Special Needs Planning for Beneficiaries with Disabilities

Families who aren’t knowledgeable about special needs planning often disinherit a disabled child because they don’t know the other options for protecting their offspring, reports a recent article, “Beneficiaries with disabilities require special planning” from The News-Enterprise. With proper planning, disabled beneficiaries can receive an inheritance and remain eligible for government benefits.

For estate planning, disabled beneficiaries are people who are disabled and receive public benefits, should be receiving public benefits, or are likely to need public benefits in the future. These public benefits are means-tested and determined by financial eligibility. They typically include Social Security Insurance and Medicaid. However, they may also include Section 8 housing, food stamps and other income or asset-based assistance.

Some people think they can replace public benefits with an inheritance. However, realistically, the disabled person will likely use up their inheritance and then be left only with public benefits and no resources to cover any other needs.

The best practice is to create a third-party supplemental needs trust for the beneficiary to receive an inheritance. This differs from a first-party supplemental needs trust and an ABLE account, since both have requirements based on the beneficiary’s age. The third-party supplemental needs trust can be funded regardless of the beneficiary’s age.

Third-party supplemental needs trusts don’t have a payback provision to the state. This is because a third party has funded the trust and not the beneficiary. Therefore, the assets within the trust aren’t required to be repaid to the state upon the death of the beneficiary. This leads to another benefit—the third-party supplemental needs trust may be left to a contingent beneficiary upon the death of the primary beneficiary.

Some families may leave the bulk of their estate to their disabled child, while the other children will be contingent beneficiaries.

A third-party supplemental needs trust is relatively flexible to set up and administer for future trustees. Your estate planning attorney can create one to include basic protective provisions giving the trustee maximum flexibility or set it up with instructions for an advisory committee, care planning and housing requirements.

Not all disabled individuals receive income or asset-based public benefits. In this case, the inheritance can be managed in one of two ways. First, planning documents could require the beneficiary’s inheritance to be left in a third-party supplemental needs trust, either because the planning anticipates a future need for benefits or because the beneficiary cannot manage their assets.

Another option is to leave the inheritance to the beneficiary outright, with a “trigger trust” provision. This means the third-party supplemental needs trust is set up within the planning document—a will or a trust—and will be “triggered” if the beneficiary is eligible for financial-based public benefits at the time of distribution.

The benefit of a trigger trust is that any beneficiary, including those who are healthy and capable of managing their lives when the documents are executed, can have the protection of a third-party supplemental needs trust, if and when needed.

The downside of a trigger trust is that once assets are distributed to the beneficiary outright, the option for a third-party trust is no longer available.

An experienced estate planning attorney will help the family with a disabled member plan for the future.

Reference: The News-Enterprise (July 8, 2023) “Beneficiaries with disabilities require special planning”

Where Is the Best Place to Keep Your Will?

Aretha Franklin may have done the right thing in writing down her wishes. However, she made a costly mistake resulting in an expensive estate battle over a multimillion-dollar estate, says a recent article from The Washington Post, “Aretha Franklin’s will was in her couch. Here’s where to keep yours.”

Three of her sons battled in court over handwritten wills, one of which was found under her couch cushions. Another was found in a locked cabinet. Her family was put into a pricey, heart-breaking and public battle by failing to be clear about her final wishes and improperly storing the wills. This is not likely the legacy you want to leave.

If you have a will, keep it in a place where it will be secure and easily found. Don’t put it in your bank’s safe deposit box. The bank will seal the box when it learns of your passing, and your executor may need a copy of the will and a court order to open the box. This will add a layer of delay and stress to administering your will. If this is the only option, you may want to add your executor as an owner of the safe deposit box and make sure they have a copy of the key.

What about keeping the will at home? A copy of the will can be kept in a fireproof and waterproof safe.However, be sure that someone else has a duplicate key or combination code. Your executor, personal representative, or another trusted person will need to be able to access the will. The risk here is the possibility of someone intentionally destroying the will, if they are disinherited or think you won’t leave them what they deserve.

