Special Needs Trusts for People Without Special Needs?

Special Needs Trusts for People Without Special Needs?

By Alan G. Orlowsky

Would it surprise you if your professional adviser recommended “special needs” planning when you don’t have any special needs children or grandchildren? It’s important to think about what might happen to your loved ones after you’re gone, that would impact your estate plan. We try to plan for unforeseen financial circumstances, and thus build into our plans some creditor protections for our beneficiaries whenever possible. The same type of preventive planning can be done to protect loved ones in a tragedy that leads to physical and/or mental disability. Consider what happened with the estate plan of John and Elizabeth.

John and Elizabeth had three children: John Jr., Michelle, and Jerry. Their estate planning attorney prepared a living trust that passed their estate in equal shares to the children in trust. At John and Elizabeth's death, the estate, which was estimated at $2,100,000 after taxes and expenses, would be divided among the children – $700,000 to each of their trusts, which they were free to spend as needed.

 The trusts for the children provide that if John Jr., Michelle, or Jerry passes away, anything that’s left in their trust will be distributed to their own children. All three of John and Elizabeth's children had children of their own, and everyone in the extended family was in good health.

One day John, Elizabeth, and Jerry were traveling together and were involved in a terrible automobile accident. John and Elizabeth were killed, and Jerry was injured so badly that he was no longer able to care for himself.

The person named as his guardian immediately sought help for Jerry's medical expenses from Medicaid or other means-based government programs. They were shocked to learn that Jerry’s entire inheritance of $700,000 would have to be spent on medical expenses before Medicaid would assist him. As an alternative, the guardian learned that the assets could be placed in a special kind of trust to be used for Jerry's benefit. But at Jerry's death, that trust must reimburse Medicaid for what was spent for care during his life. The result in either case is that little or nothing will be left for Jerry’s children.

This result could have been avoided by creating a special needs trust. A special needs trust is specially designed to hold the inheritance of a beneficiary, and to be used for needs above and beyond those covered by government programs. These trusts contain instructions that allow the Trustee to meet the needs of the beneficiary, but prohibit the Trustee from providing for those needs if already covered by Medicaid or other programs. It also prohibits the Trustee from using the assets to reimburse any government program after the beneficiary’s death.

John and Elizabeth could have included instructions in their living trust that if one of their children were disabled, their share of the inheritance would pass to a special needs trust which could be used at the discretion of the Trustee. The result in Jerry’s case would be that his needs would be met during his lifetime, and anything left over at the time of Jerry's death could be passed on to his children.

If you have questions about Special Need Trusts or any of the topics discussed in this blog please contact Alan Orlowsky by calling 847-325-5559 or visit our website www.orlowskywilson.com.

 

Living Wills - Make Your Wishes Known.

Living Wills - Make Your Wishes Known

By: Alan G. Orlowsky

Let's Talk About........Living Wills - and making sure your wishes are known.

Estate Planning, Wills and Trusts, and Power of Attorney is so important when making decisions for loved ones as they age. Let's take a look at an example of where a Living Will benefited the children and allowed them to choose the best outcome for their elder parent.

For the last 5 weeks of her life, Mary suffered. Her dementia had progressed to the point where she was violent and forced to be hospitalized. She was in tremendous pain and suspicious of those trying to help her. 

Mary had forgotten who her daughter was, even though her daughter spent 4 or 5 hours with her every day. She could no longer remember how to talk on the phone, or do almost any other ordinary activity. In her last weeks, she started to refuse to eat or drink, thinking that she was being poisoned. 

 

The hospital started her on a course of pain relief and asked Mary's children if they should start with a feeding tube or IV for nourishment and hydration. 

Luckily, Mary’s children had the benefit of a Living Will Mary had written during her life that covered this situation. Mary had been clear that she did not want her life extended under these circumstances and her children were able to instruct the hospital not to take life prolonging measures but to keep her as comfortable as possible. 

Many children are not as lucky. In spite of the publicity around the now famous Terri Shiavo case, where family members fought for 7 years about life ending issues, some people still have not given much thought to living wills or advanced directives. 

Of equal importance is that studies have shown that standard advance directive forms do little to influence end-of-life decisions without informed, thoughtful reflection about your wishes and values, and personal communication between you and your likely decision-makers. It is completely understandable that most people do not want to spend a lot of time thinking and talking about these issues. 

However, there is no doubt that discussing these issues ahead of time will result in better outcomes for you and your decision makers. 

Mary's son and daughter both said that without clear instructions, they would have been inclined to keep their Mom alive and would have given the hospital permission to start feeding and hydration. Mary’s lawyer said later that this would have been completely against Mary’s wishes.  

The bottom line is that no matter what you would like to see happen for yourself, the best thing you can do for you and your family is to make your wishes known. Your thought process can be guided with our help and likely the input of your physician. 

