Posts Tagged ‘Special Needs’

Managing a Special Needs Trust — The Handbook

APRIL 13, 2015 VOLUME 22 NUMBER 14

Are you named as trustee of a special needs trust? Are you a trust beneficiary, wondering about how the trust should be administered? Or are you a parent or grandparent of an individual with a disability, wondering about what a special needs trust might actually look like in practice? Good news: there is a free resource that will help you understand these unusual trusts, and in some detail.

The Special Needs Alliance, a national organization of lawyers with extensive experience with special needs planning and special needs trust administration, has long maintained (and updated) its Handbook for Trustees (“Administering a Special Needs Trust”) online. There is even a Spanish language version. You can print out the Handbook, or order a printed copy from the Alliance.

(While you’re there, incidentally, you might want to check out the past editions of The Voice, the SNA’s periodic newsletter. There is a lot of really good information, with terrific detail and suggestions. This organization is very willing to share good ideas and explanations.)

What will you learn from “Administering a Special Needs Trust”? A sampling of some of the most important elements:

  • Understand the difference between self-settled special needs trusts and third-party special needs trusts. You might well have that basic understanding already — the former are usually funded with personal injury settlements or unrestricted inheritances received by individuals with disabilities, and the latter are usually funded with family inheritances left, with proper planning, directly to the trust. But the Handbook will help you understand the significant differences in administration between the two types of trusts.
  • Figure out the Social Security Administration’s concept of “In-Kind Support and Maintenance.” What is ISM, and why do you care? It’s the counter-intuitive calculation that determines how much a recipient’s Supplemental Security Income (SSI) payment will be reduced if someone (a trust, a parent or a generous stranger) pays for the recipient’s food and/or shelter. The Handbook gives some examples to help you grasp this odd concept.
  • Learn how taxation of special needs trusts works. Spoiler alert: the self-settled special needs trust is always a “grantor” trust, and that means it is taxed exactly as if there was no trust at all. Third-party trusts are harder to generalize about. OK — that wasn’t much of a spoiler, since you now have to go read the Handbook to figure out what those terms mean.
  • Appreciate the differences (and they are legion) between beneficiaries who receive Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI) payments. Bonus: you can also learn how an SSI recipient might shift to SSDI payments upon the retirement or death of a parent.
  • Identify which payments will be treated as “housing” for SSI calculation purposes. Rent payments are easy. How about homeowners insurance? Homeowners Association payments? Garbage pickup? Internet, cable, newspaper?
  • One common special needs trust payment is for vehicle operation and maintenance. Can a trust pay for gas? Repairs? Insurance? Read the Handbook and find out. (Spoiler alert: yes.)
  • Get a brief description of trust administration rules. Can the trustee “invest” in their own business? Hire a professional care manager, or a financial planner?

The Special Needs Alliance’s Handbook is less than 20 pages long, so it is not the ultimate authority on special needs trust administration. It is an excellent introduction to the difficult questions, and it provides answers to many of the most common questions. There are also a number of other resources we regularly suggest:

Managing a Special Needs Trust: A Guide for Trustees (2012 Edition) by Jackins, Blank, Macy and Shulman.

Special People, Special Planning: Creating a Safe Legal Haven for Families with Special Needs by Hoyt and Pollock.

Special Needs Trusts: Protect Your Child’s Financial Future by Elias and Fuller.

New York Judge Takes Bank, Lawyer to Task Over Special Needs Trust

MARCH 9, 2013 VOLUME 20 NUMBER 10
We don’t very often focus on trial court decisions, and especially not in cases from outside Arizona. Trial judges are often very dedicated and bright, and their opinions may be eloquent and well-reasoned, but they do not establish precedent we can describe for our readers. Once in a while we come across a trial court opinion that speaks to our area of law practice, however, and we want to share it with you.

Such a case comes to us from now-retired New York Surrogate’s Court Judge Kristin Booth Glen. Surrogate’s Court is similar to Arizona’s probate court — it is where trusts, estates and guardianships are handled. Judge Glen handled a particularly challenging estate and trust, and wrote an opinion detailing the history of the case on her last day in office.

The case involved a guardianship of a profoundly developmentally disabled adult named Mark (his full name is not given in the judge’s opinion). Mark was 16 when his adoptive mother Marie died in 2005. Mark was then living in a group home, where Marie had placed him after she learned that she was terminally ill.

Marie’s living trust (which, as an aside, was apparently never funded) divided her assets between Mark and his brother. Mark’s share was to be held in a special needs trust, with JP Morgan Chase Bank and Marie’s lawyer acting as co-trustees. Her pour-over will left everything to the trust; in the probate proceeding initiated after her death, the total estate was described as just short of $12 million. Probate-related costs and expenses reduced that by almost a million dollars, and another $3.5 million was paid in estate taxes. Inexplicably, Mark’s one-half share of the remaining $8 million was reported as $1,420,343.29.

A year after Marie’s death, her lawyer sought appointment as Mark’s guardian. For reasons not explained in the written decision, no hearing was held for almost a year. When the attorney appeared before the judge, he told her that he was fulfilling a death-bed promise he had made to his former client, but that he had not actually seen Mark in more than ten years. He had not visited the facility where Mark was living, and he had not asked the staff whether Mark had any unmet needs. In the almost three years he had been co-trustee of the trust for Mark, not a penny had been spent on him.

Judge Glen ordered the lawyer and the bank to explain themselves — to file an accounting in the trust detailing income and expenditures. She also suggested that they ought to find someone to evaluate Mark and his needs, and to figure out whether there were things the trust could provide for his benefit. A professional care manager was eventually hired (though it inexplicably took a year before she was sent to visit Mark), and a program of providing for Mark’s needs finally began. Meanwhile, Marie’s considerable estate had sat idly, paying only administrative expenses, for almost five years after her death.

The judge’s written opinion details all that history, and the gradual improvement in Mark’s life and care over the two-year period since the care manager began visits and recommendations. It also leaves little doubt about the judge’s frustration at not getting sufficient information to determine how the estate shrank from $12 million to the $1.5 million (or so) in Mark’s trust, or how much had been paid to the bank or the lawyer in probate fees and trust administration fees. It laid out a few next steps to guide her successor after her own retirement. It did not resolve any potential or actual challenges to the fees charged by the bank or lawyer, but it clearly signaled her likely intention to reduce fees and potentially order return of some fees already collected. In the Matter of the Accounting by JP Morgan Chase Bank, N.A., v. Marie H., December 31, 2012.

