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Special Needs Self Settled Trusts

The Three Flavors of Special Needs Trusts: #3 Self-Settled Trusts

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The federal “Special Needs Trust Fairness Act,” enacted in December of 2016, changed the law to allow individuals with special needs to create their own special needs trust. Ohio law, in response, has changed to coincide with this recent change. Currently, a mentally or physically disabled person may create a self-settled trust to hold their own assets and avoid them being counted for Medicaid or other public assistance program eligibility. Usually the need arises to make this type of trust when a person with special needs receives a legal settlement or inheritance while already eligible and receiving government assistance.

In a nutshell, “self-settled” special needs trusts are simply trusts established by the disabled beneficiary with the beneficiary’s own money and assets.  The devil, however, is in the details. Self-settled special needs trusts are, by regulatory requirements, only available to those persons who are 1) disabled and 2) are under 65 years of age. Further, the trust must be appropriately drafted to include language that mandates that the cost of Medicaid services actually paid on the individual’s behalf will be paid back to Ohio at the individual’s death. Thus, in an indirect way, the Department of Medicaid and other government program will get their money and be reimbursed, at the point of death, but the individual reliant on government assistance can still maintain eligibility. Therefore, both parties win. Note, however, the use and drafting of self-settled special needs trusts is nuanced. For example, with these trusts once a beneficiary reaches 65, the trust can no longer be funded with new assets or money. Yes, what is already in the trust will remain protected, but flexibility and control is lesser than with other types of special needs trusts. As such, always consult an experienced Cleveland area estate planning attorney when deciding which type of special needs trusts is appropriate for you and your family.

A self-settled special needs trusts are often referred to as a “Medicaid payback trust.” Both names refer to the same type of trust, however, the later name focuses on the primary characteristic, and requirement, of a self-settled special needs trust, in that any Medicaid resources or services received by the beneficiary will be paid back from the assets housed within the trust. A partial corollary is a Miller trust. A Miller trust houses income for those receiving nursing home care that would otherwise put them over the income thresholds for the Medicaid income cap. The income is kept in trust and used to pay for care, but relevant here, names the State of Ohio as a beneficiary under the trust. Thus, the State of Ohio can recover the total amount of Medicaid payments made to an individual after death.

Self-settled special needs trusts are different from Miller trusts in that they allow for a much greater breath of resources allowed to be placed in trust and does not set the State of Ohio as a direct beneficiary under the trust. Naming a person or entity as a trust beneficiary grants them certain rights and privileges which, in certain circumstances, can lead to headaches and issues for the special needs person and their families.

Often self-settled special needs trusts are estate planning instruments of last resort. Usually within the context of an unexpected windfall going to a person with special needs. Going the self-settled route also places administrative labor and costs of the trust on the special needs person. Further the requirements of specific drafting to be legally operative under Ohio law is usually something laypersons are ill-equipped to do themselves. As such, always consult an experienced Cleveland area estate planning attorney when deciding which type of special needs trust is good for you and your family. The stakes are too high to do things ill-informed.

Helping You and Your Loved Ones Plan for the Future

Special Needs Trust #2 photo

The Three Flavors of Special Needs Trusts: #2 Pooled Trusts

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Baron Law LLC, Cleveland, Ohio, offers information for you to reflect upon while you are setting out looking for an estate planning attorney to help protect as much of your assets as you can. For more comprehensive information contact Baron Law Cleveland to draft your comprehensive estate plan to endeavor to keep more of your assets for your heirs and not hand them over to the government by way of taxes.

In order for those with special needs to qualify for government assistance programs such as Social Security Income and Medicaid, they must meet health, income, and asset thresholds. In other words, at least on paper, potential recipients must be quite poor to receive benefits. As such, just like to initially receive benefits, if special needs person is already receiving these benefits they must maintain the established thresholds of assets and income, or lack thereof. So, an inheritance, receiving an accident or medical malpractice settlement, or merely amassing too much money in an account can kick these people off of much needed benefits due to violating the standards set down by managing government entities and departments. In the hopes of preventing this outcome proactively, many people turn to special needs trusts.

