Background
Irrevocable trusts are created in two ways:

1. A revocable trust becomes irrevocable after the grantor has died.
2. An irrevocable trust is established while the grantor is living to save estate taxes (by removing assets from the grantor’s estate) and/or for asset protection or Medicaid (Medi-Cal in California) planning.

While a grantor may technically be allowed to serve as the trustee of an irrevocable trust he creates, it is not a good idea at best. That is because if the grantor has any discretion with trust asset distributions, it could lead to inclusion of the trust assets in his estate for tax, Medicaid and other purposes, which could frustrate the trust’s objectives.

Often there is someone the grantor knows who the grantor suggests to be the trustee. Typical choices are the grantor’s spouse, sibling, child, or friend. Any of these may be an acceptable choice from a legal perspective, but may be a poor choice for other reasons. For example, some families would be torn apart if one sibling had to ask another for a distribution.

Left to their own devices, clients trustee appointments will frequently be made (out of ignorance) with little consideration of the qualifications the trustee should have. Likewise, those who agree to be trustees typically have no idea what they are getting into. Non-professional trustees often are overworked, underpaid, unappreciated, find they are dealing with unhappy and unappreciative beneficiaries, and may even wind up being sued by the beneficiaries.

With this in mind, let’s look at some factors (non-tax and tax) that should be considered when selecting a trustee.

Non-Tax Considerations for Selecting a Trustee
Here are some of the characteristics that the client should consider in choosing an individual trustee:

Judgment: Clients typically want their trustee to make the same decisions they would. Someone who shares the grantor’s values, virtues, spending habits and faith is more likely to do this. Also, consider whether the trustee candidate will be aware of his own capabilities and weaknesses. If the trustee candidate does not have accounting or investment experience, would she have the judgment to admit this and engage an appropriate qualified professional?

Availability/Location: Does this trustee candidate have the time required to be a trustee? Will he be available when needed or will work and/or family demands leave too little time for trust responsibilities? Where does the candidate live? If the trustee lives in a place different than the trust situs, different laws may apply. Is living near the beneficiary important?

Longevity: How long will the trustee be needed? Many grantors are most comfortable with friends who share their values and have gained wisdom from life experiences, but someone near the grantor’s age may not live long enough to fulfill the job. A trust established for the grantor’s child will likely need a trustee for many years to come. Thus, for trusts that may last a long time, a corporate trustee is often the preferred choice.

Impartiality: The trustee must be capable of being impartial among the beneficiaries. This is especially difficult to do if the trustee is one of several beneficiaries. Corporate trustees, because they can be impartial, are often chosen to prevent a sibling or relative from being placed in an uncomfortable (and often unfair) position.

Interpersonal Skills: The trustee needs to be able to communicate well and effectively to the beneficiaries and to professionals who may be involved with the trust. Some people may be good record keepers or investors, but lousy at diplomacy or feel intimidated or even be offended if a beneficiary gets an attorney. A good trustee will need to be able to work calmly and well with all involved.

Attention to Detail: Does the trustee understand the serious duties that come with the job and is she willing to be accountable for her actions? Fiduciaries are often thought by the beneficiaries to be guilty until proven innocent. While it may not happen, the trustee should assume he will be sued at some point and keep meticulous records as a ready defense. A trustee who expects to be sued will be much better prepared than one who doesn’t think it will happen and, as a result, does not take the record keeping requirement seriously.

Investment Experience: While it is helpful to have investment experience, the trustee can certainly get by without it, as long as he/she recognizes this is an area for which to secure professional help. Also, if the trustee lives in a place different than the trust situs, different investment laws may apply, making it especially prudent or even essential to seek professional assistance.

Planning Tip: CPAs can make good trustees, but often are unwilling or unable (because of insurance considerations) to serve. Sometimes, the best choice would be a corporate trustee. Seldom will the unguided grantor even think of using a team, which can include both various professionals and friends and family members.

Fees: The non-professional trustee rarely discusses fees with the beneficiaries. Often, family members and friends will not charge a fee for their services out of a sense of family duty or respect for the grantor. But trustees should be paid and, more often than not, an unpaid trustee will eventually come to that conclusion or fail to diligently carry out his duties. From the outset, a trustee should keep close track of time and expenses so that a reasonable fee can be substantiated. Generally, a reasonable fee is what a corporate trustee would charge, so thinking that a non-corporate trustee will do the same necessary work for less is false economy.