Though this written opinion is from a trial court rather than a court of appeals, it is worth looking at and considering. Though it is a New York case, it speaks to judges, trustees, beneficiaries and families in other states, as well. It lays out a disturbing history of inattention to the needs of a severely disabled man even though there apparently were funds available for his benefit. It tells trustees that:

  • inaction can be as bad as affirmative misbehavior.
  • it can be helpful to bring in a professional care manager to assess needs and make recommendations.
  • the courts can initiate reviews on their own, even if no complaint has been filed, when it becomes apparent that oversight is needed.
  • beneficiaries who are unable to protect themselves need special protection.

What happens next? We really don’t know — though the three months the judge gave for a more detailed accounting and action plan will expire at the end of this month. It will be interesting to see what Judge Glen’s successor does with this case, and how her written decision affects professional trustees and lawyers in New York and elsewhere. We’ll let you know as we see updated information.

Meanwhile, we hope that Mark continues to see benefits from his mother’s trust. It sounds like he has made a lot of progress with a little protection, oversight and professional care recommendations.

 

Can a Special Needs Trust Pay Credit Card Bills? Security Deposit?

JANUARY 21, 2013 VOLUME 20 NUMBER 3
Administering a “special needs” trust can be a challenge. The rules often seem vague, and they occasionally shift. What may seem like a simple question might actually involve layers of complexity. Sometimes an expenditure might be permissible under the rules of, say, the Social Security Administration, but not acceptable to AHCCCS, the Arizona Medicaid agency — or vice versa. Trustees work in an environment of many constantly-moving parts.

Take two questions we have been asked lately:

I am trustee of a self-settled special needs trust for my sister. Can I pay her credit card bills?

Maybe (don’t you just love lawyers’ answers?). Let’s break the question down a little bit.

First, have identified the trust as “self-settled.” That means the money once belonged to your sister (it might have been an inheritance, or a personal injury settlement, or her accumulated wealth before she became disabled). That also means the rules are somewhat more restrictive.

We will assume that the bills are for a credit card in her name alone. If the card belongs to someone else, the rules may be different. Not many special needs trust beneficiaries can qualify for a credit card; when they can, it can be a very useful way to get things paid for (as you will soon see).

The next question requires a look a the trust document itself. It might be that it prohibits payments like the one you would like to make. That would be uncommon, but not unheard of. We will assume that the trust does not expressly prohibit paying her credit card bills.

What benefits does your sister receive? Social Security Disability and Medicare? No problem. Supplemental Security Income (SSI) and AHCCCS (Medicaid)? Could be a problem.

Next we need to know what was charged to the credit card. Was it food or shelter? If it was used for meals at restaurants, or grocery shopping, or for utility bills, you probably do not want to pay the credit card bill from the trust. If you do (and assuming the trust permits it) then you will face a reduction of any SSI she receives, and possible loss of AHCCCS benefits.

Were the credit card bills for clothes, medical supplies, gasoline for her vehicle, even car repairs? There is probably no problem with paying the credit card statement. Even home repairs should be OK in most cases (just not rent, mortgage, utilities, etc. — and the rules might be different if anyone else lives with your sister).

As you can see, what started out as a simple question turns out to have a lot of complexity. You might want to talk with a lawyer about your sister could use the credit card. When it works, though, it can be quite a boon — it is an easy way to get gas into her car and clothes on her back.

Can my special needs trust pay the security deposit on my new apartment?

What an interesting question. We think the answer is probably “yes.”

Once again we need to look at the trust document itself. Was it funded with your own money (like a personal injury settlement), or was the trust set up by a relative or friend with their own money? Is there language prohibiting payment for anything related to your apartment?

Assuming no trust language prohibits the payment, we can turn to the effect such a payment would have on your benefits. Social Security Disability and Medicare? Once again, no problem. SSI and AHCCCS/Medicaid? Your benefits might be reduced, but the payment can probably be made.

The key question is whether a “security deposit” is “rent.” Arguably, it is not — it is advance payment for cleaning. A special needs trust — even a self-settled special needs trust — can pay for cleaning. Social Security’s rules treat payment of “rent” as what’s called “In-Kind Support and Maintenance (ISM).” This payment, we think, should not be characterized as ISM.

If it is not ISM, then it should have no effect on your SSI or your AHCCCS benefits. If it does, it might simply reduce your SSI payment (by the amount of the deposit, but capped at about $250). So long as you still get SSI it should not have any effect on your AHCCCS benefits.

Are these rules unnecessarily complicated? Yes. Does it sometimes end up costing more in legal fees to figure out what to do than it would to just pay the bills? Yes. Welcome to the complex world of special needs trust administration. Would it be possible to write simplified rules that allowed limited use of special needs trust funds while saving a bundle on administrative expenses? Yes — but please don’t hold your breath while waiting for them.

Special Needs Trusts: How Much Trouble Are They to Manage?

SEPTEMBER 3, 2012 VOLUME 19 NUMBER 34
I’m thinking about setting up a special needs trust for my son, who has a developmental disability. Will it mean a lot more work for my daughter, who will be handling the estate?

It’s a fair question, and one we hear a lot. No one ever asks: “could you please give us the most complicated estate plan possible?” Everyone wants things as simple as they can be.

When you think about providing an inheritance for your child — or anyone, for that matter — with a disability, there are some realities you just have to deal with. Those realities almost always lead to the same conclusion: a special needs trust is probably the right answer. There are a number of answers to the “can’t we keep it more simple?” question:

