King & Wood, P.A.

You Can Avoid Unintended Consequences

“Although there is certainly no shortage of people with selfish or malevolent intent, a great number of estate plans that end in disaster are due to unintended consequences.”

The mistake can be as simple as signing a document without understanding its potential impact on property distribution, failing to have a last will and testament properly executed, or expecting a result different from what the will directs. Unfortunately, these unintended consequences are relatively common, says the article “Advice for avoiding unintended issues in estate planning” from The News-Enterprise.

The most common mistake that leads to unintended consequences is leaving everything to a spouse in a blended family. Even if children don’t have a close relationship with their stepparent, they’re willing to get along for the sake of their biological parent. However, when the first spouse dies, the decedent's beneficiaries are generally disinherited if the surviving spouse receives the entire estate.

If the family truly has blended and maintains close relationships, the surviving spouse may ensure that the decedent’s children receive a fair share of the estate. However, if the relationships are tenuous at best, and the surviving spouse changes their will so their biological children receive everything, the family is likely to fracture.

Using a revocable living trust as the primary planning tool is a safer option. An experienced estate planning attorney can create the trust to allow full flexibility during the lifetime of both spouses.  Upon the first spouse’s death, part of the estate is still protected for the decedent’s intended beneficiaries.

This way, the surviving spouse has full use of marital assets but can only change beneficiaries for his or her portion of the estate, protecting both the surviving spouse and the decedent’s intended beneficiaries.

Another common mistake occurs when married couples execute their last will and testaments with different beneficiaries. For example, if they’ve named each other as the primary beneficiary, only the survivor will have property to leave to loved ones.

An alternative is to decide what the couple wants to happen to the estate as a whole, then include fractional shares to all beneficiaries, not just the one spouse’s beneficiaries. This protects everyone.

Many people assume that if they die without a will, their spouse will inherit everything. Unfortunately, this is not always the case, and a local estate planning attorney will be able to explain how your state’s laws work when there is no will. Children or other family members are often entitled to a share of the estate. This may not be terrible if the family is close. However, if there are estranged relationships, it can lead to the wrong people inheriting more than you’d want.

Failing to plan in case an heir becomes disabled can cause life-altering problems. If an heir develops a disability and receives government benefits, an inheritance could make them ineligible. The problem is that we don’t know what state of health and abilities our heirs will be in when we die, and few will want their estate to be used to reimburse the state for the cost of care. A few extra provisions in a professionally prepared estate plan can result in significant savings for all concerned.

Estate planning is about more than signing off on a handful of documents. It requires thoughtful consideration of goals and potential consequences. Can every single outcome be anticipated? Not every single one, but certainly enough to be worth the effort.

Reference: The News-Enterprise (March 25, 2023) “Advice for avoiding unintended issues in estate planning”

Should Each Child Get Equal Inheritance?

“Equally sharing the wealth among the children isn’t always fair, such as when one sibling is the primary caretaker, or another is already wealthy.”

Every estate planning attorney has conversations with their clients about how adult children should inherit. While most people assume siblings should all inherit equally, in many situations, equal is not always appropriate. There are many situations where an equal inheritance might be unfair, says a recent article, “How Should Your Children Inherit? 4 Scenarios Where ‘Equal’ Is Not Appropriate,” from Kiplinger.

The Caretaker Child Lives With the Parent. When one of the children lives with the parent and has taken on most, if not all, of the responsibilities, it may be fair to treat the child differently than siblings who are not involved with the parent’s care. Taking care of paying bills, coordinating health care appointments, driving the parent to appointments and being involved with end-of-life care is a lot of responsibility. It may be fair to leave this child the family home or leave the home to a trust for the child for their lifetime. The parent may wish to leave the caretaking child a larger portion of the inheritance to recognize the additional help they provided.

A Special Needs Child. If the parent has been the primary caregiver for a special needs child, the estate plan must take this into consideration to ensure the child will be properly cared for after the parents die or are unable to care for the child. Depending on what government benefits the child receives, this usually means the parents need to have a Special Needs Trust or Supplemental Needs Trust created. Most government benefits are means-tested. To remain eligible, recipients may not have more than a certain amount of personal assets. The Special Needs or Supplemental Needs trust could receive more or less than an equal amount of the estate the child would have inherited.

