Category: Special Needs Trust

Preparing for Retirement with a Special Needs Child

Preparing for Retirement with a Special Needs Child

For parents of children with disabilities, the challenges of preparing for retirement with a special needs child are far higher than for families with healthy, high-functioning adults. Planning for your own retirement, while needing to secure the stability and basic needs of a child who will be a dependent forever often feels impossible, according to the recent article “Planning for Your Retirement, and for a Child’s Special Needs, All at Once” from The New York Times.

Even under the best of circumstances, where there’s plenty of money available and many hands to help, caring for an adult child with special needs is emotionally and physically challenging. As parents age, they have to address their own needs plus the needs of their adult dependent. Who will care for them, provide safe and comfortable housing and care for them when their parents no longer can?

Understanding the entire picture can be difficult, even for parents with the best of intentions. First, they need to understand how preparing for their retirement will be different than other families without a special needs child. Their investments need to be multi-generational to last not just for their lifetimes, but for their child’s lifetime. They can’t be too conservative because they need long-term growth.

In addition, special needs parents need to keep a certain amount of funds liquid and easily accessible, for times when their child needs a new piece of expensive equipment immediately.

One of the parents will often leave the workforce to provide care or take a lower paying position to be more available for care. This creates a double hit; the household budget is reduced at the same time its strained by costs not covered by benefits or insurance. Paying for gas to drive to therapy appointments and day program, buying supplies not covered by insurance, like adult diapers, waterproof bedding, compression garments to promote circulation, specialized diets, etc. adds up quickly.

Even with public health assistance, finding affordable housing is not easy. One adult may need supervised care in a group home, while others may need in-home care. However, the family home may need to be modified to accommodate their physical disabilities. With wait times lasting several years, many families feel they have no choice but to keep their family member at home.

Another challenge: if the parents wanted to downsize to a smaller house or move to a state where housing costs are lower, they may not be able to do so. Most of the public benefits available to special needs people are administered through Medicaid at the state level. Moving to a state with a lower cost of housing may also mean losing access to the disabled individuals’ benefits or being placed at the end of the waiting list for services in a new state.

For disabled individuals, maintaining eligibility is a key issue. Family members who name a disabled individual as a beneficiary don’t understand how they are jeopardizing their ability to access public benefits. Any money intended for a disabled person must be held in a specialized financial instrument, such as a special needs trust.

The money in a special needs trust (SNT) may be used for quality-of-life enhancements like a cellphone, computer, better food, care providers, rent and utilities among other qualified expenses.

There are two main categories of SNTs: first party trusts, created with assets belonging to the individual. Any money in this trust must go to reimburse the state for the cost of their care. Another is a third-party special needs trust, established and funded by someone else for the benefit of the disabled individual. These are typically funded by parent’s life insurance proceeds and second-to-die life insurance policies. Both parents are covered under it, and the policy pays out after the second spouse dies, providing a more affordable option than insuring both parents separately. Your estate planning attorney can assist you in preparing for retirement with knowledge that your special needs child’s future is secure. If you would like to read more about planning for families with a disabled loved one, please visit our previous posts. 

Reference: The New York Times (Aug. 27, 2022) “Planning for Your Retirement, and for a Child’s Special Needs, All at Once”

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Special Needs Trusts can Protect disabled Child

Special Needs Trusts can Protect disabled Child

Parents with disabled children worry about how their offspring will manage when parents are no longer able to care for them. Leaving money directly to a child receiving means-tested government benefits, like Social Security Supplemental Income or Medicaid, could make them ineligible for these programs, explains an article from Kiplinger titled “Estate Planning: A Special Trust for a Special Need.” In most states, beneficiaries of either program are only allowed to have a few thousand dollars in assets, with the specific amount varying by state. However, the financial support from government programs only goes so far. Many families opt to have their own family member with special needs live at home, since the benefit amount is rarely enough. A Special Needs Trust can protect your disabled child.