  1. In most cases there’s going to be a trust, whether you set it up or not. If you leave money outright to a person suffering from a disability, someone is probably going to have to transfer that inheritance to a trust in order to allow them to continue to receive public benefits. The trust set up after your death will be what’s called a “first-person” (or “self-settled”) trust, and the rules governing its use will be more restrictive. There will also have to be a “pay-back” provision for state Medicaid benefits when your son dies — so you will lose control over who receives the money you could have set aside. Even if no trust is set up, there is a high likelihood that your son will (because of his disability) require appointment of a conservator. The cost, loss of family control and interference by the legal system will consume a significant part of the inheritance you leave and frustrate those who are caring for your son. If you prepare a special needs trust now it sidesteps those limitations.
  2. The trust you set up will not be that complicated to manage. People often overestimate the difficulty of handling a trust. Yes, there are tax returns to file, and summary accounting requirements. Neither is that complicated; neither is anywhere near as expensive as the likely costs of not creating a special needs trust.
  3. Your daughter can hire experts to handle anything that she finds difficult. There are lawyers, accountants, care managers and even trust administrators who can take care of the heavy lifting for your daughter — or whomever you name as trustee. The costs can be paid out of the trust itself, so she will not be using her portion of the inheritance you leave, or her own money. Yes, they add an expense — but they can actually help improve the quality of life for both your daughter the trustee and your son with a disability.
  4. Your daughter does not have to be the trustee at all. We frequently counsel clients to name someone else — a bank trust department, a trusted professional, or a different family member — as trustee. That lets your daughter take the role in your son’s life that she’s really better suited for: sister. If it is right for your circumstance, you might even consider naming her as “trust protector.” That could allow her, for instance, to receive trust accountings and follow up with the trustee, or even to change trustees if the named trustee is unresponsive, or too expensive, or just annoying. Trusts are wonderfully flexible planning devices — but that does mean you have to do the planning.
  5. If your son gets better, or no longer requires public benefits, the trust can accommodate those changes. Depending on your son’s actual condition and the availability of other resources, you might reasonably hope that he will not need a special needs trust — or at least might not need one for the rest of his life. The good news: your special needs trust will be flexible enough to allow for the use of his inheritance as if there were no special needs. The bad news: that is only true if you set up the trust terms yourself — the trust that will be created for him if you do not plan will not have that flexibility.
  6. Simply disinheriting your son probably is not a good plan. Sometimes clients express concern about the costs and what they perceive as complicated administrative and eligibility issues, and they decide to just leave everything to the children who do not have disabilities. “My daughter will understand that she has to take care of my son,” clients tell us. That’s fine, and it might well work. But do you feel the same way about your daughter’s husband? What about the grandkids and step-grandkids who would inherit “your” money if both your daughter and her husband were to die before your son (the one with the disability)? What about the possibility of creditors’ claims against your daughter, or even bankruptcy? Most of our clients quickly recognize that disinheriting the child with a disability is not really a good planning technique.
  7. But who knows what the public benefits system, the medical care available, or my son’s condition might look like twenty years from now? Indeed. That’s exactly why the trust is so important.

What does that mean for your planning? If you have a child, spouse or other family member with special needs — OR if you have a loved one who may have special needs in the future — your plan should include an appropriate trust. The cost is relatively small, and the benefits are significant. There are really only three downside concerns for special needs planning:

  1. The cost. But the cost of not doing anything is probably higher — and the opportunity loss from failure to plan is especially high.
  2. The nuisance value. Yes, that does mean you need to go see a lawyer. Need a place to start? Look at the membership of the Special Needs Alliance. There’s likely someone near you who understands the importance of special needs planning.
  3. The name. Don’t want to tag your loved one as “special needs”? Then don’t. Call your trust The John Doe Maximum Opportunity Trust. Or the Panorama 2012 Trust. Or Green Acres Fund. With your lawyer’s help, customize the language of your child’s trust to speak in your voice, and to identify what you think is important. Take advantage of the flexibility offered by trust planning.

 

Arkansas Court Refuses to Allow Trust Modification

JUNE 25, 2012 VOLUME 19 NUMBER 24
A recent Arkansas Court of Appeals case reminds us (yet again) how important it can be to plan for the possibility of a future disability in your family. Here’s the background (with names changed to help protect internet privacy): Ruth Olsen, like thousands of other seniors, created a revocable living trust. She provided for gifts for nine grandchildren, including her granddaughter Christie.

When the trust was signed (in 2009), Christie was in her early 20s and living in another state. A year later she was diagnosed as suffering from schizophrenia and a guardian was appointed. Just one month after the guardianship Ruth Olsen died.

Christie was receiving Medicaid benefits from the state where she lived. Her grandmother’s trust did include language indicating that the trustee should have discretion about whether or not to distribute either income or principal of her trust share to her or for her benefit, but it did not include specific language making clear that Ms. Olsen intended the trust to be a special needs trust.

The trustee of the trust is a bank headquartered in Arkansas, where Ms. Olsen lived and died. The trustee asked the local courts to allow the trust for Christie to be modified — just to make clear that it should be a special needs trust, and that the trustee should be required to try to protect Christie’s eligibility for Medicaid in her state.

The trial judge in Arkansas refused. He pointed out that — in Arkansas, at least — the Medicaid program was intended to be available only for people who had not other access to resources. According to the trial judge, it would violate the public policy of the State of Arkansas to allow court modification of a trust to prevent it being counted as a resource for Medicaid eligibility purposes.

The Arkansas Court of Appeals agreed (more accurately, it did not disagree — but the effect is the same). The appellate court declined to follow the lead of the Washington State Court of Appeals — the Washington court had allowed just such a modification, and in very similar circumstances.

The Court of Appeals cited a number of Arkansas cases in which courts refused to allow transfer of an individual’s assets into a self-settled special needs trust — thereby preventing eligibility for Arkansas Medicaid. Ruth Olsen’s trustee argued that (a) this trust was not a self-settled trust but a third-party trust, and the request was for clarification of the trust’s terms, not creation of a trust, and (b) the law and public policy in question should be those of the state where Christie lived, not Arkansas. Those arguments did not prevail. The appellate court declined to reverse the trial judge’s finding. Matter of Owen Trust, June 13, 2012.

