Leaving a Legacy for Your Disabled Child

 Your Children with Disabilities Will Become Ineligible for Benefits…

Unless You Act!

Parents of children with mental or physical disabilities face a variety of challenges in ensuring their children can successfully navigate life with and without them. Because people with disabilities are living longer due to advances in healthcare and other enabling strategies, they are increasingly outliving their parents. This necessitates that planning for their future care should begin as early as possible, especially with respect to estate planning. In most instances, leaving even a moderate-sized inheritance outright to a loved one with special needs will result in that person becoming ineligible to receive government benefits such as Supplemental Security Income (SSI) or Medicaid medical coverage. Enter the Special Needs Trust. Because the assets are controlled by the trust rather than the child, the child may benefit from the assets in their trust without losing eligibility for their deserved government benefits.

Understanding a Special Needs Trust

The future of children with a disability is less stable than those without, and they may be looking at a future of lifelong help. Because many of these individuals may not hold a job that gives them access to health insurance, coverage under Medicaid is critical when they are no longer covered by their parents. Medicaid is only available to people who have very limited income and resources. Hence, an inheritance leaving money directly to the individual will disqualify them from Medicaid.

With a Special Needs Trust, the assets are placed in trust for the benefit of the special needs beneficiary. This person doesn’t have control over the trust funds—they are under the control of the trustee the parents chose. Because of this structure, the funds are not viewed as a resource of the beneficiary and can therefore be set aside to pay for other expenses besides healthcare, food, clothing, and shelter. Examples of qualifying expenditures out of the trust are a motorized wheelchair or specially-equipped van, household furnishings, educational pursuits, or even some entertainment-oriented purchases.

A Special Needs Trust is organized like other trusts in that there is a settlor (or grantor) who creates the trust, a beneficiary (in this case the person with special needs), and a trustee who is responsible for managing the money for the person with special needs. You should consider choosing someone who really understands the needs of your child and who you can trust wholeheartedly.

The Trustee’s responsibilities include:

  • Manage and invest trust funds in accordance with the terms of the trust document and state law
  • Spend trust assets only for the beneficiary
  • Understand the SSI and Medicaid laws to not run afoul of the government benefits
  • Keep careful records of all spending
  • File federal and state trust tax returns
  • Decide how to use trust funds to meet the beneficiary’s ongoing needs

Taking The Right Steps

A Special Needs Trust has complexities, so be sure to partner with an estate planning attorney who understands the nuances of setting up the trust properly and can educate the trustee as to their responsibilities. If you have a beneficiary of ANY AGE with special needs, you should consider a Special Needs Trust. CunninghamLegal has certified specialists in estate planning, trust and probate law who will listen to your unique needs and put a plan in place that makes sense for you and your family.

 

Jeffrey S. Rosen, Attorney at Law

626.585.6970

team@162.144.216.105

2700 E. Foothill Boulevard
Suite 306
Pasadena, CA 91107

 

 

 

 

 

Is an AB Trust Still Effective?

Is the AB Trust Still Part of Your Estate Plan? Should It Be?

An AB trust is a joint trust commonly created by a married couple to minimize estate taxes prior to the considerable increase in federal estate tax exemption. This trust is funded with assets of each spouse and divides into two separate trusts (Trust A and Trust B) upon the death of the first spouse.

The AB trust plan results in the B Trust, or bypass trust, being funded upon the death of the first spouse with an amount equal to the applicable estate tax exclusion amount. Any remaining estate assets (1/2 of the deceased spouse’s community property and separate property of the surviving spouse) are placed into the A Trust, or survivor’s trust. The assets required to fund the B Trust do get an adjusted basis on the death of the first spouse, but do not receive a second adjusted basis upon the death of the surviving spouse. Consequently, inheritors of the trust assets at the surviving spouse’s death will not inherit the assets at fair market value and face potential significant capitals gains tax upon sale of those B trust assets.

