 Overview:
One of the most common estate planning
strategies for married individuals
is for each spouse to leave his
or her entire estate to the surviving
spouse. Due to the unlimited marital
deduction, an entire estate (regardless
of size) can pass to the surviving
spouse without incurring any federal
estate taxes upon the first death.
However, such a strategy fails to
take advantage of the applicable
exclusion amount of $1,500,000 for
2004 (increasing to $3,500,000 by
2009) that each individual can transfer
to heirs completely free of gift
or estate taxes, potentially subjecting
the survivor's estate to higher
than necessary future taxes. This
undesirable situation occurs because
all property remaining in the survivor's
estate will otherwise be subject
to estate taxation.
One of the popular trust arrangements
designed to remedy this problem
in advance is the common "A/B"
combination, typically set up as
revocable trusts that can be modified
at any time prior to death. However,
there is another option known as
a qualified disclaimer, that can
provide some flexibility after a
spouse has died.
How much do you know about qualified
disclaimers?
Take this short quiz now or later!
- True or False. This planning
technique may be useful in situations
where proper arrangements were
not established prior to death.
- Which of the following is not
a requirement for a disclaimer
to qualify for federal tax purposes:
- The disclaimer must be in
writing and must be irrevocable;
- The disclaimed interest
must pass according to the
direction of the person disclaiming
the property;
- With the exception of a
spouse, the person disclaiming
the property cannot receive
any benefit from the disclaimed
property, such as trust income;
or
- None of the above.
- True or False. Any decision
to disclaim an inheritance should
be carefully reviewed to determine
if such a decision is consistent
with the overall goals and objectives
of the disclaimant.
Read here to learn more about
qualified disclaimers.
This post-mortem planning technique
may be useful in situations where
"A/B" trusts or similar
arrangements were not established
prior to death. Rather than transfer
all property to the surviving spouse
using the unlimited marital deduction,
thereby wasting the first spouse's
applicable exclusion amount, the
surviving spouse can disclaim a
portion of his or her inherited
property. The disclaimed property
then passes to other heirs or beneficiaries
as if the surviving spouse had predeceased.
The estate can then take advantage
of the applicable exclusion amount
with respect to the disclaimed property.
In order to be effective for federal
tax purposes, a disclaimer must
meet the following requirements.
- The disclaimer must be in writing
and must be irrevocable;
- The disclaimed interest must
pass without direction by the
person disclaiming the property.
Consequently, before deciding
to disclaim, it is advisable to
know who, under the will or applicable
state laws, will receive the property
instead. Typically, a will can
direct the disposition of any
disclaimed property;
- The written refusal must be
received by the grantor of the
interest (or the grantor's estate)
within nine months of the taxable
transfer creating the interest
(or, where the disclaimant is
a minor, within nine months of
the disclaimant's 21st birthday);
- and With the exception of a
spouse, the person disclaiming
the property cannot receive any
benefit from the disclaimed property,
such as trust income.
Spouse's Special Exemption
If the surviving spouse wants to
take advantage of this planning
technique, yet desires a lifetime
income from the disclaimed property,
a provision in the decedent's will
could accomplish this feat by establishing
a disclaimer trust. With this alternative,
the surviving spouse can effectively
establish an "A/B" trust
after the death of the first spouse.
Disclaiming an inheritance might
prove useful in certain situations.
For example, suppose your wealthy
uncle, a widower without children,
has named you as the beneficiary
of his entire estate, but has also
stipulated that should you die before
him, his estate will be distributed
to your children. Sadly, your uncle
passes away unexpectedly, and at
a time when you are financially
comfortable and really don't need
the money. Accepting your inheritance
will just increase the value of
your estate, and, hence, your potential
tax bill, when it ultimately passes
to your children. A better alternative
might be to benefit your children
today by disclaiming the inheritance,
with no associated gift tax imposed
as a result of the transfer assuming
all qualified disclaimer requirements
are satisfied.
