IRA Distributions to Special Needs Trusts: Minimizing Income Taxes

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For many parents, the majority of their savings is held in some kind of a retirement account, often an Individual Retirement Account (IRA). At age 70 1/2, an IRA account holder faces the Required Beginning Date, when he or she must take mandatory distributions from the IRA. These payments are determined by the government and are known as Required Minimum Distributions.

If the parents have a child with special needs, it is often important for the parents’ estate plan to direct Required Minimum Distributions following the parents’ death into a special needs trust (SNT) that has been set up for the child. For income tax purposes, it is usually best to stretch these distributions out over as long a period as possible, particularly if the IRA is a large one.

How long the distributions can be stretched out depends. Typically, if an IRA account holder names a “designated beneficiary,” the designated beneficiary’s age determines the amount of the distributions. If there is no designated beneficiary, the account must either be paid out in full within five years after the account owner passed away (the “five-year rule”) or over the owner’s remaining life expectancy (the “life expectancy rule”), depending on whether the owner died prior to age 70 ½. If the owner died prior to reaching age 70 ½, the five-year rule applies.  If the owner dies after reaching age 70 ½ , the life expectancy rule applies..

Unfortunately, a poorly drafted SNT may not qualify as a “designated beneficiary” under the IRS rules. As long as all of the SNT’s remainder beneficiaries are individuals, required distributions are allowed to be made based on the age of the eldest potential beneficiary of the trust. The problem is that sometimes SNTs are drafted so that entities that don’t have life expectancies — such as a charity — are potential beneficiaries. In such cases, either the five-year rule or the life expectancy rule applies and the SNT will have to face the income tax consequences of an expedited payout of the IRA.

This is one of the potential IRA pitfalls for “third-party SNTs,” trusts set up and funded by someone other than the child. But when the person with special needs has his or her own assets, a “first-party” or “self-settled” SNT may be more appropriate.

Through careful and complicated tax planning, it may be possible to minimize the income taxes that would otherwise be paid by the SNT on distributions from an IRA into a first-party SNT so long as the trust qualifies as a “grantor trust” — a trust where all income and expenses from the trust count as the grantor’s for income tax purposes. In a first-party SNT, the “grantor” for income tax purposes is the beneficiary.   In such a case, the beneficiary will generally pay the income taxes at a lower tax rate than if the income was taxed to the SNT directly.

If a first-party SNT does not meet the requirements for a grantor trust but the beneficiary meets the definition of being disabled under the Social Security rules, the trust may still be able to take advantage of an additional income tax exemption if the SNT qualifies as a “qualified disability trust.” But a trust can lose this exemption if the beneficiary loses his or her benefits, for whatever reason.

As you can see, the rules governing IRA distributions to SNTs are exceedingly complicated. This is all the more reason to consult with your special needs planner.

Filed Under: IRA, Special Needs Planning, Special Needs Trust

Housing Options for Adults with Special Needs

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Fifty years ago, most people with even moderate special needs were institutionalized throughout their adult lives.  Now, thanks in part to societal changes and decades of litigation, most people with special needs, including those with very severe special needs, live in some type of community setting.  In fact, the U.S. Supreme Court has specifically ruled that people with special needs who receive government benefits must be housed in the least restrictive possible setting.  Here are some of the most popular housing options for adults with special needs.

Living with Parents or Other Family Members

Many adults with special needs, especially young adults, may live with their parents or other family members.  People with special needs who live with their parents don’t have to experience the sometimes stressful transition into a different type of housing when they become adults, and they are usually surrounded by caregivers (their family members) who have experience with their specific special needs.  In many cases, Medicaid funds can be used to pay family members who provide care for their children in their own homes.

But as any young adult will probably tell you at one point or another, living with one’s parents is not always a great solution.  In some cases, the child’s special needs will be more difficult than what the parents can handle.  In other cases, a child’s parents may be a bad influence on the child or may even abuse the child or steal his government benefits.  Depending on the person with special needs’ level of social interaction, he may not have the opportunity to meet a lot of other people if he is constantly surrounded by the same family members. Finally, as parents age, it may become impossible for them to care for their child anymore, and the transition from a life-long residence could be more traumatic for the child than if he had moved out when he was younger.

Section 8 Housing

The Section 8 program provides vouchers for people with low incomes to obtain housing in the community.  In general, a Section 8 recipient has to pay approximately one-third of her monthly income towards her rent, and the voucher pays for the rest.  Many people with special needs who receive Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) benefits as their sole source of income will likely qualify for Section 8 as well.  In theory, Section 8 landlords must meet certain standards in order to rent their units to Section 8 tenants, but in reality, whether a unit meets these standards is rarely monitored closely.