Due to the increase of the federal estate tax exemption over the past few years (currently $11,200,000 million per person and $22,400,000 million per couple when a surviving spouse elects portability), most married couples are more concerned with avoiding income and capital gains tax rather than estate tax. Portability is a federal tax provision that allows the first spouse to leave all of his or her assets to the surviving spouse. Portability affords an incentive to move away from the AB trust because with today’s $11.2 million exemption amount, a couple can protect $22.4 million without using AB trust planning. Instead, an estate plan that gives the surviving spouse flexibility and control over the trust estate is the better option to avoid estate tax and reduce income tax and potential capital gains tax exposure.

Understanding the B Trust

The requirement to fund and maintain a B Trust is the responsibility of the trustee, typically the surviving spouse. There are several factors to consider and understand regarding the B Trust:

  1. The B trust becomes irrevocable upon the first spouse’s death(surviving spouse cannot revoke, amend, or change the provisions of the B trust).
  2. The surviving spouse’s use of the assets in the B trust are typically limited to the principal amounts for health, education, maintenance, and support.
  3. The trustee is liable to the future “inheritors”of the B trust for appropriately using the assets and rendering yearly accountings.
  4. The trustee must provide a copy of the terms of Trust B to the heirs and future beneficiaries.
  5. The trustee must properly allocate, title assets in, obtain a tax ID number for, and maintain the B trustafter the first spouse’s death.
  6. The trustee must accurately track and keep records of the assets and transactions of each trust and complete separate tax filings for the A & B trusts each year.

It is imperative that you have your estate plan reviewed periodically to ensure your plan evolves with changes in the law and the wishes of you and your spouse. The structure of the AB trust may or not be the best option for your family. If this is your current plan, we would like to discuss the consequences of this structure with you.

Please contact us today for your complimentary estate plan review.

 

Rachelle Lee-Warner, Attorney at Law

805.484.2769

team@162.144.216.105

771 E. Daily Drive
Suite 350
Camarillo, CA 93010

Understanding Prop 13

Proposition 13: How Not to Lose it

Proposition 13 has saved many homeowners from losing their homes by keeping property taxes low. Passed by voters in 1978, Proposition 13 lowered property taxes to 1% (from 2.67%) of the full value of the property. Equally as important, Proposition 13 capped the increase in taxes to a maximum increase of 2% per year regardless of the value of the property. A reassessment of the property tax can only be made when the property ownership changes or there is construction done. Pretty simple right? This system has resulted in many homeowners who have owned their home for some time paying significantly less in real property taxes then their neighbors.

Did you know that you can transfer this benefit to your children?

As I mentioned, when a property changes hands–either through a sale or death–it is reassessed. This means that whatever the value of the home is on the date of transfer, the county assessor values the property and imposes property taxes of approximately 1% of the value of the property. If a person has lived in their home for a long time, this reassessment and subsequent taxes can be significant. Yet when the transfer occurs between a parent and a child, the child can inherit the low Proposition 13 tax basis. There are some catches, however.

This “inheritance” of the low tax basis does not happen automatically; each child must file papers with the county very soon after the date of transfer. But what if you don’t get this paperwork filed in time? The answer is that the property gets reassessed. But when the property gets reassessed is very important.

Lessons from Abigail’s Story

Take for example Abigail. Abigail is an elderly woman with three children. Abigail bought her home in 1975 for $20,000. The home is now worth $1,000,000. Abigail’s property taxes are $500 per year. Abigail’s next-door neighbor just purchased a similar home for $1 million. The neighbor’s property taxes are $10,000 a year. This is Proposition 13 at work.

For five years preceding her death, Abigail is in need of in-home care and her daughter Betty takes care of her. Betty puts her life on hold and cares for her mother. Betty also moved into the house to care for her mother. Abigail has two other children Charlie and Danny.

When Abigail finally dies, Betty, Charlie, and Danny all agree that Betty should be able to live in the house for as long as she wants because she took care of Abigail for so long. Betty continues to pay the bills and the property taxes. Abigail’s property tax bill is $500 per year. Nobody tells the county assessor that Abigail has died. The assessor doesn’t know Abigail died until the right form is filed with the assessor’s office. After ten years, Betty decides that it’s time to sell the house and move on. Betty, Charlie, and Danny finally look at mom’s living trust. Since Abigail had a living trust, the children are able to sell the property without probate.