Proceed with Caution
Be aware that there are instances,
such as in smaller-sized estates
for which a surviving spouse's standard
of living will be dependent upon
all of his or her assets, where
a qualified disclaimer may not be
an appropriate planning choice.
In addition, if the property in
question is of substantial value
and is transferred to an individual
two or more generations younger
than the donor, a disclaimer could
trigger generation-skipping transfer
taxes (generally levied on property
transfers valued above $1,120,000
per individual in 2004, indexed
for inflation).
 Nevertheless,
under the appropriate circumstances,
a qualified disclaimer may be an
effective tool to assist in reducing
the effects of transfer taxes. Remember,
however, that any decision to disclaim
an inheritance should be carefully
reviewed in advance with a qualified
legal professional to determine
if such a decision is consistent
with your overall goals and objectives.
Quiz Answers: 1) True; 2) b; 3)
True.
 Estate
planning has traditionally focused
on minimizing estate taxes and directing
the disposition of your assets after
death. Yet, in today's modern world,
managing your affairs has become
even more complicated as issues
involving health care and personal
finances, which can arise during
your lifetime, have become increasingly
more important.
Consider what would happen if you
were to suffer a catastrophic illness
or become incapable of managing
your own affairs. This situation
could occur either through a long,
gradual process, such as a deteriorating
medical condition, or through a
sudden and unexpected accident or
illness. If such an event were to
happen, who would make your important
legal, financial, and health care
decisions? On what authority would
this individual act?
Fortunately, there are some estate
planning tools called advance directives
that can help in dealing with these
contingencies.
Legal and Financial Decisions
A durable power of attorney grants
authority to another person to make
legal and financial decisions on
your behalf in the event of mental
incapacity. The powers granted can
be broad or limited in scope. Some
decisions a durable power of attorney
can assist you with include your
personal finances, insurance policies,
government benefits, estate plans,
retirement plans, and business interests
Health Care Decisions
In the area of health care decision-making,
you may recall the Karen Ann Quinlan
case. In 1979, the New Jersey Supreme
Court granted permission to her
family to disconnect Karen's respirator,
which her doctors believed was prolonging
her life in a vegetative state.
The case led to the enactment by
various states of Natural Death
Act Declarations (i.e., living wills).
A living will generally allows
you to state your preferences prior
to incompetency regarding the giving
or withholding of life-sustaining
medical treatment. In most states,
you must have a "terminal condition,"
be in a "persistent vegetative
state," or be "permanently
unconscious" before life-support
can be withdrawn. The definition
of these terms and the medical conditions
covered may vary from state to state.
A health care proxy allows you
to appoint an agent to make health
care decisions on your behalf in
the event of incapacity. These medical
decisions are not limited to those
regarding artificial life-support.
 Advance
directives by durable power of attorney,
living will, or health care proxy
are generally inexpensive, easy
to implement, and should be considered
essential estate planning tools
for all individuals, regardless
of age. In the absence of such documents,
court intervention involving a great
deal of time, expense, and possibly
stress to your family, may be necessary
to carry out your legal, financial,
and health care wishes at precisely
the moment when timeliness and ease
of action are of the greatest importance.
 Historically,
estate planning has focused on the
minimization of taxes and the disposition
of one's assets at death. However,
managing one's affairs in the modern
world has become more complicated,
and quality of life issues (involving
health care, finances, and how critical
planning decisions are made) are
becoming more important.
Consider what might happen in the
event of catastrophic illness or
incapacity. How, and by whom, would
important financial decisions be
made? How, and by whom, would important
health care decisions be made? Such
an event could be either a long
gradual process (e.g., a deteriorating
medical condition) or something
which happens precipitously (e.g.,
a serious accident). Estate planning
tools that can provide instructions
for certain lifetime contingencies
are called advance directives.
One mechanism that can provide
for financial decision-making is
a power of attorney. This agreement,
entered into voluntarily, grants
authority to another person to make
legal decisions on one's behalf.