Special Needs Trusts: Revisited

A special needs trust allows a disabled person to, theoretically, shelter an unlimited amount of assets for their needs without being disqualified from government benefits.  As hinted to above, this is because the assets held in a special needs trust properly drafted by experienced Cleveland attorneys are not counted as individual resources for purposes of qualifying for benefits.  On paper, at least in the eyes of the government and taxman, the beneficiaries of special needs trusts meet their asset and income thresholds. As a consequence, those special needs persons lucky enough to have a special needs trusts have access to more money, which can be spent on comforts, necessities, housing, and much needed medical care. Though we in this country are lucky to have government assistance programs available to us, anyone with a loved one solely dependent on them will tell you it’s certainly not enough. A properly drafted special needs trust will provide extra care and life satisfaction for disabled loved ones regardless of whether supporting family members are around for many years or pass away suddenly.

Pooled Special Needs Trusts

As mentioned in previous blogs, there are many “flavors” of special needs trusts. One such type is a “pooled” special needs trust. The focal point with this trust is maximizing potential gains from money funded into the trust, minimizing administrative costs, and delegating trust management to experienced personnel. In a nutshell, pooled trusts are a method to provide benefits of a special needs trusts without having to do the administrative legwork yourself.

As a rule, pooled trusts are required to be run by non-profit companies or organizations. The company or organization running the pooled trust drafts a master trust agreement that dictates the terms of the trust and the relationship between the trust and all participants.

In almost all cases, the pooled trust is run by a professional administrator. After establishment of the trust, money is transferred into the pooled trust to fund a particular individual’s stake in the trust. This single source of funding is then pooled with other people’s money to make one big pot, hence the name pooled trust. This pot is then controlled and invested, usually by an investment manager, similar to the way a hedge fund or other investment group operates.

The major takeaway is the “pooled” aspect of this particular trust. In theory, because there are many sources of funding brought together and utilized tactically, a pooled trust can make more stable investments and provide additional management services that other types of special needs trust cannot. Again, this increased investment power and potential returns coupled with lowered administrative costs, because it is borne by a large group instead of the individual and also an individual trustee does not need to be vetted and appointed, is also with the added benefit of the special needs beneficiary still being able to receive government benefits.

Unique Issues with Pooled Special Needs Trusts

The most obvious potential issue with pooled trusts is control, or lack thereof for individual participants. With a pooled trust, the trust assets are managed by people selected by the non-profit organization and not by anyone associated with an individual participant. This, in turn, means unassociated individuals and trust terms dictate how investments proceed and when disbursements occur, pretty much in a take it or leave it style. Once money is surrendered and placed into the pooled trust, individual participants how no say over how it is spent or when it will be distributed.  Additionally, it is a little known and little advertised fact that after the special needs beneficiary passes, some or all of their particular trust account will be kept to help with continued funding for the pooled trust. As always read the fine print and be completely sure you know what you’re signing up for.

With pooled trusts you make undertake a pro’s vs. con’s analysis, lack of control versus potential gains that might be indispensable in providing of critical healthcare costs for those with special needs. Consult an experienced Cleveland estate planning attorney who is familiar with drafting and administrating special needs trusts in order to find out potential options and they best course to take. Further, before signing on the dotted line to participate in any pooled trust, have an experienced Ohio estate planning attorney review the master trust agreement. Often these documents are very massive and have many hidden terms that can have profound impacts on your and your loved ones with special needs.

Helping You and Your Loved Ones Plan for the Future

Special Needs Trusts

The Three Flavors of Special Needs Trusts: #1 Third-Party Trusts

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Estate Planning law firm Baron Law Cleveland offers the following part 1 of a three part series of explaining the difference trusts available for those who have loved ones with Special Needs.  Dan Baron of Baron Law can advise what is best trust for your situation as the trusts are as individual as your loved one.

