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Timing Is Everything: Preserving Your Assets for the Next Generation

The Legal Intelligencer - February 9, 2016

By: Wayne Buckwalter

Trusts are no longer exclusive tools for large estates as a greater number of families with various levels of income and wealth are using trusts to pass on their assets to the next generation. The current Pennsylvania and federal tax laws provide ample opportunities to create a flexible plan that will cover every possible scenario for the estate.

  • Do you have an existing estate plan that was developed in 2011 or earlier before the estate and tax exemption became $5 million per individual and $10 million per married couple and indexed thereafter?
  • Do you own real estate in more than one state?
  • Do you have beneficiaries under the age of 40?
  • Do you have beneficiaries with a disability, addiction or other issue?
  • Do you have a significant portion of your investments in a retirement plan?

These are all relevant questions to consider when planning to pass on assets, and if your answer to any of them was yes, it is safe to say that you need to review and update your current estate plan to avoid unnecessary ­complications and costs.

Trust advantages
Estate plans created prior to the huge increase in the federal estate and gift-tax exemption and the implementation of portability may result in the surviving spouse facing unnecessary financial restrictions and unnecessary expense. A married couple with an estate up to $10,900.000 in 2016 may create a simple joint revocable living trust that will:

  • Avoid the unnecessary probate process in their state of residence and other states where they may own real estate including time shares.
  • Guarantee tax deferred distributions for non spouse beneficiaries over the life expectancy of the ultimate trust beneficiary.

The same principles apply to single individuals with an estate up to $5,450,000.

Protecting and gradually handing over control to young beneficiaries
In the case of younger beneficiaries, a process for using assets for their benefit, gradually transitioning control of assets, ensuring the option of life expectancy tax deferred distribution of retirement assets and protecting beneficiaries from claims of creditors and spouses may be established. Benefits include continuation of family values such and education, employment and entrepreneurship.

In addition, instead of having assets transferred to beneficiaries directly, assets may continue to be owned by the trust. However, at the end of a protective period, the beneficiary becomes the trustee and has total control of the assets while not ownership, unless the beneficiary so chooses. The trust completely controlled by an adult child provides more protection for the adult child than outright ownership while providing maximum flexibility and use of assets for the adult child.

There are many options when establishing a transition pattern that may be tailored to the family culture, a family business and the type of assets. Rather than use a one size fits all cookie cutter approach, specific goals, personal preferences and personalities determine a plan that works for each family.

Overcoming challenges of creating a trust for beneficiaries with disabilities
A Special or Supplemental Needs Trust (SNT) is a specific type of trust that can be created by a parent or guardian to benefit a person with a disability. When drafted correctly, a SNT allows a person with a disability to benefit from funds placed in the trust while receiving public benefits.

A SNT may be created using assets of the beneficiary (the person with a disability) or funds from a family member transferred to the SNT following death through an estate plan. The trust funds may be used for treatment, education and quality of life improvement for a person receiving public assistance. Rules and restrictions must be followed to allow the beneficiary of the trust to remain eligible for SSI and Medicaid by supplementing not replacing public benefits including SSI and Medicaid. Funds from the trust may be used to pay for services that are not already covered by public benefits.

The trust must be irrevocable and the beneficiary must not have the power to direct the use of trust assets for his or her own support. Funds paid directly to the beneficiary are treated as the beneficiary's income. If the beneficiary receives a direct cash payment from the trust in a given month, the SSI benefit for that month will be reduced dollar for dollar. However, funds from the trust used to purchase goods and services for the beneficiary, including education, recreation, counseling and supplemental medical services, do not affect the beneficiary's SSI benefit. But the purchase of food, clothing, or shelter for the beneficiary does affect the SSI benefit which is meant to cover these expenses.

There are also specific rules about home ownership. When the trust purchases a home outright for the use of the beneficiary, the beneficiary's SSI is not reduced. This is true even if the beneficiary pays rent to the trust.

SNT's have special status for Medicaid purposes. Trust funds are not considered a "resource" of the beneficiary, provided that the trust must be for the sole benefit of a person with a disability and, if the trust was established using the beneficiary's assets, any money that remains when the beneficiary dies must be paid to the state up to the amount that was spent on health care for the beneficiary through Medicaid.

State laws and court decisions may specify particular procedures and requirements that must be followed to ensure the trust does not affect Medicaid eligibility of beneficiaries in the state. This summary is not exhaustive and is intended only to include this as an option. Generally SNT's are unfunded so while the SNT is technically irrevocable if it is never funded (by for example updating an estate plan so that the SNT is NOT a beneficiary), overall planning flexibility in maintained.

How to plan for a beneficiary facing addiction
Successfully covering an addiction issue in a trust requires sensitivity to and understanding of the disease of addiction. The first step is to point out to the client that this is a different situation than creating a trust for young beneficiaries or beneficiaries with special needs. A solution is creating a separate trust for the benefit of the addict which is tailored to the specific issues involved in addiction.

Naming a family member or corporate fiduciary is often not the best solution. Corporate trustees are not addiction therapists and are not equipped to administer drug tests. A family member most likely has already been manipulated by the addict and being named as a trustee would cause more family stress. Why not consider naming a person in recovery as trustee of a trust created for the benefit of the addicted beneficiary?

A trustee with this background knows that even after treatment, the path to recovery is filled with obstacles. Recovering addicts need a strong support system which in most cases consists of groups of other recovering addicts. A qualified trustee will be in the best position to monitor and foster the support system while making best use of the trust income and assets. Once the trustee determination has been made, the next issue is creating the terms of the trust. These may include giving the trustee broad discretion for using trust assets and income for treatment and determining where and when. The trustee obviously cannot require that the beneficiary enter a treatment center. However, the trustee can determine if, how and when assets and income are used for or by the beneficiary. The trustee can assist the beneficiary with budgeting and planning. The trust may be structured as a basic broad discretionary trust or structured to qualify as an SNT. The discussion with the client requires sensitivity to the client's hope for the recovery of the beneficiary. The trustee may also be given discretion to terminate the trust. The hope of the family is that the beneficiary ultimately be committed to recovery. A trustee who has made a similar journey is in the best position to make this determination. This approach provides support and funding for recovery while protecting the beneficiary and family. It avoids family conflict by removing a family member from the affairs of a beneficiary suffering from an addiction. In addition to financial protection, the beneficiary has a trustee who knows the struggles that face the beneficiary and is potentially a vital part of the recovery support network.

The current tax laws are such that for the vast majority of people a plan that requires no lifetime restrictions and complete flexibility is available. This is the time to eliminate needlessly restrictive plans. A thoughtful plan creates the timing for funding, distributing, maximizing income tax protection and gradually giving control to younger beneficiaries while still affording maximum protection for younger beneficiary. A timely plan preserves and best uses assets for beneficiaries facing challenges. There is no better time than now to act.

This article was originally published in the February 9, 2016 Special Edition of the “The Legal Intelligencer: Wealth Management/ Trusts & Estates”©  2016 ALM Media Properties, LLC. All rights reserved. You can read the article on the Legal Intelligencer website.