Section 8 vouchers can allow people with mild or moderate special needs and low incomes to live on their own in the community.  However, it usually takes years to obtain a Section 8 voucher and, once acquired, there may not be any available Section 8 units for rent in the individual’s community.  Section 8 housing is also not appropriate for people with more complicated special needs who can’t live on their own.

Group Homes / Supportive Housing

Many people with special needs choose to live in supportive group homes with several other people with special needs.  Depending on the program, these homes could be staffed with counselors and other workers who help the residents live on their own, or, in some cases, the residents live without live-in assistance.  Group homes come in many varieties and can be paid for in many ways, including private payment or state programs for people with disabilities.

Group homes are great options for people with special needs who don’t require more advanced care but who cannot live independently.  In many cases, group homes also provide a social setting for the residents that they would not otherwise have if they lived with parents or on their own.

Assisted Living Facilities

Some people with special needs, especially older individuals, live in assisted living facilities.  Although the term “assisted living” has come to mean a lot of things, in general, assisted living facilities house residents in their own apartments within a building or complex of buildings.  The residents can cook in their units or eat in a communal dining hall, and they receive non-skilled care in their units, including assistance with bathing, cleaning and sometimes administration of medicine.  Some assisted living facilities specialize in treating people with dementia or other neurological conditions.

Skilled Nursing Facilities (Nursing Homes)

If a person with special needs requires around-the-clock skilled medical care, he may need to live in a skilled nursing facility if it is impossible to provide that care at home.  Although nursing homes are the last resort for most families, in some cases they can be the most appropriate option for a person with severe special needs because there is constant supervision of care and the person’s family members do not have to spend all of their time caring for their loved one.

Skilled nursing facilities are incredibly expensive, often costing more than $10,000 a month.  In many cases, an individual with severe special needs and minimal assets will qualify for Medicaid coverage that will pay for care in a skilled nursing facility.

Special Needs Trust Ownership of a Home / Payment of Rent

Special needs trusts can own homes for their beneficiaries or pay for a beneficiary’s rent in a private apartment.  In many cases, this is a very flexible option for the beneficiary, since the trust can also pay for services to help the beneficiary live independently.  However, home ownership by a trust comes with a large set of responsibilities.

Filed Under: Special Needs Housing, Special Needs Planning, Special Needs Trust

Make Sure Your Estate Plan Doesn’t Put Your Child at Risk

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Most parents of children with special needs are well versed when it comes to the government benefits like Medicaid or Supplemental Security Income (SSI) that their child receives. Most know not to give the child any money outright and to establish a standalone supplemental needs trust to protect their child’s assets, and they usually know all of the ins and outs of the SSI and Medicaid application processes. What many parents don’t often think about is the effect that their own estate plan can have on their child’s benefits.

The first thing for parents to keep in mind is that they must, without a doubt, have an estate plan. Parents who are often so good about getting their child’s plan in order can balk at creating their own estate plan for a variety of reasons. But by failing to put together your own plan, you are placing your child’s benefits at risk. If you pass away without a valid will (known as dying intestate), your assets will be distributed according to state law. These laws will often leave a sizable portion of your estate to your children. In the case of a child with special needs, receipt of these funds could eliminate benefits that the child relies on. Therefore, it is essential that you prepare an estate plan that will take into account your child’s unique circumstances.

The next thing to remember when assembling your estate plan is that, except in very limited circumstances, you should not leave anything directly to your child with special needs. Instead, your estate should flow through your own will into a special needs trust for your child’s benefit. A properly drafted special needs trust will protect your child’s benefits and allow your estate to be utilized as you intended without interference from outside sources. You will also have the opportunity to choose a guardian for your child in your will, another important decision that you should not leave up to chance or state law.

Sometimes parents will leave their entire estate to their children without special needs in the hope that those children will take care of their sibling with special needs. You should avoid the temptation to do this. While your motives and trust in your children are well placed, this arrangement often leads to bitter family disputes and should be avoided if at all possible. Typically, the better option will be a separate trust that can hold your child with special needs’ share of your estate and free up the shares for your other children to be spent as they see fit.

Another potential problem area is when parents name their children as beneficiaries of life insurance policies and retirement plans. These assets, which are not governed by the terms of your will, could easily pass to all of your children in equal shares if you are not careful about naming plan beneficiaries (this is a very common problem when your child develops a special need later in life, after you have had these policies in place for years). As you did in your will, you can place your child’s share of these important assets into a properly configured special needs trust. However, some complicated tax issues may have to be addressed first.