Planning Tip: Become knowledgeable about the fees charged by corporate trustees in your area as a guideline. Talk about trustee fees when establishing the trust to avoid problems and misunderstandings later.

Insurance: Anyone serving as a trustee needs to have plenty of insurance (errors and omissions or liability). Some of the laws that govern trustees are absolute standards, so a trustee needs to have adequate insurance for protection in the event of a mistake or an innocent error. The amount of insurance needed can depend on the degree to which a trustee is indemnified. However, legal defense costs in trustee litigation can be very large and are typically borne by the insurer.

Indemnification: This often comes up when family members or friends are serving as trustee. Grantors want to indemnify family members and their friends; they do not want them to be sued. It is possible to reduce or eliminate the prudent investor rule for such trustees. However, indemnification is a two-edged sword because it may result in the non-professional trustee not taking the job seriously.

Planning Tip: A good alternative is to have a family member or friend serve with a corporate fiduciary that is assigned the administrative and investment responsibility. The family member or friend trustee could make or veto discretionary distributions, but having no oversight, administration, or investment obligations would be less likely to be sued if something goes wrong.

Planning Tip: Indemnification might be appropriate in a situation with obvious bad family dynamics, where the siblings are already fighting each other yet the grantor insists on naming one sibling as trustee. In such a situation, your recommendation to name a corporate fiduciary instead should be well documented.

Planning Tip: Waiving the prudent investor rule can also be helpful in other situations, depending on the use of the trust. For example, with the sale of an appreciated asset(s) to a grantor trust, the trustee is usually buying hard-to-value assets (real estate, wholesale business interest) from the client in order to shift future appreciation to the trust and away from the grantor. Rather than starting initially with a corporate fiduciary who is not familiar with the asset or situation, it may be more effective (saving both time and money) to have the initial trustee be someone close to the family who better understands the issues, and then change later to a corporate fiduciary. Waiving the prudent investor rule and providing indemnification for the initial trustee in this situation could make sense.

Planning Tip: Being able to waive all or part of the prudent investor rule when using an irrevocable life insurance trust (ILIT) gives greater latitude and peace of mind to make some of the transactions meet the unique needs of the client. Beware, however, of the risk that the trustee, shielded from liability, may fail to do the appropriate work to make sure that the insurance held in the ILIT is appropriate as markets change.

Note: Florida is considering a statute that would relieve trustees of the duty to review the propriety of investments in life insurance policies, which would, in effect, waive the prudent investor rule for life insurance policies owned by ILITs. This would help to solve the problem of corporate trustees not wanting to serve as the trustee of ILITs due to the obligation to review policies that have not performed very well.

Tax Considerations
Estate Tax
If a purpose of the trust is to remove assets from the grantor’s estate, the grantor cannot have any role in determining who gets distributions or when they occur. However, the grantor can have the power to remove and replace the trustee or to control the investments of the trust. Neither of those will cause estate tax inclusion providing the grantor cannot appoint a trustee who is related or subordinate to the grantor (as would be a brother, employee or someone else who will capitulate to the grantor’s wishes). Interestingly, there is no problem appointing, at the inception of the trust, an initial or successor trustee who is related or subordinate to the grantor.

Planning Tip: It is unclear if a grantor can have the right only to remove a trustee and allow the next named successor trustee to take over. While also unclear, it seems that a grantor can reserve the right to remove and replace someone who is not a fiduciary (for example, a trust protector).

Income Tax
A non-adverse trustee having certain powers may trigger grantor trust rules and cause the grantor to be taxed on the trust’s income. In some instances the client may not want the tax to come back to the grantor and instead want a trust that is a separate tax-paying entity for which the income that is distributed to the beneficiaries is be taxed to the beneficiaries.

Planning Tip: Because the trustee’s identity may affect state income tax as well, you may be able to shift the trust situs to a state with a lower income tax rate. Depending on the trust assets, this could be important as some investments (such as oil and gas) may be taxed significantly higher in some states than in others.