The solution is a Special Needs Trust, which provides financial support for a disabled individual. The SNT owns the assets, not the individual. Therefore, the assets are excluded from asset limit tests. The funds in the trust can be used to enhance quality of life, such as a cell phone, a vacation or a private room in a group living facility. The SNT is a means of making sure that a vulnerable family member receives the money and other relatives, such as a sibling, don’t have a financial burden.

SNTs can only be created for those who are younger than age 65 and are meant for individuals with a mental or physical disability so severe they cannot work and require ongoing support from government agencies. A disabled person who can and does work isn’t eligible to receive government support and isn’t eligible for an SNT, although an estate planning attorney will be able to create a trust for this scenario also.

Each state has its own guidelines for SNTs, with some requiring a verification from a medical professional. There are challenges along the way. A child with autism may grow up to be an adult who can work and hold a job, for instance. However, estate planning attorneys recommend setting up the SNT just in case. If your family member qualifies, it will be there for their benefit. If they do not, it will operate as an ordinary trust and give the person the income according to your instructions.

SNTs require a trustee and successor trustee to be responsible for managing the trust and distributing assets. The beneficiary may not have the ability to direct distributions from the trust. The language of the trust must state explicitly the trustee has sole discretion in making distributions.

Because every state has its own system for administering disability benefits, the estate planning attorney will tailor the trust to meet the state’s requirements. The SNT also must be reported to the state. If the beneficiary moves to another state, the SNT may be subjected to two different sets of laws and the trustee will need to confirm the trust meets both state’s requirements.

SNTs operate as pass-through entities. Tax treatment favors ongoing distributions to beneficiaries. Any earned investment income goes to the beneficiary in the same year, with distributions taxed at the beneficiaries’ income tax rate. Trust assets may be used to pay for the tax bill.

As long as all annual income from the trust is distributed in a given year, the trust will not owe any tax. However, a return must be filed to report income. For any undistributed annual investment income, the trust is taxed at one of four levels of tax rates. These range from 10% and can go as high as 37%, depending on the trust income.

An SNT can be named as the beneficiary of a traditional IRA on the death of the parent. Investments grow tax deferred, as long as they remain in the retirement account and the SNT collects the required minimum distributions for the retirement account each year, with the money passing as income. However, any undistributed amount of the required distribution will be taxed at the trust’s highest tax rate. Using a Special Needs Trust can protect your disabled child and ensure they have a quality of life for years to come. If you would like to learn more about SNTs, please visit our previous posts. 

Reference: Kiplinger (June 8, 2022) “Estate Planning: A Special Trust for a Special Need”

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Supplemental Needs Trust can safeguard Benefits

Supplemental Needs Trust can safeguard Benefits

A Supplemental Needs Trust can safeguard government benefits. Supplemental Needs Trusts allow disabled individuals to retain inheritances or gifts without eliminating or reducing government benefits, like Medicaid or Supplemental Security Income (SSI). There are cases where the individual is vulnerable to exploitation or unable to manage their own finances and using an SNT allows them to receive additional funds to pay for things not covered by their benefits.

Having an experienced estate planning attorney properly create the SNT is critical to preserving the individual’s benefits, according to a recent article titled “Protecting Government Benefits using Supplemental Needs Trusts” from Mondaq.

Disabled individuals who receive SSI must be careful, since the rules about assets from SSI are far more restrictive then if the person only received Medicaid or Social Security Disability and Medicaid.

The trustee of an SNT makes distributions to third parties like personal care items, transportation (including buying a car), entertainment, technology purchases, payment of rent and medical or therapeutic equipment. Payment of rent or even ownership of a home may be paid for by the trustee.

The SNT may not make cash distributions to the beneficiary. Payment for any items or services must be made directly to the service provider, retailers, or other entity, for benefit of the individual. Not following this rule could lead to the SNT becoming invalid.

SNTs may be funded using the disabled person’s own funds or by a third party for their benefit. If the SNT is funded using the person’s own funds, it is called a “Self-Settled SNT.” This is a useful tool if the disabled person inherits money, receives a court settlement or owned assets before becoming disabled.

If someone other than the disabled person funds the SNT, it’s known as a “Third-Party SNT.” These are most commonly created as part of an estate plan to protect a family member and ensure they have supplementary funds as needed and to preserve assets for other family members when the disabled individual dies.

