King & Wood, P.A.

How to Handle an Inheritance

“It can be fun to daydream what life would be like if you hit the Powerball for $1.7 billion, but for most people, windfalls aren’t quite as exciting.”

If you’ve ever read an article about what someone does with a financial windfall, it’s probably been about a truly life-changing amount of money. A recent article from CNBC, “Receiving an inheritance? Here’s how experts say to handle any windfall,” says the average American inheritance across all age groups and incomes between 2001 and 2019 was just over $12,000. These numbers are from the University of Pennsylvania’s analysis of data from the Federal Reserve’s Survey of Consumer Finances.

The number is skewed down by the vast majority of Americans who don’t receive any inheritance. Looking just at those who did receive an inheritance, the average amount was about $184,000—a healthy amount, but not enough to retire.

You’ll likely fold that money into your current financial plan if you receive an inheritance. Inheritances usually come in three different forms: cash, real estate and investments.

A cash investment is the easiest to handle if you’re not receiving an enormous amount. In 2023, you won’t owe any federal taxes on inherited cash up to $12.92 million. However, depending on where you live, there may be state estate or state inheritance taxes.

Unless you grew up in a palace, it’s not likely you’ll need to deal with the insurance tax limit on a real estate inheritance. With the rule known as “step-up in basis,” you likely won’t owe any tax on property you inherit—not initially, anyway.

The value of an inherited home resets when the owners die. If your parents paid $100,000 for a house and gave it to you when its fair market value is $500,000, and you sold it the next day, you’d owe tax on the $400,000 gain. However, if they die and leave the house to you, the value of the house, known as your basis, is the fair market value of the house—$500,000. If you sold it for this amount, as far as the IRS is concerned, you would not realize a gain. However, there are time limits. There’s a step-up in basis at the time of death, but the estate settlement process can drag on for six or twelve months.

A house can’t be divided up as neatly as cash. If you have siblings, one may want to sell the home for cash. Another might want to rent it out. Another might want to move in.

Get the property appraised as soon as possible and get at least two appraisals. This will make life easier for everyone. If one sibling wants to buy the other’s share of the home, you’ll all know exactly what the shares will be. It also gives you the number when determining when or if to sell it.

Remember, real estate requires maintenance, so until the house is sold, there is an obligation to pay the mortgage, property taxes and upkeep.

Like real estate, any investments inherited in taxable accounts come with a step-up in basis. If your parents paid $10 for Apple stock, you’re inheriting it at its current market value. You can sell it at its basis, and it’s cash. If you decide not to sell it and hang onto the investments, the rules apply as if you bought the stocks at market value, and you’ll owe tax on any gains realized.

The rules are tricky when it comes to inheriting retirement accounts. Plans funded with pre-tax dollars, like 401(k)s and traditional IRAs, are taxable when money comes out for the owners. For heirs, the IRS now gives a ten-year window to empty some of these accounts. If you’re in your peak earning years when you inherit, this can significantly affect your income tax liability.

In a perfect world, heirs and their benefactors would sit down with an estate planning attorney to map out the best way to leave inheritances so both benefactors and heirs would benefit in terms of taxes and a smooth transition of assets passing from one generation to the next. It’s something to consider.

Reference: CNBC (Oct. 16, 2023) “Receiving an inheritance? Here’s how experts say to handle any windfall”

Tax Strategies for Different Stages of Aging

“We’re conditioned to think of 65 as the tipping point into old age. At least we used to. Actuarial tables combined with the attitude that ‘70 is the new 50’ mean that you can and should consider clients’ needs for protection from taxes at three distinct stages of old age.”

Defining “late old age” must consider factors like health, mental status, family history and plain old luck, says a recent article from Financial Advisor, “Tax-Smart Wealth Transfer Tips For Clients In Late Old Age.” However, imagine this scenario: a person in late old age is often widowed and, if they are well-to-do, has more assets than they are likely to spend in their remaining years after accounting for reserves needed for long-term care.

