Aaron Charles Gregg

How Do I Align Retirement Planning with Planning for a Special Needs Child?

“As parents of children with special needs age, they should revisit the decisions they made—sometimes many years ago—regarding guardianship, beneficiarie, and other aspects of their child’s care.”

Neglecting to update an estate plan is always problematic. However, failing to update an estate plan when the family includes a special needs child can lead to disaster. An article from Barron’s titled “Retirement Planning? Don’t Forget to Review Plans for Special Needs Children” explains how this can be prevented before problems arise.

Decisions made in the past may no longer be appropriate, or even permitted. A grandparent may have been named as a guardian ten years ago and may have moved to another part of the country or died. A retirement plan based on selling the family home and downsizing to a small apartment may no longer be feasible. Healthcare insurance choices may be limited after retirement. In other words, life changes and estate plans need to change also.

Children with special needs who receive Supplemental Security Income (SSI) and Medicaid may not have more than $2,000 of assets in their name. If they are listed as beneficiaries on retirement plans or life insurance proceeds, they will become ineligible for these benefits. Money should never be left directly to a child with special needs, but it can be left through a Special Needs Trust. Parents may not realize how critical this is, or they may overlook changing beneficiary designations. Either way, the results can be financially devastating.

Talk with grandparents and any relatives who might want to leave something to a special needs child. Chances are they have no idea how an inheritance can impact a special needs family member.

Laws concerning funding a Special Needs Trust have changed. The ten-year rule on required distributions no longer applies to beneficiaries of qualifying Special Needs Trusts, so the SNT may be a beneficiary of a qualified retirement plan. A Roth IRA may be the best way to leave assets to an SNT, as there are no taxes due on withdrawals.

Life insurance is often used to care for a special needs family member. A second-to-die life insurance policy can be used to insure both parents and pay to the SNT on the death of the second parent, when the money is needed most. If one parent doesn’t qualify because of health issues, their underwriting may be balanced by the good health of another parent, which may keep premiums reasonable. Make sure the laws of your state and financial institution permit the proceeds to be directed to an SNT.

An ABLE account is a tax-advantaged savings plan for individuals with disabilities. The account can be opened for an individual at any age, as long as the disability onset occurred before age 26. Talk with an estate planning attorney to ensure the individual will qualify for this type of account. The 2021 annual contribution limit is $15,000. However, there are many exceptions, so don’t do this without professional help. For instance, SSI may be suspended, if the account balance rises about $100,000. Be sure the amount in the ABLE account won’t put means-tested programs at risk.

Reference: Barron’s (Oct. 23, 2021) “Retirement Planning? Don’t Forget to Review Plans for Special Needs Children”

Estate Planning for Special Needs Children

“It takes a special parent to care for a child with special needs. These parents’ greatest financial concern is typically ensuring that their children are cared for when they can no longer do so.”

Part of providing comprehensive estate planning for families includes being prepared to address the needs of family members with special needs. Some of the tools used are trusts, guardianship and tax planning, according to the article “How to Help Clients With Special Needs Children” from Accounting Web. Your estate planning attorney will be able to create a plan for the future that addresses both legal and financial protections.

A survey from the U.S. Department of Health and Human Services revealed that 12.8 percent of children in our country have special health care needs, while 20 percent of all American households include a child with special needs. The CDC (Center for Disease Control) estimates that 26% of adults in America have some type of disability. In other words, some 61 million Americans have some kind of disability.

Providing for a child with special needs can be expensive, depending upon the severity of the disability. The first step for families is to have a special needs trust created through an estate planning attorney with experience in this area. The goal is to have money for the support and care of the child available, but for it not to be in the child’s name. While there are benefits available to the child through the federal government, almost all programs are means-tested, that is, the child or adult with special needs may not have assets of their own.

For many parents, a good option is a substantial life insurance policy, with the beneficiary of the policy being the special needs trust. Depending on the family’s situation, a “second to die” policy may make sense. Both parents are listed as the insured, but the policy does not pay until both parents have passed. Premiums may be lower because of this option.

It is imperative for parents of a child with special needs to have their will created to direct their assets to go to the special needs trust and not to the child directly. This is done to protect the child’s eligibility to receive government benefits.

