Paul O. Dillon, Attorney at Law

How Do Special Needs Trusts Work?

Preparing an intentional plan for beneficiaries is essential for several reasons. First, careful planning protects vulnerable beneficiaries from people who may try to take advantage of them when they receive an inheritance, according to the article “Be proactive if considering special needs” from The News-Enterprise.

Second, planning is almost always necessary to protect government benefits the beneficiary is receiving, which could be at risk if they receive an inheritance. Third, proactive special needs planning is needed to make decisions in advance about living situations, guardians if required and who will control the beneficiary’s assets.

The two most common types of Special Needs Trusts are the First Party and Third Party trusts.

First-Party Special Needs Trusts are used when the recipient of public benefits receives money that would make them ineligible for public benefits. This usually occurs because of a legal settlement or an inheritance.

This type of trust is funded with assets in the beneficiary’s own name, and the requirements are strict. The trust must be irrevocable, funded entirely with the beneficiary’s own assets. It must be set up by a parent, grandparent, legal guardian, or the court, except for some physically disabled beneficiaries.

There is an age limit for First Party Special Needs Trusts. The beneficiary must be under 65 when the trust is established, and the trust must include a provision that the state will be repaid first for money paid out on behalf of the beneficiary.

This provision allows the trust assets to be stretched to supplement the beneficiary's needs without losing public benefits. Whatever assets are left in the trust may end up with the state on the beneficiary's death.

The First Party trust is a good emergency plan. However, it’s not a great primary planning instrument for every Special Needs family.

Third-Party Special Needs Trusts are created proactively, allowing for greater flexibility and asset protection. They can be revocable or irrevocable, act as a standalone trust, or be part of a last will and testament and do not need to contain a payback provision to the state.

Another option for giving assets to beneficiaries is an ABLE account, similar to college savings accounts but designed for Special Needs individuals. They allow for simplified spending categorization and, in some states, offer a debit card the beneficiary can use, which allows limited spending.

There are limits to how much can be deposited into an ABLE account, and there is a payback provision to the state upon the account owner's death.

An experienced estate planning attorney can help create an intentional and proactive plan to ensure the best result for beneficiaries and their families.

Reference: The News-Enterprise (Oct. 14, 2023) “Be proactive if considering special needs”

Do You Need a Trust Fund or a Will? Or Both?

Understanding the difference between a will and a trust fund, including their advantages and disadvantages, is important for effective estate planning. A trust fund is a legal entity holding and managing assets for another person or organization, explains a recent article from SmartAsset, “Trust Fund vs. Will: Which Is More Essential For Estate Planning?” A will is a legal document directing the distribution of assets after death. Both have a role to play in estate planning.

A trust fund is a legal arrangement where a trustee holds and manages assets for the benefit of another party, known as the beneficiary. There can be multiple beneficiaries, and organizations may be beneficiaries in addition to individuals. The trust can hold cash, investments, real estate, or other property types. The trust document details the rules and guidelines for the trustee to follow while managing the assets. This gives the grantor—the person who created the trust—a lot of control over how the assets are used during life or after their death.

Different types of trusts serve various purposes, depending on the grantor’s financial and family situation. A family with a developmentally disabled member may use a Special Needs Trust to ensure long-term security and care for their child. A wealthy family planning for estate tax liabilities may use an irrevocable trust to remove assets from their taxable estate.

A will is a legal document used to express an individual's wishes for the distribution of their property after death. The will is only effective after the testator, or the person creating the will, has died. Unlike a trust, nothing in the will is enforceable during the person’s lifetime. The will is overseen and executed through probate, a judicial procedure. Prepared correctly, a will can speed up access to beneficiaries and ensure that the decedent’s wishes are followed.

Creating a will includes naming an executor to carry out the terms of the will, identifying beneficiaries, and signing the document in the presence of witnesses. Wills are state-specific, meaning the laws of each state govern how a will needs to be prepared and the requirements for witnesses. A local estate planning attorney should be used ensure that the will aligns with state law.

When the will goes through probate, it becomes part of the public record, and anyone wishing to review it in its entirety may do so. For many individuals, the lack of privacy is a reason to place assets in trusts, which remain private.

Whether you use trusts, a will, or both, ensure that you’ve titled assets correctly, so beneficiaries can have access while minimizing estate taxes. An experienced estate planning attorney can help you to create an estate plan that is best suited for you and your family’s needs.

Reference: SmartAsset (Oct. 10, 2023) “Trust Fund vs. Will: Which Is More Essential For Estate Planning?”

Why are Contingent Beneficiaries Important?

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”

Should Each Child Get Equal Inheritance?

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

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

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

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

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

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

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

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

How Do Special Needs Trusts Work?

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

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

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

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

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

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

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

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

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

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

Trusts Make Sense Even When You Aren’t a Billionaire

Trusts are used to solve problems in estate planning, giving great flexibility in how assets are divided after your death, no matter how modest or massive the size of your estate, according to an article titled “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller” from Market Watch. Don’t worry about anyone thinking your children are “trust fund babies.” Using trusts in your estate plan is a smart move, for many reasons.