We do not practice law in Arkansas (for which, incidentally, we are thankful), but there are a number of important points we take away from the Arkansas court decisions:

  • Courts often have a very hard time clearly separating “self-settled” special needs trusts from “third-party” special needs trusts. That should not be surprising — trust settlors, trustees and lawyers often have the same problem. It is confusing. But one key element should be kept in mind: if you are setting up a trust with your money for the benefit of someone who has (or might have) a disability, you are permitted to impose appropriate restrictions to make sure the money is not treated as an available resource for public benefits calculations.
  • Even if a formal finding of disability has not been made, it is prudent to include strong “special needs” trust language in your estate plan (your will or trust). That way you protect the availability of the money you leave to a child or grandchild and their eligibility for public benefits.
  • State laws vary. Some states (like Arkansas) take a dim view of transfers into special needs trusts — or, apparently, of efforts to ensure that even a third-party trust has appropriate provisions. Other states (like Washington) would more likely permit a clarification such as the one Ruth Olsen’s trustee proposed. Where is Arizona in this continuum of state approaches? Much closer to Washington than to Arkansas. In general, states which have adopted the Uniform Trust Code (about half of the states have) are more likely to allow modifications like the one proposed here — but not always (Arkansas has adopted the Uniform Trust Code, but it didn’t help Christie).
  • Just to keep things confusing, it is not even clear that the proposed modification is necessary. The state Medicaid rules in Christie’s new state are more important in analyzing her grandmother’s trust than are the state laws in Arkansas. And Christie might well move to yet another state before she actually makes a Medicaid application. Her grandmother’s trust — even though not perfectly written — might well be treated as a third-party special needs trust, depending on the state (and, candidly, on the eligibility worker, the law at the time of her Medicaid application and perhaps a handful of other factors).

What is the ultimate take-away message? Plan carefully. Talk with a qualified lawyer — one who knows something about disability, public benefits and the surprises that can be in store. Make sure you fully share information about your family, your concerns, and your wishes. Learn local laws and practices. Having a disability — or having a family member with a disability — can make planning much more difficult and complicated, and the results much more uncertain.

Why You Should Not Create a Special Needs Trust

JANUARY 16, 2012 VOLUME 19 NUMBER 3
Let’s say you have a child with “special needs,” or a sister, brother, mother or other family member. You have not created a special needs trust as part of your own estate plan. Why not?

We know why not. We have heard pretty much all the explanations and excuses. Here are a few, and some thoughts we would like you to consider:

I don’t have enough money to need a special needs trust. Really? You don’t have $2,000? Because that’s all you have to leave to your child outside a special needs trust to mess with their SSI and Medicaid eligibility.

I can’t afford to pay for the special needs trust. We apologize that it can be expensive to get good legal help. But the cost of preparing a special needs trust for your child is likely to be way, way less than the cost of providing a couple month’s worth of care. That is what is likely to happen if you die without having created a special needs trust, since it will take several months of legal maneuvering to get an alternative plan in place. Even if there is no loss of benefits, the cost of fixing the problem after your death will be several times that of getting a good plan in place now.

I’ve already named my child as beneficiary on my life insurance/retirement account/annuity. Ah, yes — our favorite alternative to good planning. If your child is named directly as beneficiary, you may have avoided probate but complicated the eligibility picture. Their loss of benefits will occur immediately on your death, rather than waiting the month or two it would have taken to get the probate process underway. This just might be the worst plan of all.

It’ll all be found money to my kids. I’ll let them take care of it if I die. We have bad news for you: “if” is not the right word here. That aside, you should understand that a failure to plan means you are stuck with what’s called the law of “intestate succession.” That means (in Arizona — if you are not in Arizona you might want to look up your state’s law) that if you die without completing your estate plan, your spouse gets everything unless you have children who are not also your spouse’s children. If you are single, your kids get everything equally. If your child on public benefits gets an equal share of your estate, we will probably need to either (a) spend it all quickly or (b) put it into a “self-settled” special needs trust. That means more restrictions on what it can be used for, and a mandatory provision that the trust pays back their Medicaid costs when they die. All their Medicaid costs. Including anything Medicaid has provided before your death. Wouldn’t you like to avoid that result? It’s simple: just see us (or your lawyer if that’s not us) about a “third-party” special needs trust. The rules are so much more flexible if you plan in advance.

My child gets Social Security Disability (or Dependent Adult Child) Benefits and Medicare. Good argument. Because those programs are not sensitive to assets or income, your child might not need a special needs trust as much as a child who received Supplemental Security Income (SSI) and Medicaid (or AHCCCS or ALTCS, in Arizona). But keep these three things in mind:

  1. Even someone who gets most of their benefits from SSD and Medicare might qualify for some Medicaid benefits, like premium assistance and subsidies for deductibles and co-payments. Failure to set up a special needs trust might affect them, even if not as much as another person who receives, say, SSI and Medicaid.
  2. Even someone receiving Medicare will have some effect from having a higher income. Premium payments are already sensitive to income, and future changes in both Medicare and Social Security might result in reduced benefits for someone who has assets or income outside a special needs trust.
  3. If your child has a disability, it might be that a trust is needed in order to provide management of the inheritance you leave them. If they are unable to manage money themselves the alternative is a court-controlled conservatorship (or, in some states, guardianship). That can be expensive and constraining.

I’m young. We agree. And we agree that it’s not too likely that you will die in the next, say, five years (that’s about the useful life of your estate plan, though your special needs trust will probably be fine for longer than that). But “not too likely” is not the same as “it can’t happen.” You cut down your salt and calories because your doctor told you it’d be a good idea — even though your high blood pressure isn’t too likely to kill you in the next five years, either. We’re here to tell you that it’s time to address the need for a special needs trust.

I’m going to disinherit my child who receives public benefits and leave everything to his older brother. That will probably work. “Probably” is the key word here. Is his older brother married? Does he drive a car? Is he independently wealthy? These questions are important because leaving everything to your older child means you are subjecting the entire inheritance to his spouse, creditors, and whims. And have you thought out what will happen if he dies before his brother, leaving your entire inheritance to his wife or kids? Will they feel the same obligation to take care of your vulnerable child that he does?

I’ll get to it. Soon. OK — when?

I don’t like lawyers. We do understand this objection. Some days we’re not too fond of them, either. But they are in a long list of people we’d rather not have to deal with but do: doctors, auto mechanics, veternarians, pest control people, parking monitors. Some days we think the only other human being we really like is our barista. We understand, though, that if we avoid our doctor when we are sick the result will not be positive. Same for the auto mechanic when our car needs attention. Also for the vet and all the rest. In fact, the only one we probably could avoid altogether is the barista, and we refuse to stay away on principle.

Seriously — lawyers are like other professionals. We listen to your needs, desires and information, and we give you our best advice about what you should do (and how we can help). Most of us really like people. In fact, all of us at Fleming & Curti, PLC, really like people — it’s a job requirement. We want to help, and we have some specialized expertise that we can use to assist you. Give us a chance to show you that is true.

We also know a good barista.

When Is a Living Trust More Appropriate Than a Will?