According to recent statistics for the National Organization on Disability, nearly 1/5 of all Americans, almost 54 million, have a physical, sensory, or intellectual disability. Every one of those 54 million have parents, siblings, family members, and loved ones who want to ensure they are comfortable and provided for. As with many things with special needs persons, the solution for providing for them isn’t straightforward or simple. This is where special needs trusts often play a pivotal role in providing support and estate planning peace of mind.

Special Needs Trusts: A Primer

Special Needs Trusts, as their name suggests, are trusts. As trusts, they hold the common characteristics and features shared by all trusts. A trust, to put it simply, is a private agreement that allows a third party, a trustee, to manage the assets that are placed inside the trust for the benefit of trust beneficiaries. There are innumerable types of trusts, each with own its respective legal conventions and purposes. A critical aspect of trusts is that the assets housed within them usually aren’t counted as a part of the trust creator’s taxable estate. Thus, when the owner of the trust creates the trust and properly funds it, the assets go from the owner’s taxable estate to the trust. Afterwards, when the owner dies, the assets are not in the owner’s estate and subject to probate.

The distinguishing aspect and purpose of special needs trusts, sometimes referred as supplemental needs trusts, is that resources placed within these trusts can be managed for the benefit of a person with special needs but still allow them to qualify for public benefits like supplemental security income and Medicaid. This allows grantors, those who create the trust, usually in this instance parents of someone with special needs, to provide much need stable and monetary support while still allowing often indispensable social assistance programs for their children, even long after the parents pass. Third-party trusts seek to supplement income from assistance programs not to replace it.

Third-Party Special Needs Trusts

In general, there are three types of special needs trusts: Third-party trusts, self-settled trusts, and pooled trusts. Of focus here is third-party special needs trusts. The name denotes the defining characteristic of this trust, that a third-party set up a trust and funded the trust. This is also its most critical aspect because the funds and/or assets in the trust never belonged to the beneficiary with special needs, the government is not entailed to reimbursement for Medicaid payments made to the beneficiary nor are these assets taken into account when calculatng either initial or continued eligibility for government assistance programs for the special needs person.

These trusts are usually set up as a part of a comprehensive estate plan that initially provides a place to house gifts given by family members during their life to someone with special needs and later to also house inheritance from these same family members when they pass. Third-party special needs trusts are often denoted as beneficiaries on life insurance polices or certain retirements accounts. Further, these trusts can also own real estate or investments in the name of the trust but for the ultimate benefit of the person with special needs.

Advantages of Third-Party Special Needs Trusts

A big advantage of third-party special needs trusts is that, while the grantor is living, funds in the trust usually generate income tax for the grantor, not for the special needs beneficiary. This shift in taxation is dependent on proper drafting which is why experienced counsel is always recommended with special needs trusts. This tax shift avoids the hassle and stress of having to file income tax returns for an otherwise non-taxable special needs beneficiary and also having to explain the income to the Social Security Administration or other interested government entity.

Additionally, because it a trust, ultimately what happens after the special needs beneficiary is controlled by the grantor, you. Thus, the grantor always retains control and upon the special needs beneficiary’s death, the assets in the trust pass according to the grantor’s express wishes, even longer after death, and usually to the grantor’s surviving family member or other charitable institutions. This means the special needs person is always provided for, and far-above those people solely dependent on government assistance, and the money, at the end, will continue to do good for either your family or the world at large.

Helping You and Your Loved Ones Plan for the Future

Special Needs Trusts

Unique Needs, Unique Solution: Supplemental Services Trusts

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As with most persons with special needs and disabilities, the name of the game is to pay it forward. Unplanned and unthought out self-sacrifice, however, are rarely the proper ways to go about anything. Unfortunately, those families with loved ones with particularly debilitating diseases or affiliations are often solely focused on the here and now in terms of providing care. When asked, was about in 10 years? Or what about when you pass or are too old or sick yourself to provide care, what then? Regularly, these questions, though critically important, are pushed aside because to answer them would require tough choices to be made. Often these families fall back on pithy and often callous responses.  Responses such as, “everything will be fine as long as my child dies before I do” or “my other, more typical children will shoulder the burden and take care of their special needs sibling.”