In this scenario, siblings are generally understanding. The siblings often know they will be the ones caring for the family member with special needs when the parents can no longer provide care and welcome the help of an elder law estate planning attorney to plan for their sibling’s future.

An Adult Child With Problems. It’s usually not a good idea to leave an equal portion of an inheritance to an adult child who suffers from mental illness, substance abuse, is going through a divorce or has a life-long history of making bad choices. Putting the money into a trust with a non-family member serving as a trustee and strict directions for when and how much money may be distributed may be a better option. In some cases, disinheriting a child is the unpleasant but only realistic alternative.

Wealth Disparities Among the Siblings. When one child has been financially successful and another struggles, it’s fair to bequeath different amounts. However, wealth can change over a lifetime, so review the estate plan and the wealth distribution on a regular basis.

How To Decide What Will Work For Your Family? Every family is different, and every family has different dynamics. Have open and honest discussions with your estate planning attorney, so they can help you plan for your family’s situation. If possible, the same frank discussion should take place with adult children, so no one is taken by surprise at a time when they will be grieving a loss.

Reference: Kiplinger (Dec. 18, 2022) “How Should Your Children Inherit? 4 Scenarios Where ‘Equal’ Is Not Appropriate”

How Do Special Needs Trusts Work?

“A special needs trust (SNT) can help you provide financial security to your child after you die without leaving them ineligible for the government benefits that they need to sustain care.”

Parents with children who have special needs know they play a pivotal role in their child’s medical, social, emotional and mental health. They also face the challenges of figuring out government assistance programs like Medicaid and how these and other programs provide much-needed help throughout a child’s life. Another important way that parents of children with special needs help is with the creation of a special needs trust, as explained in the article “Special Needs Trust (SNT): What It Is and How It Works” from Forbes.

A special needs trust is used to hold assets in an account to be used to support an individual with special needs. The funds belong to the trust and not the individual, so they are not factored into their eligibility for government benefits.

SNTs are typically set up by a parent, grandparent, or guardian. The person who sets up the account, called the “grantor,” funds the account, as may any other individuals who wish to provide for the child.

The grantor names a trustee, or a third party, who administers the trust. The trustee is a fiduciary and must act in the best interest of the beneficiary. Funds are to be distributed in accordance with the directions in the trust. The trustee will be responsible for distributing funds, following government benefit rules and requirements, and managing tax obligations, among other things.

Parents are often the trustees, although others, like siblings or close relatives, may also be trustees. Parents who are both grantor and trustee generally name a successor trustee to take over after they die, become incapacitated or resign from their role.

A person who may not be able to support themselves due to a medical condition or a disability can gain financial security from an SNT.

Someone with special needs is likely to rely on means-tested government benefits, like Supplemental Security Income (SSI) or Medicaid. These benefits are only available to people with limited income or assets. Anyone receiving SSI, for example, may not have more than $2,000 of countable resources.

A parent who wishes to provide support after they die must plan in advance, so their bequest does not result in the person losing their benefits. This could happen if money is left through anything except a special needs trust. An estate planning attorney will know how to structure the parent’s estate plan to protect the individual with special needs and their government benefits.

Assets in an SNT can be used for a wide variety of expenses, including out-of-pocket medical or dental expenses, personal care givers, rehab services, education, vacations, and other permissible uses.

There is a lot of complexity involved with creating a special needs trust. For one, there are several different kinds of SNTs. You’ll want to select the one best suited for your family. Laws about means-tested benefits vary across states, so you’ll need to work with an estate planning attorney familiar with the laws of your state.

A well-drafted estate plan, incorporating a special needs trust, will provide your loved one with the resources to maintain as much normalcy as possible as they adjust to life without their parents.

Reference: Forbes (Sep. 22, 2022) “Special Needs Trust (SNT): What It Is and How It Works”

How Do You Provide Financial Help for a Special Needs Child and Retirement Too?,

“People with children who cannot support themselves need to think well past their own lifetime and figure out how to provide for children after they are gone.”

For parents of children with disabilities, the challenges of preparing for retirement and for their child’s future 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 their retirement planning must be different than other families. 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 in dividual 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.

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

How to Protect Child’s Public Benefits

“If you have a child or other family member who has special needs due to physical or mental conditions, you face a variety of challenges planning for their care, including financial ones.”