At this stage, it’s important for the person to have an estate plan in place, with named beneficiaries on any retirement and investment accounts, and have taken steps to minimize taxes heirs will be liable for upon their death. If this planning has not been done yet, there’s still time—but there’s no time for delay.

Recent changes in the treatment of inherited retirement accounts and events like deaths, births, or marriages in the family mean every plan needs a close look at least annually. What else needs to be done?

• Directed, consistent, constant dollar levels of withdrawals from traditional individual retirement accounts (IRAs). This avoids being catapulted into a higher tax bracket. Charitable donations should be used, while enough IRA assets should be retained to take advantage of lower tax brackets coming in late old age.
• Topping off required minimum distributions (RMDs) with voluntary withdrawals to fund Roth conversions, starting when the individual was married, and the spouse was alive when couples enjoy more advantageous tax levels than singles.
• This is also the time to contribute to donor-advised funds (DAFs) or the family foundation by selling highly appreciated stocks. If one spouse’s death was anticipated, a share of appreciated stock held in joint accounts could be transferred to a separately owned account to gain the step-up at the spouse’s death.

After the work has been done and you enter late old age, there are three priorities to keep in mind:

• Be sure the beneficiaries in your IRA reflect your current preference and minimize the beneficiaries’ taxes from traditional IRAs.
• Confirm that the person named as your executor understands your investments and bequest preferences and is ready to take on the tasks to come in the future.
• In the case of imminent inheritance tax liability imposed by federal or state law, speak with your estate planning attorney about how a planned charitable gift or other means of minimizing estate taxes might be accomplished.

Can beneficiaries’ tax burdens be minimized? Consider these options:

• Switching IRA beneficiaries to grandchildren or younger family members in lower tax brackets, since non-spouse beneficiaries have only ten years to empty the accounts.
• Helping wealthy children who don’t need inheritances designate their children or others in the family’s next generation as beneficiaries of other non-IRA assets in the estate.
• Make a planned charitable gift to avoid federal and state inheritance taxes and capital gains taxes on appreciation the estate will owe before probate is completed.

An experienced estate planning attorney can handle legal filings after death. Nevertheless, the exact attorney needs to be part of the team, including a competent executor aware of your intentions and a financial advisor familiar with your assets and transaction history.

Reference: Financial Advisor (Oct. 3, 2023) “Tax-Smart Wealth Transfer Tips For Clients In Late Old Age”

Three More Reasons to Have an Estate Plan

“Estate planning not only makes things easier for your loved ones if you become incapacitated or when you’re gone, but it also does these three important things.”

Even after COVID, most Americans still don’t have an estate plan. A 2023 survey reported in Kiplinger’s recent article, “Three Overlooked Benefits of Estate Planning,” found that 75% of respondents didn’t have an estate plan. Worse, 72% of all respondents over age 75 didn’t have an estate plan.

It’s an easy task to postpone. No one likes to think about death, their own or their spouse’s. However, not having an estate plan condemns your loved ones to deal with an expensive, time-consuming, stressful mess that can be easily avoided.

Estate planning involves the creation and execution of the documents needed to address healthcare, financial, and legal affairs in case of incapacity or death. This is done with a series of documents created by an estate planning attorney. The names of the documents vary by state, but their function is roughly the same:

• Guardianship—if there are minor children, the will names who will receive custody of your children if you and your spouse both die.
• Will—A legal document used to express your wishes to distribute your property, name a guardian and an executor.
• Trust—A fiduciary agreement used to shield your estate from probate and allow further customization of your estate plan.
• Durable Power of Attorney—A legal document naming a spouse, partner, or other third party to manage finances if you can’t manage your own decisions.
• Advanced Care Directive—A document outlining the medical care you want or don’t want if you can’t make or communicate these decisions on your own.
• Medical Power of Attorney—A document naming a third party to make medical decisions if you are incapacitated.
• HIPAA Authorization—A document giving another person the right to view medical and insurance records and communicate with healthcare providers.