The most important distinction between a Self-Settled SNT and a Third-Party SNT is a Self-Settled SNT must contain a provision to direct the trust to pay back the state’s Medicaid agency for any assistance provided. This is known as a “Payback Provision.”

The Third-Party SNT is not required to contain this provision and any assets remaining in the trust at the time of the disabled person’s death may be passed on to residual beneficiaries.

A Supplemental Needs Trust can safeguard benefits. That is why so many estate planning attorneys use a “standby” SNT as part of their planning, so their loved ones may be protected, in case an unexpected event occurs and a family member becomes disabled. If you would like to learn more about SNTs, please visit our previous posts.

References: Mondaq (May 27, 2022) “Protecting Government Benefits using Supplemental Needs Trusts”

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Maximize the Benefits of a Trust Fund

Maximize the Benefits of a Trust Fund

To maximize the benefits of a trust fund, you’ll need to understand how trusts funds work and how to create a trust fund the right way, advises this recent article from Yahoo! Money titled “How to Start a Trust Fund the Easy Way.” You don’t have to be a millionaire to start a trust fund, by the way. “Regular” people benefit just as much as millionaires from using trusts to protect assets and minimize taxes.

A trust fund is an independent legal entity created to own assets and ensure money and property are used to benefit loved ones. They are commonly used to transfer assets to family members.

Trust funds are created by grantors, the person who sets up the trust and transfers money or assets into it. An experienced estate planning attorney will be essential, since creating a trust is not like going to the bank and opening an account. You need the assistance of a professional who can create a trust to reflect your wishes and comply with your state’s laws.

When assets are moved into a trust, the trust becomes the legal owner of the property. Part of creating the trust is naming a trustee, who manages the trust and is legally bound to follow the wishes of the trust following the grantor’s wishes. A successor trustee should always be named, in case the primary trustee becomes unwilling to serve or dies.

Subject to compliance with specific requirements, assets owned by an irrevocable trust are not countable towards Medicaid, if someone in the family needs long-term care and is concerned about qualifying. Any transfer must be done at least five years in advance of applying for Medicaid. An elder law attorney can help in preparation for this application and to ensure eligibility. This is a very complex area of law. Do not attempt it alone without the assistance of an elder law attorney.

Trusts can have a long or short life. Some trusts are held for a child until the child reaches age 25, while others are structured to distribute a portion of the assets throughout the beneficiary’s lifetime or when the beneficiary reaches certain milestones, such as finishing college, starting a family, etc.

A revocable trust allows the grantor to have the most control over the assets in the trust, but at a cost. The revocable trust may be changed at any time, and property can be moved in and out of it. However, the assets are available to creditors and are countable towards long-term care because they are in the control of the grantor.

The irrevocable trust requires the grantor to give up control, in exchange for the benefits the trust provides.

There are as many types of trusts as there are situations for trusts. Charitable Remainder Trusts reduce estate taxes and allow beneficiaries to receive an income stream for a designated period of time, at the end of which the remainder of the trust’s assets go to the charity. Special Needs Trusts are created for disabled persons who are receiving means-tested government benefits. There are strict rules about SNTs, so speak with an experienced estate planning attorney to ensure that your loved one continues to be eligible, if you want them to receive assets from you.

Trusts are often used so assets will pass through the trust and not through the probate process. Assets owned by a trust pass directly to beneficiaries and information about the assets does not become part of the public record, which is part of what occurs during the probate process.

Your estate planning attorney will help you maximize the benefits of a trust fund, achieve your specific wishes and are in compliance with your state’s laws. A boilerplate template could present more problems than it solves. For trusts, the experienced professional is the best option. If you would like to learn more about the benefits of a trust, please visit our previous posts.

Reference: Yahoo! Money (March 18, 2022) “How to Start a Trust Fund the Easy Way”

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Young adults should have a will

Young Adults should have a Will

Young adults should have a will. Millennials are starting to get their affairs in order, contacting estate planning attorneys because they are concerned about dying unexpectedly. A study by Caring.com, a senior referral service, said that almost a third of young adults, ages 18—34, had a will in 2021, compared to 18% in 2019. The leap, according to a recent article in The Wall Street Journal titled “Millennials, Feeling Their Mortality During Covid-19, Start Writing Their Wills” can be directly attributed to the Covid-19 pandemic.