Special Needs Trusts in a Nutshell

Special Needs Trusts are private agreements that allows a third party, a trustee, usually the family, to manage the assets that are placed inside the trust for the benefit of trust beneficiaries, the special needs person. There are many types of trusts, each with own its unique legal conventions and uses. The critical aspect of trusts in this circumstance is that the assets housed within them usually aren’t counted as a part of the trust beneficiary’s taxable estate. Thus, the resources placed within these trusts can be managed for the benefit of a person with special needs but still allow them to qualify for public benefits like supplemental security income, Medicaid, and other local and state government benefits. This allows grantors, those who create the trust, to provide much need stable and monetary support while still allowing often indispensable social assistance programs for their children, even long after the parents pass. Critically, these trusts seek to supplement income from assistance programs not to replace it, which is important in the eyes of the government because if a family, and by extension a special needs person, can provide for themselves than they don’t need assistance programs.  This theory is echoed in the needs and health-based requirements of many, if not all, assistance programs. The rules and requirements for local, state, and federal government assistance programs can be confusing, contract a local Cleveland area estate planning attorney today to make sure you’re informed enough to make the right choices.

Supplemental Services Trusts

Per O.R.C. § 5122-22-01(D), trusts for supplemental services, denotes the primary requirements of these trusts which allow special needs persons to benefit from them while also receiving government benefits:

“(D) Supplemental services. (1) Supplemental services are expenditures, items or services which meet the following criteria:

(a) The services are in addition to services an individual with a disability is eligible to receive under programs authorized by federal or state law or regulations, and the services do not supplant services which would otherwise be available without the existence of the trust;

(b) The services are in addition to basic necessities for such items as essential food, clothing, shelter, education and medical care, and the services are in addition to other items provided pursuant to an ascertainable standard; and

(c) The services are paid for with funds distributed pursuant to a trust which meets the requirements of section 5815.28 of the Revised Code or with funds distributed from the supplemental services fund created in section 5119.51 of the Revised Code, and the services would not be available without payment from the trust or fund.

The two main takeaways from this passage is that 1) the trust services do not replace government benefits and 2) a supplemental services trusts is the only way a special needs person would get these additional benefits.

In nutshell, a supplemental services trust is for individuals who are eligible to be served by the Ohio Department of Mental Retardation, a county board of mental retardation and developmental disabilities, the Ohio Department of Health, or a board of alcohol, drug addiction, and mental health services. With this trust, trust beneficiaries must be vetted and approved by the State Department of Disabilities or the County Board of Developmental Disabilities. The trust estate, i.e. stuff placed in trust, as of 2015, cannot exceed $242,00o.  Further, Ohio law is strict that the trust assets are used only for supplemental services, those services not provided by government assistance programs. Additionally, another hardpoint with these trusts is that upon the death of the beneficiary, a portion of the remaining assets, which must be at least 50 percent of the remaining balance, must be returned to the state of Ohio to be used for the benefits of others who do not have such a trust. Thus, pay it forward, at least in this circumstance, is written in the rock of Ohio law.

So why use a Supplemental Services Trust?