Why should you go through the trouble of having all these documents created? If focusing on the benefits of having an estate plan is the motivation you need to get going, here are several good reasons to have an estate plan.

Securing management of health care and finances if you’re incapacitated. No one likes to think they’ll ever be too sick to care for themselves or make their own decisions. However, this happens routinely to older Americans. Diseases like Alzheimer’s and other illnesses strike older adults with increasing frequency as they age. If you have an estate plan in place, family members can step in to take care of you if necessary. They’ll be able to pay bills to keep your household running smoothly, speak with your doctors and avoid going to court to obtain guardianship or conservatorship.

Fulfilling your wishes. Lacking a will, the laws of your state will determine how your property is distributed, with most states following a next-of-kin lineage. If you want your spouse to inherit everything and the state law divides your estate so 50% goes to a spouse and 50% is divided among the children, the state law will rule.

Another set of problems comes from outdated wills. If you named someone to be your executor thirty years ago and haven’t updated your will, they may no longer be in your life, or you may not want them administering your estate. Another problem is that if you’ve divorced a spouse and never updated your will, life insurance policies, or retirement accounts, your next call should be to your estate planning attorney and insurance agent.

Avoiding probate. Probate is a process where your will is filed with the court, reviewed by a judge,and approved—or not—to be administered. Depending on the jurisdiction, all documents, including your will, are available to anyone by searching the public records. An estate planning attorney can help you decide what assets you are willing to have to go through probate and what might be removed from your estate using trusts. Trusts provide more control over asset distribution and, depending upon the trust used, can provide protection from creditors and nuisance lawsuits. Trusts are also used in tax planning, which should go hand-in-hand with estate planning.

Estate plans have many benefits. Consider having an estate plan as part of your legacy to protect yourself during your lifetime and help your family.

Reference: Kiplinger (September 6, 2023) “Three Overlooked Benefits of Estate Planning”

Is a Power of Attorney Really Necessary?

“A document usually included in an estate planning package is a financial power of attorney. What is a financial power of attorney?”

A power of attorney is a document to be signed and notarized and allows one person, known as the “principal,” to appoint another person, known as the “agent,” to act on the principal’s behalf within the scope of authority described in the document. According to a recent article from The Gazette, “Money & the Law: Powers of attorney more complex than they might seem,” the power of attorney can be very broad or limited to a particular transaction.

You may want someone to be able to pay your bills if you are temporarily incapacitated, for instance, but not to sell your home. A personalized power of attorney document can set specific limits for your unique situation.

As part of an estate plan, the POA is likely to be “general,” granting broad authority to the agent. This may be especially useful to someone who regularly travels and can’t always be physically present to conduct transactions. It also benefits someone who faces a risk of cognitive decline or impairment due to age or illness.

With proper language, a power of attorney can be made “durable,” meaning the grant of authority contained in the document survives legal incapacity. The POA does not survive the death of the principal.

If a person doesn’t have a durable financial POA and becomes incapacitated, a conservator must be appointed to handle the person’s financial affairs. This requires a legal proceeding, which can be costly, time-consuming and divisive among family members.

A POA should be created with careful thought and planning. The agent could turn rogue. For instance, a child appointed as the POA watching their inheritance shrink because of their ill parent’s medical expenses might skimp on an elderly parent’s health needs.

Financial powers of attorney can also create risks for agents. The agent’s job is simple when the person has full capacity—most of what the agent will do is carry out directions given by the principal. However, when the person becomes incapacitated, they are responsible to act as a fiduciary, in the same way a trustee or conservator would.

What duties does the POA entail once the principal becomes incapacitated? They must round up information and become responsible for managing whatever is delineated in the POA document. This may include financial affairs, investment accounts, tax obligations, pet care, etc.