Well-meaning relatives may not understand that putting a family member with special needs in their will could put your family member’s lifestyle and future at risk, says the article “Protect benefits for children with special needs from Hoosier Times. Planning ahead is your best defense.

Individuals with special needs are eligible for a variety of government benefits and local programs that help with housing, medical needs, specialized equipment, independent living, job training and a variety of other services. Most of these programs are means-tested, that is, they require participants to qualify for benefits. If your loved one has no income and few assets, that’s not a problem.

However, when relatives, especially grandparents, include individuals with special needs in their estate plans or make them beneficiaries of insurance policies or retirement plans, they could put all of these benefits at risk.

Hopefully, relatives will keep you informed of their plans. You’ll need to be appreciative but firm and explain just how badly their generosity could backfire, if their gifts are not structured properly.

There is a way to leave bequests or make gifts to individuals with special needs that will not put their benefits at risk: a Special Needs Trust (SNT), either one that has been created already or one created for their gift. A SNT is designed to help people with special needs use financial gifts for different purposes, while maintaining their eligibility for services.

There are two types of SNTs:

First-party SNT—An individual with Special Needs, their legal guardian, or the court may establish a first party SNT funded by the individual’s own assets, either through earnings or an inheritance or a personal injury award. The first party SNT includes a “payback” rule: the trust must pay back the state for certain benefits, when the individual with special needs dies.

Third-party SNT—A relative other than the individual wishes to include them in an estate plan, so the relative or other person sets up a third-party SNT. The third-party trust is funded with assets from the relative or other person and no payback provision is required.

There are many issues involved in establishing an SNT, so the best person to set one up is an elder law estate planning attorney. You’ll also want to involve anyone in the family who might contribute to the trust, so they know what to expect and how they can participate, if they wish to do so.

Reference: Hoosier Times (March 4, 2021) “Protect benefits for children with special needs

How Do Special Needs Trusts Work?

“Just as you have trust in a relationship, trusting your document and those with responsibilities in the trust are crucial to obtaining your objectives.”

A trust of any kind is a document that expresses your wishes while you are alive and after you have passed. The need for a dedicated trust for loved ones differs with the situations or issues of the family. Getting this wrong can lead to financial devastation, explains the article “Take special care with Special Needs trusts” from the Herald Bulletin.

A Special Needs Trust or supplemental trust provides protection and management for assets for specific beneficiaries. The trustee is in charge of the assets in the trust during the grantor’s life or at his death and distributes to the beneficiary as directed by the trust.

The purpose of a Special Needs or supplemental trust is to help people who receive government benefits because they are physically or mentally challenged or are chronically ill. Most of these benefits are means-tested. The rules about outside income are very strict. An inheritance would disqualify a Special Needs person from receiving these benefits, possibly putting them in dire circumstances.

The value of assets placed in a Special Needs trust does not count against the benefits. However, this area of the law is complex, and requires the help of an experienced elder law estate planning attorney. Mistakes could have lifelong consequences.

The trustee manages assets and disperses funds when needed, or at the direction of the trust. Selecting a trustee is extremely important, since the duties of a Special Needs trust could span decades. The person in charge must be familiar with the government programs and benefits and stay up to date with any changes that might impact the decisions of when to release funds.

These are just a few of the considerations for a trustee:

• How should disbursements be made, balancing current needs and future longevity?
• Does the request align with the rules of the trust and the assistance program requirements?
• Will anyone else benefit from the expenditure, family members or the trustee? The trustee has a fiduciary responsibility to protect the beneficiary, first and foremost.

Parents who leave life insurance, stocks, bonds, or cash to all children equally may be putting their Special Needs child in jeopardy. Well-meaning family members who wish to take care of their relative must be made aware of the risk of leaving assets to a Special Needs individual. These conversations should take place, no matter how awkward.

An experienced elder law estate planning attorney will be able to create a Special Needs trust that will work for the individual and for the family.

Reference: Herald Bulletin (March 13, 2021) “Take special care with Special Needs trusts”

How Does Planning for a Special Needs Child Work?

“When parents start the planning process for a child with special needs, they usually work under the perception that if they create a special needs trust (SNT), the child will be taken care of and the needs will be met.”

Funding a Special Needs Trust is just the start of the planning process for families with a family member who has special needs. Strategically planning how to fund the trust, so the parents and child’s needs are met, is as important as the creation of the SNT, says the article “Funding Strategies for Special Needs Trusts” from Advisor Perspectives. Parents need to be mindful of the stability and security of their own financial planning, which is usually challenging.

