AATEELA Blog

submitted by Peter G. Lennington, Esq., St. Paul, MN

This post, examines the unique planning requirements of families with children, grandchildren or other family members (such as parents) with special needs. There are many misconceptions in this area that result in costly mistakes in planning for these special needs beneficiaries. It is therefore incumbent upon us - the client's advisors - to ensure that clients understand all of their options.

COSTLY MISTAKE #1: Disinheriting the child.
Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. Your clients may have been advised to disinherit their disabled child - the child who needs their help most - to protect that child's public benefits. But these benefits rarely provide more than basic needs. And this "solution" does not allow your clients to help their child(ren) after the client becomes incapacitated or is gone. When a child requires, or is likely to require, governmental assistance to meet his or her basic needs, parents, grandparents and others who love the child should consider establishing a Special Needs Trust.

Planning Tip: It is unnecessary and in fact poor planning to disinherit a special needs child. Clients with special needs beneficiaries should consider a Special Needs Trust to protect public benefits and care for the child during the client's incapacity or after the client's death.

COSTLY MISTAKE #2: Procrastination.
Because none of us knows when we may die or become incapacitated, it is important that your clients plan for a beneficiary with special needs early, just as they should for other dependents such as minor children. However, unlike most other beneficiaries, a child with special needs may never be able to compensate for a failure to plan. A minor beneficiary without special needs can obtain more resources as he or she reaches adulthood and can work to meet essential needs, but a child with special needs may never have that ability.

 Planning Tip: Parents, grandparents, or any other loved ones of a special needs child face unique planning challenges when it comes to that child. This is one area where the client simply cannot afford to wait to plan.

COSTLY MISTAKE #3: Failure to coordinate a planning team effort.
It is critical that the advisor assisting with special needs planning include in the planning team: an attorney who is experienced in this planning area; a life insurance agent who can ensure that there will be enough money to maintain the benefits for the special needs child; a CPA who can advise on the Special Needs Trust's tax return; an investment advisor who can ensure that the trust fund's resources will last for the child's lifetime; and any other key advisors that may support the goals of the trust going forward.

Planning Tip: Special needs planning dictates that the client's advisors work together to ensure that there are sufficient trust assets to care for the child throughout his or her lifetime.

COSTLY MISTAKE #4: Ignoring the special needs when planning for the child's benefit.
Planning that is not designed with the child's special needs in mind will probably render the child ineligible for essential government benefits. A properly designed Special Needs Trust promotes the special needs person's comfort and happiness without sacrificing eligibility.

Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (for example, a specially equipped van), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment & appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses: the sorts of things your clients now provide to their child or other special needs beneficiary.

Planning Tip: When planning for a child with special needs, it is critical that the client utilize a Special Needs Trust as the vehicle to pass assets to that child. Otherwise, those assets may disqualify the child from public benefits and may be available to repay the state for the assistance provided.

COSTLY MISTAKE #5: Creating a "generic" special needs trust that doesn't fit.
Even some "special needs trusts" are unnecessarily inflexible and generic. Although an attorney with some knowledge of the area can protect almost any trust from invalidating the child's public benefits, many trusts are not customized to the particular child's needs. Thus the child fails to receive the benefits that the parent provided when they were alive.

Another frequent mistake occurs when the Special Needs Trust includes a "pay-back" provision rather than allowing the remainder of the trust to go to others upon the death of the special needs child. While these "pay-back" provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your clients hundreds of thousand of dollars, or more.

Planning Tip: A Special Needs Trust should be customized to meet the unique circumstances of the child and should be drafted by a lawyer familiar with this area of the law.

COSTLY MISTAKE #6: Failure to properly "fund" and maintain the plan.
When planning for children with special needs, it is absolutely critical that there are sufficient assets available for the special needs beneficiary throughout his or her lifetime. In many instances, this requires utilization of a funding vehicle that can ensure liquidity when necessary. Oftentimes permanent life insurance is the perfect vehicle for this purpose, particularly if the clients are young and healthy such that insurance rates are low.

Also, because this is an ever-changing area, it is also imperative that the clients revisit their plan frequently to ensure that it continues to meet the needs of the special needs beneficiary.

Planning Tip: Clients should consider permanent life insurance as the funding vehicle for special needs beneficiaries, particularly when the beneficiary is young given the often staggering costs anticipated over that beneficiary's lifetime.