Beneficiary Removal and Replacement of Trustee
This is an area that is customizable for each trust and can help maintain some downstream flexibility. Some grantors may not want the beneficiaries to be able to remove the trustee, especially if the grantor is aware of family quarreling. But if the corporate or individual trustee knows it cannot be replaced there is little need for responsiveness or careful attention to investments. Because there does need to be a way to have the trustee removed if things should deteriorate, the document can include that the trustee can only be removed for cause as determined by the court. On the other end, spendthrifts may want to “trustee shop” until they find one that will do whatever they want, so there will need to be some restraints on when a trustee can be replaced.

Team Approach
There are times when a team can do a better job than a single trustee. Having more than one trustee, even with different duties and responsibilities, can work well for many situations. The trust can benefit from assigning the trustees specific duties based on their strengths and experience. Of course, the fewer people who are involved, the less complicated the administration. Also, disagreements will have to be worked out. If there are two trustees or any even number, deadlocks are possible. With an odd number, a simple majority would be needed. If an agreement cannot be reached, the court can be allowed to intervene as a last resort.

Also, as mentioned earlier, family member trustees can work with professionals as paid advisors instead of as trustees. This would allow the advisors to provide valuable input and insight into both the grantor’s desires and the personalities of the beneficiaries, without being so exposed to possible lawsuits.

Planning Tip: Ethical issues can arise if the attorney represents more than one trustee, so she should be sure to have a waiver of conflict or other plan in place.

Planning Tip: Naming someone as trustee is a nomination. The person named is under no obligation to accept the responsibility when the time comes, and it is not unusual for someone to refuse to serve or to step aside once he understands the duties and responsibilities involved. For this reason, it is important for the trust maker to name several successor trustees and to clearly communicate with each before finalizing the choices. Most drafting attorneys will also recommend naming a corporate trustee as trustee of last resort, especially if no procedure for appointing successors is provided to the beneficiaries, short of going to court.

The Trustee’s Duties and Responsibilities

Conclusion
A competent trustee is as important to the success of a trust as its being well-drafted. Naming a favorite family member as trustee may not be the smartest (or kindest) thing the grantor can do. As experienced professionals who have seen the consequences of unwise choices for trustee, we are in a unique position to counsel our clients with their and their beneficiaries’ best interests in mind.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances. ]]> http://mareklanker.com/2011/10/trustee-selection-for-irrevocable-trusts/feed/ 0 http://mareklanker.com/2011/09/understanding-the-significance-of-trusts/ http://mareklanker.com/2011/09/understanding-the-significance-of-trusts/#comments Mon, 19 Sep 2011 00:19:26 +0000 admin http://crawfordesign.com/mareklanker/?p=137 This issue of The Wealth Advisor addresses a topic that is important to many Americans yet is sometimes misunderstood – trusts. In the right circumstances, trusts can provide significant advantages to those who utilize them, particularly in protecting trust assets from the creditors of beneficiaries. Admittedly this can be a complex topic, but you see its implications in the headlines every day. This newsletter attempts to simplify the subject and explain the general protection trusts provide for their creator (the “trust maker”) as well as the trust beneficiaries. Given the numerous types of trusts, this newsletter explores only the most common varieties. We encourage you to seek the counsel of your wealth planning team if you have questions about the application of these concepts to your specific situation, or if you have questions about specific types of trusts.

Revocable vs. Irrevocable Trusts

There are two basic types of trusts: revocable trusts and irrevocable trusts. Perhaps the most common type of trust is revocable trusts (aka revocable living trusts, inter vivos trusts or living trusts). As their name implies, revocable trusts are fully revocable at the request of the trust maker. Thus, assets transferred (or “funded”) to a revocable trust remain within the control of the trust maker; the trust maker (or trust makers if it is a joint revocable trust) can simply revoke the trust and have the assets returned. Alternatively, irrevocable trusts, as their name implies, are not revocable by the trust maker(s).

Revocable Living Trusts

As is discussed more below, revocable trusts do not provide asset protection for the trust maker(s). However, revocable trusts can be advantageous to the extent the trust maker(s) transfer property to the trust during lifetime.

Planning Tip: Revocable trusts can be excellent vehicles for disability planning, privacy, and probate avoidance. However, a revocable trust controls only that property affirmatively transferred to the trust. Absent such transfer, a revocable trust may not control disposition of property as the trust maker intends. Also, with revocable trusts and wills, it is important to coordinate property passing pursuant to contract (for example, by beneficiary designation for retirement plans and life insurance).