The person to whom the authority
is given is called the attorney
in fact (generally must be an adult)
who can act as the principal's surrogate
or agent. The powers granted can
be broad or limited in scope, depending
on the desires of the principal
(the person granting the power),
and can include such areas as insurance
transactions, estate transactions,
investment decisions, government
benefits, and retirement plan decisions.
Making the Document Binding
There are two aspects critical
to assuring maximum benefit from
setting up a power of attorney.
First, the principal must have sufficient
mental capacity at the time the
document is drawn to make it binding
in law. This means that the individual
must understand the nature and effect
of the document, much the same as
required for other legally binding
documents.
Second, if you want to use a power
of attorney in the event of incapacity,
the document must be a durable power
of attorney. A durable power of
attorney will remain in full force
even upon subsequent mental incapacity
of the principal. While this may
seem obvious (the document remaining
effective when it is most needed),
it was not long ago that a power
of attorney terminated upon incapacity.
Now, all 50 states have statutes
providing for a durable power of
attorney. The expressed language
must convey the idea that the powers
granted in the document will not
be affected by the principal`s subsequent
disability.
In most states, there is a presumption
that a power of attorney is not
intended to be durable unless specific
"durable" language is
included. Additionally, state requirements
can vary, making familiarity withindividual
state statutes important. For example,
Florida restricts who can be the
attorney in fact, limiting the designation
to a close blood relative. Some
states also require that the document
be witnessed or notarized. Not all
states recognize a springing durable
power of attorney (discussed below).
Choosing a Trigger Mechanism
Sometimes, the principal may want
to have the power of attorney take
effect only if and when mental incapacity
occurs. In such a case, a springing
durable power of attorney can be
used, which becomes effective only
upon the occurrence of a specific
contingency (e.g., certification
by a physician that management of
one's financial affairs is no longer
possible).
A springing durable power of attorney
assures that the principal will
not be relinquishing important rights
while still able to make independent
decisions. In crafting a springing
durable power of attorney, the method
of determining the triggering event
(e.g., defining mental incapacity)
should be carefully spelled out.
(For example, relying on a court
determination of incapacity would
defeat one of the benefits of using
a power of attorney, namely, avoiding
court intervention.)
 A
durable power of attorney is generally
inexpensive, easy to implement,
and should be considered an essential
estate planning tool for all individuals,
regardless of age. In the absence
of such a document, court intervention
(with the accompanying time and
expense) may be necessary to carry
out one`s financial desires at precisely
the moment when facility and timeliness
are paramount.
 Part
I of this series looked at the durable
power of attorney as an estate planning
tool to direct financial quality
of life decisions, designating an
agent to act on one`s behalf when
one is no longer able to do so.
However, there are other issues
which may be just as important as
financial decisions, revolving around
what kinds of health care measures
will be taken (to alleviate suffering
or prolong life) if one is incapacitated.
How, and by whom, such health care
quality of life decisions will be
made can be addressed using additional
advance directives: living wills
and health care proxies.
First, Some History
In the area of health care decision-making,
you may recall the Karen Ann Quinlan
case. In 1979, the New Jersey Supreme
Court granted permission to the
Quinlan family to discontinue Karen's
respirator which her doctors believed
was prolonging her life in a vegetative
state. This case led to the enactment
by various states of Natural Death
Act Declarations (i.e., living wills).
More recently, in the Nancy Beth
Cruzan case (1990), the U.S. Supreme
Court affirmed that a person's right
to refuse treatment is guaranteed
by the Constitution, but held that
individual states had the right
to determine the criteria for providing
or withdrawing life sustaining treatment.
(Nancy Cruzan, permanently incapacitated
from an accident, had discussed
her feelings about prolonging life
with family and friends, but had
not committed her thoughts to writing.
Missouri required clear and convincing
evidence--i.e., a written document.)
The Quinlan and Cruzan cases suggest
that instructions of a formally
appointed health care agent must
be followed, provided such directives
are consistent with individual state
guidelines. While definitions vary
from state to state, over 40 states
now have living will statutes, allowing
individuals to provide instructions
regarding life sustaining measures
in the event of a terminal illness,
including (in some states) coma
or persistent vegetative state.