Parents should keep careful records of their expenses for their child now and project those expenses into the future. Consider what expenses may not be covered by government programs. You should also evaluate the child’s overall health, medical conditions that may require special treatment and the possibility that government resources may not be available. This will provide a clear picture of the child’s needs and how much money will be needed for the SNT.

Ultimately, how much money can be put into the SNT, depends upon the parent’s ability to fund it.

In some cases, it may not be realistic to count on a remaining portion of the parent’s estate to fund the SNT. The parents may need the funds for their own retirement or long-term care. It is possible to fund the trust during the parent’s lifetime, but many SNTs are funded after the parents pass away. Most families care for their child with special needs while they are living. The trust is for when they are gone.

The asset mix to fund the SNT for most families is a combination of retirement assets, non-retirement assets and the family home. The parents need to understand the tax implications of the assets at the time of distribution. An estate planning attorney with experience in SNTs can help with this. The SECURE Act tax law changes no longer allow inherited IRAs to be stretched based on the child’s life expectancy, but a person with a disability may be able to stretch an inherited retirement asset.

Whole or permanent life insurance that insures the parents, allows the creation of an asset on a leveraged basis that provides tax-free death proceeds.

Since the person with a disability will typically have their assets in an SNT, a trust with the correct language—“see-through”—will be able to stretch the assets, which may be more tax efficient, depending on the individual’s income needs.

Revocable SNTs become irrevocable upon the death of both parents. Irrevocable trusts are tax-paying entities and are taxed at a higher rate. Investing assets must be managed very carefully in an irrevocable trust to achieve the maximum tax efficiency.

It takes a village to plan for the secure future of a person with a disability. An experienced elder law attorney will work closely with the parents, their financial advisor and their accountant.

Reference: Advisor Perspectives (April 29, 2020) “Funding Strategies for Special Needs Trusts”

 

Long Term Care Varies, State by State

 

 

 

 

 

 

“States can differ dramatically when it comes to long term care regarding availability, quality, government benefits, retirement communities and cost.”

What if your parents live in Oklahoma, you live in Nebraska and your brothers and sisters live in New York and California? Having the important conversation with your aging parents about what the future might hold if one of them should need long-term care is going to be a challenge, to say the least.

It’s not just about whether they want to leave their home, reports the article “What is the best state for long term care” from The Mercury. There are many more complications. Every state has different availability, levels of care and taxes. If the family is considering a continuing care retirement community, or if the parents already live in one, what are the terms of the contract?

The differences between states vary, and even within a state, there can be dramatic differences, depending upon whether the facility being considered is in a metropolitan, suburban or rural area. There’s also the question of whether the facility will accept Medicaid patients, if the parents have long-term care insurance or any other resources.

Here’s what often happens: you open up a glossy brochure of a senior community in a warm climate, like Florida or Arizona. There are golf courses, swimming pools and a great looking main house where clubs and other activities take place. However, what happens when the active phase of your life ends, slowly or suddenly? The questions to ask concern levels of care and quality of care. Where is the nearest hospital, and is it a good one? What kind of care can you receive in your own apartment? Are you locked into to your purchase, regardless of your wishes to sell and move to be closer to or live with your adult children?

And what happens if you or a “well” spouse runs out of money? That’s the question no one wants to think about, but it does have to be considered.

For people who move to Florida, which has a very generous homestead exemption for property taxes and no state tax, the incentives are strong. However, what if you become sick and need to return north?

For seniors who live in Pennsylvania and receive long-term care and other services, the well spouse’s retirement funds are exempt for Medicaid regardless of the amount. However, if you move over the state’s border to New Jersey, and those accounts will need to be spent down to qualify for Medicaid. The difference to the well spouse could be life changing.

Delaware and New Jersey have Medicaid available for assisted living/personal care. Pennsylvania does not. The Keystone State has strict income limitations regarding “at home” services through Medicaid, whereas California is very open in how it interprets rules about Medicaid gifting.

The answer of where to live when long-term care is in play depends on many different factors. Your best bet is to meet with an estate planning elder care attorney who understands the pros and cons of your state, your family’s  situation and what will work best for you and your spouse, or you as an individual.

Reference: The Mercury (March 4, 2020) “What is the best state for long term care”