If the client may be subject to estate tax, consider having an Irrevocable Life Insurance Trust own and be the beneficiary of the policy, naming the Special Needs Trust as a beneficiary. Alternatively, in a non-taxable situation, consider naming the client's revocable trust as the beneficiary to help equalize inheritances if that is the client's objective.

COSTLY MISTAKE #7: Choosing the wrong trustee.
During your client's life, he or she can manage the trust. When the client is no longer able to serve as trustee, they can choose who will serve according to the instructions that they have provided. They may choose a team of advisors and/or a professional trustee. Whomever they choose, it is crucial that the trustee is financially savvy, well-organized, and, of course, ethical.

Planning Tip: The trustee of a Special Needs Trust should understand the client's objectives and be qualified to invest the assets in a manner most likely to meet those objectives.

COSTLY MISTAKE #8: Failing to invite contributions from others to the trust.
A key benefit of creating a Special Needs Trust now is that the beneficiary's extended family and friends can make gifts to the trust or remember the trust as they plan their own estates. For example, these family members and friends can name the Special Needs Trust as the beneficiary of their own assets in their revocable trust or will, and they can also name the Special Needs Trust as a beneficiary of life insurance or retirement benefits.

Planning Tip: Creating a Special Needs Trust now allows others, such as grandparents and other family members, to name the trust as the beneficiary of their own estate planning.

COSTLY MISTAKE #9: Relying on siblings to use their money for the child with special needs' benefit.
Your client may be relying on their other children to provide for their child with special needs from their own inheritances. This can be a temporary solution for a brief time, such as during a brief incapacity if their other children are financially secure and have money to spare. However, it is not a solution that will protect the child with special needs after your client has died or when siblings have their own expenses and financial priorities.

What if the inheriting sibling divorces or loses a lawsuit? His or her spouse (or a judgment creditor) may be entitled to half of it and will likely not care for the child with special needs. What if the sibling dies or becomes incapacitated while the child with special needs is still living? Will his or her heirs care for the child with special needs as thoughtfully and completely as the sibling did?

Siblings of a child with special needs often feel a great responsibility for that child and have felt so all of their lives. When your clients provide clear instructions and a helpful structure, they lessen the burden on all their children and support a loving and involved relationship among them.

Planning Tip: Relying on siblings to care for a special needs beneficiary is a short-term solution at best. A Special Needs Trust ensures that the assets are available for the special needs beneficiary (and not the former spouse or judgment creditor of the sibling) in a manner intended by the client.

COSTLY MISTAKE #10: Failing to protect the child with special needs from predators.
An inheritance from parents who fund their child's special needs trust by will rather than by revocable living trust is in the public record. Predators are particularly attracted to vulnerable beneficiaries, such as the young and those with limited self-protective capacities. When you plan with trusts rather than a will, your client decides who has access to the information about their children's inheritance. This protects their special needs child and other family members, who may be serving as trustees, from predators.

Planning Tip: A Special Needs Trust created outside of a will ensures that information about the inheritance is not in the public record, protecting the special needs beneficiary from predators.

Conclusion
Planning for special needs beneficiaries requires particular care and the participation of all of the client's wealth planning advisors. A properly drafted and funded Special Needs Trust can ensure that the beneficiary has sufficient assets to care for him or her, in a manner intended by the client, throughout the beneficiary's lifetime.

(Peter G. Lennington, Esq., is a wealth preservation and estate planning member attorney with offices in St. Paul, MN, Bloomington/Edina, MN, and Minnetonka, MN.  The Lennington Law Firm, PLLC website is located at www.lennington.com.  You can contact Peter G. Lennington via e-mail at peter@lennington.com)

submitted by Peter G. Lennington, Esq., St. Paul, MN

If you’re over the age of 70½ — or if you reach that age this year — you may be planning to take required minimum distributions (RMDs) from your IRA, 401(k) plan or other retirement accounts later this year. But you may be better off taking advantage of a tax law change that lets you skip RMDs this year.

Leaving funds in your tax-deferred accounts as long as possible often can make sense from an estate planning perspective. The longer you allow your retirement funds to grow on a tax-deferred basis, potentially the more there will be for your heirs.

Normally you must take your first distribution by April 1 following the year you turn 70½. After that, annual distributions are required no later than Dec. 31. Many people take their first RMD during the year they turn 70½ to avoid taking two distributions the following year.

