New Law Allows Individuals to Create Special Needs Trusts

Buried in a new federal law is a tiny change that will now allow individuals to set up their own special needs trusts. The sum total of the change is two words - "the individual" - intended to correct a more than 20-year-old error. The change is called the Special Needs Trust Fairness Act.

Authorized under the Omnibus Budged Reconciliation Act of 1993, special needs trusts protect assets and allow an individual to maintain eligibility for governmental benefits such as Supplemental Security Income (SSI) and Medicaid. 

Prior to the law being enacted, a person with a disability under the age of 65 would, in most cases, have to spend down to reach $2,000 or less in assets before becoming eligible for Medicaid and other governmental benefits. The individual would have to remain at that asset level to continue receiving benefits.

Under the 1993 law, a disabled individual's assets in a special needs trust are disregarded in evaluating the individual's assets for the purposes of obtaining government benefits. At death, the state that provided for the person's care would be repaid out of the assets remaining in the trust. 

But here's the issue. The law allowed parents, grandparents, legal guardians and courts to create such trusts. So what happens to individuals with disabilities who don't have living parents or grandparents? Previously, their only option was to go to court to have a special needs trust created on their behalf.

Now, under the new law, individuals can create their own special needs trust.

This is a huge relief, because individuals can avoid the extra time and costs incurred from going to court. But it's still essential to have an attorney draft the trust property and make sure it's customized to your needs and those of your loved ones.

Estate Planning Options for Blended Families

The dynamics of a blended family, defined as one where at least one spouse has at least one child from a prior marriage or relationship, can complicate financial and estate planning because no off-the-shelf plans apply.

It's important to contact your estate planning attorney to ensure complete review of all personal and economic aspects of your family and a resulting plan that works for everyone involved. 

From designing account beneficiaries to updating Wills and Trusts, it takes attention to detail to ensure specific wishes are carried out properly. Effective, collaborative planning can address the family's needs and goals while building trust and helping everyone move forward together.

A good place to start is with reviewing and updating beneficiary designations for life-insurance policies and retirement accounts. That's a simple way to ensure that the proper beneficiaries are noted on all accounts and the proceeds from those accounts end up going to the correct individuals.

While any estate planning must be done on a case-by-case basis, the following are options to consider for blended families:

Reciprocal Wills

Some blended families use reciprocal Wills, where the assets pass outright to the surviving spouse, as their primary estate plan. They do this for the sake of simplicity and to keep their estate planning costs at a minimum. 

But this type of plan comes with some serious disadvantages. One issue is that it does not provide a great deal of comfort when there are children from a prior marriage, because the first spouse to die has no guarantee that the surviving spouse will provide for his or her children when the surviving spouse ultimately dies.

There are several ways the surviving spouse can defeat the intent of the deceased spouse even without changing his o her Will, including making gifts of assets during his or her lifetime, changing beneficiary designations, and re-titling assets as joint with a right of survivorship with his or her own children or even a new spouse, potentially leaving nothing to pass under his or her reciprocal Will.

Another major disadvantage of a reciprocal Will is that it is revocable. That means the surviving spouse can change it to favor his or her own children charities, or a new spouse. The surviving spouse also could deplete the estate by overspending and incurring debt, leaving nothing for the children of the deceased spouse. 

Non-reciprocal Wills

An option that does not require reliance on and trust in the surviving spouse is to have each spouse create a non-reciprocal Will, or Wills that are not exactly the same and don't leave the estate outright to the surviving spouse. Under this approach, each spouse could leave a percentage or dollar amount to the surviving spouse and a percentage or dollar amount to be divided equally between his or her own children, but not the children of the other spouse. 

It can be difficult to determine at the time the Will is made the amount needed to provide for the spouse and an appropriate amount to go to the children, so this type of estate plan requires monitoring and updating over time.

Life Insurance

A third alternative is to purchase life insurance to provide for the surviving spouse or the children of the first spouse to die. The advantage with using life insurance is that it guarantees, as long as the policy is active, that the children will receive something upon the death of their parent. Life insurance policies tend to become increasingly expensive as you grow older, however.