JUNE 6, 2011 VOLUME 18 NUMBER 20
Last week we answered a pair of questions from our readers and solicited others. Almost immediately we received an excellent question:

What are the factors you look at to determine if a client is best served w/ a will and durable power of attorney or a living trust? In other words, what are the key factors that would lead you to recommend a living trust?

Let us start with a quick disclaimer: the answer to this question is significantly different from state to state. What is true in Arizona may not be the same in other states — and some states will be wildly different. Even for lawyers in the same state there is significant difference of opinion; we are fond of saying that if you ask ten lawyers for their opinions you are bound to get at least fifteen strongly-held, well-reasoned views. Disclaimers aside, what follows is our take on the question.

We think most people do estate planning for one or more of these four reasons:

  1. To minimize taxes. Usually, but not always, that means estate taxes.
  2. To avoid probate, or (more broadly) to simplify matters for their heirs or successors.
  3. To control the way their assets are used after their death.
  4. To make it easier for someone to handle their affairs in the event of their own incapacity or disability.

Which does better at each of those tasks, a will and powers of attorney or a revocable living trust? In almost every case the trust will handle each of those tasks better than a will and powers of attorney. But that is not really the right way to address the question. Since trusts are somewhat more expensive to prepare (assume your lawyer will charge from three to ten times as much for preparation and “funding” of a trust as for a will and powers of attorney) and involve some extra effort, the analysis really becomes one of cost vs. benefit. Will the extra expense and effort of creating a living trust generate enough savings of time or money for heirs that it will turn out to be the right choice?

For most people, the answer is unclear. There are a handful of our clients for whom the trust is unquestionably the right technique, and another handful for whom the trust is not harmful but simply too much legal help for a problem that doesn’t exist. But most of our clients fit into the large middle ground — it would not be foolish of them to opt for a living trust, and it would not be foolish of them to avoid the expense and trouble now and let their heirs deal with it later.

So how do those four estate planning goals relate to the will vs. living trust question? Here’s what we think:

Taxes. Few people need to worry very much about estate taxes these days. With a federal exemption set at $5 million, and no Arizona state estate tax at all, only a tiny fraction of clients have estates large enough to make their decisions on the basis of tax effect.

It is true that the federal estate tax is scheduled to return to the $1 million level in 2013. It is also true that the Arizona legislature could decide to reimpose an estate tax (though most people think that highly unlikely). But for most people, even a taxation level set at $1 million would not make any difference in their planning.

But that’s not the end of the inquiry about taxes. Even if your estate is large enough for you to worry about estate taxation, there is no inherent tax benefit in living trusts. There used to be a way for married couples to lower their combined estate tax bill if their total estate was over the taxation level, but even that has changed (though of course it might change back in 2013). Bottom line: estate tax concerns simply do not drive the trust vs. will question in 2011 the way they did in, say, 1999. And if you are unmarried, or if you are married and your combined estate is less than about $1 million, you simply do not care about estate tax considerations.

Probate avoidance. Arizona’s probate process is not nearly as complicated as its reputation would suggest. It is also not nearly as expensive. Have you read stories about estates that have gone entirely to the lawyers because of a messed-up probate system? Yes, it does happen — but not really because of the system so much as because of family disputes over the validity of documents (including, increasingly, living trusts).

That said, most people will say that even a modest probate cost and time spent in lawyers’ offices would be something worth avoiding. What you need is a solid estimate of what it would cost to probate your estate if you relied on a will instead of a living trust, so that you can compare that cost to the cost of opting for a living trust. It is too hard to generalize about either expense, but we are prepared to go this far: in Arizona, the cost of preparing a living trust (and “funding” it — transferring all your assets into the trust’s name) will almost always be less than the cost of probating your estate later. But not necessarily by much.

There are some other points to be made here. If you own real estate in more than one state, your will must be probated in each of those states (unless you create a living trust or other probate-avoidance mechanism for some or all of those properties). That can drive the expense up considerably, and certainly complicates things for your family. On the other hand, if you have less than $50,000 worth of personal property and no real estate at the time of your death, no probate proceeding is likely to be needed anyway, since there is a “small estates” affidavit mechanism to avoid the probate process.

In general terms, larger estates tend to be more complicated to administer. More complex estates are better candidates for a living trust. So if you are wealthy, probate avoidance is more likely to be a concern for you — and especially if you have unusual assets, or real estate in multiple states, or other uncommon kinds of property issues.

One special consideration here: if you are married, you are probably comfortable putting most or all of your assets in “joint tenancy with right of survivorship” or designating your spouse as beneficiary. You might not feel the same way if you are single; it is not quite as easy (or advisable) to put your children or other beneficiaries on your bank and stock accounts as joint owners. So single people are usually better candidates for living trusts as a means of avoiding probate.

Control. We use the word advisedly. That’s what you might want to do with your funds, even after your death. Are you in a second marriage, with children from the first marriage, and a desire to provide for your spouse but ultimately pass most of your estate to those children? Maybe you have a spendthrift son (or a son who has married a spendthrift). Perhaps your daughter is disabled, and receiving government benefits she would lose if you left her an inheritance outright. Or maybe you want your money to be a retirement fund for your children, or to encourage your grandchildren to get an education, or some other laudable goal you are trying to achieve.

How can you address all of those issues? By putting your money in trust, with a trustee who has been instructed on how you want the money to be used.

You don’t have to create a living trust to put your money in trust. Instead you can create a trust in your will — what we lawyers call a “testamentary” trust. But it will cost you more, and the difference between the cost of a will (with your testamentary trust) and a living trust will shrink. So if you need (or just want) to control the uses of your funds after your death, you will be a better candidate for a living trust.

Your own incapacity. This is why you should sign a power of attorney. It is simultaneously one of the most important documents in your estate plan, and the single most dangerous one. But the cost of going through the courts (in a probate-like proceeding called a conservatorship) is almost always high and the invasion of privacy significant.

There are some times when a power of attorney just won’t solve the problem, though. Plus it is hard to predict when those times arise. Banks, title companies, the federal and state governments — none of them are required to accept the power of attorney. If you sign a living trust and transfer all of your assets to it, though, the problem becomes simpler and narrower: if your successor trustee can show the item the trust calls for (like a letter from your doctor, for instance), then the successor trustee just takes over. There will probably be somewhat fewer problems administering your affairs with a living trust than with a power of attorney.