Again, the best way to demonstrate the value of these trusts is to go into the Ohio code. Per Per O.R.C. § 5122-22-01 (D)(2):

Supplemental services…include, but are not limited to, the following:

(a) Reimbursement for attendance at or participation in recreational or cultural events;

(b) Travel and vacations;

(c) Participation in hobbies, sports or other activities;

(d) Items beyond necessary food and clothing (e.g., funds for dining out occasionally, for special foods periodically delivered, or for an article of clothing such as a coat which is extra but which is desirable because it is newer, more stylish, etc.);

(e) Cosmetic, extraordinary, experimental or elective medical or dental care, if not available through other third party sources;

(f) Visiting friends, companionship;

(g) Exercise equipment, or special medical equipment if not available through other third party sources;

(h) The cost differential between a shared room and a private room;

(i) Equipment such as telephones, cable television, televisions, radios and other sound equipment, and cameras for private use by the individual;

(j) Membership in clubs such as book clubs, health clubs, record clubs;

(k) Subscriptions to magazines and newspapers;

(l) Small, irregular amounts of personal spending money, including reasonable funds for the occasional purchase of gifts for family and friends, or for donations to charities or churches;

(m) Advocacy;

(n) Services of a representative payee or conservator if not available through other third party sources;

(o) Guardianship or other protective service listed in paragraph (C)(9) of this rule;

(p) Someone other than mental health community support staff members to visit the individual periodically and monitor the services he receives;

(q) Intervention or respite when the person is in crisis if not available through other third party sources;

(r) Vocational rehabilitation or habilitation, if not available through other third party sources;

(s) Reimbursement for attendance at or participation in meetings, conferences, seminars or training sessions;

(t) Reimbursement for the time and expense for a companion or attendant necessary to enable the individual to access or receive supplemental services including, but not limited to, travel and vacations and attendance at meetings, conferences, seminars, or training sessions;

(u) Items which medicaid and other governmental programs do not cover or have denied payment or reimbursement for, even if those items include basic necessities such as physical or mental health care or enhanced versions of basic care or equipment (e.g., wheelchair, communication devices), and items which are not included for payment by the per diem of the facility in which the beneficiary lives; and

(v) Other expenditures used to provide dignity, purpose, optimism and joy to the beneficiary of a supplemental services trust.

From the extensive list of available uses for trust assets for special needs persons, it is no surprise that those persons with those trusts live and much more comfortable and fulfilling life than those without. Additionally, these trusts shoulder the burden for parents and sibling for providing much need support and care while also acting as a tool for benefit preservation. There are many options available for those family members with special needs persons, talk to an experienced Ohio area estate planning attorney to find out the best options for your family.

Helping You and Your Loved Ones Plan for the Future

Business Attorney Baron Law

The Difference Between Business As Usual And Bankruptcy. Here Are Two Ohio Laws That All Business Owners Must Know!

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Every business and every business owner should be aware if and how the Consumer Sales Protection Act (“CSPA”) and/or the Home Solicitation Sales Act (“HSSA”) effects their business. On the first day of law school, every new law student learns that ignorance of the law is no defense. The same applies to business owners. In the context of CSPA or HSSA violations, being unaware of the law, which in turn leads to noncompliance of the law, can open you up to thousands of dollars in damages, discretionary rescission of expensive contracts, and ruin your hard-earned professional reputation. The CSPA and HSSA are lengthy statutes which cover a multitude of business and scenarios and, as such, require an experienced hand to walk you through all the wrinkles and hurdles. If your personal knowledge of these statutes is lacking, never hesitate to contact an experienced Cleveland business attorney. A little forethought now, can save you a whole lot later.    

  • What is the CSPA and HSSA? 

The Ohio CSPA is located under Chapter 1345 of the Ohio Revised code. In a nutshell, the CSPA prohibits “suppliers” from committing unfair or deceptive acts or practices in connection with a “consumer transaction.” Naturally who is and is not a “supplier” and what is or is not a “consumer transaction” under the CSPA are pivotal first points of analysis. Further, the CSPA does not stand alone. The CSPA works in conjunction with Ohio’s HSSA. Again, to simplify everything, the CSPA is a list of things considered unfair or deceptive acts or practices and denotes potential avenues for redress of legal grievances for harmed customers. On top of the CSPA, the HSSA also provides an additional list of things considered unfair or deceptive acts or practices and denotes potential avenues for redress of legal grievances for harmed customers but with slightly different triggering circumstances, i.e. the existence of a home solicitation sale, hence the name, and different recovery options for customers.  