Eleven months after the sale, Betty, as trustee, receives a “Supplemental Unsecured Property Tax” bill in the mail. Because Betty never told the county assessor’s office that Mom died 10 years before, the children were unable to file the necessary papers to avoid reassessment of the property – which would have avoided an increase in property taxes. The assessor has no choice but to reassess the property as of Abigail’s death. This results in increased taxes of $9,500 per year–for a ten-year period–or $95,000. Because Betty served as trustee, she is personally liable for these taxes. To make matters worse, she cannot force her siblings to pay the tax.

This cautionary tale speaks to the value of working with an attorney specializing in estate planning and trust administration to protect your assets and minimize taxes. Had Betty checked in with a qualified lawyer at the time of Abigail’s passing, the family would have saved this $95,000 increase in taxes by understanding the timing implications of reassessments.

James L. Cunningham, Jr., CEO and Lead Attorney

530.269.1515

team@162.144.216.105

200 Auburn Folsom Rd.
Suite 106
Auburn, CA 93010

5 Critical Components of an Estate Plan

An estate plan is important for people of all ages and wealth levels. Yet many people avoid estate planning because they do not want to think about the end of life, the possibility of failing health, or potential for an unfortunate disability. There is no time like the present to overcome those fears, stop procrastinating and start planning for your future. Pulling back the curtain on what makes up a solid plan may help put you at ease.

Your “estate” is all the property owned both individually and jointly with your spouse—including bank accounts, real estate, jewelry, IRAs, investments—minus that which you owe. If you pass away without a plan, the result is a long, drawn-out probate process that can be very expensive for the family. Being prepared will provide peace of mind for the you and all of your beneficiaries. So let’s get started.

The Top 5 Items That Should be Included in Every Estate Plan

  1. Living Trust – A living trust is a legal document that names someone to take care of your trust assets if you are incapacitated and details who you want to get your estate upon your death. The benefit of a trust is that it does not go through probate, unlike a Will. Probate is a court process where a judge oversees the transfer of your estate to your heirs and of distributing your assets to heirs the paying off your debt. It sounds simple, but it is a very costly and time-consuming process and is a huge hassle (ask anyone who has been through the probate process)!
  2. Will – If you have a living trust, your Will acts as a safety net for assets you forgot to put into your trust during your lifetime. The Will takes those out of trust assets and pours them into your trust (a “Pour-Over Will”).
  3. Living Will – A living Will outlines your wishes for end-of-life medical care. It can include what medical treatments you would (or would not) like to have in the event you become incapacitated. A living Will removes the stress of making these decisions from family members and helps to provide peace during times that can be difficult and emotional. This can be the most important document in your estate plan.
  4. Advance Health Care Directive – An Advance Health Care Directive (AHCD) is a document in which you choose someone to make health decisions for you if you are unable to do so yourself. The Living Will describes your wishes; the AHCD names the person who communicates these to all pertinent healthcare parties.
  5. Durable Financial Power of Attorney – A durable financial power of attorney names an agent who has the power to act in your place for matters relating to finances. This may include paying your bills, accessing your financial accounts, managing your real estate assets, etc. Again, the word durable means that it stays in effect if you become mentally incapacitated and unable to handle your affairs.

Consulting and planning with an estate planning attorney will help to ensure that all your options are explored and the best possible solution for you is implemented. We can walk you through the necessary parts of the estate plan, provide explanations, and create strategies for maximizing your assets and protecting them from unnecessary taxes. We are here to help put your mind at ease.

Stephen Wood, Certified Specialist in Estate Planning, Trust, and Probate Law

805.484.2769

team@162.144.216.105

771 E. Daily Drive
Suite 350
Camarillo, CA 93010

Maximizing the Value of Inherited IRAs

Stretching an inherited IRA is extremely valuable to the beneficiary. Learn what that means.