There are two basic types of trust. A Revocable Trust is flexible and can be changed at any time by the person who creates the trust, known as the “grantor.” These are commonly used because they allow a high degree of control, while you are living. It’s as if you owned the asset, but you don’t—the trust does.

Once the trust is created, homes, bank and investment accounts and any other asset you want to be owned by the trust are retitled in the name of the trust. This is a step that sometimes gets forgotten, with terrible consequences. Once that’s done, then any documents that need to be signed regarding the trust are signed by you as the trustee, not as yourself. You can continue to sell or manage the assets as you did before they were moved into the trust.

There are many kinds of trusts for particular situations. A Special Needs Trust, or “SNT,” is used to help a disabled person, without making them ineligible for government benefits. A Charitable Trust is used to leave money to a favorite charity, while providing income to a family member during their lifetime. A real estate trust can be used for real property.

Assets that are placed in trusts do not go through the probate process and can control how your assets are distributed to heirs, both in timing and conditions.

An Irrevocable Trust is permanent and once created, cannot be changed. This type of trust is often used to save on estate taxes, by taking the asset out of your taxable estate. Funds you want to take out of your estate and bequeath to grandchildren are often placed in an irrevocable trust.

If you have relationships, properties or goals that are not straightforward, talk with your estate planning attorney about how trusts might benefit you and your family. Here’s why this makes sense:

Reducing estate taxes. While the federal exemption is $11.58 million in 2020 and $11.7 million in 2021, state estate tax exemptions are far lower. New York excludes $6 million, but Massachusetts exempts $1 million. An estate planning attorney in your state will know what your state’s estate taxes are, and how trusts can be used to protect your assets.

If you own property in a second or third state, your heirs will face a second or third round of probate and estate taxes. If the properties are placed in a trust, there’s less management, paperwork and costs to settling your estate.

Avoiding family battles. Families are a bit more complicated now than in the past. There are second and third marriages, children born to parents who don’t feel the need to marry and long-term relationships that serve couples without being married. Trusts can be established for estate planning goals in a way that traditional wills do not. For instance, stepchildren do not enjoy any legal protection when it comes to estate law. If you die when your children are young, a trust can be set up so your children will receive income and/or principal at whatever age you determine. Otherwise, with a will, the child will receive their full inheritance when they reach the legal age set by the state. An 18- or 21-year-old is rarely mature enough to manage a sudden influx of money. You can control how the money is distributed.

Protect your assets while you are living. Having a trust in place prepares you and your family for the changes that often accompany aging, like Alzheimer’s disease. A trust also protects aging adults from predators who seek to take advantage of them. Elder financial abuse is an enormous problem, when trusting adults give money to unscrupulous people—even family members.

Talk with an estate planning attorney about your wishes and your worries. They will be able to create an estate plan and trusts that will protect you, your family and your legacy.

Reference: Market Watch (Dec. 4, 2020) “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller”

Special Needs Plans Need Regular Reviews to Protect Loved Ones

Special needs planning is far more detailed than estate planning, although both require regular reviews and updates to be effective. For creating a wholly new plan or reviewing an older plan, one way to start is by writing a biography of a loved one with special needs, recommends the article “Special needs plan should be carefully considered” from The News-Enterprise.

Write down the person’s name, birth date and their age at the time of writing. Include information about favorite activities, closest friends and favorite places. Consider all of the things they like and dislike. Make detailed notes about relationships with family members, including any household pets. Think of it as creating a guide to your loved one for someone who has never met them. This guide will be useful in mapping out a plan that will best suit their needs.

Follow this by writing down what you envision for their future, in three distinct scenarios. A good future, where you are able to care for them, a not-so-great future where they are alive and well, but you are not present in their life and a bad future. You should be as specific as possible. This exercise will provide you with a clear sense of what pitfalls may occur, so you and your estate planning attorney can plan better.

Your plan needs to consider who will become the person’s guardian. You’ll need to list more than one person and put their names in order of preference. Consider the possibility that the first person may not wish to or be able to serve as a guardian and have second and third guardians. Talk to each person to be sure they are willing and able to take on this responsibility.

Next, consider living arrangements. Will your loved one be able to live independently, with regular check ins? Could they live in an accessory apartment with a guardian close at hand? Or would they need to live in a group care facility with an on-site social worker?

A special needs plan usually includes a Special Needs Trust (SNT), with comprehensive details for the trustee. Just as you need multiple guardians, you should also name several trustees. The guardian is responsible for a person and the trustee is responsible for the property.

The question is raised whether a family member or a professional should be the trustee. Having a family member manage the finances is not always the best idea. A professional fiduciary will be able to manage the funds without the emotional ties that could cloud their ability to make good decisions. This is especially important, if the beneficiary has a drug dependency problem, does not have a strong family network or if the estate is large.

Consideration should also be given to having the trustee check in on the beneficiary on a regular basis to ensure that the beneficiary’s needs are being met. The trustee should have permission to make decisions about the use of the trust funds in special circumstances. The trustee will need to be someone who is skilled with managing money and is well-organized and responsible.