Asset Protection for the Trust Maker

The goal of asset protection planning is to insulate assets that would otherwise be subject to the claims of creditors. Typically, a creditor can reach any assets owned by a debtor. Conversely, a creditor cannot reach assets not owned by the debtor. This is where trusts come into play.

Planning Tip: The right types of trusts can insulate assets from creditors because the trust owns the assets, not the debtor. As a general rule, if a trust maker creates an irrevocable trust and is a beneficiary of the trust, assets transferred to the trust are not protected from the trust maker’s creditors. This general rule applies whether or not the transfer was done to defraud an existing creditor or creditors. Until fairly recently, the only way to remain a beneficiary of a trust and get protection against creditors for the trust assets was to establish the trust outside the United States in a favorable jurisdiction. This can be an expensive proposition. However, the laws of a handful of states (including Alaska, Delaware, Nevada, Rhode Island, South Dakota, and Utah) now permit what are commonly known as domestic asset protection trusts. Under the laws of these few states, a trust maker can transfer assets to an irrevocable trust and the trust maker can be a trust beneficiary, yet trust assets can be protected from the trust maker’s creditors to the extent distributions can only be made within the discretion of an independent trustee. Note that this will not work when the transfer was done to defraud or hinder a creditor or creditors. In that case, the trust will not protect the assets from those creditors.

Planning Tip: A handful of states permit what are commonly known as domestic asset protection trusts. Given this insulation, asset protection planning often involves transferring assets to one or more types of irrevocable trusts. As long as the transfer is not done to defraud creditors, the courts will typically respect the transfers and the trust assets can be protected from creditors.

Planning Tip: If you are concerned about personal asset protection but are unwilling to give up a beneficial interest to protect your assets from creditors, consider a domestic asset protection trust or even a trust established under the laws of a foreign country.

Asset Protection for Trust Beneficiaries

A revocable trust provides no asset protection for the trust maker during his or her life. Upon the death of the trust maker, however, or upon the death of the first spouse to die if it is a joint trust, the trust becomes irrevocable as to the deceased trust maker’s property and can provide asset protection for the beneficiaries, with two important caveats. First, the assets must remain in the trust to provide ongoing asset protection. In other words, once the trustee distributes the assets to a beneficiary, those assets are no longer protected and can be attached by that beneficiary’s creditors. If the beneficiary is married, the distributed assets may also be subject to the spouse’s creditor(s), or they may be available to the former spouse upon divorce.

Planning Tip: Trusts for the lifetime of the beneficiaries provide prolonged asset protection for the trust assets. Lifetime trusts also permit your financial advisor to continue to invest the trust assets as you instruct, which can help ensure that trust returns are sufficient to meet your planning objectives. The second caveat follows logically from the first: the more rights the beneficiary has with respect to compelling trust distributions, the less asset protection the trust provides. Generally, a creditor “steps into the shoes” of the debtor and can exercise any rights of the debtor. Thus, if a beneficiary has the right to compel a distribution from a trust, so too can a creditor compel a distribution from that trust.

Planning Tip: The more rights a beneficiary has to compel distributions from a trust, the less protection that trust provides for that beneficiary. Therefore, where asset protection is a significant concern, it is important that the trust maker not give the beneficiary the right to automatic distributions. A creditor will simply salivate in anticipation of each distribution. Instead, consider discretionary distributions by an independent trustee.

Planning Tip: Consider a professional fiduciary to make distributions from an asset protection trust. Trusts that give beneficiaries no rights to compel a distribution, but rather give complete discretion to an independent trustee, provide the highest degree of asset protection.

Lastly, with divorce rates at or exceeding 50% nationally, the likelihood of divorce is quite high. By keeping assets in trust, the trust maker can ensure that the trust assets do not go to a former son-in-law or daughter-in-law, or their bloodline.

Irrevocable Life Insurance Trusts

With the exception of domestic asset protection trusts discussed above, a transfer to an irrevocable trust can protect the assets from creditors only if the trust maker is not a beneficiary of the trust. One of the most common types of irrevocable trust is the irrevocable life insurance trust, also known as a wealth replacement trust.