Parents of a child with special needs also need to consider who will care for their child after they have died. A guardian needs to be named as early as possible in the child’s life, in case something should occur to the parents. The guardianship may end at age 18 for most children, but for an individual with special needs, more protection is needed. The guardian and their role need to be spelled out in documents. It is a grave mistake for parents to assume a family member or sibling will care for their child with special needs. The need to prepare for guardianship cannot be overstated.

The special needs trust will also require a trustee and a secondary trustee, if at some point the primary trustee cannot or does not want to serve.

It may seem easier to name the same person as the trustee and the guardian, but this could lead to difficult situations. A better way to go is to have one person paying the bills and keeping an eye on costs and a second person taking care of the individual.

Planning for the child’s long-term care needs to be done as soon as possible. A special needs trust should be established and funded early on, wills need to be created and/or updated, and qualified professionals become part of the family’s care for their loved one.

Having a child with special needs is a different kind of parenting. A commonly used analogy is for a person who expected to be taking a trip to Paris but finds themselves in Holland. The trip is not what they expected, but still a wonderful and rewarding experience.

Reference: Accounting Web (Sep. 13, 2021) “How to Help Clients With Special Needs Children”

Who Pays the Tax on a Special Needs Trust?

“The main financial vehicles of supporting disabled individuals—the special needs trust and the Achieving a Better Life Experience (ABLE) account—both come with special tax conditions that advisors need to consider.”

One of the reasons to use a Special Needs Trust (SNT) or open an ABLE account is to prevent federal or state benefits for a disabled person to be put at risk. The SNT is a way to hold property for someone without interfering with their eligibility. However, there are no tax advantages to the trust, according to a recent article titled  “How To Factor In Taxes When Considering Special Needs Trusts, Accounts” from Financial Advisor.

Tax results depend on who creates the trust, the terms of the trust and how it’s administered. The trust pays no taxes on any income it earns, as long as that income is passed on to the beneficiary. Trust tax rates are generally higher than individual tax rates. The income to the beneficiary will be taxable at their income tax rate. In some cases, all of the income of a trust might be taxed to the beneficiary, while in others the parent or person who created the trust might bear a tax burden, or the trust itself may be responsible for the tax liability.

An ABLE account is also a tax-favored vehicle, similar to a 529 college saving account. For a person to qualify for an ABLE account, they must have a disability that began before age 26 or be a recipient of Supplemental Security Income (SSI) or Social Security disability insurance benefits or meet other disability requirements.

The ABLE account will not reduce the major part of SSI benefits under the dollar-for-dollar SSI direct support rules, and it won’t be counted as an asset. The disabled person may also use their ABLE account to save earned income. The ABLE account can be inherited, and new rules allow funds in a 529 college savings account to be rolled into an ABLE account.

You can only contribute $15,000 a year to most ABLE accounts, and if the account plus other resources exceeds $100,000, SSI benefits will be suspended. These accounts must be managed carefully to protect eligibility.

The ABLE account varies, depending on the requirements and rules of the state where it is established. Some states offer additional tax benefits, if the person uses the ABLE accounts offered by their home state.

Depending on the state where you open the account, there can be deductions for contributions to an ABLE account. Earnings in the account are generally not subject to taxes, but the funds in the ABLE account may only be used tax-free for qualified expenses that result from living with a disability. Those include education, housing, employment training and special assistance.

The ABLE account is a useful financial tool for disabled individuals, but it does not completely replace a Special Needs Trust or trust planning.

When there are substantial funds, such as those from an inheritance, litigation settlement or a major gift, most estate planning attorneys recommend that those funds go into a Special Needs Trust.

Reference: Financial Advisor (July 12, 2021) “How To Factor In Taxes When Considering Special Needs Trusts, Accounts”

an I Set Up a Trust for an Adult Child?

“Creating a will is important for all adults, but particularly those who have dependents—including adult dependents. Adding a trust to your estate plan can provide even more guidance.”

If you are the parent or guardian of an adult who depends upon you financially, estate planning is critical. When you can’t care for your child, an estate plan which includes funding and guidance protects your dependent and ensures that they will receive the care they need, reports Parents in the article “Wills and Trusts for Adult Dependents.”

First, you need a will. This fundamental estate planning document lets you be very specific about what you want to happen after your death. It also nominates guardians for minor and adult children and pets. Wills can be used to manage decisions that apply to everyone. If there is no will, the laws of your state and a court make all of the decisions, not you.