You may also benefit from the free Consumer’s Tool Kit for Health Care Advance Planning provided by the American Bar Association. The keys to success in this area are thoughtfulness and communication. There is no time like the present to take action. Make your wishes known and be sure your decision makers are fully prepared to carry them out. 

If you have questions about Living Wills or how to set up a will or trust please contact Alan Orlowsky by calling 847-325-5559 or visit our website www.orlowskywilson.com.

 

 

Business Law - Keeping it all in the Family

Business Law - Keeping it all in the Family

By Alan G. Orlowsky

Let's Talk about.............Business Law - and Keeping it all in the Family. 

Vito Corleone had built a vast empire in his 50+ years in the olive oil business. It was important to him that the business remained in the family, and he expected his three sons to take over when he was gone. They were already involved in the business, and quite passionate about it, and each had a defined role. Vito’s wife Mary was a stay-at-home Mom who was never really involved in the business, and knew very little about the day-to-day operations. Vito consulted with his top executive and in-house counsel, Tom Hagen, on ways to ensure the business would pass to the three boys. Tom suggested several ideas for Vito’s consideration.

Many business owners assume that their children will want to carry on the family business, but this is not always the case. So begin with a heart-to-heart discussion. It’s important to understand what the children want and expect. If any of the children are interested in carrying on the business, you’ll need to realistically and objectively assess each child’s qualifications and abilities to do so.

 To have someone in charge of a business who doesn’t have the personality, skills, or knowledge to successfully run the business is unworkable – even if that person is your child! However, the best person to run the business is often not the same person that a family’s dynamics would indicate. It’s not necessarily the oldest child, the “born salesman,” or the daughter with the MBA. Every business is unique, and there are no easy answers in business succession planning.

If your children already work in the business, you can evaluate their performance and their strengths in such areas as marketing, administration, finance, and operations. If a child is interested in the business but not working in the business, you should get them involved as soon as possible. You should provide that child with the necessary experience in the day-to-day operations of the business and general corporate matters. Let that child work his or her way up the ladder in non-management positions, gaining important experience. This will help non-family employees accept that child more readily.

 One of the biggest obstacles in transferring to family is how to ensure that the business will continue to be profitable and growing. Selling or transferring to family has the same problems as transferring internally to employees. The big hurdle is management training. If you have been running the company successfully then you will now need to train family members to do “what you do.” This takes time, often three to five years.

It is helpful to have your business plan outline the steps of the transfer, and establish goals that can be monitored and measured at regular intervals. If enough time is allowed, the training can be carried out in a slow, purposeful, and organized fashion. A multi-step transfer allows you to control the process, and relinquish management duties over time in small pieces.

In addition, as a parent you may be hesitant to face the emotions or even accusations about having a favorite child, or arguments about who is smarter, or better with people, or better with money. It’s easy (and not uncommon) for emotional issues to cloud and confuse the discussion about what is best for the business. Using an outside advisor who specializes in both family and business dynamics allows a more objective input into the decision. Once that decision is made, ensuring that the family members are groomed to be successful becomes equally as difficult to do.

There are several issues to be dealt with in a transfer to family members upon death. First is the obvious problem of the lack of liquidity of a non-spouse survivor, inheriting an illiquid asset with a substantial taxable value. If there are estate taxes to pay, how will the beneficiaries pay them? If a minority owner can’t get along with the other owners, how will the minority owner receive fair value if they try to sell their ownership? The minority owner might be forced to accept less than fair value for their ownership just to get out of the business.

Transfer of a business to unprepared survivors usually causes immediate and obvious problems. Grieving the loss of a loved one while also assuming new responsibilities, can cause panic, exhaustion, family squabbles, and ultimately, failure. Vendors, competitors, and other adverse parties might be able to take advantage of the situation. This is exacerbated if the heirs are not familiar with the business.

Transfer of a business to heirs who have no interest in operating the business will also cause problems. Perhaps some of the heirs don’t want to participate in management, but don’t want to sell their share to the other owners, either. Uninvolved owners can cause friction between other owners, employees, even customers, if they disagree with how the business is being run.

Valuing and selling the interest of those who want to be “bought out” will likely be contentious. The deceased owner won’t be available to provide wisdom and advice. The business may lose value due to the absence of the founder and a subsequent reduction in activity or sales. Buyers will likely know the situation and offer a reduced price. Liquidity issues may grow as time goes by. Inadequate offers may start to look appealing. If the business is unique there may be few potential buyers available to begin with.

There may belegal and tax issues to resolve. There are often valuation disputes with the IRS. They often result in litigation or settlement at higher-than-expected values. Understatement of values can result in estate tax penalties.

Obviously, there is no shortage of problems that might occur. That’s why it is so important to plan well in advance of a transfer. And in many cases, it is advisable to actually carry out the transfers of closely-held business interests prior to death.

If you have questions regarding a Family run business or general Business Law inquires please visit our website at www.orlowskywilson.com or call us today at 847-325-5559.