Also, in 1991, the Federal Patient
Self-Determination Act was passed,
requiring all Medicare and Medicaid
health care providers to inform
recipients of their rights (under
various court decisions and state
statutes) to accept or refuse medical
treatment, and of the right to set
up advance health care directives.
Living Wills vs. Health Care Proxies
A living will is a set of instructions
for a health care provider, stipulating
the extent to which measures should
be taken (consistent with state
statutes) to maintain one's life,
should incapacitation render the
person unable to express his or
her wishes. A health care proxy
(also called a health care power
of attorney in some states) appoints
an agent to make any and all health
care decisions, in effect implementing
instructions, on one's behalf in
the event of incapacity (a life
threatening condition, or where
the individual is unconscious and
a treatment decision must be made).
Since the health care proxy grants
decision-making power to a surrogate,
its scope is broader than the living
will which simply states a person's
wishes in the face of terminal illness.
The documents may be drawn separately,
or the living will may be incorporated
into the health care proxy, depending
on state law. Both directives come
into play only when the principal
is unable to make health care decisions
for him or herself.
Up until that point, the individual
maintains decision-making authority
with respect to health care. Usually,
an individual can change or revoke
both directives at any time. Some
states have also enacted Default
Surrogate Decision Making Statutes
which define a priority of individuals
who are empowered to act on behalf
of a person who did not execute
advance directives prior to incompetency.
Into the Future
 These
quality of life issues have become
further complicated by the controversy
surrounding the physician-assisted
death movement and ongoing "Death
with Dignity" voter initiatives.
(One particularly important unresolved
issue which could affect the use
of living wills is the definition
of "suicide" for insurance
purposes.)
Despite such controversies, not
only are one's personal wishes at
stake, but also the potential emotional
and financial burden placed on family
members by a medical condition with
no hope of recovery. Advance directives
can allow an individual to maintain
autonomy, while providing specific
instructions to assure that his
or her wishes are carried out to
the fullest extent possible.
 Over
the past ten years, owners of nursing
homes have seen a steady decline
in the occupancy rates of their
facilities. There are a number of
reasons for this historic drop.
One significant reason is that the
number of "home care agencies"
has increased, thus allowing the
less disabled to remain in their
homes. Another reason is that Medicaid
waivers have siphoned off long-term
care patients in some states by
paying for limited home care, thus
saving states the higher costs of
institutional care. In addition,
Medicare also began paying nursing
homes more to admit hospital patients
for rehabilitation. There is also
another explanation for the increase
of empty beds in today's nursing
homes-assisted living facilities
(ALFs).
Assisted Living: The Future of
Residential LTC
Assisted living facilities (ALFs)
include apartments, usually with
small kitchens, coupled with the
provisions of personal assistance
for some disabilities. It's easy
to appreciate the difference between
these facilities and traditional
nursing homes that normally put
two residents into each small, sterile
room.
ALFs range in quality for those
offering top-end accommodations
and amenities to lower priced, but
quality, operations.
Formal assisted living must be
distinguished from board and care
homes. The latter tend to be "mom
and pop" operations, often
consisting of private residences
managed either by either the owner
or someone who lives on the premises,
and who provides care. The quality
of care in ALFs is often considerably
better due to the substantially
greater privacy, freedom, and amenities
than those possible in traditional
long-term care settings, or traditional
nursing homes.
Assisted Living is Often Less
Expensive Than The Nursing Home
While prices for ALFs vary according
to quality, services, and amenities,
they tend to be less expensive than
nursing homes. Some facilities'
fees cover personal care, others
may not. If you ever consider an
ALF for yourself or a relative,
be sure to review the contract carefully
to find out what is covered, and
what is not, before you sign. And
remember, it could be a mistake
to make a decision purely on your
cost. Today's long-term care insurance
policies generally cover assisted
living. There may be some limitations
involved, so it's important to understand
the impact of all policy benefits
and conditions.
