Special Trusts

By Susan M. Graham, Certified Elder Law Attorney, Senior Edge Legal, Boise, Idaho

Marie died and $400,000, which was all of her estate, went to her son, Chris.  Chris was married to Jane and they had three children.  Chris died two years later giving all of his assets, including those he inherited from his mother, to his wife.  After a few years, Jane married Tim, a widower with one child.  Jane and Tim did not have a prenuptial agreement, and they just decided to put all the assets each of them owned in joint names.  Jane died a year after marrying and everything she owned went to Tim.  When Tim died everything went to his child.  Nothing went to Chris and Jane’s children. 

Do you want your son’s widow to give your son’s inheritance to her new husband rather than your grandchildren?  If not, you may want an “Inheritance Trust.”

Some other names for this type of trust are “dynasty,” “heritage,” or “legacy” trusts.

This trust provides powerful protection for the individuals who inherit from you.  How does an inheritance trust work?  Upon your death, the monies a person inherits from you will be deposited directly into this trust rather than being given to them out right.   The funds that are placed in this trust will be protected from divorces, creditors, lawsuits, and bankruptcy.

Using an inheritance trust, we will rewrite the story about Chris.   When Marie died, $400,000 went to Chris. This time Marie has created an irrevocable inheritance trust naming Chris as the Trustee and the sole beneficiary during his lifetime.  When Chris dies, whatever remains in this Trust will go to his three children.  Marie dies, and Chris puts the $400,000 in this inheritance trust.  Chris decides how the funds will be invested, and he has the right to withdraw the money under certain circumstances. When Chris dies, those funds will go to his children and stay in Marie’s family. This trust provides extraordinary protection for Chris because the money will be protected should certain life tragedies occur, such as a serious illness, financial reversal or divorce.

By Susan M. Graham, Attorney at Law, Senior Edge Legal, Boise, Idaho

         Margaret Barkley, a retired first grade teacher, has been married for 45 years to Al, a machinist.  They lived in town and have one son, Lee, also a machinist who is married to Sally.  Lee and Sally have three children, Joe, Pete and Victoria. 

         Margaret and Al have been frugal all their lives and made a habit of putting money aside every paycheck.  Now they are in their seventies and plan to leave everything they have to their son Lee, when they both die.  They have not told Lee, but they never liked his wife.  The Barkleys want to make certain that Sally does not end up with Lee’s inheritance

         Margaret and Al have another worry--their grandson, Pete.  Pete is 17, spends all his free time fishing in the Boise River and rather than study, he is with his girlfriend.  His grades are so bad that he may not graduate from high school.  His grandparents are concerned that unless Pete changes his ways, he will not be able to support himself.

         What to do?  Margaret and Al talked to their estate-planning attorney and shared their concerns about Lee, Sally and the grandchildren.  They were honest in sharing their worries.  For certain they did not want to give everything to Lee, and have it go to Sally when he dies because, if she remarried, Sally’s second husband would end up with everything.   They want all their assets to pass to Lee and somehow be protected from Sally inheriting the balance.  In addition, they want to help and protect their grandchildren.  Their attorney suggests one planning method to accomplish their goals is to create an “Inheritance Trust.”

         How does an “Inheritance Trust” work?  Margaret and Al create the Inheritance Trust now, and they name the Trust as the recipient of their estate when they both die.  Lee manages the Trust and also has the use of the estate assets deposited in the Trust.  A big difference is when Lee dies the assets in the Trust go to his children, not his spouse.  In addition, the funds in the trust can be used to help provide an education for the grandchildren.  Pete can get the help he needs to be self-supporting, but he will not be able to freely waste the money in the Trust. 

         There are a number of additional benefits to leaving assets in Trust to Lee.  These include: (1) the assets will be protected from his spouse in the event of divorce, (2) the assets will be protected from Lee’s creditors in the event of a financial hardship, (3) on Lee’s death, the unused assets will go to his blood relatives (grandchildren) instead of in laws, and  (4) these assets are protected from lawsuits.   If the grandchildren are under age 30, the funds are held in Trust for them until 30, but the funds can be available to the grandchildren to help them get started in life.

         If you want to protect your children’s inheritances from divorce, lawsuits, creditors and bankruptcy, call and set up an appointment with me to see how this planning technique fits for your estate plan.

By Susan M. Graham, Certified Elder Law Attorney, Senior Edge Legal, Boise, Idaho

An inheritance of cash can be good or bad.  The "good" part is easy.  Someone receives the inheritance and uses the funds wisely to enhance their lives.  The "bad" part is often swept under the rug.

If someone inherits money and that person is young emerging into adulthood, likes to spend money freely with no sense of tomorrow, has an addiction problem or has trouble holding down a job, his or her inheritance is likely to evaporate.

An Incentive Trust may be the solution to help a child who is a reckless spender.  How does such a Trust work?  The parents need to sit down with their attorney and discuss the needs and abilities [and shortcomings] of their child.  Between them they can craft a Trust that will provide for the child's future in a constructive way.  Frequently a professional Corporate Trustee (such as a Bank Trust Department) will be the Trustee or co-Trustee with the child.  You don't want to make a family member a Trustee because that will poison the relationship between that person and the child.  Incentive Trusts frequently include a method to help educate the child to manage money responsibly so that he or she can develop the skills to take over their own finances in the future.  These trusts can work if they include objective standards and are transparent so the Trustee knows what the beneficiary is doing and the beneficiary knows the standards used for measurement.

Your other choice is to give the money outright with a "wish and a prayer" that it will all work out, knowing in your heart that result is unlikely.

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)