In the economic downturn, the value of many investments has declined, so it’s not the best time to make withdrawals from tax-deferred accounts. Lawmakers recognized this when they enacted the Worker, Retiree and Employer Recovery Act of 2008 late last year. The act suspended RMDs for 2009.

If you reached age 70½ before this year, you can skip the distribution that would have been required by Dec. 31, 2009. And if you turn 70½ during 2009, you can skip your first RMD — which would have been due by April 1, 2010 — so you won’t have to take an RMD until the end of 2010.

The act also provides relief for people with inherited retirement accounts. The rules are a bit complicated, though, so if you’re in that situation, consult your estate tax advisor to find out whether you’re entitled to skip this year’s RMD.

(Peter G. Lennington, Esq., is a wealth preservation and estate planning member attorney with offices in St. Paul, MN, Bloomington/Edina, MN, and Minnetonka, MN.  The Lennington Law Firm, PLLC website is located at www.lennington.com.  You can contact Peter G. Lennington via e-mail at peter@lennington.com)

Minimize postmortem disputes over your estate plan

Submitted by Peter G. Lennington, Esq., St. Paul, Minnesota

The goal of estate planning is to gain the peace of mind that comes with knowing your family will be provided for and your wishes will be carried out after you’re gone. Few things can disturb that peace of mind as quickly as the fear that someone will contest your plan.

No protection is absolute, but with thorough planning you can minimize the chances that an assault will pierce your armor. Let’s take a closer look at several tips for “bulletproofing” your estate plan.

Risk assessment

The first step is to evaluate your risk. There’s no reason to invest in protection you don’t really need. If your estate plan distributes your wealth to the “natural objects of your bounty” — such as your spouse and children — in roughly equal shares, you probably have little reason for concern. But if you plan to disinherit a family member or leave most of your assets to charity, you might want to shore up your defenses.

There also may be a heightened risk of litigation over your estate plan if you own a family business or have children from a previous marriage.

Protection for your estate plan generally falls into two categories: 1) strategies that discourage others from contesting your plan, and 2) those that make it more difficult for a challenge to succeed.

Conflict avoidance

There are several strategies you can use to avoid disputes over the terms of your estate plan:

Treat everyone fairly. It may seem obvious, but if your plan makes everyone happy, there’s no reason for anyone to contest it. Remember, though, that equal doesn’t necessarily mean fair. Suppose you have a young child from your current marriage and a financially independent adult child from a previous marriage. If you divide your wealth between them equally, the younger child — who likely needs more financial help — may perceive your plan as unfair.

Talk it over. If your estate plan is atypical, you can avoid misunderstandings and potential disputes by sitting down with your family and explaining your motives. Perhaps you’re leaving the bulk of your estate to a family-run private foundation to get your children involved in philanthropy. If so, the time for them to learn this is now, not at the time of your death.

If you own a family business, you might plan to leave equity interests to family members who work in the business and use other assets to provide for those who don’t. Or you might use voting and nonvoting shares to divide the business equally while preserving management control for family members who work in it. Whichever approach you use, it’s important to discuss your reasoning with those affected and solicit their input.

Create a revocable living trust. Using a will as your primary testamentary instrument guarantees that your estate will go through probate. That means your plan will become a matter of public record and your named beneficiaries — as well as anyone legally entitled to a share of your wealth — will be notified and given an opportunity to object in probate court.

In most states, you can avoid probate by using a revocable trust. Without probate, there’s no notice requirement or opportunity to be heard in court, so someone would have to file a lawsuit to challenge your estate plan. For a revocable trust to be effective, you must transfer title to all of your assets to the trust, including any assets you acquire after you establish the trust.

Use a no-contest clause. Consider making bequests that include a “no-contest” clause. Essentially, this clause says that, if a beneficiary challenges your will or trust, he or she forfeits the bequest. For a no-contest clause to work, the bequest must be large enough to deter the person from risking an unsuccessful challenge.

Strong defenses

If your estate plan is unconventional or you plan to disinherit one or more family members, it may be difficult to avoid a challenge. And even if your plan is the epitome of fairness, it’s not always easy to predict who might feel slighted.

Most wills that are contested involve claims of undue influence or lack of testamentary capacity (though fraud and invalid execution also may be grounds for a challenge). Strategies for thwarting these attacks include:

Have your head examined. Seriously, one of the best ways to establish your testamentary capacity is to undergo a “mini mental state examination” or have a medical practitioner attest to your competence. The examination should be conducted near the time you execute the will — on the same day, if possible.