A Word of Caution
 ALFs
may not be for everyone who needs
long-term care. Granted, they are
generally the more qualitative alternative
to nursing homes, however, they
are designed only to care for the
lightly to moderately impaired.
If a person is seriously impaired,
a nursing home is often the best
choice. On the other hand, some
people who need long-term care neither
need, nor prefer, either an ALF
or a nursing home. They can receive
care at home, both from relatives
and friends and from paid, trained
home care personnel. How do you
know which type of care is best
for you or a loved one? Most long-term
care policies today provide a care
coordinator to assist you in making
the right decision regarding the
type and place of care best suited
to your needs. Again, check your
policy or ask your agent if your
policy pays for a care coordinator.
Life in America today commonly
finds families scattered across
the country. With family members
often separated by hundreds or thousands
of miles, it may be extremely difficult
to manage the care of an older parent
or relative living far away. To
help facilitate the best care possible
for your loved one, and to alleviate
the stress long distance caretaking
could cause, you may want to take
steps now to be prepared, should
the need arise.
Down to Basics
As a first step, look into what
services are available in your family
member’s local community. Most areas
have government or nonprofit agencies
to provide assistance and referrals.
Once appropriate providers have
been identified, consider making
use of services that can assist
with the desired needs, such as
managing finances, drafting or amending
a will, or preparing advance directives
(e.g., durable power of attorney,
health care proxy, and living will).
When properly prepared, the following
legal documents can provide essential
protection and, therefore, should
be prepared without delay:
- A will provides instructions
for distributing assets and providing
for the needs of heirs, while
aiming to reduce probate expenses.
- A durable power of attorney
authorizes a third party to manage
the financial and legal affairs
of a person who is no longer capable
of doing so.
- For making decisions concerning
health care, a living will is
a set of instructions for health
care providers that stipulates
the extent to which measures should
be taken (consistent with state
statutes) to sustain the patient’s
life should the person be unable
to express his or her wishes.
In some states, the patient’s
condition must be considered “terminal”
under state laws before a living
will becomes effective.
- A health care proxy allows an
individual to designate a person
to make critical medical decisions
in the event the individual is
incapable of directing his or
her own health care. Unlike a
living will, it is not limited
to decisions regarding artificial
life-support.
Get Organized
Once you know where to turn for
assistance, it will be helpful to
gather and organize the following
information about your loved one:
- General Assessment and Support—Keep
notes on the current mental and
physical condition of the individual
and compare your observations
with those of other family members.
Identify neighbors or friends
who could keep an eye out for
your loved one and who would be
willing and able to help in a
pinch. List agencies located near
your relative that provide specific
services and support he or she
may need in an emergency.
- Medical Information—Identify
all pertinent doctors, hospitals,
and other medical providers. In
addition, keep track of all medications
and health insurance policy numbers.
- Financial and Legal Information—Obtain
copies of all financial and legal
documents, including wills, advance
directives, insurance policies,
bank accounts, and other financial
statements. Record all relevant
account and Social Security numbers.
Take Action now
A variety of resources are available
to assist in the care of older parents
and relatives. Begin planning now
to make the best use of them. When
it comes to preparing advance directives
and handling other estate planning
matters, it is generally prudent
to consult a qualified legal professional.
Your efforts now can help ease future
stress for family caregivers and
help provide the most comfortable
life for your loved one.
A charitable remainder trust (CRT)
can be a highly effective, financial
and estate planning tool through
which one can: avoid capital gains
taxes on highly appreciated assets;
receive a stream of income based
on the full, fair market value of
those assets; receive an immediate
charitable deduction; and ultimately
benefit the charity(ies) of one’s
choice.
Some individuals may be reluctant
to transfer significant assets to
a CRT because they would rather
see their children be the ultimate
recipients of the property. However,
transferring property to a CRT doesn’t
necessarily mean your children cannot
benefit as well.