If you have dependents, the will lets you choose who you want to serve as a guardian for your children. If you are already the legal guardian of a dependent adult, the will can be used to name the person to take over for you. Choose guardians who are up to the responsibilities that come with caring for a dependent adult.

The will is used to manage assets after your death. However, in the case of a dependent adult, you may also need a Special Needs Trust. If you pass assets directly to a dependent adult and they are receiving certain government benefits, the inheritance may make them ineligible for benefits and services.

A Special Needs Trust allows you to earmark a certain amount of money for their care. An estate planning elder lawyer will be familiar with this type of trust and help you create it.

If your dependent adult does not receive any means-tested benefits but is not able to manage an inheritance, then a trust can be used to hold assets to be controlled by a trustee, who might also be a guardian or caretaker.

A will and trusts are central to a well-prepared estate plan. Working with an estate planning attorney will give you the opportunity to consider how you want to distribute assets while you are living and after you have died. It also gives you the opportunity to name a personal representative, or executor, who will manage your estate after your death and be in charge of making sure that your wishes, as expressed in your will, are followed.

Trusts are more complex than wills and allow for a greater degree of control over assets. The trust is a legal entity to benefit others, and a trustee is the person named to be in charge of the trust.

Bear in mind that anything passed through a will has to go through a court process known as probate. The will has to be validated and the executor has to be approved by the court. Any assets in the trust are already outside of your estate and do not go through probate.

Reference: Parents (July 7, 2021) “Wills and Trusts for Adult Dependents.”

How Do You Divide Inheritance among Children?

“First, before making a gift or bequest outright to your youngest son, consider whether now or in the future he will possibly be eligible for governmental assistance based on his disability and his own assets.”

A father who owns a home and has a healthy $300,000 IRA has two adult children. The youngest, who is disabled, takes care of his father and needs money to live on. The second son is successful and has five children. The younger son has no pension plan and no IRA. The father wants help deciding how to distribute 300 shares of Microsoft, worth about $72,000. The question from a recent article in nj.com is “What’s the best way to split my estate for my kids?” The answer is more complicated than simply how to transfer the stock.

Before the father makes any kind of gift or bequest to his son, he needs to consider whether the son will be eligible for governmental assistance based on his disability and assets. If so, or if the son is already receiving government benefits, any kind of gift or inheritance could make him ineligible. A Third-Party Special Needs Trust may be the best way to maintain the son’s eligibility, while allowing assets to be given to him.

Inherited assets and gifts—but not an IRA or annuities—receive a step-up in basis. The gain on the stock from the time it was purchased and the value at the time of the father’s death will not be taxed. If, however, the stock is gifted to a grandchild, the grandchild will take the grandfather’s basis and upon the sale of the stock, they’ll have to pay the tax on the difference between the sales price and the original price.

You should also consider the impact on Medicaid. If funds are gifted to the son, Medicaid will have a gift-year lookback period and the gifting could make the father ineligible for Medicaid coverage for five years.

An IRA must be initially funded with cash. Once funded, stocks held in one IRA may be transferred to another IRA owned by the same person, and upon death they can go to an inherited IRA for a beneficiary. However, in this case, if the son doesn’t have any earned income and doesn’t have an IRA, the stock can’t be moved into an IRA.

Gifting may be an option. A person may give up to $15,000 per year, per person, without having to file a gift tax return with the IRS. Larger amounts may also be given but a gift tax return must be filed. Each taxpayer has a $11.7 million total over the course of their lifetime to gift with no tax or to leave at death. (Either way, it is a total of $11.7 million, whether given with warm hands or left at death.) When you reach that point, which most don’t, then you’ll need to pay gift taxes.

Medical expenses and educational expenses may be paid for another person, as long as they are paid directly to the educational institution or health care provider. This is not considered a taxable gift.

This person would benefit from sitting down with an estate planning attorney and exploring how to best prepare for his youngest son’s future after the father passes, rather than worrying about the Microsoft stock. There are bigger issues to deal with here.

Reference: nj.com (June 24, 2021) “What’s the best way to split my estate for my kids?”

How Do Special Needs Trusts Work?

“Trusts give parents of special-needs children additional options for extending care and financial assistance. However, you might need some expert help.”