Finally, your estate plan may not be the only issue. Make sure to check with any relatives who may be leaving something for your children and make sure that they also speak with a qualified attorney before including your child with special needs in their estate plan.

If you don’t have an estate plan at all or are worried that your current plan is not appropriate, please call our office at (508) 421-4610 to schedule a complimentary consultation.

Filed Under: Social Security Disability, Special Needs Trust, SSDI, SSI, Uncategorized

Special Needs Planning Is a Marathon, Not a Sprint

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Unlike some areas of law like “employment discrimination law” or “patent law,” special needs planning does not focus on one specific legal principle or topic. Instead, it encompasses a broad array of subjects that people with special needs and their families encounter, from estate planning to government benefits to guardianship to advocacy. Attorneys who focus on special needs planning have dedicated their practices to helping families with a wide variety of legal issues, and they must master a vast section of the legal canon in order to properly assist their clients. But all too often, clients arrive at the doorsteps of special needs planners with what they see as specific problems, and they believe that there will be a single, quick solution. Fortunately, good special needs planners don’t operate this way, because unlike some types of law that require a concentrated burst of effort to “solve” a particular problem, special needs planning is a marathon, not a sprint.

Of course, there are some times when clients need immediate solutions to very concrete problems, and special needs planners are happy to help. For instance, if someone is seriously injured in an accident and can no longer make decisions for himself, his family may need to pursue a guardianship right away, and this one step may consume significant time and energy, both by the family and by a special needs planner. That’s a sprint. But what happens once a family obtains guardianship? Do they no longer require special needs planning? Of course not!

  • The guardian will need assistance filing annual reports and accounts with the court, and this could go on for years.
  • If the injury came about because of someone else’s negligence, then the injured party may need a special needs trust to hold a personal injury settlement.
  • If he qualifies, he may need to apply for government disability benefits, including Supplemental Security Income, Social Security Disability Insurance or Medicaid.
  • Family members may have to change their own estate planning documents to make sure that they reflect their relative’s special needs.

No one needs to tell parents of young children with special needs that planning is a marathon (even though daily life may seem like one endless sprint). These families often come to special needs planners because they want to provide for their children if something happens to them, and this often leads to the creation of a special needs trust and a coordinated estate plan for the parents. As the child grows older and reaches the age of majority, he may need a guardianship if he is incapable of managing his own affairs. However, in many cases, the 18-year-old with special needs will be able to sign his own estate planning documents delegating the power to make health care decisions through a health care proxy and naming an attorney-in-fact to assist with financial affairs, and a special needs planner can help him do this. Housing, financial aid for college, and getting ready for independence all take years of planning, and the plans often change over time as an individual grows.

Special needs planners provide all of these services because their focus is on the long-term health and well-being of the client, not just on the immediate issues at hand. That’s why attorneys who focus on this area of law are called “planners.”

It can be frustrating to enter an attorney’s office with one problem only to realize that there is a lot more to think about (and probably worry about, at least initially) than you thought. But a good special needs planner will set your mind at ease and help you approach the future with confidence, and when emergencies strike (as they often do), your planner can jump to the rescue with the added benefit of having already gotten to know your family. If you’ve already started working with a special needs planner, make sure that you stay in touch. And if you’re just starting out, welcome to the marathon — your planner will be there every step of the way.

Filed Under: Special Needs Planning, Special Needs Trust

Say a Little Prayer: Aretha Franklin Had No Will, and a Child With Special Needs

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According to court documents, legendary singer Aretha Franklin did not have a will when she died, despite reportedly having a son with special needs. The lack of a will opens up the intensely private singer’s estate to public scrutiny and unnecessary costs, and means that there are no specific provisions to protect her son.

Franklin, who died in Michigan at age 76, left behind four sons, but no guidance on how to distribute her estimated $80 million estate. The eldest son, Clarence, age 63, has unspecified special needs and requires “financial and other forms of support for his entire life,” according to the entertainment news site TMZ.

When someone dies without a will – called dying “intestate” — the estate is divided according to state law. Under Michigan law, an unmarried decedent's estate is distributed to his or her children. (Franklin had been married twice but long since divorced.)

Even if the “Queen of Soul” had wanted her estate to go solely to her children, by not having a will or trust, her estate will have to go through a long public probate process, which will likely cost her estate considerable money. If Franklin had created an estate plan that included a will and a trust, she could have avoided probate and kept the details of her financial circumstances private.

But perhaps even more importantly, that estate plan could have made special provisions to ensure that Clarence would receive proper care for the rest of his life. Franklin could have established a special needs trust to preserve any public benefits Clarence may be receiving, or perhaps allocated him a larger share of her estate. She also could have accompanied a financial plan for him with a Memorandum of Intent (also called a “Letter of Intent”) to serve as the primary source of information about her son’s care, providing a roadmap for the courts, guardians, caregivers and others involved in his life.