Can you leave your will with your estate planning attorney? Creating a duplicate set of original documents, one for you to keep at home and another for your estate planning attorney, is a good option. If you choose this route, make sure the family knows the name of the attorney who has the will. If the practice closes, your heirs may need help tracking down the original will.

In some jurisdictions, you can store your original last will with the court. You give your court a sealed will for a one-time fee. The will can then only be released to you or the person you designate in writing. Remember, the will becomes a public document after you die as part of the probate process.

Wills can also be stored online. However, most states don’t yet recognize electronic wills, so your executor would need to have the originally signed copy, even if you have one stored in the cloud. Remember, no matter how secure a site is, even the Pentagon was hacked. Your will could be compromised in a data breach.

Wherever you store your will, estate planning attorneys often recommend leaving a letter of instruction to serve several purposes, including letting family members know your will exists and where it is stored.

To make things easier for your family during a difficult time, put together a binder and include a letter with a list of important information. The list should include assets, names and contact information for the professionals they’ll need to know, including your estate planning attorney, financial advisor and CPA.

When you update your estate planning documents, which should be done every three to five years, or when there is a trigger event in your life (birth, death, divorce), destroy any old wills. Your estate planning attorney will add a provision saying the new will supersedes any previous versions.

If you don’t have a will, state law will dictate how your property will be distributed, which may not be what you want. Known as dying “intestate,” your assets could go to a relative you haven’t seen in decades or people you don’t know or like. Your children, siblings, or parents may not inherit your property, and fighting will likely occur, especially if significant sums of money are involved.

Having a will and making sure people know where it is doesn’t always ensure that there won’t be a battle over your estate. However, it may prevent a war.

Reference: The Washington Post (July 14, 2023) “Aretha Franklin’s will was in her couch. Here’s where to keep yours.”

Did Russian Billionaire Who Died Mysteriously Have an Estate Plan?

French police suspected no wrongdoing in the death of real estate baron Dmitry Zelenov. However, they are still investigating his unusual and untimely death.

At just 50, he left behind a wife and four children (his family learned of one minor after his death)—but no will or estate plan to divvy up his assets, reports Forbes’ recent article entitled, “Former Russian Billionaire Mysteriously Died Last Year. Now His Family Is Feuding Over His Fortune.”

Less than two months later, some of his family members say they’ve been locked out of his fortune.

According to a complaint filed in Florida court, his widow, Natalia Dvoryanynova, and their adult son, Michael Zelenov, have filed suit against Dmitry Zelenov’s parents, adult daughter, and financial advisor. They claim that they attempted to disinherit them.

For example, the complaint says that the defendants changed the locks on the couple’s Moscow home and took more than two dozen of his cars—including four Mercedes, two Bentleys and a Rolls Royce—collectively worth more than seven figures.

Once one of the youngest billionaires in Russia—and all of Europe—Zelenov entered Forbes’ billionaire ranks in 2008 at 36 and built his fortune largely through a vast commercial real estate empire in his home country.

Zelenov co-founded the construction giant Don-Stroy in the 1990s, building numerous shopping centers across Russia and the 61-story Triumph Palace skyscraper in Moscow, Europe’s tallest apartment building when it opened in 2003.

However, his fortune was diminished when the real estate market crumbled globally during the Great Recession. It’s unclear just how much Zelenov’s assets are now worth. Even the plaintiffs acknowledge they’re unsure what he was worth. However, the complaint lists bank accounts, jewelry, and cars. Dvoryanynova’s attorneys note that the assets include “tens of millions of dollars” in Russian real estate and as much as $90 million in France.

Reference: Forbes (Feb. 3, 2023) “Former Russian Billionaire Mysteriously Died Last Year. Now His Family Is Feuding Over His Fortune”

What Is a Letter of Instruction?

A letter of instruction can be an essential component of your estate plan. Regardless of your wealth and family situation, there is vital information you should organize and communicate to loved ones, heirs, fiduciaries and others, says Forbes’ recent article entitled, “Letter Of Instruction: Roadmap To Take This Important Estate Planning Step.”