Determining when incapacity has arrived can be difficult. In some elderly people, capacity comes and goes. When should the agent begin making discretionary decisions?

There are also questions about the standard of care applicable to agents named as POA. In most states, the standard of care is more than good faith, requiring diligence, competence, and prudence.

A power of attorney is more complex than it appears, requiring serious attention by estate planning attorneys and their clients as part of the estate planning process. They should be updated, just as an estate plan is updated, every three to five years or when circumstances warrant.

Reference: The Gazette (Sep. 3, 2023) “Money & the Law: Powers of attorney more complex than they might seem”

Why are Contingent Beneficiaries Important?

“When planning your estate rarely will you experience difficulty naming your initial beneficiary or beneficiaries for your will, IRA’s or life insurance.”

If you’ve been married or in a longstanding relationship, it’s almost certain your initial beneficiary will be your spouse or partner. If you have children, it’s likely an easy decision to make them contingent or successor beneficiaries to your estate. More often than not, children inherit equally, explains the article “PLANNING AHEAD: The problems we have naming contingent beneficiaries” from The Mercury.

To avoid conflict, parents often decide to name children equally, even if they’d prefer a greater share to go to one child over another, usually because of a greater need. This is, of course, a matter of individual preference.

However, as you move down the line in naming a successor or contingent beneficiaries, you may encounter some unexpected stumbling blocks.

If there is a beneficiary who is disabled, whether a child, grandchild or more distant relative, or even a spouse, you have to determine if naming them is a good idea. If the disabled individual is receiving Medicaid or other government assistance, an inheritance could cause this person to become ineligible for local, state, or federal government benefits. An estate planning attorney with knowledge of special needs planning will help you understand how to help your loved one without risking their benefits.

A Supplemental Needs Trust may be in order, or a Special Needs Trust. If the person’s only benefit is Social Security Disability—different from Supplemental Security Income or some others—they may be free to inherit without a trust and will not impact benefits. Social Security Disability recipients cannot work in “substantial gainful employment.”

Another issue in naming successor and contingent beneficiaries is the choice of a trustee or manager to handle funds if a beneficiary cannot receive benefits directly. A grandparent will sometimes be reluctant to name a son-in-law or a daughter-in-law as trustees for minors if their daughter or son predeceases and the inheritance is intended for a minor or disabled grandchildren. The grandparents may be concerned about how the funds will be used or how well or poorly the person has handled financial matters in the past.

The same concern may be at issue for a child. A trust can be structured with specific parameters for a grandchild regarding the use of funds. If a supplemental needs trust is established, the trustee must understand clearly what they can and cannot do.

What happens if you’ve run out of beneficiaries? For those with small families or who live into their 90s, many family members and friends have passed before them. These seniors may be more vulnerable to scams or new “friends” whose genuine interest is in their assets. In these cases, an estate plan prepared by an experienced estate planning attorney will need to consider this when mapping out the distribution of their estate, however large or small, to follow their wishes.

Reference: The Mercury (Aug. 28, 2023) “PLANNING AHEAD: The problems we have naming contingent beneficiaries”

How to Pass on Family Heirlooms with Fewer Estate Battles

“There are better—and often more creative—ways to plan and divide that can avoid family squabbles over cars, jewelry, furniture and household items.”

Family feuds are more likely over Aunt Josephine’s jewelry than the family home. Putting sticky notes on personal items before you die or expecting heirs to figure things out after you’ve passed often leads to ugly and expensive disputes, says a recent article from The Wall Street Journal, “Pass On Your Heirlooms, Not Family Drama.”

Boomers handling parents’ estates and assessing their personal property are having more conversations around inheritance and heirlooms. However, there are better ways to plan and distribute property to avoid family fights over cars, jewelry, furniture and household items.