Under the appropriate circumstances,
donors can apply the savings available
from their charitable deduction,
along with a portion of the CRT’s
income stream if necessary, to purchase
a life insurance policy inside an
irrevocable life insurance trust
(ILIT). After the death of the last
income beneficiary, the charity
receives the remaining assets in
the CRT, while your children receive
the proceeds of the life insurance
policy, income and estate tax free,
upon the death of the insured in
accordance with the terms of the
ILIT. In some instances, policy
proceeds may be equal to, or even
exceed, the value of the transferred
property.
General Guidelines
A CRT starts with a contribution
of assets, preferably highly appreciated
assets, into an irrevocable trust.
Once the trust is funded, the trustee
pays named beneficiaries (selected
by the donor upon establishment)
an income each year for their lives,
a term of years, or a combination
of the two. If a term of years is
involved, the maximum term is 20
years. Income beneficiaries must
receive a minimum percentage payout
each year equal to at least 5 percent
of the trust’s assets, not to exceed
50 percent. When the trust terminates,
the remaining assets that pass to
charity must be equal to at least
10 percent of the original assets
in the trust. Within these broad
guidelines, donors can select a
number of flexible payment options
designed to meet their specific
financial, estate, and charitable
giving objectives.
Additional Benefits
Because a CRT is tax exempt, the
trustee can sell highly appreciated
assets on a tax-free basis and reinvest
the full proceeds in other assets
most likely to meet the growth and
income objectives of the trust.
Assets donated to the trust are
removed from the donor’s taxable
estate, potentially avoiding significant
future estate taxation and likely
reducing future probate costs. Donated
assets are also protected from the
claims of creditors, which may be
particularly attractive to business
owners concerned about their personal
liability or perhaps those who are
sensitive to issues related to the
division of assets in a divorce.
The charitable deduction available
to a donor may be limited by the
type of property donated, the kind
of organization(s) ultimately receiving
the gift, the donor’s overall tax
status, the age(s) of the income
beneficiary(ies), and the trust’s
income payout provisions. If a deduction
is limited on the current year’s
tax return, Internal Revenue Service
(IRS) rules allow unused amounts
to carry forward for up to five
additional, consecutive tax years.
Moreover, since donations of appreciated
property are no longer preference
items for the alternative minimum
tax (AMT), donating such property
may now be much more advantageous.
(Under prior law, the AMT could,
in many cases, have significantly
trimmed the potential income tax
deduction available for donations
of appreciated property.)
The Choice is Yours
While most people may be resigned
to the inevitability of taxation,
one way or another, many may be
unaware that they have a choice
with respect to the form in which
their contribution to society is
fulfilled. When viewed from the
perspective of a choice to channel
your funds directly to select charities
rather than through the government,
charitable giving takes on a new
meaning. The CRT may then become
a valuable tool to facilitate your
choice. As with all complex financial
transactions, the assistance and
counsel of qualified professionals
is highly recommended in order to
ensure your wishes are properly
met.
 Liquidating
the family business in order to
pay estate taxes is often a grim
reality for families of individuals
who die without wills or estate
plans.
If you own a family business, you
need to take steps now to help ensure
that one of your most valuable assets
will still be around for your children,
grandchildren, and beyond.
|
The facts on family-owned
businesses.
The terms "family business"
or "small business"
can be misleading, especially
when you consider the impact
these businesses have on the
U.S. economy. Of all small
companies in the U.S. employing
fewer than 500 people, 88%
are owned by families. According
to an estimate by the National
Family Business Council (NFBC),
12.9 million family-owned
U.S. businesses generate 60%
of the gross national product
and employ 40 to 50 million
people.
It's natural to assume that
many business owners would
like to keep this kind of
influence in the family. However,
in reality, the situation
is much different: only a
fraction of business owners
who want their family business
to remain in the family actually
take steps to plan a formal
succession, according to the
Boston-based Family Firm Institute.
Why do so many business owners
fail to act on their intentions?
Because business continuation
is often a difficult subject
for family business owners
to confront. In many cases,
the subject of succession
is avoided rather than planned
for. It is often a taboo topic.
