The Petrosewicz Law Firm Estate Planning Blog

How Do I Plan for a Loved One with Special Needs?

Parents and grandparents do all they can to help their children and grandchildren lead their best lives, and that often extends to the child or grandchild’s adult lives. When estate plans are made, people who can afford to, leave money and property to continue to support loved ones. However, when there is a family member with special needs, planning is different, explains the article “Planning for loved ones with special needs” from The Sentinel. The child may have been born with a developmental disability or a motor disability or developed mental illness or an addiction.

A person who is not able to work or care for themselves often receives public benefits to pay for food, shelter and medical care. Those public benefits will be jeopardized, if parents or grandparents make the mistake of leaving a gift of money or a bequest. Special needs planning addresses this issue.

Public benefits for people with no assets or income include Supplemental Security Income (SSI) to pay for food and shelter, Medicaid for medical care and the SNAP program for food, among others. Before money is given to a disabled family member or left in an estate plan, a review of the public benefits that are in use or available needs to be done, so benefits are not disrupted.

One example is SSI, a federal program that supports disabled persons who meet the eligibility criteria. A disabled person who has less than $794.00 in countable income and owns less than $2,000 in assets can receive $794.00 monthly to pay for food and shelter. If the person owns the home they live in or owns one car, they may still be considered to have under $2,000.00 in assets. Clothing and personal belongings are also not counted against the $2,000.00 asset limit.

However, to continue receiving the full benefit amount, the person cannot receive money from family or friends, since that money could be used for food and shelter. This also applies to “in kind” gifts, such as making a mortgage payment or helping with utility bills. Any direct or indirect gift to pay for food or shelter reduces the SSI benefit.

There are ways for parents and grandparents to help their loved one enjoy a better quality of life. However, gifts must be carefully planned and within the laws. For instance, a family member may purchase certain services for a disabled person that would not disrupt their benefits. A parent or grandparent could pay for auto repairs, cell phone and land line phone services, educational expenses, medical care and social services. One very important note: the payments must be made directly to the merchant or provider and not to the disabled person.

There are two primary tools used to consider, when helping a special needs or disabled person:

Special Needs Trust: The gift is placed in the control of a trustee who manages the money, invests it, makes the appropriate tax filing and makes the decision about when to distribute funds.

Most family members don’t understand the web of complex regulations that dictate how public benefits work. Properly created and managed by a responsible trustee, the Special Needs Trust avoids putting the burden of financial care on other family members and lets money be wisely distributed.

Money and property in a Special Needs Trust is not considered to be an asset of the individual, as it is owned by the trust. However, the same restrictions apply to making direct distributions from the trust to the individual beneficiary for food and shelter.

The other account is an ABLE account, created by the Achieving a Better Life Experience law. Anyone can contribute to it and money in the account is not considered income and not counted against the asset limitations. Contributions are currently capped at $15,000 per year, and the account cannot contain more than $100,000.

Distributions from the ABLE account can be used to pay for a wide array of expenses for a disabled person without impacting government benefits. That includes housing, transportation, assistive technology, health, education and other needs. Families need to be aware that the disabled individual owns the assets in the ABLE account. If they are unable to manage money or are susceptible to scams, the family will want to be cautious about putting funds into the account.

Reference: The Sentinel (Nov. 20, 2020) “Planning for loved ones with special needs”

Should a Husband and Wife have Separate Trusts?

The decision about separate or joint trusts is not as straightforward as you might think. Sometimes, there is an obvious need to keep things separate, according to the recent article “Joint Trusts or Separate Trusts: Advice for Married Couples” from Kiplinger. However, it is not always the case.

A revocable living trust is a popular way to pass assets to heirs. Assets titled in a revocable living trust don’t go through probate and information about the trust remains private. It is also a good way to plan for incapacity, avoid or reduce the likelihood of a death tax and make sure the right people inherit the trust.

There are advantages to Separate Trusts:

They offer better protection from creditors. When the first spouse dies, the deceased spouse’s trust becomes irrevocable, which makes it far more difficult for creditors to access, while the surviving spouse can still access funds.

If assets are going to non-spouse heirs, separate is better. If one spouse has children from a previous marriage and wants to provide for their spouse and their children, a qualified terminable interest property trust allows assets to be left for the surviving spouse, while the balance of funds are held in trust until the surviving spouse’s death. Then the funds are paid to the children from the previous marriage.

Reducing or eliminating the death tax with separate trusts. Unless the couple has an estate valued at more than $23.16 million in 2020 (or $23.4 million in 2021), they won’t have to worry about federal estate taxes. However, there are still a dozen states, plus the District of Columbia, with state estate taxes and half-dozen states with inheritance taxes. These estate tax exemptions are considerably lower than the federal exemption, and heirs could get stuck with the bill. Separate trusts as part of a credit shelter trust would let the couple double their estate tax exemption.

