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Please join George and I as we discuss cutting edge techniques that we employ to help our clients protect their assets from the ravages of the aging process. We will discuss proven methods that assist our clients in avoiding the financial devastation that often comes along with a long term illness. Please contact my office to reserve a seat.
This week’s post is part one of a “two-parter.” Planning for disabled and special needs beneficiaries is too important for just 500 words.
One of the more tragic situations I encounter in my work is when a person fails to adequately plan for a disabled or special needs beneficiary. Do you have a family member with special needs, or know someone who does? Parents of children with special needs face unique challenges in providing for their day-to-day needs while both parents are alive, and also face exceptional challenges in providing for them after both parents are deceased. This is true whether the children are minors or adults.
The financial costs of caring for a family member with special needs can be overwhelming. Specialized equipment and skilled professional assistance may be required for many daily tasks. Ongoing and expensive medical care is common, often without private insurance to cover the bills. Assistance is available from state and federal governments, namely the Supplemental Security Income (SSI) program, which is administered by the Social Security Administration, and Medicaid (Title 19). Both SSI and Medicaid are needs-based programs, and as such, assistance is subject to strict financial eligibility requirements.
SSI typically pays eligible beneficiaries a small monthly benefit. Often this amount is not sufficient to meet their monthly expenses. Any person receiving SSI also will also qualify for Medicaid, although you still have to apply for it. Medicaid picks up the tab for hospital visits, prescription medications, and doctor bills, as well as other healthcare costs. Medicaid (Title 19) is a means-based benefit system, meaning that how much a person has in assets figures into whether or not they are eligible for benefits under Title 19.
If there are special needs concerns in your family, the estate plans of parents and grandparents must be carefully thought out and monitored to meet objectives beyond probate avoidance and federal estate tax minimization. Parents and relatives of special needs children should have their estate plans designed to ensure adequate care throughout the lifetime of their family member, while at the same time not disqualifying them from any governmental assistance.
Although it may seem like a good idea, parents and grandparents are strongly discouraged from establishing custodial accounts or leaving cash outright to minor children with special needs. The reason for this is that once that child reaches the age of majority under state law (18 in Connecticut) the custodial account is distributed to the child. The distribution itself may have the effect of disqualifying them from government assistance, which is means-based.
Part II will focus on how people can protect disabled and special needs beneficiaries through their estate plans, stay tuned!
Stretching: Most runners would tell you that stretching before a marathon is a good thing to do, many people may say that wearing stretch pants to an all you can eat buffet is also a good thing, but the best stretch for the majority of us, is one that the government has given us; the ability to stretch your Individual Retirement Account (IRA).
The IRS has said that even though you have the ability to withdraw from your IRA, you will only pay income tax on the money when you actually do withdraw it. So, the money that you have in your IRA continues to grow tax-deferred until you make a withdrawal, and then the tax is only on the sum withdrawn while the balance continues to grow on a tax deferred basis.
Most of the clients I consult with have IRAs and after their real estate, their IRA is usually their largest asset. This asset is unique in that it can be passed on to a spouse or to others, and if done properly, many of the benefits can continue for decades.
One of the major problems with IRAs is that most people, and even some folks in banking or financial planning do not understand all of the highly technical rules that must be followed to get the maximum benefits out of an IRA and its stretch ability. For example, let’s assume you had an IRA that grew to $100,000 before you died. If you didn’t provide the proper beneficiaries for your IRA (let’s assume you named your estate as your beneficiary) your heirs could lose up to 79 percent of the value (depending upon the size of your estate and your tax bracket). That same IRA which was worth the $100,000 at your death, could pay out over One Million Dollars if stretched properly. The stretching allows the beneficiary to take a yearly payment based upon their life expectancy, (the younger the beneficiary, the more it will grow).
Another major problem associated with IRA’s is that the ability to stretch is usually up to the beneficiary. If you give a young person the option of taking $100,000., now or taking a smaller amount each year with the possibility of getting 1 Million by the time of their death, guess which option most will choose. AARP did a study a couple of years ago and found that over 70% of beneficiaries “took the money and ran.” They ran to the auto dealers, to the travel agencies, and to the real estate agents. When the IRS wanted the tax due on the distribution, those same folks wanted to run to the nearest rock and hide under it.
The IRS has recently approved a particular technique which allows the owner of an IRA to set up a unique type of trust agreement where, upon the death of the owner, the IRA goes into this trust for the benefit of the children, grandchildren, etc. of the IRA owner. The Trustee of this trust then either distributes out all of the annual distributions to the beneficiaries (conduit trust) or distributes out, at his or her discretion, a portion of the amount received by the IRA and accumulates the remainder (accumulation trust). These Trusts can not only “force” the stretch, but can also provide for protection for the beneficiaries from their “creditors and predators”. These Trusts are used successfully for children with special needs, children who may have addiction problems, as well as children who are in careers where they tend to be sued (such as Doctors), and many other similar situations.
The IRA rules are very technical and unforgiving. A mistake made by you, the IRA custodian, your CPA, financial advisor, or attorney could cause your beneficiaries to lose thousands of dollars. Please consult with someone who is knowledgeable in this area.
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