Clarence could also be harmed by the absence of a will because it opens up an estate to potential challenges that could drag out the probate process. Without a will to clearly state the decedent's intent, litigation resulting from family conflicts often eats into estates.

Finally, Franklin’s estate will be subject to unnecessary estate taxation, leaving even less for Clarence and her other sons. Although she may not have been able to avoid estate tax entirely, there are steps she could have taken to reduce the amount her estate will have to pay.

“I was after her for a number of years to do a trust,” attorney Don Wilson, who represented Franklin in entertainment matters for the past 28 years, told the Detroit Free Press. “It would have expedited things and kept them out of probate, and kept things private.”

Estate planning is important even if you don't have Aretha Franklin's assets, and it’s doubly crucial if you have a child with special needs as she did. It allows you, while you are still living, to ensure that your property will go to the people you want, in the way you want, and when you want, and to create special protections for the child with special needs before it’s too late. You don’t want your plan for your loved ones to simply be “I Say a Little Prayer.”

Contact your special needs planner to begin working on your estate plan now.



Filed Under: Estate Planning, Special Needs Trust 
Should You Have a Care Committee in Your Special Needs Trust?


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Most special needs trusts give their trustee wide authority, often appropriately so, to respond to unforeseen circumstances. But for those concerned about placing some checks and balances on the trustee’s authority, one possible option is a care committee.


Special needs trusts are trusts designed to protect the assets of a person with disabilities. The trustee is the person tasked with managing and distributing the trust’s assets on the beneficiaries’ behalf.


As previously discussed here, in addition to the trustee, many trusts create a separate care committee, either explicitly in the trust or through a separate memorandum of intent. Care committees, also commonly known as “trust advisory committees,” are typically granted the right to review accountings, to examine records, and to remove and replace the trustee.  To use an analogy from the corporate world, the trustee is the CEO and the care committee is the board of directors. The care committee may also be given the authority to amend the trust, veto certain distributions or participate in other decisions.


A downside to the creation of a care committee is that it can slow down the decision making process, at the expense of the beneficiary. Likewise, a care committee can deny the trustee the appropriate flexibility to act in the person with disability’s best interests.


To see if a care committee is right for your special needs trust, contact your special needs planner.


Filed Under: Special Needs Planning, Special Needs Trust 
Can the Beneficiary of a Special Needs Trust Change the Trustee?


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The beneficiary of a special needs trust can never control or access trust funds – that is the job of the trustee. A common fear among beneficiaries or their families is that the trustee may not do what’s in the beneficiary’s best interests and that, if this happens, the beneficiary may not be able to do anything about it.


Choosing the right person to serve as trustee is one of the most important and difficult issues in creating a special needs trust. If you haven’t chosen wisely, problems can emerge. The trustee might be incompetent in administering the trust and thus jeopardize the beneficiary’s public benefits, be unresponsive to the beneficiary’s needs, or even take improper fees from the trust. Or, the beneficiary and the trustee simply might not get along. Can the beneficiary of a special needs trust do anything about the actions, or inactions, of the trustee?


The short answer is “yes.” First, the law generally charges a trustee of a special needs trust with the usual duties of any trustee, plus other specific obligations. Usually, the trustee has an affirmative duty to inquire into the needs and welfare of the beneficiary, to communicate with the beneficiary and other involved individuals, and to make certain that the beneficiary maintains eligibility for public benefit programs.


If the beneficiary has grounds to believe that the trustee is not acting according to the law, the beneficiary generally has the right to petition a court to remove the trustee and bring related actions to address the trustee’s conduct. Some states allow out-of-court ways to initiate a change of trustee. For example, in Pennsylvania, the beneficiary, or his or her representative, can draft a settlement agreement with the trustee to replace that trustee. As long as the change in trustee does not violate the essential purpose of the trust, the document is binding without going to court. However, these procedures, whether in or out of court, can be time-consuming and costly, and in some cases, merely “not getting along” with the trustee may not be enough to justify removal. Moreover, the beneficiary may not have the wherewithal to initiate the action or the legal capacity to do so. Generally, in court proceedings, the beneficiary must be able to understand what’s going on and assist in the legal representation.