Under the laws of many states, creditors can access the cash value of life insurance. But even if state law protects the cash value from creditors, at death, the death proceeds of life insurance owned by you are includible in your gross estate for estate tax purposes. Insureds can avoid both of these adverse results by having an irrevocable life insurance trust own the insurance policy and also be its beneficiary. The dispositive provisions of this trust typically mirror the provisions of the trust maker’s revocable living trust or will. And while this trust is irrevocable, as with any irrevocable trust, the trust terms can grant an independent trust protector significant flexibility to modify the terms of the trust to account for unanticipated future developments.

Planning Tip: In addition to providing asset protection for the insurance or other assets held in trust, irrevocable life insurance trusts can eliminate estate tax and protect beneficiaries in the event of divorce. If the trust maker is concerned about accessing the cash value of the insurance during lifetime, the trust can give the trustee the power to make loans to the trust maker during lifetime or the power to make distributions to the trust maker’s spouse during the spouse’s lifetime. Even with these provisions, the life insurance proceeds will not be included in the trust maker’s estate for estate tax purposes.

Planning Tip: With a properly drafted trust, the trust maker can access cash value through policy loans. Irrevocable life insurance trusts can be individual trusts (which typically own an individual policy on the trust maker’s life) or they can be joint trusts created by a husband and wife (which typically own a survivorship policy on both lives).

Planning Tip: Since federal estate tax is typically not due until the death of the second spouse to die, trust makers often use a joint trust owning a survivorship policy for estate tax liquidity purposes. However, a joint trust limits the trust makers’ access to the cash value during lifetime. In these circumstances, consider an individual trust with the non-maker spouse as beneficiary.

Conclusion

You can protect your assets from creditors by placing them in a well-drafted trust, and you can protect your beneficiaries from claims of creditors and predators by keeping those assets in trust over the beneficiary’s lifetime. By working together with your other wealth planning professionals, we can ensure that your planning meets your unique goals and objectives.

Suddenly, the federal estate tax exemption increased to $5 million ($10 million for a married couple with proper planning). As a result, most people are not affected by the federal estate tax if they die this year or next. Because the news reports did not focus on the “this year or next” part, many people took this to mean that they no longer need to do any estate planning. But that couldn’t be further from the truth. Most of the reasons families need to plan their estates are unrelated to estate taxes, and those tax changes are only until 2013.

In this issue of The Wealth Advisor, we will look at what people want in their estate planning, why failure to plan is courting disaster, and how the power of trusts can help you achieve your estate planning needs and desires.

Changing the Focus . . . For Now

For years, one of the major factors in estate planning was avoiding the federal estate tax. Until 2000, the estate tax kicked in at $675,000. As the estate tax exemption began to increase, albeit only for those who died before 2011, that motivator declined in significance. The new law temporarily removed tax planning as an immediate need for the vast majority of Americans. Some have been lulled into a false sense of security thinking that the estate tax will never affect them.

They have lost sight of the fact that the current tax law was only a two-year deal that Congress made with the President. It expires on January 1, 2013, and could end sooner. It came out of a compromise quickly reached. And so could the next tax change. Don’t use the “wait and see what Congress will do” excuse to postpone your estate planning. Now, not later, has always been and remains the right time to focus on what you and your loved ones really want and need from estate planning.

What Do People Want from Estate Planning?

Most of us have needs and desires for ourselves and our loved ones that are timeless and that no Congress can ever legislate away. See how many of these apply to you.

For Ourselves: Protection and Control. We want control over our assets and health care decisions. We want financial security. We want to be protected from the risks of life, which include unjust lawsuits, disability, and the cost of long-term care. Some of us have philanthropic goals, too.

For Our Surviving Spouse: Financial Security. We want to know that our surviving spouse will be financially secure and will be protected from taxes, primarily from income tax.

For Our Children and Grandchildren: An Education and Financial Security, including Asset Protection from Immaturity, Divorce and Lawsuits. We also want to know that assets that are not needed by our surviving spouse will go to our children, not to a new spouse and then his or her children.

Another big motivator for planning can be protecting assets from gift, estate and income taxes for as long as possible, which today can be forever. We want our descendants to live successful lives that include a work ethic, integrity, faith, and appreciation and respect for other family members. Above all, we want our family members to love each other, spend time together and avoid conflict. We do not want them to be harmed by the wealth that is left to them. This is often far more important to us than tax planning.