The concern over continued uncertainty regarding whether the young adults themselves or their family members will become sick, and die is all too real. Millennials also haven’t experienced another event: sharply rising inflation. The general sense of unease and instability is leading young adults to make sure they have wills and healthcare proxies in place to give some sense of control in the face of an unstable world. Young adults with families are especially concerned, as new variants of Covid emerge.

Before the pandemic, young adults, even with those with children, didn’t feel the need to have an estate plan created. That’s changed.

Just under half of all Americans have a will, and people 65 and up have traditionally been more likely to have one, according to a May 2021 study by Gallup. This number has been relatively stable since about 1990.

If you die without a will, the state law determines how to distribute assets, under court supervision. The process is slower and far more costly for survivors. In many situations, not having a will can be catastrophic. If beneficiaries with special needs inherit funds outright, and not in a Supplemental Needs Trust (or a Special Needs Trust), they could lose government benefits necessary for their day-to-day lives.

Wills are also used to name a guardian to care for minor children. If both parents die and there is no will, a court will decide who should raise a child. The court may not necessarily name a family member, and the person may not be who the parents or grandparents might have wished.

Similarly, news about millennial celebrities dying unexpectedly also pushes the “go” button for millennials to get their wills completed. When Los Angeles Angels pitcher Tyler Skaggs died of a fentanyl overdose in 2019, calls to estate planning attorneys from millennial males increased in many law offices. At the same time, millennials who are aware of the importance of a will for themselves and their families are pressing their parents to get their wills prepared or updated.

In every case, having a will is far less costly than not having a will. The cost of preparing a will depends on many factors: the size of the estate, the complexity of the family situation, the nature of assets and where the will is being prepared. Other documents are necessary. For example, every adult should have a power of attorney, health care proxy, living will and possibly a trust.

Even young adults should take the time to draft a will. The last gift you leave your heirs is a plan and organized documents, so they can grieve properly after you pass, rather than having to embark on a scavenger hunt through decades of paperwork and old files. If you would like to learn more about estate planning for young adults, please visit our previous posts. 

Reference: The Wall Street Journal (Dec. 6, 2021) “Millennials, Feeling Their Mortality During Covid-19, Start Writing Their Wills”

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Choose carefully when naming a trustee

Choose carefully when Naming a Trustee

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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Can you disclaim an inheritance?

Can You Disclaim an Inheritance?

Can you disclaim an inheritance? No one can be forced to accept an inheritance they don’t want. However, what happens to the inheritance after they reject, or “disclaim” the inheritance depends on a number of things, says the recent article “Estate Planning: Disclaimers” from NWI Times.

A disclaimer is a legal document used to disclaim the property. To be valid, the disclaimer must be irrevocable, in writing and executed within nine months of the death of the decedent. You can’t have accepted any of the assets or received any of the benefits of the assets and then change your mind later on.

Once you accept an inheritance, it’s yours. If you know you intend to disclaim the inheritance, have an estate planning attorney create the disclaimer to protect yourself.

If the disclaimer is valid and properly prepared, you simply won’t receive the inheritance. It may or may not go to the decedent’s children.

After a valid qualified disclaimer has been executed and submitted, you as the “disclaimor” are treated as if you died before the decedent. Whoever receives the inheritance instead depends upon what the last will or trust provides, or the intestate laws of the state where the decedent lived.

In most cases, the last will or trust has instructions in the case of an heir disclaiming. It may have been written to give the disclaimed property to the children of the disclaimor, or go to someone else or be given to a charity. It all depends on how the will or trust was prepared.

Once you disclaim an inheritance, it’s permanent and you can’t ask for it to be given to you. If you fail to execute the disclaimer after the nine-month period, the disclaimer is considered invalid. The disclaimed property might then be treated as a gift, not an inheritance, which could have an impact on your tax liability.