Some people see their letter of instruction as an ethical will—a communication to their family that expresses their beliefs, wishes, wisdom and thoughts. However, a letter of instruction may serve other purposes. Therefore, you might consider drafting several letters of instruction. One might be a guide for a trusted friend to handle financial and other matters if you have an emergency. Another may be akin to an ethical will left to a child or others. A third might be to the person serving as a health care agent who will make medical decisions for you if you can’t do so.

Here are some suggested categories you might include in one or all of your letters of instruction.

ICE – In Case of Emergency. A vital purpose of a letter of instruction is to tell someone (e.g., the agent under your power of attorney for financial matters and the agent under your health proxy for medical decision-making) your wishes and critical information. For both your financial and health care ICE letters, you should list the location of the original legal documents.

ICE – In Case of Financial Emergency. For your financial ICE letter, you should indicate where key financial data is maintained and how to access it. In addition, list the bills to be paid and creditor information.

ICE – In Case of Health Care Emergency. For your health care ICE letter, you should provide key health information and indicate where health records are maintained. It is important to add the contact information for healthcare professionals and any particular health challenges. Your health insurance information should also be provided.

Key Family, Advisers, and Other People. Having a list of positions, names and contact information is helpful for everyone to see, so that they know if certain actions they might have to take may be in the purview of someone else. The listing should be by categories that make sense for you. Some of the positions/relationships you might list include the following:

Professional Advisers, such as an estate planning attorney, CPA, investment consultant and banker
Family; and
Trustees of trusts, the executor under your will, and powers of attorney agents

Reference: Forbes (June 18, 2023) “Letter Of Instruction: Roadmap To Take This Important Estate Planning Step”

Who Gets My Bank Account When I Die?

Investopedia’s recent article, “What Happens to Your Bank Account After Death?” details the common ways you can set up your account to make things as simple as possible after your passing and what will happen if you don’t set up anything beforehand.

The easiest way to pass your bank account on to your heirs after your passing is to make sure you name payable-on-death (POD) or transfer-on-death (TOD) beneficiaries on your accounts. This ensures that they won’t have to go through probate. When you name a payable-on-death beneficiary, they won’t have direct access to your money until you die. You can change the named payable-on-death beneficiary at any time.

A bank will frequently freeze an account upon notification of the holder’s death to prevent fraud. Therefore, it’s important to have a payable on death (POD) beneficiary designated to ensure that your loved ones can access your money if you pass away.

Adding account holders to your bank accounts can make things easier for your heirs after your passing. However, it can have downsides while you are living. Note that most joint account holders are considered joint tenants with rights of survivorship (JTWROS). That means the account passes to the survivor(s) when an account holder dies.

The other people on your account may also be subject to gift tax and can withdraw funds from the account whether or not you want them to. The assets in the account are legally considered theirs to qualify for government programs or if they have a creditor with a judgment against them.

If you don’t set up anything before your passing, your accounts will go to probate and be distributed according to state probate law. Without a will, an executor will be appointed who will be responsible for paying off any creditors of the deceased. The remaining money will be distributed to the spouse and children of the decedent.

However, if the deceased has named a payable-on-death (POD) beneficiary for the account, they will get access to it immediately. They simply need to show the bank a death certificate and identification.

If you have a simple estate with no assets besides a bank account, adding a payable-on-death beneficiary to your account(s) is the easiest way to avoid probate. Ask an experienced estate planning attorney for assistance.

Reference: Investopedia (June 13, 2023) “What Happens to Your Bank Account After Death?”

Don’t Leave Grandchildren a Tax Bill

Changes in tax laws have made estate planning a top priority when it comes to leaving retirement savings accounts to heirs, says a recent article from The Wall Street Journal, “How to Leave Grandkids Your Retirement Savings—and Not a Huge Tax Bill.”

Heirs who are not spouses have to empty inherited retirement accounts within 10 years of the death of the original owners, with few exceptions. Before the law changed in 2020, heirs had decades to do this, enjoying tax-free growth.

For many families, these changes require drawing up new trusts and changing estate plans to maximize the family’s after-tax wealth. Some also make a series of Roth conversions or significant generation-skipping lifetime gifts.