For Our Business: Attract and keep quality talent and preserve the value we have built up through our hard work. Building a business, whether it is a store, manufacturer, or agricultural operation, is hard work. We don’t want that work to have been wasted. We want our business to pass to family members who want to own and operate it, while treating non-participating family members fairly, or we want to sell it to employees or outsiders for a fair price.

The Consequences of Not Planning

Each of these needs and desires requires proper planning to achieve. They will not just happen because you want them to. If you do not plan, you and your family will be under the default plan established by your state’s legislature. Sad experience tells us that it very probably will not be what you would want. For example, in most states, your estate will be divided between your surviving spouse, who will get half, and your descendants, who will get the other half. In some states, all would go either to your surviving spouse or your children, depending on the facts of your case. Under any of those systems, your surviving spouse might get fewer assets than needed or intended. Under every state’s default laws, adult children receive their full inheritances right away and minor children receive theirs when they turn 18, both with no controls or conditions. Without a plan to replace you as owner, your business may have to be liquidated.

The simple truth is this: to meet your needs and realize your desires you must take the time both to plan and to put that plan in place.

How to Find the Right Professionals to Help You

Instead of looking for someone who will sell you a will, a living trust or an insurance policy, look for professionals who are interested in protecting you, your family and your business. They are not just selling you a product and then moving on.

You will be best served by working with a team of professionals: an experienced estate planning attorney, an accountant, a financial advisor and/or insurance agent, possibly even a planned giving professional. This team will be able to provide thoughtful solutions to your needs from a variety of perspectives, coming up with a cohesive plan that will best suit your needs and goals. Be patient during this process; it could take two to four meetings before everything is finalized and put into place.

Planning Tip: Start with a trusted advisor and ask for recommendations for others who could be brought onto your team. Also, if there is anyone else (good friend, relative) you might consult, be sure to let the team members know. It may be helpful to have that person included at some point in the process so they will understand what your advisors are proposing, and that will allow this person to be a better sounding board for you.

Harnessing the Power of Trusts in Your Planning

Trusts are powerful tools that can be used to achieve specific estate planning goals. Here are some ideas, using trusts, that will work for most people, regardless of the size of your estate.

Idea #1: Keep Assets in Trust

Holding assets in trust is good for you, for your surviving spouse, and for your children and your grandchildren. Assets kept in a trust can be protected from predators (including your surviving spouse’s next spouse), irresponsible spending, creditors, divorce, etc. Assets in a trust can also provide for a loved one with special needs, without losing valuable government benefits. Ask yourself this question: If you could protect the assets you worked so hard to acquire, why would you not?

Idea #2: Think Differently about Your IRA and Other Tax-Qualified Plans

Most people want to maximize the stretch out of an IRA and keep the tax-deferred growth going for as long as possible, but don’t know how best to do it. There is a way to use a special trust to maximize stretch out and provide long-term divorce and lawsuit protection. And it will apply to many families with “average” sized estates and IRAs.

• Step 1: Leave your IRA to a retirement plan trust for the benefit of younger generation family members (children or grandchildren). The young age will provide the maximum stretch out and the trust will
  provide them protection from losing it in a divorce or to creditors. An outside trustee can prevent a beneficiary from “cashing out early” and preserve the intended stretch out.
• Step 2: Use the required minimum distributions you must take from this IRA to purchase life insurance on your life. But do it through an Irrevocable Wealth Replacement Trust that will benefit your surviving spouse. When you die, your surviving spouse will have lifetime access to the proceeds in the trust. This can be a much better deal for your surviving spouse than inheriting the IRA because the distributions from the IRA will be subject to income tax, while the proceeds from the life insurance in the trust will be tax-free. The trust design will provide for successor beneficiaries if your spouse dies before you.

To make these benefits clear for you, we can run projections with your spouse as the beneficiary of the IRA and a child/grandchild as the beneficiary. The results will be quite impressive.

Charitable Variation: Alternatively, you can make a charity or religious group the beneficiary of the IRA, and it will receive the proceeds taxfree. Again, use the required minimum distributions while you are living to purchase life insurance through an irrevocable trust that will benefit your surviving spouse.