When is a Joint Trust Better?

If there are no creditor issues, both spouses want all assets to go to the surviving spouse and state estate tax and/or inheritance taxes aren’t an issue, then a joint trust could work better because:

Joint trusts are easier to fund and maintain. There is no worrying about having to equalize the trusts, or consider which one should be funded first, etc.

There is less work at tax time. The joint trust doesn’t become irrevocable, until both spouses have passed. Therefore, there is no need to file an extra trust tax return. With separate trusts, when the first spouse dies, their trust becomes irrevocable and a separate tax return must be filed every year.

Joint trusts are not subject to higher trust tax brackets, because they do not become irrevocable until the second spouse dies. However, any investment or interest income generated in an account titled in a deceased spouse’s trust, now irrevocable, will be subject to trust tax brackets. This will trigger higher taxes for the surviving spouse, if the income is not withdrawn by December 31 of each year.

In a joint trust, after the death of the first spouse, the surviving spouse has complete control of the assets. When separate trusts are used, the deceased spouses’ trust becomes irrevocable and the surviving spouse has limited control over assets.

Your estate planning attorney will be able to help you determine which is best for your situation. This is a complex topic, and this is just a brief introduction.

Reference: Kiplinger (Nov. 20, 2020) “Joint Trusts or Separate Trusts: Advice for Married Couples”

Is Probate Required If There Is a Surviving Spouse?

Probate, also called “estate administration,” is the management and final settlement of a deceased person’s estate. It is conducted by an executor, also known as a personal representative, who is nominated in the will and approved by the court. Estate administration needs to be done when there are assets subject to probate, regardless of whether there is a will, says the article “Probating your spouse’s will” from The Huntsville Item.

Probate is the formal process of administering a person’s estate. In the absence of a will, probate also establishes heirship. In some regions, this is a quick and easy process, while in others it is a lengthy, complex and expensive process. The complexity depends upon the size and value of the estate, whether a proper estate plan was prepared by the decedent prior to death and if there are family members or others who might contest the will.

Family dynamics can cause a tremendous amount of complications and delays, especially if the family includes children from prior marriages or if a child has predeceased their parents.

There are some exceptions, when the estate is extremely small and when probate is not required. However, in most cases, it is required.

A recent District Court case ruled that a will not admitted to probate is not effective for proving title and thereby ownership, to real estate. A title company was sued for defamation after the title company issued a title report that included the statement that the decedent had died intestate, that is, without a will.

The decedent’s son, who was her executor, sued the title company because his mother did indeed have a will and the title report was defamatory. The court rejected this theory, and the case was brought to the Appellate Court to seek relief for the family. The Appellate Court ruled that until a will has been admitted to probate, it is not effective for the purpose of proving title to real property.

If a person owns real estate, they must have an estate plan to ensure that their property can be successfully transferred to heirs. When there is no estate plan, heirs find out how big a problem this can be when someone decides they want to sell the property or divide it up among family members.

Problems also arise when the family finds that they must pay taxes on the property or that there are expenses that must be paid to maintain the property. Without a will, the disposition of the property is determined by the state’s estate law. Things can become complicated quickly, when there is no will.

If the deceased spouse has children from outside the most recent marriage, those children may have rights to the property and end up owning a portion of the property along with the surviving spouse. However, neither the children nor the surviving spouse can sell the property without each other’s approval. This is a common occurrence.

There are also limitations as to how probate can be used to distribute and manage an estate. In some states, the time limit to probate a will is four years from the date of death.

An estate planning attorney can help the family move through the probate process more efficiently when there is no will. A better situation would be for the family to speak with each other about having a will and estate plan created before it’s too late.

Reference: The Huntsville Item (Nov. 22, 2020) “Probating your spouse’s will”

It’s Time to Stop Procrastinating and Have Your Estate Plan Done

While many people have had their wills updated or created in response to the pandemic, millions of Americans have yet to do so, reports the article “How to Stop Stalling On Getting a Will and Estate Plan” from AARP Magazine. The main reasons for the big stall? They haven’t “gotten around to it,” or, they think they don’t have enough assets to leave to anyone and don’t need a will. Neither reason is valid.

Estate Plans Protect Us During Life. A will is a legal document used to distribute assets after death. It saves families from unnecessary costs and stresses resulting from intestacy, which is what having no will is called. However, there are more documents to an estate plan than just a will. One is a health care directive, often called a living will. This document names someone of your choosing to make medical decisions for you if you are unable. It is also used to outline the kind of medical treatments you do or do not want.

