CURRENT ISSUES IN THE AREAS OF ESTATE, TAX
AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
Beware Of “Do It Yourself” Estate Planning. People should be advised to be extremely cautious about trying to write their own wills and trusts or implementing other planning arrangements through beneficiary designations regarding life insurance, IRAs and annuities. Some people have tried to videotape or audiotape their wills, and such wills are not valid. Hand-written or “holographic” wills may be valid in certain limited circumstances in some states, but they generally are not effective to pass the entirety of a person’s estate. Some states recognize a “statutory” will, which is a pre-printed, fill-in-the-blanks or check-the-boxes form authorized in some states. While it has the advantage of being relatively cheap and simple, it most likely would not operate effectively except in the simplest of circumstances. It should be remembered, as readers of this newsletter should be well aware by now, that your will or trust does not operate on or control assets which pass by a beneficiary designation. Since beneficiary assets frequently comprise the largest part of a person’s estate, even a well-written will often fails to pass assets in the desired manner. As I have written before, I estimate that at least 90 percent of all estate plans that I have reviewed are not implemented correctly because the beneficiary assets did not correspond with the provisions of the will or trust, or in the case of a trust, because the assets were not properly transferred to a trust or specified to pass by an appropriate beneficiary, pay-on-death or transfer-on-death designation. Please be advised that issues involving beneficiary assets, including POD and TOD designations, can be extremely complex. Although TOD designations are permitted in approximately 48 states, not all states allow real estate to pass by a TOD designation, and the rules differ from state to state. A TOD designation to children which does not include a reference to a per stirpital distribution in the case of a deceased child’s children would mean that only the living children would receive the TOD assets. It cannot be emphasized enough that these issues are extremely complex. Estate planning and its associated tasks are frequently as complex as major surgery and for a person to undertake to implement those arrangements on their own is akin to removing your own appendix – not a very good idea!
Retirement Benefits For A Surviving Spouse Under Age 59½. A surviving spouse who is under age 59½ and who inherits retirement benefits may leave the benefits in the name of the deceased spouse, and then be able to withdraw the benefits at any time penalty free, but subject to income tax, of course. This is because the 10% early distribution penalty does not apply to a death benefit. However, the surviving spouse’s subsequent death will often result in unfavorable distribution options. If the surviving spouse takes the benefits and rolls them over into the surviving spouse’s own retirement plan, the result will usually be more flexible distribution choices for his or her beneficiaries when the surviving spouse later dies. However, the account would then be the surviving spouse’s account and the surviving spouse would not be able to withdraw from the account until the surviving spouse attains age 59½ unless the surviving spouse is willing to pay the 10% penalty or qualifies for an exception, such as for a disability. There are planning options that should be considered when a surviving spouse confronts these choices. If it is better for the spouse to leave the inherited benefits in the account so that the surviving spouse can withdraw them without penalty, it might make sense to purchase life insurance to provide a more desirable financial result for the surviving spouse’s beneficiaries. The closer the surviving spouse is to age 59½, then the less advantageous would be the option of leaving the account in the deceased spouse’s name as an inherited account. If it is unlikely that the surviving spouse will need to withdraw the money, then it will generally be best to roll the assets over into the surviving spouse’s own IRA. As an alternative, funds could be left in the inherited account to meet the surviving spouse’s needs until he or she reaches age 59½, and the remaining funds could be rolled over into the surviving spouse’s own IRA. Please note that if the retirement plan requires the surviving spouse to take a lump sum distribution of the inherited benefits, the surviving spouse could still roll those funds over into an inherited IRA in order to be allowed to withdraw those assets penalty free.
Special Needs Trust Fairness Act. The Special Needs Trust Fairness Act (SNTFA) was signed into law and became effective on December 13, 2016. This was one of the top priorities of the National Academy of Elder Law Attorneys (NAELA) for the last several years. It allows an individual with a disability to set up his or her own “self-settled” special needs trust, typically called a “(d)(4)(A)” trust or an “under age 65″ trust. The SNTFA involves a simple amendment to the Social Security Act to allow an individual, as well as a parent, grandparent, legal guardian, or a court having jurisdiction, to establish a self-settled special needs trust. For some reason, when the Omnibus Budget Reconciliation Act of 1993 was enacted which codified the ability for persons with special needs to establish a trust to supplement public benefits, the law did not permit individuals to establish their own (d)(4)(A) SNTs. This would seem to have been a mere omission or error since a “pooled” trust SNT such as the SWIRCA & More Pooled Trust (please refer to previous editions of this newsletter, and in particular, the February 2017 issue), could be self-settled and there would appear to be no reason or legal basis for the distinction. Nevertheless, due to strict enforcement of this omission, a person with disabilities who did not have a living parent or grandparent was forced to spend time and money to go through court to have a judge approve the trust either directly or through a guardianship proceeding. The SNTFA is the second law in as many years liberalizing the use of funds on behalf of persons with disabilities. In 2015, Congress enacted the ABLE law that allows persons with disabilities to have accounts that are sheltered from being counted as a resource for public benefits eligibility. Unfortunately, there are significant limitations on the use of ABLE accounts. A self-settled SNT does not contain many of the restrictions which would be applicable to ABLE accounts. For additional information regarding ABLE accounts, please refer to previous issues of this newsletter, and in particular the August 2015 issue, and also please refer to my website, www.rkcraiglaw.com, and in particular in the section containing articles and links, refer to the materials referenced in the 2015 Elder Law Developments article and the 2016 Elder Law Developments article.
Use Of A “Minor’s Trust”. A so-called “minor’s” trust is authorized under Internal Revenue Code § 2503(c). In the case of a minor’s trust, gifts can be made to the minor through the trust, and the trust provides that the minor will receive the trust funds when he or she attains the age of 21. Such a trust is often written to give the minor a right of withdrawal for a limited period of time at age 21, and if the funds are not withdrawn, then the trust will continue until a later age. In the case of a gift made for the benefit of a beneficiary under the Uniform Transfers to Minors Act (UTMA), the gifted funds will be held in a custodial account for the benefit of the minor until the age of 18 (or age 21 if so specified), and then the funds will be distributed to the minor. A UTMA account is a sort of “quasi-trust” in that the custodian operates in a fiduciary capacity and should use the funds as provided by statute only for the benefit of the beneficiary.
Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.