An inherited IRA, or “beneficiary IRA”, is an account that gets opened when someone inherits an IRA after the death of its owner. The beneficiary may open an inherited IRA from any variety of eligible IRAs, from Roth and rollover to Simple IRAs and SEPs. This IRA beneficiary is subject to required minimum distributions (RMD) in which all the benefits needs to be distributed within five years. With a stretch inherited IRA, the beneficiary is instead eligible to stretch the RMDs out over their own life expectancy instead of that of the deceased. Given the power of compounding interest, that can make a huge difference.

Illustrating the Power of Time and Yield

We created a chart and a few scenarios to illustrate what a significant difference this can make in maximizing the value of the inherited IRA. The critical factors are annual yield and the age of the beneficiary; that is why well-advised clients often leave their retirement plans to grandchildren rather than to children.

Annual Yield

Sally, age 20, is named as the beneficiary of Grandpa’s $100,000 IRA account, which she receives shortly after his death. Sally is self-disciplined and gets excellent advice, so she manages to stretch the RMDs over her lifetime, allowing the undistributed principal to grow tax free. If her average annual yield is 6%, by age 85 she will receive just over $1,000,000 from the account – a 10x return. But if her annual yield is 10%, she will receive over $6,000,000 – a 60x return!

Age of Beneficiary

Grandpa instead leaves his $100,000 IRA account to Sally’s 50-year old mother Betty. Betty is equally self-disciplined, so she also stretches the IRA distributions over her lifetime. If her yield is 6%, then she will receive over $325,000 from the account – a 3x return. Remember, however, that 20-year-old Sally would have received a 10x return, simply because of the age difference between the two beneficiaries. The importance of age is even more striking if the yield is higher. If the yield is 10%, Betty will receive a return of just less than 8x over her lifetime, compared to Sally, who would receive a 60x return.

* Assumes beneficiary’s lifetime of 85 years or more, and that withdrawals are limited to RMDs. Data gathered by using the calculator at www.hughcalc.org/mrd.cgi                (c) 2018 CunninghamLegal

It is easy to calculate cumulative values of inherited IRAs with initial values other than $100,000, simply by adjusting figures on the table proportionally.

  • If Sally, age 20, inherits a $200,000 IRA with a 6% yield, the estimated cumulative value of the Stretch IRA would be just over $2,000,000, twice the amount shown on the table, because the value of the IRA at the date of death was 2 x $100,000. (Note that the 3x return on the investment remains the same.)
  • RMDs are added to the beneficiary’s taxable income each year, except for RMDs from inherited Roth IRAs, which are not taxed.

Common Mistakes

People fail to understand the high value of stretch IRAs to family members. As a result, some account owners purposefully draw down their IRAs even though they don’t need to, mistakenly believing them to be of less value after death than other assets they can leave to their loved ones. Other account owners leave retirement plans to charities rather than to family, or leave retirement plans to older beneficiaries because they don’t understand the greater value to younger beneficiaries.

There are a variety of reasons that most beneficiaries do not benefit from the full value of their inherited IRAs:

  • The designated beneficiary is the owner’s estate, or no one at all…thus implicitly leaving it to their estate. No stretch-out
  • The designated beneficiary is the owner’s living trust. No stretch-out. (Although the applicable laws and regulations might appear to allow a stretch-out in this situation–assuming the living trust is written perfectly for that purpose–the IRS has not approved this strategy and has actively opposed it in individual cases.)
  • The beneficiary is not financially disciplined enough to save his inheritance for the future.
  • The beneficiary does not understand the value of the stretch-out, so she/he does not attempt to benefit from it
  • The beneficiary invests in ways that result in low yields
  • The inherited IRA is lost to the beneficiary’s divorce, creditors, or bankruptcy

Do Your Planning

The IRA Legacy Trust ensures that beneficiaries avoid the problems noted above. But the stretch out in these trusts is not an automatic process, and it takes a sophisticated estate planner to understand the rules and properly implement it. We are happy to share our expertise with you to maximize the value of your IRA for generations to come.

Source: Edward W. Goodson, Attorney at Law.

530.269.1515

team@162.144.216.105

200 Auburn Folsom Rd., Suite 106, Auburn, CA 95603