The person you name to handle your estate, the executor, typically distributes personal property. Therefore, pick that person with care and clarify how much power they will have. An example of this comes from a police officer in Illinois who has been settling his father’s estate for nearly two years. His father owned more than twelve vehicles, a water-well drill rig and two semitrailers of car parts and guns dating back to the Civil War. He also listed 19 heirs, including stepchildren and friends. He told his son he knew he could handle everyone and the stress of people who “aren’t going to be happy.”

If you want a particular item to go to a specific person, make it clear in your will or trust. Describe the item in great detail and include the name of the person who should get it. A sticky note is easily removed, and just telling someone verbally that you want them to have something isn’t legally binding.

Without clear directions, one family with five siblings used a deck of cards and played high card wins for items more than one sibling wanted. Only some families have the temperament for this method.

In one estate, two sisters wanted the same ring. However, there were no directions from their late parents. An estate settlement officer at their bank had a creative solution: a duplicate ring was made, mixed up with materials from the original ring, and each daughter got one ring.

Ask your estate planning attorney how to address personal heirlooms best. In some states, you can draft a memo listing what you want to give and to whom. It is legally binding, if the memo is incorporated into a will or trust. If not, the personal representative can consider your wishes. Make sure to sign and date any documents you create.

Get heirlooms appraised to decide how to divide items equitably, which to sell and what to donate. If heirs don’t want personal property, they can donate it and use the appraisal to substantiate a tax deduction. Appraisals will also be needed for estate tax and capital gains tax purposes.

Reference: The Wall Street Journal (July 30, 2023) “Pass On Your Heirlooms, Not Family Drama”

Special Needs Planning for Beneficiaries with Disabilities

“When preparing testamentary documents, such as wills and trusts, protecting beneficiaries with disabilities should be a priority.”

Families who aren’t knowledgeable about special needs planning often disinherit a disabled child because they don’t know the other options for protecting their offspring, reports a recent article,  “Beneficiaries with disabilities require special planning” from The News-Enterprise. With proper planning, disabled beneficiaries can receive an inheritance and remain eligible for government benefits.

For estate planning, disabled beneficiaries are people who are disabled and receive public benefits, should be receiving public benefits, or are likely to need public benefits in the future. These public benefits are means-tested and determined by financial eligibility. They typically include Social Security Insurance and Medicaid. However, they may also include Section 8 housing, food stamps and other income or asset-based assistance.

Some people think they can replace public benefits with an inheritance. However, realistically, the disabled person will likely use up their inheritance and then be left only with public benefits and no resources to cover any other needs.

The best practice is to create a third-party supplemental needs trust for the beneficiary to receive an inheritance. This differs from a first-party supplemental needs trust and an ABLE account, since both have requirements based on the beneficiary’s age. The third-party supplemental needs trust can be funded regardless of the beneficiary’s age.

Third-party supplemental needs trusts don’t have a payback provision to the state. This is because a third party has funded the trust and not the beneficiary. Therefore, the assets within the trust aren’t required to be repaid to the state upon the death of the beneficiary. This leads to another benefit—the third-party supplemental needs trust may be left to a contingent beneficiary upon the death of the primary beneficiary.

Some families may leave the bulk of their estate to their disabled child, while the other children will be contingent beneficiaries.

A third-party supplemental needs trust is relatively flexible to set up and administer for future trustees. Your estate planning attorney can create one to include basic protective provisions giving the trustee maximum flexibility or set it up with instructions for an advisory committee, care planning and housing requirements.

Not all disabled individuals receive income or asset-based public benefits. In this case, the inheritance can be managed in one of two ways. First, planning documents could require the beneficiary’s inheritance to be left in a third-party supplemental needs trust, either because the planning anticipates a future need for benefits or because the beneficiary cannot manage their assets.

Another option is to leave the inheritance to the beneficiary outright, with a “trigger trust” provision. This means the third-party supplemental needs trust is set up within the planning document—a will or a trust—and will be “triggered” if the beneficiary is eligible for financial-based public benefits at the time of distribution.

