The following fifteen common assets and applicable beneficiary designations should be reviewed to make sure they will not be paid (or given) directly to the special needs child:
(1) IRA, 401(k) and other retirement benefits.
(2) Life insurance (including employer-provided life insurance) benefits.
The thirteen benefits of an inter-vivos stand alone third-party created and funded SNT are:
(1) The trust can be established by the parents (or by any third party, such as the grandparents) for the benefit of the special needs child.
(2) The trust provides for the investment and management of the special needs child’s inheritance by a third party – the trustee.
The principal purpose of a third-party created and funded SNT is to provide an inheritance for the special needs child without risking the loss of important government benefits such as SSI, Medicaid, etc. Consequently, it is important that grandparents and other relatives (including the siblings of the special needs child) not leave an inheritance outright to a special needs loved one.
Fortunately a parent’s stand alone inter-vivos third-party created and funded SNT can be structured to receive gifts, bequests, and inheritances from grandparents (and other relatives/friends) for the benefit of the special needs child. This avoids the grandparents (or other relatives/friends) having to prepare a separate third-party created and funded SNT.
There Are Many Ways A Special Needs Child Can Receive An Outright Inheritance and Lose Means-Tested Government Benefits. A special needs child can receive an outright inheritance in indirect ways. For example, if the grandparent’s will leaves his or her estate to “my descendants, by right of representation,” and the parent of the special needs child predeceases the grandparent, actually or presumptively under the requirement for survival (typically 120 hours (or 90 days for GST tax purposes)), a portion of the deceased parent’s share of the grandparent’s estate will pass outright to special needs child, and possibly disqualify the child from receiving certain government benefits.
The trustee of a third-party created and funded SNT is given complete discretion in making distributions to or for the benefit of the special needs child. Thus, who should serve as the trustee of a third-party created and funded SNT is important.
The selection of the trustee involves many considerations, including the trustee’s ability to understand and respond to the needs of the special needs child; the trustee’s knowledge of government benefit programs and the effect that trust distributions will have on the special needs child’s government benefits; the trustee’s health, integrity, reliability and financial acumen; the trustee’s potential for a conflict of interest if the trustee is a current or remainder beneficiary of the trust; the potential for adverse income and transfer tax consequences if a family member serves as a trustee and is also a current or remainder beneficiary of the trust, etc.
Caution: Due to SSI and Medicaid rules and for various tax reasons, neither the special needs child nor his or her spouse should serve as trustee of either a third-party or first- party SNT.
There are five estate planning options available to parents concerning their special needs child:
(1) Distributing assets outright to the special needs child (not recommended since the assets may disqualify the child from receiving means-tested government benefits);
(2) Disinheriting the special needs child (generally not recommended since the child will have no “safety net” if government benefits are subsequently reduced or eliminated);
Tax planning should not be ignored when preparing an estate plan that involves a special needs child.
There is a general (and incorrect) assumption among some estate planners that taxes are of little or no concern to families of special needs children.
Income taxes, estate taxes, gift taxes, and the confiscatory generation-skipping transfer (“GST”) tax should all be considered and dealt with when preparing an estate plan. Equally important are the income and transfer tax consequences of a special needs trust.
Five Essential Estate Planning Documents For A Special Needs Family. At the minimum, a special needs child deserves a parent’s continued stewardship and guidance, even though the parent may be incapacitated or deceased. Therefore, the parents of a special needs child should typically have the following five estate planning documents prepared:
(1) Last will and testament.
(2) General durable power of attorney for financial affairs (“GDPA”). The parent’s GDPA should permit the agent to make discretionary non-support distributions to or for the benefit of the special needs child, and to establish a SNT for the benefit of the special needs child.
In addition to the usual hurdles that parents face when preparing an estate plan (e.g., who should be the guardian, trustee, executor, etc.), the parents of a special needs child are faced with five unique estate planning challenges:
(1) How to provide for all of their loved ones without jeopardizing the special needs child’s current (or potential) eligibility for means-tested government benefits such as SSI and Medicaid;
(2) How to design an estate plan that supplements the special needs child’s means- tested government benefits and enhances the quality of the special needs child’s life;
There are at least seven options for family philanthropy, each of which has its own
strengths and weaknesses from tax, regulatory, and personal perspectives. Some are extremely complex while others are simple.
1. Private Foundation According to the IRS in 2006 65% of the 80,000 private foundations had assets of less than 1 million dollars. Biggest reason for forming a foundation is control over the assets and expenditure.
Advantages: 1) Charitable deduction for the gift. 2)Distributions to individuals and foreign charities. 3) Control of charitable distributions 4) Control of administrative and investment management decisions. 5) Memorializing the family. 6) Endowing the family’s charitable priorities while maintaining long-term flexibility. 7) Platform for family philanthropy. 8) Visibility and influence for family members. 9) Protection of assets from personal bankruptcy
Given that many GRATS are now underwater and will not likely recover.
Grantor can purchase assets, acknowledge that the GRAT will fail and create a new GRAT with the assets.
If the GRAT contains an annuity payment and the grantor believes that that the underlining asset will still preform over the term of the GRAT, the annuity payments can be taken and new GRATs can be formed with these payments.
Florida Estate Planning Lawyer Blog