We don’t want to overstate this benefit, however. It is almost never valuable enough to justify creating a living trust all by itself. As far as we are usually willing to go on this score is to suggest that, if one or more of the other categories make you a good candidate for a living trust, this one might put you over the top.

There’s one more category of living trusty candidates we can suggest: those who are more likely than others to (how can we say this gently?) “use” their estate plans in the next few years. In other words, the older you get the better of a candidate you become for a living trust.

So who should be considering a living trust as part of their estate plan? Look over the explanations above, and you will see that you are a better candidate for a living trust if you:

  • are older
  • are not married
  • are wealthy
  • have children who are not children of your spouse
  • have complicated assets, and especially if you
  • have real estate in more than one state
  • have beneficiaries with special needs, inability to handle money or other similar considerations

Again, we caution you against putting too much stock in these descriptions or applying them to your situation without good legal counsel. But look over this list of considerations and think about what they say about your estate planning needs. Share them with your own lawyer and ask for a thoughtful, critical evaluation. Your family and heirs will be glad you did.

What Preparation Do I Need For My Son’s 18th Birthday?

APRIL 4, 2011 VOLUME 18 NUMBER 12
My son will be 18 in a little more than a year. He is in high school, in the special education program. What do I need to do to prepare for his eighteenth birthday?

Excellent question. Assuming it is limited to legal matters (those are the only ones we’re particularly good with), we have a number of things for you to consider:

Guardianship. You may need to seek a guardianship in order to maintain your ability to make medical decisions for your son. You will undoubtedly begin hearing from all sorts of concerned (and mostly well-informed) people about how difficult and expensive that process is, and how you need to get a head start on it. Relax. The news is mostly good.

Arizona, like a number of other states, gives family members the ability to make medical decisions for an incapacitated relative. Parents have a high priority under Arizona law. Of course, if you are no longer married to your son’s other parent, that can mean a conflict over who will be first. It may be perfectly obvious to you, but the law assumes you and your ex have equal rights until a court decides otherwise — and a childhood custody order does not resolve the question.

Assuming you get along with your ex, or you are still married to your son’s other parent, does that mean no guardianship is necessary? Not exactly. There are some circumstances where it still might be appropriate to seek guardianship; you will want to consult with a lawyer who knows something about guardianship to review the concerns and options.

Some parents go ahead and file for guardianship even if it may not be completely necessary. They reason that they want the security of knowing they have legal authority, and that is not a foolish mistake. Other parents reason that they want to maintain as much autonomy and self-determination for their children as possible, despite whatever limitations they might have. That is also not a foolish point of view. What does that mean? Every family circumstance is a little bit different, and good advice is needed.

If you do decide to file for guardianship, there probably is no rush. The Arizona legislature is right now considering changes that would allow you to file before your son turns 18, but until those changes are final (perhaps by September of this year) you can’t really file until after that anyway. The process will take about six weeks, and probably cost about $1,500 to $2,000 in legal and filing fees. That assumes, of course, that it is clear that your son needs a guardian, and that he doesn’t disagree.

One thing that would help with the decision-making process, and get everything going more quickly: get a letter from your son’s physician that indicates whether the doctor thinks he can make medical and personal decisions on his own. That letter will be necessary for the permanent hearing anyway, and it will help us counsel you on whether and how to proceed.

Child Support. Is there an old child support order requiring your ex to pay you monthly? Arizona permits child support to continue past age 18 if the child is disabled. You need to jump on this issue right away.

One caveat: child support (whether it is paid to you, directly to your son or to someone else on his behalf) will probably keep him from getting Supplemental Security Income (SSI) payments — unless you plan carefully. This is not a simple issue, and few divorce lawyers have dealt with the kind of planning necessary to keep child support and SSI both coming in. We need to talk about this one at some length.

Social Security. Is your son now receiving Supplemental Security Income (SSI) payments? If not, it may be because of your assets and income, which are imputed to him for eligibility purposes. If that is the case, your assets and income will no longer count once he turns 18. If he is “disabled” (and that’s different from “has a disability”) then it would be good to get that established and get SSI benefits flowing immediately.

Promptly after your son’s 18th birthday you should apply for SSI for him. If he gets it, he will automatically qualify for AHCCCS (Arizona’s Medicaid program). That will also help assure that he gets services from the Division of Developmental Disabilities (DDD) if his disability is developmental.

There are a number of things to keep in mind once your son’s SSI eligibility is set:

  • If he lives with you without paying rent (or paying toward the costs of his food and shelter), his SSI will be reduced by about $250 per moth (the number changes with the maximum SSI benefit rate). If that happens, you might consider charging rent as a way of increasing his benefit — but it won’t change his eligibility for AHCCCS.
  • In any event, it is important to get his disability established by Social Security before he turns 22. If you do, then he will probably qualify for dependents’ and survivors’ benefits under your Social Security account. That means that when either of his parents retires, his SSI may suddenly switch to Social Security (or a combination of Social Security and SSI) and he will qualify for Medicare coverage instead of (or in addition to) his AHCCCS coverage. Similiarly, upon the death of either parent his benefit will probably bump up again.
  • If you help your son secure employment, perhaps in a family business or other friendly and unchallenging environment, he may lose his future eligibility for Social Security benefits on your account. That might not be best for him long term. Same result if he marries — it can cut off his future dependents’ or survivors’ benefits.

Graduation. You may want to have your son graduate with his high school class. It is often a matter of pride and self-respect, and friends and family may have encouraged that perspective for years. Unfortunately, graduation might not be best for your son.

Programs offered through the school systems are often more appropriate, more easily available and better staffed than those offered to adult participants in DDD-sponsored programs. Usually students who have been identified as developmentally disabled can stay in high school until age 22; that is often in their best interests. You might talk to lawyers familiar with the local social service scene, and to parents of other children who have been through the graduation decision.

UTMA Accounts. Do you have an old Uniform Transfer to Minors Act account you (or maybe your parents) set up for your son years ago? It’s time to deal with that, too. The good news: you actually still have a couple years. Rather than ending at 18, they mostly end at age 21. But when that day arrives, the UTMA account will keep your son from receiving SSI benefits and maybe even AHCCCS. Let’s get that problem dealt with in advance.

Estate Planning. When your son was still a minor it was important that you sign a will identifying your choice for his guardian if you had died. Thank goodness you are going to make it to his majority — but the problem hasn’t gone away. You still need to do your own estate planning, or to update it if you have already done it.