Special-needs trusts have been used for many years. However, there are two factors that are changing and parents need to be aware of them, says the article “Special-Needs Trusts: How They Work and What Has Changed” from The Wall Street Journal. For one thing, many people with disabilities and chronic illnesses are leading much longer lives because of medical advances. As a result, they are often outliving their parents and primary caregivers. This makes planning for the long term more critical.

Second, there have been significant changes in tax laws, specifically laws concerning inherited retirement accounts.

Special needs planning has never been easy because of the many unknowns. How much care will be needed? How much will it cost? How long will the special needs individual live? Tax rules are complex and coordinating special needs planning with estate planning can be a challenge. A 2018 study from the University of Illinois found that less than 50% of parents of children with disabilities had planned for their children’s future. Parents who had not done any planning told researchers they were just overwhelmed.

Here are some of the basics:

A Special-Needs Trust, or SNT, is created to protect the assets of a person with a disability, including mental or physical conditions. The trust may be used to pay for various goods and services, including medical equipment, education, home furnishings, etc.

A trustee is appointed to manage all and any spending. The beneficiary has no control over assets inside the trust. The assets are not owned by the beneficiary, so the beneficiary should continue to be eligible for government programs that limit assets, including Supplemental Security Income or Medicaid.

There are different types of Special Needs Trusts: pooled, first party and third party. They are not simple entities to create, so it’s important to work with an experienced estate elder law attorney who is familiar with these trusts.

To fund the trust after parents have passed, they could name the Special Needs Trust as the beneficiary of their IRA, so withdrawals from the account would be paid to the trust to benefit their child. There will be required minimum distributions (RMDs), because the IRA would become an Inherited IRA and the trust would need to take distributions.

The SECURE Act from 2019 ended the ability to stretch out RMDs for inherited traditional IRAs from lifetime to ten years. However, the SECURE Act created exceptions: individuals who are disabled or chronically ill are still permitted to take distributions over their lifetimes. This has to be done correctly, or it won’t work. However, done correctly, it could provide income over the special needs individual’s lifetime.

The strategy assumes that the SNT beneficiary is disabled or chronically ill, according to the terms of the tax code. The terms are defined very strictly and may not be the same as the requirements for SSI or Medicaid.

The traditional IRA may or may not be the best way to fund an SNT. It may create larger distributions than are permitted by the SNT or create large tax bills. Roth IRAs or life insurance may be the better options.

The goal is to exchange assets, like traditional IRAs, for more tax-efficient assets to reach post-death planning solutions for the special needs individual, long after their parents and caregivers have passed.

Reference: The Wall Street Journal (June 3, 2021) “Special-Needs Trusts: How They Work and What Has Changed”

Trusts can Work for ‘Regular’ People

“When you hear the word trust fund, you might think of the uber-wealthy giving their kids a big chunk of cash on their 25th birthday. However, trust funds aren’t just for the rich.”

A trust fund is an estate planning tool that can be used by anyone who wishes to pass their property to individuals, family members or nonprofits. They are used by wealthy people because they solve a number of wealth transfer problems and are equally applicable to people who aren’t mega-rich, explains this recent article from Forbes titled “Trust Funds: They’re Not Just For The Wealthy.”

A trust is a legal entity in the same way that a corporation is a legal entity. A trust is used in estate planning to own assets, as instructed by the terms of the trust. Terms commonly used in discussing trusts include:

• Grantor—the person who creates the trust and places assets into the trust.
• Beneficiary—the person or organization who will receive the assets, as directed by the trust documents.
• Trustee—the person who ensures that the assets in the trust are properly managed and distributed to beneficiaries.

Trusts may contain a variety of property, from real estate to personal property, stocks, bonds and even entire businesses.

Certain assets should not be placed in a trust, and an estate planning attorney will know how and why to make these decisions. Retirement accounts and other accounts with named beneficiaries don’t need to be placed inside a trust, since the asset will go to the named beneficiaries upon death. They do not pass through probate, which is the process of the court validating the will and how assets are passed as directed by the will. However, there may be reasons to designate such accounts to pass to the trust and your attorney will advise you accordingly.

Assets are transferred into trusts in two main ways: the grantor transfers assets into the trust while living, often by retitling the asset, or by using their estate plan to stipulate that a trust will be created and retain certain assets upon their death.

Trusts are used extensively because they work. Some benefits of using a trust as part of an estate plan include:

Avoiding probate. Assets placed in a trust pass to beneficiaries outside of the probate process.