How much is at stake? Americans held $12.5 trillion in IRAs as of March 31, and about half of households headed by someone 65 and older have an IRA.

A gradual conversion from traditional IRAs to Roth IRAs makes sense for many, so children and grandchildren can inherit the money tax-free. The taxes are being paid upfront. Once the money is in the Roth, it grows tax-free, and heirs can take it out tax-free when they inherit.

If the inheritance occurs during the grandchildren’s or parents’ highest earning years, they can cause a massive tax bill. Minor grandchildren might need to file a tax return to report the IRA payout, and the income could be taxed at the parent’s rate.

For many grandparents, the solution is to make lifetime gifts to grandchildren as soon as they are born, from paying for diapers and preschool to setting up 529 college savings plans and having trusts created and funded to save estate and generation-skipping transfer taxes.

Leaving an IRA outright to grandchildren, even with the ten-year payout period, is usually not a good idea. They may see the inheritance as a windfall and go through it quickly. Having conversations about your intention for their use of the money is a good idea. However, it’s not legally binding.

Inherited IRAs also come with administrative headaches. You can’t convert an inherited traditional IRA to a Roth IRA, add money to an inherited IRA, or combine an inherited IRA with your own IRA.

Leaving an IRA in a trust may seem complicated. However, it’s a worthwhile move if there are concerns about how parents or grandchildren might handle an inheritance. A trustee would distribute the money based on the terms set in the trust. This prevents the scenario of a young adult inheriting more money than they’ll know what to do with.

Your estate planning attorney will be able to help your family minimize the tax impact of inheritance with a comprehensive plan.

Reference: The Wall Street Journal (July 9, 2023) “How to Leave Grandkids Your Retirement Savings—and Not a Huge Tax Bill”

Should My Kids Get an Equal Inheritance?

Equal inheritances have become less common. According to research, the proportion of parents over 50 who reported treating children unequally in their wills rose from 16% to almost 35% between 1995 and 2010.

The News and Record’s recent article, “When Leaving an Unequal Inheritance Makes Sense,” says that leaving unequal inheritances can be risky. A third of Americans say their financial stability depends on receiving an inheritance, and the stakes can be high for siblings — and their parents.

It may be easier to divide your assets evenly among your beneficiaries. Still, you might feel strongly about helping an adult child who’s struggling or want to leave less to a child you’ve already financially supported. One of the most common reasons people leave unequal inheritances is to address uncompensated caregiving from an adult child. A 2018 Merrill Lynch and Age Wave study found that two-thirds of the respondents said that children who have provided care to them in their later years should receive a larger inheritance than those who didn’t.

When a child has had to compromise their lifestyle to care for a parent — such as giving up a job or working part-time instead of full-time — the parent understands the sacrifice and often wants to favor that child with the inheritance. And the Merrill Lynch and Age Wave study says many parents also feel that children who need the money most should get more. That may mean leaving less to relatively well-off kids.

While unequal inheritances are frequently designed to reward children for their help or to ensure kids are left in the best financial condition possible, fights can flare up if one sibling feels that another sibling didn’t “earn” the extra inheritance. Here are a few things that may help reduce any friction:

Explain your wishes. Explain what you’ve decided to leave your heirs and why before it’s too late. Include an estate planning attorney to be sure everyone understands the tax implications and liabilities associated with the assets.
Add a deterrent. Despite your explanation, your heirs may still not agree with your choices and decide to contest the will in probate court. You can discourage this by adding a no-contest clause stipulating, for instance, that anyone who contests the will and loses forfeits the right to any inheritance.
Invest in meaningful relationships. Financial need can certainly motivate a person to contest a parent’s will in court. However, emotional baggage can also have an effect. Sibling resentments can surface at the end of a parent’s life, and a larger inheritance may look like a preference for a “favored” child. The more secure children feel in their relationships with their parents, the more likely they will accept the decision to leave an unequal inheritance.

Reference: News and Record (April 13, 2023) “When Leaving an Unequal Inheritance Makes Sense”

What Should We Do with an Inherited Home?

Inheriting a house with siblings can raise some financial issues about what it means for each of you. Let’s look at some options for handling this situation and possible responses to any differences of opinion that may emerge.

