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Special Needs Trusts

Do Beneficiaries of Special Needs Trusts Have Rights?

Do Beneficiaries of Special Needs Trusts Have Rights?

A special needs trust is set up to provide money for the care and support of the beneficiary with special needs. A trustee is then named or appointed to manage the trust’s assets and act in the best interests of the beneficiary. The duty a trustee owes to a beneficiary is a fiduciary duty which is the highest duty the law creates for one person to another. It is much like the duty a parent owes to a minor child.

What happens, though, if disputes arise? Perhaps the beneficiary wants money for a particular purpose, for example to pay for an alternative form of treatment or therapy, and the trustee refuses to comply, believing such an expense is not within the terms of the trust or would breach the trustee’s fiduciary duty towards the beneficiary.

Even though the terms of the trust have been long established, does the beneficiary have any rights to challenge the trustee or dispute the terms of the trust itself? Special needs trusts are typically irrevocable, which means that the trust’s terms and its assigned beneficiaries cannot be changed without a court’s intervention. Does the named beneficiary of a special needs trust have any rights beyond that? In general terms, yes, thanks to something called the Uniform Trust Code, or UTC. Drawn up in 2000 by the Uniform Law Commission, the UTC is a nonbinding set of guidelines relating to trusts. State legislatures can vote to adopt the UTC into state law, with their own modifications if they so choose, and as of January 2020, 34 states had done so.

Here are five common rights of beneficiaries recommended by the UTC, any of which might come into play in a dispute between the special needs beneficiary and the trustee. These would be brought forward in a court and decided according to state law.

Payment: The special needs beneficiary has the right to distributions from the trust, to pay for her care and support as detailed in the trust’s terms and conditions.

The right to be informed: Beneficiaries are entitled to the trust’s financial information, such as tax returns, annual reports, quarterly earnings statements, and so on. These can be provided on a regular basis or on the beneficiary’s request.

The right to an accounting: If a beneficiary has questions about the trust’s performance or assets, he can request a thorough accounting from the trustee.

Removal and replacement of trustees: If a trustee has demonstrated behavior that violates the purpose of the trust or does not adequately protect the beneficiary’s interests, that trustee can be removed and replaced with someone else.

Termination: If the trust has failed to fulfill its purpose, or is no longer valid, the beneficiary may petition to terminate the trust altogether.

It’s important to keep in mind that these rights are codes, drawn up by the Uniform Law Commission to guide state legislatures. They are only binding if state law puts them into effect. States have made their own modifications to the UTC guidelines or enacted them only selectively. Some, such as California, haven’t adopted them at all, although these states’ laws governing trusts also likely include protections for beneficiaries.

If you are a special needs beneficiary and have questions about your rights, you will first need to find out if your state has adopted the UTC, and to what extent, and if not, what beneficiary rights and protections your state’s law provides. Consult with your special needs planner to get a complete picture of beneficiary rights where you live.

Read more related articles at:

5 Rights That Trust Beneficiaries Have

Can the Beneficiary of a Special Needs Trust Change the Trustee?

Estate Planning for Parents of Children with Autism

Also check out one of our previous blogs at : 

What is a Special Needs Trust?

Able Accounts

An Introduction to ABLE Accounts

An Introduction to ABLE Accounts

When Congress passed the Achieving a Better Life Experience (ABLE) Act in 2014, it was a game-changer for families with special needs. For the first time there was a tax-advantaged way to put money aside for dependents with disabilities without compromising their eligibility for government benefits. And, unlike a special needs trust, an ABLE account can be managed and controlled by the beneficiary.

Since this law was enacted, however, there has been some confusion about how ABLE accounts work, and the public has been slow to sign on. Here are answers to a few basic questions to help clarify what ABLE accounts can and can’t accomplish for the special needs family.

What is the ABLE Act, and what does it mean?

The ABLE Act is a provision of the 529 section of the IRS code, the section that previously established the framework for education savings plans to help families save for college. The ABLE Act allows money to be set aside for a person with special needs in a similar way. This money can grow tax-free over time and is used to pay for qualifying expenses toward the care and support of the special needs beneficiary. These accounts are administered by the individual states and accept contributions in the form of cash only (not bonds, securities, real estate, or other assets). As of February 2020, 42 states and the District of Columbia had set up ABLE programs, although if your state does not yet have its own program, many state programs allow out-of-state beneficiaries to open accounts. For a directory of state programs, click here.