  • Why should business owners care about the CSPA and HSSA? 

Many businesses and industries are subject to the laws and requirements of the CSPA and HSSA without even knowing it. Thus, these businesses are running around selling services and completing jobs all the while exposing themselves to massive amounts of potential liability. Remember, ignorance of the law is no defense and all it takes is one persnickety consumer to ruin your whole fiscal year and eat all your profits through litigation.   

In the context of home improvement, residential contractors, HVAC, roofers, electricians, landscapers, concrete work, repairs companies, and other home sale situations, to name only few, if a company has committed an unfair and deceptive trade practice, a consumer often has 1) the right to cancel the agreement, 2) receive a full refund, and 3) depending on the circumstances may not even have to return any materials or pay for any labor already performed.  

The CSPA includes a non-exclusive list of specific acts and practices that are conclusively “unfair and deceptive” and therefore violate Ohio law. The CSPA, via the HSSA, also includes specific “home solicitation sale” remedies, one of which includes a statutory right to a three-day right to cancel period when the contract is signed at the consumer’s residence. Every seller must notify the buyer of his or her right to cancel the sale and provide the buyer with a “Notice of Cancellation” form that the buyer can use to cancel the sale, both the notice and the form to cancel have specific statutory requirements. If the supplier fails to include notice and proper language regarding this 3-day right in the contract or use the proper forms, consumers are entitled to cancel their agreement whenever they wish because the 3-day timer never started. Courts have said in these situations that the right to cancel never expired, even many years after the job was done. Only following the law by delivering proper documents does a supplier start the clock. In turn, this allows homeowners to bring a claim for a refund or to get out of paying money owed on a contract well after the two-year statute of limitations under the CSPA has run out. 

  • Recent changes in the CSPA and HSSA. 

As previously stated, the CSPA and HSSA together represent a list of unfair and deceptive trade practices which often triggers liability for the offending company. Ohio Senate Bill 227, which became effective on April 6, 2017, added a new practice to this list that is conclusively violative, as in if you do it, legally there is no discussion over whether it was “unfair and deceptive” under the CSPA, it just is. This new violation is: 

“[T]he failure of a supplier to obtain or maintain any registration, license, bond, or insurance required by state law or local ordinance for the supplier to engage in the supplier’s trade or profession is an unfair or deceptive act or practice.” 

In short, under current Ohio law, even the most careful and observant supplier can violate the CSPA/HSSA by failing to timely renew any registration, license, bond, or insurance that the supplier is required to maintain under state or local law. As such, ignorance can no longer be the standard operating procedure for services such as HVAC, electrical, plumbing or refrigeration work, and other suppliers of home services. Further, for businesses who use outside contractors or other temporary workers, the risk is even more severe. Now you must be sure not only are you and your employees bonded and licensed, but any contractors have the proper paper work as well, even though technically, they are not your employees. Often courts find the burden is on the business to make due diligence and ensure compliance, responsibility must fall somewhere, and it sure isn’t going to fall on the consumer. 

Furthermore, albeit a more minor change, Senate Bill 227 also updates the Notice of Cancellation requirements under the HSSA to include fax or e-mail options, which the supplier must provide. In turn, the customer/buyer can now cancel the sale by delivering the Notice of Cancellation “in person or manually” or by “facsimile transmission or electronic mail” to the seller. As such, even a minor oversight such as not including fax or e-mail cancellations options on standard forms can open up a world of litigation pain on an unknowing business. 