Life insurance provided by an employer can be used, but there are limits to the amount an employer provides. Also, coverage usually terminates when employment ends and may become unavailable if an employer files for bankruptcy. Therefore, relying solely upon employer-provided life insurance may not be the best alternative.

Testamentary Trusts

Creating a testamentary trust that becomes irrevocable upon the death of the first spouse meets the dual goals of providing for the surviving spouse during his or her remaining lifetime and then, upon the death of the surviving spouse, passing the remaining assets to the children of the first spouse to die.

Under this approach, a trustee will have to be appointed. Common options include the surviving spouse, a child of the first spouse to die, a third-party or a trust company. Appointing the surviving spouse or a child of the deceased spouse has a greater risk of creating family friction, and therefore a third-party or a trust company might be more appropriate.

Whichever option you choose, any estate plan should remain dynamic and adapt to change when necessary, particularly given the added complexities of a blended family.

Remarriage is a Reminder to Revisit Your Estate Plan

Approximately forty percent of marriages are remarriages for at least one partner. When you remarry, you should review numerous issues related to your estate plan.

For older people, the main focus may be ensuring that your adult children or grandchildren have an inheritance. Without proper planning, a new spouse could receive assets that were originally intended for children and grandchildren.

Here are some important elements to review in order to protect everyone's interests when you remarry:

Check the titling of your assets.

Who gets your assets when you die depends on how the assets are titled -- not on what you say in your will. If an asset is titled as a joint tenancy with rights of survivorship, tenancy by the entirety, or community property with rights of survivorship, it will go automatically to the surviving owner. That means you have to retitle the assets if you don't want them to pass to the surviving joint owner. 

Revise your beneficiary designations.

When a person dies, many retirement accounts automatically pass to the person's spouse, unless the spouse has signed a waiver or disclaimer. This is true even if the person's will and prenuptial agreement state otherwise. Be sure you know where your retirement accounts will go if something happens to you. You should also review the beneficiary designations on life insurance policies, annuity contracts, and bank or brokerage accounts.

Update your power of attorney and health care proxy.

Make sure you update your power of attorney and other health care directives if you want to change who you list as your agent. Also, make clear who you want as your guardian, which will make it easier for your new spouse or another relative to care for you if you become ill.

Put certain assets into a trust.

Many people who remarry provide in their will that certain of their assets will pass into a trust for the surviving spouse after they die. The trust will commonly pay income to the second spouse for the rest of his or her life, and when that spouse dies, the assets will go to the first spouse's children.

Oftentimes, such a trust is called a "Qualified Terminable Interest Property" trust or QTIP. One advantage of a QTIP trust is that all the property in the trust is treated as having gone to your spouse for estate tax purposes, so there is no estate tax on the assets at the time of your death.

In the trust, your spouse will likely want investments that generate income, while your children will favor growing the principal. It is important to specify how the assets are to be invested. Otherwise, you risk having your spouse and your children arguing about it. A possible solution is to create a "unitrust" that will pay the spouse a percentage of the total assets each year - that way everyone benefits if the assets are appreciating.

One caveat to creating a QTIP trust is if your new spouse is significantly younger than you are and could possibly outlive your children. In that case, it might be better to protect your children's interests by buying a life insurance policy with your children (or a trust for them) as the beneficiary.

Consider buying long-term care insurance.

If one spouse requires expensive nursing home care, the other spouse may be legally required to pay for it. Few things can drain a child's potential inheritance faster than paying for a step-parent's expensive medical care. Long-term care insurance is a great way to solve this problem before it happens.

Valuation Discounts for Transfers in Family Businesses in Jeopardy

The ability to take valuation discounts on the transfer of an interest in a family business for estate, gift and generation skipping transfer tax purposes, would be drastically limited under long-awaited proposed regulations from the Treasury Department.

The element of the proposal with the most impact bars any significant discount for lack of control or lack of marketability associated with the transfer of an interest in a family-controlled entity. 