The benefit of a trigger trust is that any beneficiary, including those who are healthy and capable of managing their lives when the documents are executed, can have the protection of a third-party supplemental needs trust, if and when needed.

The downside of a trigger trust is that once assets are distributed to the beneficiary outright, the option for a third-party trust is no longer available.

An experienced estate planning attorney will help the family with a disabled member plan for the future.

Reference: The News-Enterprise (July 8, 2023) “Beneficiaries with disabilities require special planning”

Which Is the Best to Way to Transfer Wealth, Trusts or Wills?

“Take the squabbling between siblings you've had to endure and referee as a parent. Now multiply it times age and money. That might give you some idea of the need to make your final wishes clear when the time comes to divvy up your assets.”

Even when everyone in the family grows up and gets along, settling an estate can bring back old sibling battles. It is even more likely if there are large sums of money or valuable property at stake. This makes having a well-prepared estate plan necessary and making those plans clear to family members long before they are needed.

A recent article from The Motley Fool, “Living Trust vs. Will: Which Is The Best Way to Pass Inheritance to Your Family?” explores how best to prepare for the future.

A will, also known as a last will and testament, instructs the executor of your estate how to distribute assets to heirs after your death.

A trust allows you to transfer assets at any time—including while you are still living—however you want, whenever you want. A trustee is the person named in the trust who is responsible for administering the trust. You can protect your children from mismanaging their inheritance with a good trustee and a properly prepared trust.

One of the biggest differences between a will and a trust is that the will takes effect only after you die.It also usually requires review and approval by a probate court. A trust is funded while you are living and does not go through the probate process.

Many people use both a will and a trust for their estate plans.

The will is best created by an experienced estate planning attorney who knows the estate and tax laws of your state. Wills are also used to name your executor and appoint a guardian for minor children. If your children are young, you want this in your will. Remember that when wills go through probate, they become part of the public record. As a result, anyone who wants to can read your will.

Trusts fall into two main categories—revocable and irrevocable. The difference is as it sounds; the grantor can change the revocable trust after it's created. Irrevocable trusts can’t be changed once established, although some states permit what is known as “decanting”—pouring the contents from one trust into another. Your estate planning attorney will know if your state permits this.

One benefit of a trust is privacy. The trust doesn’t go through probate, so no one but the trustee and, depending on the trust, the beneficiaries, know what is in it. Assets in the trust are also distributed as directed in the trust, so they go directly to beneficiaries. There is no court involvement.

In addition, when assets are placed in the trust, they are owned by the trust and not the person who created the trust (the grantor).

Whether you are beginning to plan your estate or updating an existing plan, your estate planning attorney will help you understand your options, so you can create a plan best suited for you and your family.

Reference: The Motley Fool (July 7, 2023) “Living Trust vs. Will: Which Is The Best Way to Pass Inheritance to Your Family?”

It Can Take Time to Learn about Inheritances

“You may not always know it if you have an inheritance coming. And in some cases, you may not even know the individual has passed on.”

Often, a distant relative is notified by an estate’s executor or administrator of the death of a relative and any steps to be taken to claim their inheritance. A recent article from yahoo! finance, “How Long Will It Take For My Beneficiaries to Get Notified After Death?” explains how the process works. Every state has its own laws on this topic, but there are some basics you’ll need to know if you’re facing this situation.

Estate and property law are two of the most state-specific sets of laws; in many cases, these laws conflict with those of other states. An experienced estate planning attorney will be able to help figure out what your next steps are. And don’t start spending your inheritance too quickly—a number of things have to happen before your inheritance—if you indeed have one—arrives.

When someone dies, the total amount of their property, cash, assets, and debts is called their “estate.” The court-ordered process of distributing the estate is known as “probate.” If there was a will and an executor was named, the executor is in charge of administrating the estate. If there was no will, the person died intestate, so the court will name an administrator. The chief difference between an executor and an administrator is mainly the title. Both are responsible for paying the estate’s debts and distributing assets to named and legal heirs.

