judicial settlement agreements, where all parties are in agreement. The law has been adopted in 34 states and the District of Columbia. Any change that doesn’t violate a material purpose of the trust is permitted, as long as all parties are in agreement. An experienced estate planning attorney can ensure you have a firm understanding of how irrevocable trusts work. If you would like to learn more about the different types of trusts, please visit our previous posts. 

Reference: Market Watch (Oct. 8, 2021) “What’s the difference between a revocable and irrevocable trust”

Photo by cottonbro from Pexels

The Estate of The Union Episode 10

 

www.texastrustlaw.com/read-our-books

Estate planning for special needs children

Estate Planning for Special Needs Children

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”

The Estate of The Union Episode 9 out now

 

www.texastrustlaw.com/read-our-books

Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact The Wiewel Law Firm to schedule a complimentary consultation.
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