What can ABLE accounts pay for?

Money in an ABLE account is intended for the care and support of the person with special needs. Qualifying expenses include housing, transportation, assistive technology, health care, and employment support. Any amount withdrawn for non-qualifying expenses incurs a 10 percent penalty payable to the IRS and is subject to taxation on any gains or investment returns.

What are the advantages ABLE accounts?

ABLE accounts provide advantages in two areas: taxation and access to government benefits. Through an ABLE account, a person with special needs can accumulate savings in a tax-advantaged way similar to 529 college savings plans. Like 529 plans, the funds in an ABLE account grow tax-free, and some states even offer account contributors a deduction from state income taxes.

A person with disabilities who has more than $2,000 in assets would normally not qualify for federal government benefits such as Supplemental Security Income (SSI), but under the ABLE Act, families may establish ABLE accounts that will not affect the child’s eligibility for SSI (up to $100,000), Medicaid, and other public benefits. Such accounts are also easy and inexpensive to set up and do not require the services of a lawyer or special needs planner.

Are there any drawbacks or limits to ABLE accounts?

Due to certain restrictions, ABLE accounts may not be for everyone. Eligibility is limited to people who developed their disability before age 26, so anyone who becomes disabled later in life does not qualify. Also, unlike 529 plans, total contributions to ABLE accounts are limited to $15,000 per year, although beneficiaries who work can make ABLE contributions above the $15,000 annual cap from their own income up to the Federal Poverty Level, which is $12,760 for a single individual in the lower 48 states (in 2020), provided they do not participate in their employer’s retirement plan.

If the value of the account exceeds $100,000, any SSI income is suspended until the account dips below that limit. Faced with saving for the lifetime needs of a loved one with disabilities, families realize that $100,000 may not be enough yet are wary of losing that government income even for a short period. Another drawback is that after the death of the ABLE account beneficiary states can claim reimbursements from funds remaining in the account for any Medicaid benefits paid during the beneficiary’s lifetime.

Before setting up an ABLE account for your loved one, make sure you understand every aspect of the law, and consult your special needs planner.

For more on ABLE accounts, click herehere and here.

 

Other important information for Able Accounts can be found here:     What to know before opening an Able Account/USNews.com

    How to draw up a Special Needs Trust for a Child with Disabilities/ USNews.com

 

Also read one of our Previous Blogs here:              How much money should I put in a Special Needs Trust for my Child?

 

 

Business Succession Planning

Business Succession Planning For Business Owners

A business owner without a business succession estate plan, is a business owner whose business and personal estate are both in jeopardy, says the Augusta Free Press in an article that asks “Own a business? 5 reasons you need an estate plan.”

You need more than a will to plan for incapacity. If you become ill or incapacitated, a will isn’t the business succession estate planning tool that will help you and your family. What you need is a power of attorney (POA). This document names another individual or individuals to manage your finances and your business dealings, while you are unable to do so. Your estate planning attorney can create a power of attorney that limits what the named person, known as an “agent” may do on your behalf, or make it a broad POA so they can do anything they deem necessary.

Your state’s estate plan may not align with your wishes. Every state has its own laws about property distribution in the event a person does not have a business succession estate plan. A popular joke among estate planning attorneys is that if you don’t have an estate plan, your state has one for you—but you may not like it. This is particularly important for business owners. If you have a sibling who you haven’t spoken to in decades, depending upon the laws of your state, that sibling may be first in line for your assets and your business. If that makes you worried, it should.

Caring for a disabled family member. A family that includes individuals with special needs who receive government benefits requires a specific type of estate planning, known as Special Needs Planning. This includes the use of trusts, so a trust owns assets the assets for the benefit of such a family member without putting government benefits at risk.

Help yourself and heirs with tax liability. If your future plan includes leaving your business to your children or another family member, there will be taxes due. What if they don’t have the resources to pay taxes on the business and have to sell it in a fire sale just to satisfy the tax bill? A business succession estate plan, worked out with an experienced estate planning attorney who regularly works with family-owned businesses, will include a comprehensive tax plan. Make sure your heirs understand this plan—you may want to bring them with you to a family meeting with the attorney, so everyone is on the same page.