NASDAQ’s recent article, “What to Do When Inheriting a House With Siblings,” says that consulting with an estate planning attorney can help untangle some of the sticky issues that can arise when a home is left to multiple people.

Several siblings can inherit the same piece of property, and when siblings inherit a home, everyone’s typically entitled to an equal share of the property. So, there are a few essential things you might need to do, including:

Putting the utility services in your or your siblings’ names;
Contacting the post office to have your parents’ mail forwarded to your address;
Going through your parents’ belongings;
Taking care of any necessary maintenance or repairs;
Updating payment information for the home’s insurance policy; and
Paying any outstanding charges associated with the home, such as HOA fees or property taxes.

After that, here’s what you might consider doing with the inherited property.

Sell. Selling is an obvious choice if neither you nor your siblings plan to live in it. Sell the home and divide the proceeds.

Buyout. If a sibling is reluctant to sell or your parents’ wills bar you from selling, you could try to work out a buyout. In that scenario, one sibling would maintain ownership of the home and pay the others an amount equal to what their share of the home is worth. Getting the home professionally appraised to determine its value is a good idea.

Renting. A third option is to rent out the home. The upside of this option is collectively sharing in the rental income from the property. This might make sense if you think you might revisit the issue of selling or a buyout in the future or if you’re obligated to keep the home in the family. If you go this route, you and your siblings will need to decide how maintenance and rent collection will be handled, and it might make sense to agree to hire a property management company to help.

Reference: NASDAQ (April 12, 2023) “What to Do When Inheriting a House With Siblings”

Planning for Aging without Family Caregivers

As they age, many people have diminished capacity and cannot care for themselves. They may no longer be able to walk or drive easily and can experience difficulty with basic activities like shopping, cooking, cleaning, and arranging important doctor’s appointments. Traditionally, the adult children of the elderly have been caregivers, monitoring their parent’s health and overseeing financial decisions, reports the article “ICYMI | Getting Older Without Family” from CPA Journal. Parents without children, or those without good relationships with children, need to make alternative arrangements. An experienced estate planning attorney can help.

Living arrangements. Most people prefer to remain in their homes, in familiar surroundings. This may work if the home can be made elderly-friendly and a support system is implemented. A home alert system or automatic daily call-ins can be arranged through friends or local police departments. If remaining at home is not viable, an assisted living facility or continuing care retirement community may be the next best option if the cost can be managed.

Healthcare matters. Having a healthcare advocate is advisable for everyone. So is a Healthcare Proxy, or Healthcare Power of Attorney, which designates a person to act as the patient’s agent in making decisions. A Living Will details the kind of treatment a person does or doesn’t want if they cannot express their wishes.

Finances. As they age, people may find managing their finances too difficult. There are several options, depending on the degree of help needed. A CPA or financial advisor may be able to provide money management services. Banks may permit an account owner to add the name of another person with signatory authority—they can sign checks but are not an account owner. A representative can be named to receive Social Security funds, and they must file reports with the Social Security Administration to show how the funds have been used.

Durable Power of Attorney. This is the most critical planning tool for seniors and others. This designates an agent to act on behalf of the elderly person in financial matters. It can be created to define the scope of the agent’s authority and remains effective when the elderly person becomes incapacitated. It must be created and executed when the person has the requisite capacity.

Trusts. A trust holds legal title to an older adult’s assets, including bank accounts, brokerage accounts, or their home. The trust is managed by a trustee for the benefit of the elderly person. There are several different trusts available, depending on the situation. A Living Trust can be used while the person can still manage assets and act as their trustee, retaining the right to revoke the trust and regain title to assets. If the person becomes incapacitated, another person named the successor or co-trustee takes over, assuming the trust has not been revoked. The trustee could be a trusted professional, a relative, or a bank trust department, which may be expensive but is a good option for an aging person with significant resources but no individual to serve as the trustee.

Instead of a living trust, the elderly person may set up an Irrevocable Lifetime Trust for Medicaid and long-term care planning purposes wherein someone else is designated a trustee from the start.