Have you created a special needs trust to receive any share you intend to leave to him? Do you have life insurance, IRAs or retirement accounts, bank accounts or even real estate listing him as beneficiary? You need to get on this project right away — you are now almost two decades older than you were when you first thought about his future care.

Can My Brother’s Special Needs Trust Pay His Property Taxes?

DECEMBER 6, 2010 VOLUME 17 NUMBER 37
A client’s question:

My brother has a special needs trust, and I am the trustee. He lives in his condo and gets services from AHCCCS and ALTCS. Can the trust pay his property taxes?

Interesting question. The answer isn’t as easy or straightforward as it ought to be. Let’s start with the simple (but not completely accurate) answer, and then explain some of the limitations and qualifications.

Unless the trust language prohibits payment of property taxes (and sometimes the trust does prohibit such payments), they can be paid from the trust. There may be consequences he will have to deal with, and there may be some circumstances in which it is not permitted, but generally it can be done.

There are a number of questions that will affect the answer:

  • Is the trust a “self-settled” or “third-party” trust? In other words, was it set up to handle your brother’s money (perhaps from a personal injury settlement, for instance) or was it created by a family member and funded with their own money? If the former, the rules will probably be somewhat stricter. If the latter, there will be no problem with paying the taxes (again assuming the trust language permits it), though there may be some reduction in public benefits (especially Supplemental Security Income).
  • Does the trust own the condo? If not, does it belong to your brother, or to some other family member? It may be a little easier to pay the taxes if the trust owns the property. The most difficult problems will arise if title is in a third person’s name, with your brother not owning any interest.
  • Do other people live with him? If so (at least in Arizona) it may be a little more complicated, though it may not. In some situations the trust may only be able to pay a proportional share of the property taxes. In other words, if he has a roommate it might only be possible to pay half the property tax bill.
  • Is he on AHCCCS or ALTCS? If the former, the rules are likely to be a little bit easier. If the latter, the payments might be treated more strictly. (If your brother does not live in Arizona, this distinction will not make any sense — AHCCCS and ALTCS are the Arizona programs for Medicaid and the long-term care component of Medicaid, respectively. Other states not only do not use the same acronyms, they also do not necessarily make the same distinctions between programs). If your brother is on ALTCS but receiving most of his services from the mental health or developmental disabilities program, the ultimate answer may be different yet again.
  • Is he receiving Supplemental Security Income (SSI) payments? If so it is probably going to be much easier to pay the property taxes.

You can see that the question is getting more complex as we go along. It is an unfortunate reality of the public benefits arena — the rules are complicated and often draconian.

Let’s assume that we can get past the threshold question, and can determine that it is permissible to pay the property taxes on your brother’s condo. That immediately raises a couple of related questions:

  • What is the best way to do it? Two payments each year, or one payment? Most people pay their Arizona property taxes in two equal installments. One is due in October and the other in April. There is an alternative, however, and it is usually attractive for special needs trusts: you can make both halves of the tax payment at once, without interest, provided that you do so by December 31. In other words, no payment in October, a full payment in December, and then no payment in April. Why do it this way? Because paying the taxes might reduce your brother’s SSI payment for each month in which a payment is made — so it makes sense to have that only happen once a year.
  • What about other payments, like the homeowner’s association dues, and the insurance? Those two payments are treated differently than property taxes. First, though, look at the trust document. Does it permit payment of household expenses? If so, then public benefits rules do not prohibit payment of HOA and insurance bills — except that the HOA dues might be a problem to the extent that they include water, garbage pickup or other utilities, and the insurance may be a problem if it is required by a mortgage lender.
  • What about utilities? Does that mean they can’t be paid? Once again, look first at the trust document.  Assuming it permits these payments, you can then consider the public benefits rules. Generally speaking they may allow payment of utilities, but with a reduction in SSI payments. Some payments may be prohibited by ALTCS rules. The utilities that cause particular problems are water, gas, electricity, and garbage pickup. No problem for internet, telephone, newspaper delivery, and cable subscriptions.
  • What about home improvements and repairs? Generally speaking they are alright — though if there are others living with your brother there may be issues for some kinds of payments. Talk to us about the details (or, if your brother does not live in Arizona, consult with a lawyer familiar with special needs trusts in his state).

Exhausted? So are we. These rules are too complicated and the repercussions to serious — for that we are sorry. We can help navigate them for Arizona benefits recipients.

Where can I get more information? Good question. If you and your brother do not live in Arizona, you might want to talk with an attorney familiar with the area. Start with the Special Needs Alliance — it includes about 120 lawyers across the country, each of whom spends a considerable amount of time on special needs trusts and public benefits issues.

There is also a really good handbook available for trustees of special needs trusts. It is offered by the Special Needs Alliance, and the price is right — it is free and downloadable directly from the SNA website. If you prefer, you can get a beautifully printed version mailed to you. There are also a number of books on the topic — we favor one called “Managing a Special Needs Trust: A Guide for Trustees“.

Good luck. It isn’t always easy to be trustee of a special needs trust, and we appreciate that the challenges are sometimes legal, sometimes medical, sometimes familial.

How To Leave An IRA To A Child Who Has a Disability

SEPTEMBER 27, 2010 VOLUME 17 NUMBER 30
This is so confusing to clients, but it needn’t be. The rules are actually simpler than they seem. Stay with us, and we’ll walk you through it.

OK, here’s the set-up: You have three children, one of whom (the youngest) has a disability. We’ve decided to name her Cindy (sorry if we got that part wrong). Your estate plan is to leave everything equally to your three children, but you know that (1) Cindy can’t manage money, and (2) even if she could, leaving her money directly would knock her off of her public benefits. Just to make things more complicated, nearly half of your net worth is held in an IRA.

Before we roll up our sleeves, let us make a few observations about your situation:

  1. If instead of an IRA you have a 401k, a 403b, Keogh or other retirement plan, the rules are pretty much the same. They’re somewhat different if you have a Roth IRA; we may tackle that issue in a future newsletter.
  2. If Cindy’s disability entitles her to public benefits but she is able to manage money just fine then some of the trust issues might be different from what we describe here.
  3. We’ve decided that your estate (your combined estate, if you are married) is just under the estate tax limits, whatever they might be. That’s so we don’t have to complicate this explanation with an estate tax element. But the truth is, that wouldn’t complicate things all that much — we just don’t want to have to throw those oranges into our apple basket. Not today, anyway.