Business owners may be reluctant
to hand over something they
spent much of their lives
building. They may be forced
to confront and resolve sibling
rivalry and other unpleasant
family disagreements. Sometimes
an owner will have greater
difficulty grooming a family
member for succession because
of the overlap of family and
business boundaries. Additionally,
if the owners plan to rely
on the family business for
retirement income, they may
worry about the business's
success under new owners.
But the costs of not planning
for the continuation of family
businesses may be enormous.
Often, companies without formal
succession plans are courting
disaster. NFBC statistics
show:
- Only 4 in 10 family businesses
survive into the second
generation.
- Only 1.5 in 10 survive
into the third generation.
Survival planning for your
family business
How can you make sure that
your business avoids becoming
one of these statistics? A
sound solution is to establish
an estate plan. Simply put,
you need to:
- Develop a formal management
succession strategy and
ensure that your business
stays in the family after
your death.
- Equalize your estate so
that if you have children,
you can make alternative
bequests to those who do
not want to be involved
with the family business.
At the same time, you can
leave the business to the
children who do.
- Guarantee that the business
continues in an orderly
manner after your death.
- Create a buy-sell agreement
for family and non-family
members who may own stock
in your business
|
 As
you can see, ensuring that your
business lives on is a complicated
issue that engenders many concerns,
and care must be taken to ensure
that all issues will receive open
and honest discussion. With the
right estate planning team and the
right succession plan in place,
you can go against the statistics
to maintain your company's success
and ensure your family's ownership
for future generations.
 Overview:
Parents of a special needs child
have never ending concerns about
their child’s care. For instance,
where will the child live should
something happen to his or her parents?
Who will care for the child, and
where will the money come from?
How much do you know about financial
planning for a special needs child?
Take
this short quiz now or later.
 |
- True or False. The plan
that is often most helpful
for families needing to
make provisions for a child
with special needs is a
grantor retained annuity
trust. This device allows
a trustee, typically a family
member familiar with the
child's needs, to use funds
placed in a trust by the
child’s parents for the
necessary care.
- True or False. A charitable
remainder trust can be a
favorable planning mechanism
for the parents of a special
needs child.
- True or False. If a charitable
remainder trust is used
and a minor child is the
income beneficiary, any
income tax deduction could
be drastically reduced because
of life expectancy differences.
|
Read here to learn more about
financial planning for a special
needs child
Fortunately, help is available,
with local, state, and federal programs
easing some of the monetary demands
on the family. In addition, there
are private groups that can help
with long-term care. However, if
you wish to provide the highest
level of care, you will need to
plan for the best possible use of
your funds.
Meeting Needs
The plan that is often most helpful
for families needing to make provisions
for a child with special needs is
a special needs trust. This device
allows a trustee, typically a family
member familiar with the child's
needs, to use funds placed in a
trust by the child’s parents for
the necessary care. It offers sufficient
flexibility to handle almost any
situation, while providing privacy
for the details of the arrangements
made by parents, grandparents, or
others who wish to make a gift to
a special needs child.
Many people may assume that trusts
are only for the very wealthy, however,
a special needs family’s financial
situation demands prudent planning
to prevent loss of agency funding
after the parents are gone. For
example, assets received as an inheritance
might disqualify an adult child
from receiving public funding for
housing, medical care, and other
government programs. Assets placed
in a trust, however, and directed
to uses other than those available
through government sponsorship remain
available for the individualized
care a parent might want to provide.
While the special needs trust can
establish a mechanism for maintaining
financial care for a special needs
child, some families have utilized
the charitable remainder trust (CRT)
as an additional mechanism to help
secure future income for a special
needs child. As its name implies,
a CRT benefits a charity as well
as an individual. Here’s how it
works:
A couple starts by transferring
liquid, highly appreciated assets,
such as mutual funds or publicly
traded stocks, into their CRT. The
couple receives an annual income
from the trust for a term of years
or their joint life expectancies.