If the regulations are finalized as written, the tax cost for transferring interests in such businesses will be substantially higher.

The rules would apply to family-controlled corporations, partnerships, limited liability companies, and other similar entities.

Under current rules, transfers of interests in family businesses may be discounted due to lack of marketability and lack of control. The idea is that if you give a percentage of interest in your business to your child, it should be discounted because your child would not be able to immediately sell his or her interest to someone else for the same amount. Discounts of this nature can yield significant tax savings.

For example, assume three siblings inherited an equal third of their parents' business and now one of them wishes to transfer her third to her children. Assume if the business was liquidated or sold, the value of her one-third interest would be worth $5 million.

If a combined 30 percent discount for lack of control and lack of marketability were applied to the business interest, then the value of the gift would be $3.5 million. If the regulations become final and eliminate discounts, then the value of the same gift would be $5 million. At a 40 percent gift and estate tax rate, the impact of the elimination of discounting on this family would be $600,000 in additional tax.

As a result of the proposed changes, if you have been thinking of doing such a transfer involving a family business for estate planning purposes, it is critical to consider doing it now before the regulations become final. 

What is the time frame?

The proposed regulations were issued in early August, and a public hearing was scheduled for December 1, 2016. Generally, the rules go into effect on the day they are published in final form, although certain portions will be effective for transfers occurring 30 or more days after the date of publication.

While it is unclear exactly when that will be, the rules are not expected to be finalized until sometime later this year. Still, you should act soon and contact an estate planning attorney in you want to take advantage of the discounts under the current law. 

Could the rules be retroactive?

Even if you make transfers now, though, there is a new rule in the proposal that might have a retroactive effect. The so-called "three-year rule" in the proposed regulations may prohibit certain discounts taken for transfers made within the three years before the transferor's date of death. 

That rule would apply to transfers that result in the transferor losing a liquidation right. That means that if a transfer is made soon to take advantage of the current rules on discounts - or if the transfer has already been made - the discount might be lost if the final rules go into effect and the person who transfers the interest dies within three years.

The same rule would also apply to measure any gift component of a transfer that has been structured as a sale. Therefore, discounts on gift tax elements of such transfers could also be caught by the three-year rule.

Are there other significant changes?

The proposed regulations are lengthy and some of the applications are still unclear.

But it is important to be aware of one new section of the rules that could have a big impact. That is the creation of a new set of "disregarded restrictions."

These restrictions would be disregarded when valuing the transferred interest for estate or gift tax purposes in any family-controlled entity to compel liquidation or redemption.

For valuation purposes, that means the new rule would assume that someone who holds an interest in a family-controlled entity has the right to liquidate or redeem the interest for its pro rata share of the new asset value in cash or other property payable within six months of exercise.

Under the rules, "disregarded restrictions" will be disregarded if they lapse after the transfer, or if the transferor or the transferor's family may remove or override them.

With respect to restrictions that will be ignored for valuation purposes, the new rules no longer focus on those that are more restrictive that the relevant state law rules, but instead will affect virtually any restriction that limits the ability to liquidate.

Through public comments and a hearing, the rules will continue to be debated and discussed before they become final. To understand the possible application to your family business, contact an estate planning attorney.

Should You Amend or Rewrite Your Revocable Trust?

It is important to review a revocable trust regularly to see if any amendments are needed, such as when something changes in your personal life or in the law. 

There are two ways to go about it. You can either amend the existing trust to change a certain part of it or rewrite the whole trust, which is known as a restatement.

While you might expect that an amendment is easier and more cost-effective, that's not always the case. 

Remember that your trust should provide instructions to your heirs about your wishes, so it has to be clear and comprehensive.

If you are making one or two simple changes, then amending is often sufficient. That's especially trust if the changes do not interrelate.

However, if you have made a lot of changes over time, it might be time for a restatement to ensure that the trust clearly states your wishes and is set up to be administered properly. 

In addition, a restatement can reduce how much paperwork you need to give to third parties, like banks, and avoid beneficiaries learning about prior terms of the trust.