Aging alone may seem like a daunting experience, but with the right planning and support network in place, it can be rewarding, enjoyable, and safe.

Reference: CPA Journal (July 2023) “ICYMI | Getting Older Without Family”

What are Biggest Mistakes People Make with Social Security?

With so many ways to claim benefits, especially if you are married or were divorced at some point in your life, small mistakes can add up to a big difference in the amount of Social Security benefits you receive, says a recent article, “11 Social Security Mistakes That Can Cost You a Fortune” from Nasdaq.

Not checking your earnings record during your working life can add up to significant losses. Even if you’re decades away from claiming, you should check your earnings record annually since this is what Social Security benefits are based on. Common mistakes include employers recording incorrect earnings or earnings not showing up because you changed your name and the name change wasn’t processed correctly.

Check your statement annually to avoid losing the right number of benefits because of earnings record mistakes. If you see an error, send proof of your earnings to the Social Security Administration. You might submit your W-2 form if you’re a salaried employee or your tax return if you are self-employed. Once the SSA verifies your claim, your record will be corrected. This is a “sooner is better than later” task because you may not have a paper trail going back 30 years.

Another mistake people make is not working long enough. To qualify for Social Security, you need at least 40 work credits. Taxpayers earn up to four credits each year based on earnings. For example, in 2023, you must earn $1,640 to earn one credit or $6,560 to earn four credits. Benefits are calculated based on the average of the 35 highest earning years. If you haven’t worked for 35 years, $0 will be averaged for each year you don’t have earnings.

It’s wise to do the calculations for Social Security before retiring. As you approach your retirement date, check your earnings statement first to be sure you have enough credits to qualify for Social Security. If you don’t have 35 years, consider working another year or two. If you worked at a job where you weren’t paying into Social Security, adding another year of work could ensure you qualify and may also boost your monthly benefit amount.

Taking Social Security too early can take a big bite out of benefits. While everyone eligible can start taking benefits at age 62, for everyone born after 1959, the reduction for benefits at age 62 is 30%. This lower benefit is permanent and won’t increase until you reach Full Retirement Age (FRA). It’s best to wait at least until FRA. If you can wait past FRA, your benefits could increase by as much as 8% per year up to age 70.

Another mistake is waiting too long to claim benefits. If you live to the average life expectancy, it won’t matter if you claim benefits too early or late. The amount of the benefit reduction for claiming early and the increase in delaying a claim evens out. But if you are in poor health or have cash flow trouble, a benefit check at a younger age could be the right move.

If you file for Social Security benefits solely on your earnings record, you might miss out on a larger benefit. Let’s say you were a stay-at-home parent while your spouse worked. You may not have enough work credits to qualify, or your benefits may be small. However, you could still qualify for benefits under your spouse’s work record. Check to see how much you would be eligible to receive under your spouse’s work record before deciding how to claim benefits.

If divorced, you might claim benefits under your ex-spouse’s earnings record if you meet all the requirements. Suppose the marriage lasted at least ten years. In that case, you are 62 or older, unmarried, and your ex-spouse is eligible to receive Social Security retirement or disability benefits. Your benefit from your work is less than what you would receive under your ex-spouse’s earnings record; it’s worth exploring this option.

If you are married, it’s best to coordinate claiming strategies with your spouse. A low-earning spouse could start claiming benefits based on the higher-earning spouse’s income at full retirement age. Meanwhile, the higher-earning spouse delays benefits to increase retirement credits.

Finally, remember that up to 85% of Social Security benefits could be subject to federal income taxes if you earn substantial income from wages or dividends. The percentage of benefits subject to income taxes depends on the couple’s combined income, which includes the household Adjusted Gross Income (AGI), any nontaxable interest income, and half of your Social Security benefits.

Reference: Nasdaq (July 2, 2023) “11 Social Security Mistakes That Can Cost You a Fortune”

Estate Planning Blog Articles

Estate & Business Planning Law Firm Serving the Providence & Cranston, RI Areas

Special Needs Planning for Beneficiaries with Disabilities

Where Is the Best Place to Keep Your Will?