Avoid fracturing your own family. An unhappy truth is that when there is no estate plan, it impacts not just the family business. If some children or family members are involved in the business and others are not, the ones who work in the business may resent having to share any of the business. How to divide your business is up to the business owner. However, making a good plan in advance with the guidance of an experienced advisor and communicating the plan to family members will prevent the family from falling apart.

There’s no way to know how family members will respond when a parent dies. Sometimes death brings out the best in people, and sometimes it brings out the worst. However, by having an estate plan and business plan for the future, you can preclude some of the stresses and strains on the family.

Learn what business succession planning is all about.

Reference: Augusta Free Press (August 13, 2019) “Own a business? 5 reasons you need an estate plan.”

Changing IRA beneficiary designations after divorce

Forgot to Update Your Beneficiary Designations? Your Ex Will be Delighted

Your will does not control who inherits all your assets when you die. This is something that many people do not know. Instead, many of your assets will pass by beneficiary designations, says Kiplinger in the article “Beneficiary Designations: 5 Critical Mistakes to Avoid.”

The beneficiary designation is the form that you fill out, when opening many different types of financial accounts. You select a primary beneficiary and, in most cases, a contingency beneficiary, who will inherit the asset when you die.

Typical accounts with beneficiary designations are retirement accounts, including 401(k)s, 403(b)s, IRAs, SEPs, life insurance, annuities and investment accounts. Many financial institutions allow beneficiaries to be named on non-retirement accounts, which are most commonly set up as Transfer on Death (TOD) or Pay on Death (POD) accounts.

It’s easy to name a beneficiary and be confident that your loved one will receive the asset, without having to wait for probate or estate administration to be completed. However, there are some problems that occur and mistakes get expensive.

Here are mistakes you don’t want to make:

Failing to name a beneficiary. It’s hard to say whether people just forget to fill out the forms or they don’t know that they have the option to name a beneficiary. However, either way, not naming a beneficiary becomes a problem for your survivors. Each company will have its own rules about what happens to the assets when you die. Life insurance proceeds are typically paid to your probate estate, if there is no named beneficiary. Your family will need to go to court and probate your estate.

When it comes to retirement benefits, your spouse will most likely receive the assets. However, if you are not married, the retirement account will be paid to your probate estate. Not only does that mean your family will need to go to court to probate your estate, but taxes will be levied on the asset. When an estate is the beneficiary of a retirement account, all the assets must be paid out of the account within five years from the date of death. This acceleration of what would otherwise be a deferred income tax, must be paid much sooner.

Neglecting special family considerations. There may be members of your family who are not well-equipped to receive or manage an inheritance. A family member with special needs who receives an inheritance, is likely to lose government benefits. Therefore, your planning needs to include a SNT — Special Needs Trust. Minors may not legally claim an inheritance, so a court-appointed person will claim and manage their money until they turn 18. This is known as a conservatorship. Conservatorships are costly to set up. They must also make an annual accounting to the court. Conservators may need to file a bond with the court, which is usually bought from an insurance company. This is another expensive cost.

If you follow this course of action, at age 18 your heir may have access to a large sum of money. That may not be a good idea, regardless of how responsible they might be. A better way to prepare for this situation is to have a trust created.  The trustee would be in charge of the money for a period of time that is determined by the personality and situation of your heirs.

Using an incorrect beneficiary name. This happens quite frequently. There may be several people in a family with the same name. However, one is Senior and another is Junior. The person might also change their name through marriage, divorce, etc. Not only can using the wrong name cause delays, but it could lead to litigation, especially if both people believe they were the intended recipient.

Failing to update beneficiaries. Just as your will must change when life changes occur, so must your beneficiaries. It’s that simple, unless you really wanted to give your ex a windfall.

Failing to review beneficiaries with your estate planning attorney. Beneficiary designations are part of your overall estate plan and financial plan. For instance, if you are leaving a large insurance policy to one family member, it may impact how the rest of your assets are distributed.

Take the time to review your beneficiary designations, just as you review your estate plan. You have the power to determine how your assets are distributed, so don’t leave that to someone else.

Learn more about updating your beneficiary designations.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

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