A law without consequences is a paper tiger. You may ask yourself, who cares if technically my business engages in unfair or deceptive acts or practices. Well, for CSPA and HSSA violations, often customers are entitled to triple damages and attorney’s fees, good for them, bad for business owners. No stretch of the imagination to see a couple of CSPA/HSSA lawsuits can kill a profitable business real quick. Notice, under Ohio law it doesn’t matter if failure of compliance was willful or inadvertent, the only thing that matters is did you break the law. This is why it is important to maintain a good and ongoing relationship with a local Cleveland business attorney. Often the legal requirements for local business are buried deep within local ordinances and administrative code. Remember, what you don’t know can hurt you and, just like everything else with a business, it is on owners to stay current, but most especially, compliant with any recent changes in Ohio law.  

 

Estate Planning Attorney

What Is The Difference Between A Living And Testamentary Trust?

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Your estate plan consists of many documents and covers a lot of bases. From protecting assets from creditors and litigants to avoiding probate, a comprehensive estate plan protects you while you’re living and provides for loved ones after death. Because estate plans are, by design, comprehensive, a lot of legal jargon is thrown around and often it’s difficult to keep track of all the nuance and detail. Durable powers of attorney, QTIP elections, unlimited martial deduction, and all the many names of the many different types of trusts, to name a few.  

That said, one of the most common questions posed during an initial estate planning consultation is, what is the difference between a living and a testamentary trust? Years ago testamentary trusts were all the rage, a lot of people have them but don’t know how they work or if they are even providing any benefits to the ultimate goals of estate planning. Since trusts represent one of the most utilitarian estate planning tools, in that they have the ability to do many useful and advantageous things in regards to estate planning, understanding the difference between living and testamentary trusts is critical to providing context to any advice given by Ohio estate planning attorneys.  

  • What is trust? 

As always, we must start with the basics, what is a trust? A trust, to put it simply, is a private agreement that allows a third party, a trustee, to manage the assets that are placed inside the trust for the benefit of trust beneficiaries. There are innumerable types of trusts, each with own its respective legal conventions and purposes. A critical aspect of trusts is that the assets housed within them usually aren’t counted as a part of the trust creator’s taxable estate. Thus, when the owner of the trust creates the trust and properly funds it, the assets go from the owner’s taxable estate to the trust. Afterwards, when the owner dies, the assets are not in the owner’s estate and subject to probate. 

  • What is a living trust? 

A living trust, also called an inter-vivos trust, is simply a trust created when you are alive. They can be either revocable and irrevocable and when someone is talking about a trust, usually it’s a living trust. Living is the umbrella term for a trust and is usually paired with other descriptive terms such as family, asset protection, or revocable or irrevocable to describe the primary purpose of the trust and what it is designed to do. Living trusts must have the same basic composition as other normal trusts, a grantor, trustee, and beneficiary.   

  • What is a testamentary trust? 

A testamentary trust is created in your last will and testament, specifically, it directs your executor of the estate to create it.  Thus, unlike a living trust, a testamentary trust will not take effect until you die.  The terms of the trust are amendable and revocable, in that they can be changed at any time, which makes sense because it doesn’t come into being until after death.  

One of the major distinguishing features of a testamentary trust is the involvement of the local probate court. From the time of the settlor’s death until the expiration of the testamentary trust, the probate court checks up on the trust to make sure it is being managed properly. Court involvement is usually sought in the context of testamentary trusts because these trusts are usually created for beneficiaries who, for some reason, are unable to received and manage trust funds appropriately.  

  • When would you use one over the other?  

At the end of the day, just like every other estate planning decision, it is all circumstantial and highly depend on personal situation and estate planning goals. (Which is why estate planning attorneys ask so many questions when you first meet them.) For the sake of some definitive answer, however, there are some tried and true situations when one is preferable over the other.  

If you are interested in avoiding probate, avoiding excessive court oversight, keeping your estate private, and saving your estate money by simplifying property conveyances and avoiding potential will contests, then a living will is likely a good choice. As mentioned before, since living trusts can be created to meet almost any goal or concern of estate planning, the major deciding factors of use is initial cost and ultimate utility of a trust, i.e. there is no point buying a trust if you have nothing to fund it with.   