In some states, the executor, heirs, and any interested parties must file for probate within 30 days of the decedent’s death. In other states, you have three years to file for probate. However, in all cases, heirs may not be formally notified of their inheritance until the probate process begins and the executor or administrator starts working on the estate.

Once probate begins, the executor must notify all heirs and potential heirs of their inheritance. If there is a will, the most common rule is for the executor to notify all known and named beneficiaries within 90 days of the start of probate. However, this can also vary from 15 days from the first hearing date to a year or more for notifications.

These rules apply only to known beneficiaries. During probate, the executor may learn of new or unresolved inheritance issues, and then heirs are notified as they are identified.

If the estate has no will, the rules are different. First, the administrator must identify potential beneficiaries based on state law and family records. Sometimes the only source for this information comes from family members who come forward and identify themselves. The administrator is required to make a public notice of the deceased so any unknown heirs have a chance to come forward. The notice usually runs in a local newspaper, and different states have different rules regarding how long it needs to appear in print.

After the heirs have been notified, there is a waiting period for any distributions. This is common, as real estate or other high-value assets may be sold and their value added to the state. If the state requires a waiting period, it’s often six months from when heirs are notified and when they can receive their inheritance. This allows enough time for any interested parties to come forward and contest the inheritance.

An experienced estate planning attorney can help the executor or administrator move through the process of settling the estate.

Reference: yahoo! finance (June 27, 2023) “How Long Will It Take For My Beneficiaries to Get Notified After Death?”

How Does a Special Needs Trust Work?

“If you have a family member with special needs, you might face emotional and physical issues. However, you also may be concerned about maximizing the financial support that your loved one requires.”

A special needs trust, or SNT, is an important part of planning for the financial security and lifestyle of a family member with special needs. A special needs trust can allow the trust’s beneficiary to receive financial support from the family for supplemental needs without losing public benefits, such as SSI (Supplemental Security Income) and Medicaid. A recent article from The Westerly Sun, “Special needs trust could ease families’ stress,” explains how this works.

A parent typically has the special needs trust created. As the grantor, the parent establishes the trust and names a trustee who will be responsible for managing the trust. The trust may be funded with gifts throughout the parent’s lifetime or from other sources, such as a court settlement or an inheritance.

Life insurance proceeds are often used as the funding mechanism. The trust purchases a life insurance policy on the life of one or both parents of a special needs individual. Government benefits are protected as long as the trust is named the policy beneficiary.

The role of a trustee is important in a special needs trust. They must manage the funds within the trust and ensure that they are only used to supplement SSI and Medicaid, the two government programs that typically cover the costs of housing, food, and medical care. The special needs trust can be used for other qualified expenses, including transportation, travel, education, entertainment, professional services, and personal items.

The parent could serve as a trustee, or a trusted friend or relative may be named. Whoever is chosen as the trustee should be familiar with the family and the needs of the family member with disabilities. You also want to name a person who is competent at managing finances and can be trusted to stay current regarding SSI and Medicaid regulations.

Another option is to hire a professional trust company to manage the special needs trust. This type of company is experienced in both asset management and government regulations and would provide parents with strict recordkeeping of all financial transactions associated with the trust.

Parents should also be familiar with areas of concern about special needs trusts. The trustee controls how and when funds are distributed, which can frustrate beneficiaries if requests for funds are denied.

While third-party special needs trusts are funded by someone other than the beneficiary, the beneficiary’s own assets fund first-party special needs trusts. The trust must pay back Medicaid for money used for the beneficiary after the beneficiary’s death. This repayment could deplete the trust, depriving secondary beneficiaries of any funds they might otherwise receive. Third-party trusts do not require Medicaid repayment.

Speak with an experienced estate planning attorney before establishing a special needs trust to be sure that this is the right solution for your family’s situation.

Reference: The Westerly Sun (June 10, 2023) “Special needs trust could ease families’ stress”