The IRS allows the couple to take
a current income tax deduction for
the present value of the property
that ultimately passes to the charity
they selected-- generally one involved
with the special needs of the child--when
the CRT terminates. [Note: In the
case where a minor child is the
income beneficiary, this tax deduction
could be drastically reduced because
of life expectancy differences.]
Any property put into the trust
is out of the parents' estates,
and when the trust terminates, a
sizable legacy will be left to the
charity of their choice. In addition,
there is no capital gains taxes
due for transfers of highly appreciated
property to the CRT.
The use of a CRT to benefit a special
needs child may be advantageous
in many ways. The income stream
is used for the benefit of the child,
with either the child or the parents
as the named income beneficiaries.
If the child is the income beneficiary,
the trust can pay income for the
child's life, and the parents, as
financial guardians, will oversee
the use of the income. Should the
child outlive the parents, a guardian
will step into the parents' role.
A Parting Thought
 Certainly,
planning for a special needs child
is emotionally challenging and financially
demanding. However, with a solid
plan in place, you can help ensure
the best possible care for your
child, both now and in the future.
Quiz Answers: 1) False; 2) True;
and 3) True
 If
you are like most people, wills,
trusts, life and disability income
insurance, and advance directives
are topics you would just as soon
avoid. Yet, timely planning is necessary
to preserve the assets you have
worked so hard to build and to protect
those you love. Here are some important
steps you can take now to ease your
family’s emotional and financial
burden in the event of your death:
- Prepare a will. This document
specifies how you want your assets
to be distributed after your death.
If you die without a will (intestate),
your estate will be distributed
through the probate court according
to the intestacy laws of your
state. Intestacy laws essentially
function as a “one-size-fits-all”
will. Without a will, your assets
may or may not be transferred
to those you would have chosen.
In some cases, you must have a
will, such as if you wish to designate
an executor for your estate, name
guardians for minor children,
or appoint other fiduciaries.
- Consider a living trust. Also
called an inter vivos trust, a
living trust is established and
in effect during your lifetime.
It provides a mechanism to safekeep,
manage, and distribute your assets.
These trusts are revocable in
the sense that you retain complete
control of your assets and may
alter the trust at any time. Most
people establish living trusts
to avoid probate. Avoiding probate
may make sense for those who are
concerned about privacy, since
probated assets are a matter of
public record. It may also benefit
those who own property outside
their state of domicile, since
their estates might otherwise
be subject to multiple probate
proceedings. Once a trust is established,
assets must be transferred into
it or they may be subject to probate.
Keep in mind that a trust’s usefulness
depends on the type of property
involved (e.g., real estate, life
insurance, bank accounts, investments,
business interests, and personal
property), where it is located,
and how it is currently titled.
In addition, a living trust generally
does not eliminate the need for
a will.
- Title property for ease of transfer.
A simple and inexpensive estate
planning technique is to own property
as joint tenants. Many couples
do this, for instance, with their
personal residence. With jointly-owned
property, when one partner dies,
the property automatically passes
to the surviving partner without
going through probate. However,
it is important to note that community
property states have their own
laws governing the disposition
of assets.
- Purchase life and disability
income insurance. For a relatively
low cost, life insurance can help
provide a source of replacement
income for your family. The death
benefit may also be used to help
pay estate taxes or other immediate
financial obligations. According
to the Insurance Information Institute
(III, 2002), a working American,
at the age of 40, has a 21% chance
of becoming disabled for 90 days
or more before age 65. Disability
income insurance can help protect
the integrity of your family’s
finances.
- Establish advance directives.
It is essential to have a living
will, durable power of attorney,
and health care proxy in place
in case of a physical or mental
incapacity. A living will allows
you to express your preferences
regarding the giving or withholding
of life-sustaining medical treatment.
A durable power of attorney and
health care proxy allow you to
designate someone to handle your
legal and financial affairs and
make your medical decisions if
you are unable to do so. It is
also important to inform those
closest to you of your arrangements
and the whereabouts of the related
documents.
Consider taking these initiatives
now, while they are fresh on your
mind. The key to successful estate
preservation is planning!
|