Choose the right witnesses. Witnesses should be people you expect to still be alive and easily located years or even decades later — and they shouldn’t be beneficiaries of the will. Ideally, they will be familiar enough with you and your family that they can attest to your testamentary capacity and freedom from undue influence.

Put it on tape. Videotaping the execution of your will can be an effective way to demonstrate your competence. It also gives you an opportunity to discuss the reasoning or motives behind your estate plan and refute any potential claims of undue influence. Obviously, no one who stands to benefit from your will should be present.

Be sure to plan your statements carefully so that nothing you say can be misinterpreted. Also, for this strategy to work, you should be comfortable with the recording process. The last thing you want is viewers mistaking discomfort for duress or confusion.

Arm yourself

If you’re concerned that postmortem challenges might derail your estate plan, strategies like the ones described can provide the ammunition you need to fend off would-be attackers. Ask your estate planning professional which combination of techniques is right for your situation.

(Peter G. Lennington, Esq., is a wealth preservation and estate planning member attorney with offices in St. Paul, MN, Bloomington/Edina, MN, and Minnetonka, MN.  The Lennington Law Firm, PLLC, focuses on Minnesota estate planning, wills, trusts, estates, probate administration, asset protection, Medical Assistance planning, Medicaid planning & eligibility, elder law, business succession planning, family limited partnerships, real estate and transactional law.  The Lennington Law Firm, PLLC website is located at www.lennington.com.  You can contact Peter G. Lennington via e-mail at peter@lennington.com)

Wealthy Americans really struggle over how much inheritance their children should receive.  According to JPMorgan Private Bank, more than a quarter of all clients with over $25 Milion simply cannot decide how much is "too much"  Nearly 1/3rd of those interviewed feared that conflict would arise over the allocation/distribution of ivestable assets. And nearly 40% feared that their family would succumb to "financial predators."

Virtually none of those interviewed believed that children under 30 should receive a substantial outright inheritance.  But more than one-half said that they were leaving their wealth to multiple generations.

As reported in the N.Y. Times, an adoption designed to result in the adoptee qualifying as an heir to the I.B.M fortune was thrown out.  The Times reported:

"The adoption of a woman by her lesbian partner 17 years ago in Maine has been annulled, and the woman has filed an appeal in the State Supreme Court, according to recently unsealed documents. The case involves Olive F. Watson, 60, the granddaughter of the founder of I.B.M. and the daughter of Thomas J. Watson Jr., the company’s longtime chief executive. In 1991, Ms. Watson adopted Patricia Ann Spado, now 60, in Maine, where the women spent several weeks each summer at the Watson compound on the island of North Haven. The purpose of the adoption, Ms. Spado said in court documents, was to allow her to qualify as an heir to Ms. Watson’s fortune. A year after the adoption, the women broke up. Now, with both of Ms. Watson’s parents dead, Ms. Spado is seeking to qualify as Mr. Watson’s 19th grandchild and a beneficiary of his trusts. The Watson family, including Olive, is fighting Ms. Spado’s claim. In April, the probate judge who granted the adoption annulled it on the grounds that the women did not meet residency requirements. Ms. Spado’s lawyers filed an appeal on July 2."

For the full story, go to http://tiny.cc/annulled

According to a recent Kiplinger Report, the future of estate taxes is becoming clearer:

"A quick refresher course: Back in 2001, Congress passed a law to phase out the tax. The amount Americans can pass to their heirs tax-free was set to rise from $675,000 in 2001 to $3.5 million by 2009 (it's $2 million this year). Then, in 2010, the estate tax was supposed to expire. But there was a catch: The tax was also scheduled to rise from the dead in 2011 with a paltry $1 million exemption.

That seesaw scenario is what had a lot of people pulling out their hair instead of planning. Although the schedule is still in place, it's clear that it will never happen. Why not? The next president is against it. John McCain and Barack Obama oppose repeal of the estate tax.

Obama would let the $3.5 million exemption continue; McCain would prefer a $5 million exemption. Because the law allows married couples to double the tax-free amounts, it's likely that, in the future, couples could leave their heirs a minimum of $7 million -- and maybe up to $10 million -- before Uncle Sam gets a bite of their assets."

For the full report, click http://tiny.cc/aateela