To avoid these types of obstacles, a special needs planner may draft the trust document to include mechanisms for removing a trustee (including defining reasons for trustee removal). The trust can also include provisions for trustee resignation, the appointment of successor trustees, and the appointment of a “trust protector.” The trust protector is a person or entity chosen by the person setting up the trust to keep an eye on the trustee’s performance, usually with the right to remove the trustee and appoint a new one. Even though there is no need to anticipate trustee misconduct, appointing a trust protector is a recommended way to provide an extra level of protection to the beneficiary. However, the rights and procedures for changing trustees vary from state to state. Therefore, the best way to build in protections that allow for the replacement of a trustee gone bad is to consult with a qualified special needs planner.


Filed Under: Special Needs Trust 
President Signs Special Needs Trust Fairness Act


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The 21st Century Cures Act, which includes the Special Needs Trust Fairness Act has passed both the House and Senate and was signed by President Obama on December 13, 2016.  Individuals with disabilities, who have capacity, can create their own first party special needs trusts (sometimes called (d)(4)(A) trusts as they are established under 42 U.S.C. s. 1396p(d)(4)(A)). The federal statute prior to this legislation only allowed a special needs trust to be established for a person with a disability by the person’s parent, grandparent, guardian, or by a court.


The individual that would benefit the most from the trust, the beneficiary, however could not establish the trust themselves. The law as it was written presumed that all individuals with disabilities lack the mental capacity to establish a trust. The Special Needs Trust Fairness Act will end this presumption. No longer will individuals in need of a special needs trust, but without parents or grandparents, face undue legal difficulties.


The assets held within a special needs trust are considered to be non-countable for purposes of eligibility for means-tested public benefits, including Supplemental Security Income and Medicaid. The Special Needs Trust Fairness Act, along with the recent ABLE account, give individuals more options to managing their own financial affairs.


Please click here for our post on the Achieving a Better Life Experience Act, or ABLE account.


Filed Under: Special Needs Planning, Special Needs Trust, Special Needs Trust Fairness Act 
Planning With Special Needs Trusts


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When your estate plan includes family or friends with special needs, care must be taken.  As the Supplemental Security Income (SSI) program is means tested, beneficiaries are allowed only $2,000 in countable assets to retain eligibility.  Although Social Security allows beneficiaries to have one house and one car, any other assets over $2,000 will be countable and affect eligibility.  Therefore, if you leave money to a loved one who is receiving SSI or Medicaid benefits, there is a good chance it will affect their eligibility.  More importantly, it may affect the medical insurance they receive as part of their benefits.


One option to consider when your estate plan includes special needs family members is a Special Needs or Supplemental Needs Trust.  With this option, instead of leaving your assets directly to your loved one, you leave it to the Special Needs Trust for their benefit.  If the trust is properly drafted, the beneficiary can benefit from the assets without affecting their eligibility for Medicaid or SSI.  This type of Special Needs Trust is a Third Party Special Needs Trust.  Another type of Special Needs Trust is the Self-Settled Special Needs Trust, which will not be discussed as part of this post.


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Filed Under: Special Needs Trust 
Financial Planning For Families With Special Needs


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ESSENTIAL STEPS TO ACCOMPLISH YOUR GOAL


    

  • Start Early and Get Help –  Lack of planning may have disastrous consequences.  Planning for special needs families often involves several  financial, legal and benefits-related strategies.  Assembling a team of qualified professionals to advise you will take time.  A financial advisor, estate planning attorney, benefits coordinator, trustee/trust company, family physician/registered nurse, and of course family members may all need to be involved in the ultimate plan.
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  • Establish a Special Needs Trust – If you’re receiving government sponsored benefits, a gift or inheritance may cause a disqualification of those benefits.  A frequently asked question  is how to provide for a family member with special needs without jeopardizing those government benefits.  Parents may purchase life insurance to be paid out to a special needs trust.  They may also designate the special needs trust as a beneficiary in a will, trust or retirement account.  The funds designated to the special needs trust at death may be used to supplement the special needs family member without jeopardizing their benefits.
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  • Draft a Letter of Intent – How can you be assured that proper care will be given to your child? You’ve established a special needs trust  to provide financial assistance when you’re gone, but have you named  a person that will assume the role of guardian or caregiver?  Do they know the name and address of your child’s physician?  Do they know their therapies, procedure and medication schedule?  Do they know their faith and where they attend religious services?  Answers to these and many other questions should be discussed and memorialized to ensure the best possible care for your child.
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  • Consider Life Insurance – Someone, most likely a family member, will have to step in to act as a guardian and raise your child.  In all likelihood, that family member will have to pay for some of the services the parents had provided when able.  If the estate was not large enough, life insurance can provide the needed funds to help defray the cost of care.
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  • Review Often – Many changes will occur during the course of your life.  Reviewing your plan annually will ensure everything is up to date to give you the peace of mind your family is taken care of.
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Filed Under: Disability, Special Needs Trust, Uncategorized 
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