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.

 

Just Let Go! Estate Planning and Losing Control

Just Let Go! Estate Planning and Losing Control
By: Alan Orlowsky

Let's Talk about.....The biggest obstacle to smart estate planning, the fear of letting go.

Stan (not real names) was a successful business man living in Northbrook, IL. Over the past few decades he had made all the right moves, was a success in both his business and personal life and had set up a Estate Plan to ensure his life's work would take care of his biggest asset his Family. On the advice of his financial and legal advisers, Stan set up a special needs trust for the benefit of his disabled son Dan. Not only would the trust help reduce estate taxes, because it held assets outside of Stan's estate for tax purposes, but it provided a professionally manages fund for Dan, the beneficiary, after Stan's death. The same year he set up the trust, Stan gave a $12,000 gift to each of his other children so they would not feel slighted. Doing so also reduced the value of his estate for tax purposed, without incurring gift tax consequences, thanks to the annual gift tax exclusion.

Unfortunately, Stan made one of the most common estate planning mistakes. He neglected to transfer to the trust valuable assets that he acquired years later, and so the trust was now inadequately funded, and those assets ended up in probate when he passed years later. He had worried that once he transferred assets to the trust he would lose access to them in case of emergency. This fear was true, because the trust was irrevocable. Stan had also stopped giving annual exclusion gifts towards the end of his life.  His advisers assured Stan that he had enough wealth, as well as insurance coverage, to survive just about any emergency, and still to give generously to his loved ones. Stan's biggest issue was he could not let go. Luckily, after Stan's death one of his well-to-do children helped to take care of Dan, otherwise Dan would have had to rely on the state for support.

Security is in your mind. The fear of letting go is a common affliction among people who are planning their estates, especially those who are accustomed to being in charge.  The irony is, gifting and transferring assets can actually make you feel more secure rather than less. Advisers often have a hard time persuading people that giving up control of their money, or giving it away, or move from being active investor to a passive investor, is in their best interests. Knowing that you have provided for your loved ones in the event of your death can give you more peace of mind than mountains you of wealth. It can also improve family relationships and let you enjoy the gratitude you earn during your lifetime from your beneficiaries. It's so important to understand how estate planning can enhance, rather that destroy, your financial security. Below is a brief guide to some of the basic estate planning tools and their benefits.

• Revocable Living Trust - Assets that you transfer into a living trust will pass to your heirs outside of probate, sparing your heirs delays and extra costs. You have access to all trust funds at any time, and you can amend, terminate or revoke the trust as well.
• Irrevocable Trust - You can;t revise or revoke it, but you can rest assured that your estate will not pay estate tax on the assets that you transfer to it. You can use irrevocable trusts to accomplish various goals from minimizing estate taxes, like Stan's special needs trust. 

Other kinds include incentive trusts, irrevocable life insurance trusts, trusts for minor children from previous marriage (which also keeps the funds out of the ex-spouse's control), and Trusts for the spendthrift beneficiaries or others who are not ready or able to manage an outright inheritance. Knowing that the trust beneficiary is going to be well cared for, and/or the funds will be managed by a competent trustee after your death will help you sleep better at night.

• Annual Exclusion Gifts - You can give away $12,000 ($24,000 for married couples) to any recipient, and to as many recipients as you wish, free of gift tax consequences. Gifting also reduces the value of your taxable estate. At the same time, you can help your loved ones make a down payment on a home, pay college tuition, take a vacation, or simply pull through a rough period. Of course you would not give money away if you really need it for your own survival and comfort, but you should always consult your financial adviser before the end of each year to decide whether you are in a position to make exclusion gifts.

•  Durable Power of Attorney for Property - A durable Power of Attorney gives your agent the authority to manage your financial affairs if you become incapacitated. As long as you are competent (as determined by your own physician and/or judge), you do not give up control. But if you do become unable to make sound decisions, the person who takes over is the person you selected. If you do not have a durable Power of Attorney and become incapacitated, a judge will appoint an agent to make decision on your behalf.

The Best time to take action - You will probably derive greater satisfaction sharing your wealth now, while you are able to enjoy the gratitude of your loved ones, rather than after your death. If you have not created an estate plan, or have neglected to transfer assets to your living trust or irrevocable trust now is the time to take action. Your options only narrow as you age.

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559 or visit our website http://orlowskywilson.com/