Idea #3: Use the $5 Million Gift Tax Exemption Now In the new tax law, Congress also temporarily increased the gift tax exemption to $5 million ($10 million for married couples). We may have this through 2012, but it could disappear even sooner as Congress begins to focus on how to raise revenue and cut spending. If you have a substantial estate, you can use this exemption to move assets and future appreciation out of your estate now in the likely event that a lower estate tax exemption returns. For example, you could use the $5 million gift tax exemption to fund a large life insurance policy in an irrevocable trust that can build up cash value for a supplemental retirement fund or provide an alternative
financial investment. A second-to-die policy to pre-fund estate taxes could also be purchased. The $5 million exemption can also be used to fund other “advanced” planning options.

Planning Tip: There are two relatively easy ways to give you access to insurance owned by an irrevocable trust. First, the trust can be set up so that the trustee can make withdrawals or loans from the cash value of the policy and then lend the proceeds to you. It can be an interest-only loan during your lifetime, with no additional income tax due; at your death, the loan can become a debt of your estate. (It must be a credible loan, fully documented, and you must have the means to make the interest payments.) Alternatively, the distributions can be made to your spouse, on the assumption that you will stay married and your spouse will “share” the proceeds with you.

Idea #4: Use Trusts to Create a Non-Financial Legacy Creating a non-financial legacy can be quite powerful. You can write your motivations for the planning and explain discretionary guidelines. If there is heirloom property that is sentimental or historical, you can provide a handwritten note with a story or significance of the item(s). After your trust has been signed and your plan put in place, we can arrange for a family meeting: in person for those who live in the area and/or via Skype for out-of-towners. We can talk about the planning that has been done and why. This is good for your beneficiaries, as it brings them into the process and helps them understand your motivations, the planning and your intended results.

Conclusion

The new tax law has definitely not changed the need for each of us to make and implement an estate plan. It has only changed the need for estate tax avoidance for those who are certain to die before the end of 2012.

The power of trusts can be a big motivator and can help you achieve your goals. Don’t sit around waiting to find out “what Congress will do” and hoping it will be good for you. Call us. We can help you understand where you are now, put together a team of qualified professionals, help you determine your needs and goals, work with you to create the plan you want and need, and help you put your plan in place.

The Increasing Need for Special Needs Care and Planning

Chances are there is or will be someone in your family (child, grandchild, nephew, niece, parent, grandparent) who will need longterm help managing personal care and/or finances. A quick look at the following statistics confirms that the need for special needs care and planning is increasing:

• In 1992, there were 15,580 children ages 6-22 who were diagnosed as having what is now called an Autism spectrum disorder. In 2006, the number was 224,594.
• In 2006, there were an estimated 24.9 million adults in the United States with Serious Psychological Distress.
• An estimated 4.4 % of U.S. adults may have some form of bipolar disorder during some point in their lifetime.
• In 2006, an estimated 22.6 million people in the U.S. (9.2% of the population age 12 or older) were substance dependent or abusive in the previous year.

Because many of the conditions causing a need for special care do not decrease life expectancy, families are seeking answers on how to provide the best quality of life for their loved ones for the rest of their lives . . . which, for a young child, could be 70 years or longer.

Fewer Programs Are Available

At the same time that the need for support services is increasing, government and non-government programs are being reduced and even eliminated due to the strain on state and local budgets and pressures to reduce deficit spending at the federal level. Once a program benefit is lost, for whatever reason, it may be difficult if not impossible to get it back.

Many families with special loved ones are losing faith that these programs will be there to provide the needed benefits in the future. They are wisely (and often fearfully) looking at alternatives to provide those services. Common concerns are:

• Who will care for my loved one when I am gone?
• Who will be my loved one’s advocate?
• Where will my loved one live?
• How much independence can my loved one maintain?
• Will the money I provide last for my loved one’s lifetime?

Preserving Government Benefits/Special Needs Planning Today

Are government benefits for a special needs person worth preserving? For families of modest or limited means, the answer is almost always, “Yes.” However, for more affluent families, the answer may be, “Maybe not.” In the past, many planners focused exclusively on preserving public benefits at all costs. Today, special needs planning is not necessarily “poverty planning.” The proper focus today is how to provide the best quality of life throughout the person’s lifetime. It may be better to privatize some special needs care instead of spending thousands to protect a benefit that has a low probability of being available in the future.