Protecting beneficiaries from themselves. Young adults may be legally able to inherit but that doesn’t mean they are capable of handling large amounts of money or property. Trusts can be structured to pass along assets at certain ages or when they reach particular milestones in life.

Protecting assets. Trusts can be created to protect inheritances for beneficiaries from creditors and divorces. A trust can be created to ensure a former spouse has no legal claim to the assets in the trust.

Tax liabilities. Transferring assets into an irrevocable trust means they are owned and controlled by the trust. For example, with a non-grantor irrevocable trust, the former owner of the assets does not pay taxes on assets in the trust during his or her life, and they are not part of the taxable estate upon death.

Caring for a Special Needs beneficiary. Disabled individuals who receive government benefits may lose those benefits, if they inherit directly. If you want to provide income to someone with special needs when you have passed, a Special Needs Trust (sometimes known as a Supplemental Needs trust) can be created. An experienced estate planning attorney will know how to do this properly.

Reference: Forbes (March 15, 2021) “Trust Funds: They’re Not Just For The Wealthy”

How to Protect Child’s Public Benefits

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

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

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

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

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

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

There are two types of SNTs:

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

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

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

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

How Do Special Needs Trusts Work?

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

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

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

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

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

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

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

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

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

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

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

SECURE Act has Changed Special Needs Planning

“An applicable multi-beneficiary trust can solve some--but not all--of the challenges that the new act presents.”

The SECURE Act eliminated the life expectancy payout for inherited IRAs for most people, but it also preserved the life expectancy option for five classes of eligible beneficiaries, referred to as “EDBs” in a recent article from Morningstar.com titled “Providing for Disabled Beneficiaries After the SECURE Act.” Two categories that are considered EDBs are disabled individuals and chronically ill individuals. Estate planning needs to be structured to take advantage of this option.

The first step is to determine if the individual would be considered disabled or chronically ill within the specific definition of the SECURE Act, which uses almost the same definition as that used by the Social Security Administration to determine eligibility for SS disability benefits.

A person is deemed to be “chronically ill” if they are unable to perform at least two activities of daily living or if they require substantial supervision because of cognitive impairment. A licensed healthcare practitioner certifies this status, typically used when a person enters a nursing home and files a long-term health insurance claim.

However, if the disabled or ill person receives any kind of medical care, subsidized housing or benefits under Medicaid or any government programs that are means-tested, an inheritance will disqualify them from receiving these benefits. They will typically need to spend down the inheritance (or have a court authorized trust created to hold the inheritance), which is likely not what the IRA owner had in mind.

Typically, a family member wishing to leave an inheritance to a disabled person leaves the inheritance to a Supplemental Needs Trust or SNT. This allows the individual to continue to receive benefits but can pay for things not covered by the programs, like eyeglasses, dental care, or vacations. However, does the SNT receive the same life expectancy payout treatment as an IRA?

Thanks to a special provision in the SECURE Act that applies only to the disabled and the chronically ill, a SNT that pays nothing to anyone other than the EDB can use the life expectancy payout. The SECURE Act calls this trust an “Applicable Multi-Beneficiary Trust,” or AMBT.

For other types of EDB, like a surviving spouse, the individual must be named either as the sole beneficiary or, if a trust is used, must be the sole beneficiary of a conduit trust to qualify for the life expectancy payout. Under a conduit trust, all distributions from the inherited IRA or other retirement plan must be paid out to the individual more or less as received during their lifetime. However, the SECURE Act removes that requirement for trusts created for the disabled or chronically ill.

However, not all of the SECURE Act’s impact on special needs planning is smooth sailing. The AMBT must provide that nothing may be paid from the trust to anyone but the disabled individual while they are living. What if the required minimum distribution from the inheritance is higher than what the beneficiary needs for any given year? Let’s say the trustee must withdraw an RMD of $60,000, but the disabled person’s needs are only $20,000? The trust is left with $40,000 of gross income, and there is nowhere for the balance of the gross income to go.

In the past, SNTs included a provision that allowed the trustee to pass excess income to other family members and deduct the amount as distributable net income, shifting the tax liability to family members who might be in a lower tax bracket than the trust.

Special Needs Planning under the SECURE Act has raised this and other issues, which can be addressed by an experienced estate planning attorney.

Reference: Morningstar.com (Dec. 9, 2020) “Providing for Disabled Beneficiaries After the SECURE Act”