Imagine your family faced with making the decision of keeping you on a heart and lung machine or pulling the plug and letting you die. Would they know what you want them to do? Without a living will, they have to make a decision, and hope it’s the one you would have wanted. That’s quite a burden to put on your loved ones, especially since there is a simple way for you to convey your wishes in a legally enforceable manner.

You also Need a Power of Attorney. A financial power of attorney appoints a person of your choosing to make financial and legal decisions on your behalf, if you are incapacitated. This is an important document and can be created to be as broad or as narrow as you want. You can provide the direction for someone—a trusted, responsible adult—to manage finances, including paying bills, managing a portfolio, paying a mortgage and generally taking over the business of your life. Without it, your family will need to go to court to obtain a guardianship or conservatorship to take care of these matters.

Estate Planning Requires Hard Conversations. When people say they “haven’t gotten around” to doing their wills, what they are really thinking is “This is too unpleasant a topic for me” or “I can’t bring myself to have this conversation with my children.” Death and sickness are uncomfortable topics, and most people find it painful to discuss them with their spouses and their children.

However, imagine the great relief you will feel when your loved ones know what your wishes are for sickness and death. You can also imagine the relief they will have in knowing that you took the time to give them the tools needed to deal with whatever the future will bring.

Joint Wills are Never a Good Idea. A joint will can leave a surviving spouse in a terrible legal and financial situation. They are not even valid in certain states. They can restrict a surviving spouse from changing the instructions of the will, which could create all kinds of hardships. Circumstances change, and a joint will won’t allow for that. Most couples opt for a “Mirror” will, where they leave the estate to each other and/or their children.

Blended Families Need Special Treatment. If your family is made up of children from different parents, it is important to understand that stepchildren are not treated the same as children by the law. You may love your stepchildren as if they were your own, but unless you specifically name them in the will, they will not be included. Your estate planning attorney will know how to address this issue.

A few final thoughts: estate planning laws of each state are different, so you should meet with an estate planning attorney who practices in your state. The Power of Attorney and Health Care Directives should name the people who you feel will carry out your wishes and can be trusted to do as you want. The person does not have to be the oldest male child. They don’t even have to be related to you, as long as the person you choose is trustworthy, responsible and good with managing money and details.

Reference: AARP Magazine (Nov. 12, 2020) “How to Stop Stalling On Getting a Will and Estate Plan”

What Do I Need to Know about Roth IRA Conversions?

People with large tax-deferred accounts they intend to leave to their children can eliminate a tax burden on their heirs, by converting the tax-deferred money over time. By doing the conversion this way, says a recent article from The Wall Street Journal entitled “Roth IRA Conversions: What You Need to Know,” the cost is manageable and the heirs won’t have to pay taxes.

For a Roth conversion, the owner pays income tax on every dollar converted, which makes sense for people who retire early and want to avoid higher taxes in the future, or when children inherit the assets.

Recent changes require account owners to start taking required minimum distributions at age 72. The withdrawals can be costly in two ways: pushing household income into a higher tax bracket and forcing Medicare premiums higher.

Withdrawals from a Roth IRA, on the other hand, are not taxed and have no required distributions. It is tax-free money, since taxes are already paid. It can be a cash fund as needed, or a tax-free legacy to heirs.

The interest in Roth conversion increased since Congress tightened rules for inheriting tax-deferred assets. In the past, heirs had a lifetime to take withdrawals from inherited IRA accounts. Now, only surviving spouses and a small group of other individuals have this option. For everyone else, there’s a ten-year window to empty the account, which means increased income tax bills, especially for heirs who are already in high tax brackets.

Those who do the conversion over an extended period of time eliminate a tax timebomb for heirs and funds can be invested more aggressively to maximize growth.

In the simplest type of conversion, the owner notifies the custodian of the account of their wish to move assets from the tax deferred account to the Roth account. They need to specify how much they want to move, what funds they want to move and what date they want the transaction to happen. When taxes are filed the next year, all of the money transferred is treated as ordinary income.

Doing this during a market decline is a smart move. One investor moved $200,000 of stock mutual funds during the market downturn, which cost him about $85,000 in federal and state taxes. The converted funds have since bounced back to around $320,000, above where they were before the market decline. Those gains in a tax-deferred account would have been taxable, but now, they are tax free.

Seniors who have low taxable income, but large tax-deferred accounts, might consider doing a conversion every year before reaching age 72, when they must begin taking required minimum distributions.

Reference: The Wall Street Journal (Nov. 19, 2020), “Roth IRA Conversions: What You Need to Know,”