If you execute a non-qualified disclaimer relating to a $100,000 inheritance and it ends up going to your offspring, you may have inadvertently given them a gift according to the IRS. You’ll then need to know who needs to report the gift and what, if any, taxes are due on the gift.

Persons with Special Needs who receive means-tested government benefits should never accept an inheritance, since they can lose eligibility for benefits.

A Special Needs Trust might be able to receive an inheritance, but there are limitations regarding how much can be accepted. An estate planning attorney will need to be consulted to ensure that the person with Special Needs will not have their benefits jeopardized by an inheritance.

The high level of federal exemption for estates has led to fewer disclaimers than in the past, but in a few short years—January 1, 2026—the exemption will drop down to a much lower level, and it’s likely inheritance disclaimers will return. If you would like to learn more about inheritance issues, please visit our previous posts.

Reference: NWI Times (Nov. 14, 2021) “Estate Planning: Disclaimers”

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Can you sue a trust directly?

Can You Sue A Trust Directly?

If you have a trust, plan to create one or are the beneficiary of one, you’ll want to understand whether or not a trust can be sued. It’s not a simple yes/no, according to a recent article titled “Estate Planning: Can You Sue a Trust?” from Yahoo! Finance. Can you sue a trust directly? Generally, no, but you can sue the trustee of a trust. You can also sue beneficiaries of a trust.

Understanding when a lawsuit can be brought against a trust should be considered when creating an estate plan, a good reason to work with an experienced estate planning attorney.

A trust is a legal entity used to hold and manage assets on behalf of one or more beneficiaries. A trustee can be a person or business entity responsible for managing the trust and the assets it holds. Trusts can be revocable, meaning the person who created them (the grantor) can make changes, or irrevocable, meaning transfer of assets is permanent (for the most part).

Trusts are used to manage assets while the grantor is living and after they have died. There are many different types of trusts, from a Special Needs Trust (SNT) used to manage assets for a disabled person, or a CRT (Charitable Remainder Trust) used for charitable giving. For instance, a trust generally cannot be sued, but a trustee can.

A trust cannot always protect the grantor or beneficiaries from litigation. If a person has debt and creditors want to be paid, they can sue a revocable trust, as you have not given up much in the way of control using this type of trust—you still directly own the assets in the trust!

Irrevocable trusts provide more protection. Once assets are in the trust, the grantor has given up control of the assets. However, if the trust was created mainly to protect assets from creditors, a court could determine the trust was created fraudulently, and rule against the grantor, leaving all of the assets in the trust vulnerable to creditor lawsuits.

Here’s an example. If you transfer a car into a revocable living trust and cause an accident leading to the death or serious injury of another driver, the driver or their family could sue the trust for damages indirectly, by suing you as the trustee.

Trustees are bound as fiduciaries to manage the trust assets as directed by the grantor and for the best interest of the beneficiaries. The trustee can be sued if someone, typically a beneficiary, believes the trustee is not carrying out their duties. A beneficiary might sue a trustee, if they were supposed to receive a certain amount of money at a specific time, but the trustee has not distributed the funds. This is known as a “breach of fiduciary duty.”

Trustees are also prevented from self-dealing or using trust assets for their own benefit. If a beneficiary believes a trustee is taking money from the trust for their own benefit, they can sue the trustee.

While you can sue a trust directly, it is only under very specific circumstances. A trust can also be “contested,” which is different from suing. Contesting a trust occurs when someone believes the grantor was coerced or subjected to undue influence in creating the trust. It also happens if someone believes the trust or amendments to the trust were the result of elder financial abuse, or if it appears trust documents have been forged or fraudulently altered.

Before a trust can be contested, there needs to be a valid suspicion the trust is somehow in violation of your state’s estate planning laws. You also have to have legal standing to bring a claim. The court may or may not side with you, so there are no guarantees. If you would like to learn more about how trusts works, please visit our previous posts.

Reference: Yahoo! Finance (Nov. 17, 2021) “Estate Planning: Can You Sue a Trust?”

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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 Texas Trust Law to schedule a complimentary consultation.
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