Special needs planning is complex, but careful planning will give you the peace of mind of knowing that your loved one will be cared for by people you choose and trust.

Reference: The News Enterprise (Oct. 13, 2020) “Special needs plan should be carefully considered”

Should You Include a Letter of Instruction with Your Estate Plan?

A letter of instruction, or LOI, is a good addition to the documents included in your estate plan. It’s commonly used to express advice, wishes and practical information to help the people who will be taking care of your affairs, if you become incapacitated or die. According to this recent article “Letter of instruction in elder law estate plan can help with managing important information” from the Times Herald-Record, there are many different ways an LOI can help.

In our digital world, you might want to use your LOI to record website names, usernames and passwords for social media accounts, online accounts and other digital assets. This helps loved ones who you want to have access to your online life.

If you have minor children who are beneficiaries, the LOI is a good way to share your priorities to the trustee on your wishes for the funds left for their care. It is common to leave money in trust for HEMS—for “Health, Education, Maintenance and Support.” However, you may want to be more specific, both about how money is to be spent and to share your thoughts about the path you’d like their lives to take in your absence.

Art collectors or anyone who owns valuable items, like musical instruments, antiques or collectibles may use the LOI as an inventory that will be greatly appreciated by your executor. By providing a carefully created list of the items and any details, you’ll increase the likelihood that the collections will be considered by a potential purchaser. This would also be a good place to include any resources about the collections that you know of, but your heirs may not, like appraisers.

Animal lovers can use an LOI to share personalities, likes, dislikes and behavioral quirks of beloved pets, so their new caregivers will be better prepared. In most states, a pet trust can be created to name a caregiver and a trustee for funds that are designated for the pet’s care. The caregiver and the trustee may be the same person, or they may be two different individuals.

For families who have a special needs member, an LOI is a useful means of sharing important information about the person and is often referred to as a “Letter of Intent.” It works in tandem with a Special Needs Trust, which is created to leave assets to a person who receives government benefits without putting means-tested benefits in jeopardy. If there is no Special Needs Trust and the person receives an inheritance, they could lose access to their benefits.

Some of the information in a Letter of Intent includes information on the nature of the disability, daily routines, medications, fears, preferred activities and anything that would help a caregiver provide better care, if the primary caregiver dies.

The LOI can also be used to provide basic information, like where important documents are kept, who should be notified in case of death or incapacity, which bills should be paid, what home maintenance tasks need to be taken care of and who provides the services, etc. It is a useful document to help those you leave behind to adjust to their new responsibilities and care for loved ones.

Reference: Times Herald-Record (Sep. 8, 2020) “Letter of instruction in elder law estate plan can help with managing important information”

Coronavirus Makes Estate and Tax Planning an Urgent Task

The Covid-19 pandemic has brought estate planning front and center to many people who would otherwise dismiss it as something they would get to at some point in the future, says the article “Estate and Life Insurance Considerations During the Covid-19 Pandemic” from Bloomberg Tax. Many don’t have a frame of reference to address the medical, legal, financial, and insurance questions that now need to be addressed promptly. They’ve never experienced anything like today’s world. The time to get your affairs in order is now.

What will happen if we get sick? Will we recover? Who will take care of us and make legal decisions for us? What if a family member is in an assisted living facility and is incapacitated? All of these “what if” questions are now pressing concerns. Now is the time to review all legal, insurance and financial plans, and take into consideration two new laws: the SECURE Act and the CARES Act.

An experienced estate planning attorney who focuses in estate planning will save you an immense amount of money. Bargain hunters be careful: a small mistake or oversight in an estate plan can lead to expensive consequences. A competent legal professional is the best investment.

Here’s an example of what can go wrong: A person names two minor children—under age 18—as beneficiaries on their IRA account, life insurance policy or bank account. The person dies. Minors are not permitted to hold title to assets. Minors in New York are considered wards of the court in need of protection and court supervision. Therefore, in this state, the result of the beneficiary designation means that a special Surrogate’s Court proceeding will need to occur to have a pecuniary guardian appointed for the minors, even if the applicant is their custodial guardian.

Another “what if?” is the support for a disabled or special needs beneficiary who may be receiving government support. If the parents are gone, who will care for their disabled child? What if there are not enough assets in the estate to provide supplemental financial support, in addition to the government benefits? Life insurance can be used to fund a special needs trust to ensure that their child will not be dependent upon family or friends to care for their needs. However, if there is no special needs trust in place, an inheritance may put the child’s government support in jeopardy.

Here are the core estate planning documents to be prepared:

• Last Will and Testament
• Revocable Living Trust
• Durable General Power of Attorney
• Health Care Declaration

The SECURE Act changed the rules regarding inherited IRAs. With the exception of a surviving spouse and a few other exempt individuals, the required minimum distributions must be taken within a ten- year time period. This causes an additional income tax liability for future generations. There are strategies to reduce the impact, but they require advance planning with the help of an estate planning attorney.

Reference: Bloomberg Tax (June 18, 2020) “Estate and Life Insurance Considerations During the Covid-19 Pandemic”

How Does Planning for a Special Needs Child Work?

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

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

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

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

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

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

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

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

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

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