Ready? Here we go. We’ll start by asking you some questions:

First question: What benefits does Cindy get? Is she on Supplemental Security Income (SSI)? Does she also get Social Security benefits, either on her own work history or on yours? Is she receiving Medicare coverage? How about Medicaid (or, in Arizona, AHCCCS)? Does she also get a housing subsidy, benefits through the Division of Developmental Disabilities, or therapy and care from the school district?

This question is important, because first we need to figure out whether her benefits will be affected by any trust you might set up for her. Here’s a surprise: it’s not enough to figure out what benefits she is on now, particularly if she was disabled before age 22. She might be eligible to receive benefits on your work history (or your spouse’s), and those benefits could go up when you retire and again when you die. Since your estate plan is all about what happens to your money when you die, the benefits Cindy gets then will be more important than the benefits she receives now.

Second question: How important is it to you to give your children the chance to “stretch-out” your IRA? We’re sorry — we didn’t explain what that means.

You already know that you have to withdraw money at a set pace, calculated based on your life expectancy, once you reach age 71 (we know — it’s really 70.5; it’s actually the year after you turn 70.5, so let’s just call it 71, okay?). You probably also realize that your beneficiaries get to use their own life expectancies after they inherit your IRA. Or at least they do most of the time.

If that is important to you, your beneficiary designation should make it easy for your children to use the longest stretch-out period possible. Since they are probably all different ages that means there is a benefit — maybe a slight one, but a benefit — to the youngest children to be able to use their own age rather than being stuck with an older sibling’s age.

Note: this assumes your children share your interest in stretching out the IRA withdrawals. Take the simple case, with Cindy not involved: if you make the other two children (let’s call them Amelia and Barbara) beneficiaries of the IRA, Barbara (the younger) will be able to take a little less out each year than Amelia is required to do. But if either of them decides to just withdraw all the money and use it for an extended European vacation, then they can choose to make a decision that is not tax-wise. If you want to prevent them from doing that, you have raised the complication factor — but it can be done. We’re just not going to try to explain it here. But we do — here.

Third question: Do you want to try to give Cindy some non-IRA assets rather than an interest in the IRA, just to make this simple? Let’s say you left your IRA to Amelia and Barbara, and increased Cindy’s share of the non-IRA assets to make the shares equal. Would that work?

Well, yes — but it’s not quite that easy. Say you leave $100,000 in an IRA to Amelia — is that worth $100,000 to her? No, because she will have to pay taxes on it when she takes it out. How much? It depends on her state, her marginal tax rate and how long she leaves it in the IRA, so it’s very hard to figure out the “real” value to Amelia. Plus we know that the real value of the same amount of IRA will be different for Barbara, making the calculation that much more difficult.

Maybe we can use a rule of thumb, though. Let’s guess that Amelia and Barbara will delay taking out their inherited IRA money as long as possible, and that when they do they’ll both be retired and not making a lot of income. Perhaps the “real” value (to them) of your IRA will be 65% to 80% of its balance when you die. Is that close enough for you to figure out what would be “fair” if you gave Cindy more cash and less IRA? We can’t tell you — this one is a judgment call for you.

Fourth question: Who will manage Cindy’s money after your death? Amelia, the banker (and classic first-born)? Barbara, who has some financial challenges of her own but has always been close to Cindy, and still lives in the same community with her? Your local bank? A family friend, or a professional you have worked with?

Enough questions for a moment. Let us tell you what we think, based on your answers.

First, you can create a trust and name it as beneficiary of your IRA. Don’t listen to your banker or your accountant if they tell you that you can not do that — they are reciting old rules that no longer apply.

But if you do name a trust as beneficiary, you are likely to force everyone to use a shorter stretch-out date — probably all three daughters will be stuck with Amelia’s life expectancy. If there are only a few years’ difference between the girls, that may not be a big deal. If this issue is important, then we probably can work around it — we can name Amelia and Barbara as beneficiaries directly, and a stand-alone “special needs” trust for Cindy’s benefit to receive her share of the IRA. If we do that, though, you have to make us a promise: you can’t let anyone else tell you to change your beneficiary designations after we get them set up. At least you have to promise not to make any changes until after you have met with us and gone back over the beneficiary form.

In fact, you will find that you have to help educate lots of folks about IRA beneficiary designations. Over time you will be told that you have a mistake in your designation, that you have unnecessarily caused tax increases for your daughters, that your lawyer obviously doesn’t know how to do this. We do, and we can help you respond to those bankers, accountants and others who tell you that you need to make changes. Keep us in the loop, please.

We also need to make sure you realize Cindy’s share can’t go to charity after her death. None of it. Even though the non-profit which provides a sheltered workshop for her would be the logical beneficiary of a share of “her” IRA portion, it mucks everything else up.

So how do we get Cindy’s portion of the IRA — and for that matter the rest of her inheritance — set up to benefit her without knocking her off of her SSI, Medicaid, AHCCCS and other government benefits? That’s what a special needs trust is all about.

We have important advice for you: Be careful as you look for information about special needs trusts, though: much of what you read will be about the rules (and limitations) on so-called “self-settled” special needs trusts, and Cindy’s trust will not be one of those. You will be establishing a “third-party” special needs trust, and the rules will be much different, and much more liberal. You can leave IRA and non-IRA assets in a special needs trust for Cindy’s benefit, and you will actually improve the quality of her life without jeopardizing the programs and benefits she receives.

We hope this helps sort through some of the finer points of IRA beneficiary designations. If you want more, we can recommend a really thorough article by our friend Ed Wilcenski, a New York lawyer. He wrote for Forbes.com, and he’s a smart guy who writes well.

Incidentally, we’d love to hear from you. Maybe you have a question about IRAs and special needs trusts, or you just want to tell us whether this helped you out. Maybe you want to quibble with some of our advice. We love to hear from readers.

We will not, however, undertake to represent you based on a simple e-mail or internet inquiry — we need much more information (starting with where you live — we don’t practice outside Arizona) before undertaking a lawyer/client relationship. We won’t be able to answer your specific questions about your own legal situation, either. What good are we, then? Well, we’ll try to demystify some of the general rules and answer general questions about these topics. Contact us if you’d like us to try, or simply Leave a Reply below. We’ll read your comments and let you know, even if we can’t help you with individual legal problems.

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