Careful planning is necessary to craft a plan that will supplement government benefits that are worth preserving, is flexible enough to adjust to changes in future benefits, will preserve and expand assets, will make sure this person receives proper care, and may even save taxes.

It Takes a Team

For a special needs trust, the proper funding, implementation and periodic review are especially critical because it may have to last a lifetime and often cannot be replaced. Once the plan is in place, it will be need to be managed. Who should do that? The ideal trustee would:

• use discretion, acting in the best interest of the disabled beneficiary;
• understand public benefits and keep up with changes in the law;
• wisely invest and conform to all statutory fiduciary requirements;
• understand taxes;
• keep perfect books;
• provide advocacy and prevent abuse; and
• be immortal.

Since no one person can meet all of these requirements, often the most effective solution is to divide the responsibilities into areas and have a team of professionals work together. For example:

• A Corporate Fiduciary Trustee (bank or trust company) keeps perfect books; carries insurance, is bondable or has deep pockets; is immortal.
• A Care Manager uses discretion and acts in the best interest of the beneficiary; understands public benefits; provides advocacy and prevents abuse.
• A Financial Advisor invests wisely; conforms to all statutory fiduciary requirements; understands taxes.
• A lawyer skilled in special needs matters keeps up with the everchanging laws and regulations and provides wise counsel to the family and the other team members.

Often a professional trustee will manage the funds, make distributions, prepare tax returns and keep the records, but will be directed by a Trust Advisory Committee that makes distributions, can amend the trust or replace the trustee. A care manager can be on this committee or be appointed by the committee. Another alternative is to have a trustee manage the funds but be directed by a care manager who interacts with the beneficiary. A trust protector or advisor would oversee the trustee and care manager from a distance and would be able to replace either for any reason.

Planning Tip: Many parents think a sibling would be the best trustee, but this is rarely a good idea. Most individuals are just not prepared to handle the responsibilities. A professional trustee likely will, in the long run, be less expensive than the mistakes that are often made by a well-meaning but inexperienced family member. Also, some siblings may be torn between using the trust assets to provide for the beneficiary and preserving the assets, especially if they will inherit the assets after the beneficiary dies. It is usually better to have a professional as trustee, and have the family member be on the Trust Advisory Committee or to be the trust protector.

Planning Tip: The role of the care manager is critical. In most families, one person has been a fierce advocate, actively seeking benefits and supervising the special needs person’s care and progress. The care manager will assume that role and will become the beneficiary’s advocate, seeking and evaluating benefits and programs, supervising the person’s care and preventing abuse. Selecting a care manager while the current advocate is living will give families peace of mind that their loved one will have the quality of life they so strongly desire.

Managing the Trust Assets

Careful investment of the trust assets is critical, since loss of these assets could be catastrophic for the beneficiary. The assets will need to earn or grow enough to provide for or supplement the beneficiary’s care. Trust income can be distributed in such a way that it is taxable to the beneficiary (because the beneficiary will typically be in a much lower tax bracket than the trust itself), but without unintentionally jeopardizing any public benefits the beneficiary may be receiving. This can often be accomplished by having the trustee make direct payments to the providers for care and/or supplemental benefits.

Planning Tip: Insurance on the life of a parent or grandparent is often used to fund these trusts. Using a separate, stand alone trust (instead of a parent’s revocable living trust) will also allow other family members to make gifts to support the beneficiary.

Planning Tip: Tax planning combined with special needs planning can present some unique opportunities. For example, using qualified plans to fund these trusts can offer tax advantages. Charitable trusts can also be used to benefit both the beneficiary and an organization. Families are often grateful to organizations that have provided assistance and benefits to the family member and to them, and often want to help make sure these organizations can continue to provide services to not only their loved one but to other families in the future.

Planning Tip: Families with affluent means will be able to provide more opportunities for their special needs beneficiary. For example, purchasing a home in a residential community will guarantee your loved one will always have a familiar, safe home.

Conclusion

If you or someone close to you has a loved one with special needs, we can help with all phases of the planning and implementation. Contact our office for a consultation.