Testamentary trusts, on the other hand, are created for young children who may be at risk of receiving improper inheritances or trust distributions, family members with disabilities, or other who may get large amounts of money or assets that enter into the estate upon a testator’s death. Further, these trusts are often highly recommended for parents who are at risk of dying at the same time. 

A testamentary trust can set parameters on your estate and how it will be distributed and/or managed after you pass on.  For example, you might include terms that allow for discretionary distributions of $1,000 a month to be given to your children until the age of 21 in the event both parents pass. This ensure that, even if tragedy strikes, the kids will, at least in some way, be supported by their parents, whether they’re gone or not.  At the end of the day, testamentary trusts, like all trusts, allows estate control even after death. Testamentary trusts are unique, however, in that the allow for greater oversight, via the courts, in what’s going on inside the trust. This can be a double-edged sword, however, in that, depending on how long the court needs to be involved, legal fees and administrative costs could add up making this trust structure unattractive if the trust is designed to last a long time.  

Again, dependent on the circumstances, such as estate planning goals, family structure, available estate assets, either or both types of trusts may be advantageous to use. A Cleveland estate planning attorney is in the best position to judge what is most appropriate for a given situation.

 

Charitable Trust Attorney

Thinking Of Giving To A Charity? Consider A Charitable Remainder Trust.

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Significant and stable retirement income, reduction in taxes, whether income, capital gains, or estate respectively, and the provision of critical needed support for worthy charitable organizations and endeavors. If any, or all, of these sound good to you and your estate planning goals, charitable remainder trusts might be a useful option. Charitable remainder trusts, not to be confused with charitable lead trusts, is a way many people are planning for retirement but also “paying it forward.”  

  • What is a Charitable Remainder Trust? 

A charitable remainder trust is a type of irrevocable trust. Irrevocable trusts are trusts in which the grantor, you, relinquishes all control and ownership over the trust and the assets used to fund the trust. Thus, the trust cannot be changed or canceled without the beneficiaries’ permission. Prior to trust formation, the grantor can dictate whatever terms desired to govern the trust, but after formation, those terms control independent of grantor’s wishes and desires. 

What makes an ordinary irrevocable trust in to a charitable remainder trust are a few unique characteristics. Namely, the guiding purpose of the trust and the remainder interest. First, usually, the primary goals with a charitable remainder trust is to reduce taxes and provide additional retirement income. The namesake charitable remainder, however, denotes that eventually, after the grantor passes, whatever is left over in the trust, the remainder, is given to a chosen charity.   

  • How do Charitable Remainder Trusts help pay for retirement? 

The name of game is tax reduction and maximizing potential income production, but how do charitable remainder trusts accomplish this. In a nutshell, it begins with transferring high valued assets into an irrevocable trust, thus initially avoiding estate taxes when making the trust.  

After funding, assets are then sold by the trustee, thus avoiding capital gains on the sale, and these proceeds are reinvested into income producing assets, which can add to available retirement income. Additionally, after you pass, the whatever is left in trust, the remainder, passes on to the charitable beneficiary. The precise manner how a grantor will receive income is usually either a fixed distribution rate via percentage value of appreciated assets or a flat amount of actual income earned by trust assets.   

It should be noted, that charitable remainder trusts should not be viewed as the primary vehicle in which an individual will pay for retirement, these trusts really supplement income more than anything. This reality is largely due to the nature of these trusts. A large trust funding takes full advantage of the associated tax breaks, has the ability to earn significant and usable income for retirement expenses based off the initial principle funding, and, at the end of life, represent a charitable contribution large enough to actually make a different in the world. Thus, if an estate is healthy enough in which a charitable remainder trust is an attractive option, usually the grantor(s) have a lesser concern with the financials of old age.  

  • How are Charitable Remainder Trusts taxed?  

At initial funding of a charitable remainder trust, estate tax is avoided on the assets placed in trust and an immediate charitable income tax deduction is enjoyed. The charitable income tax deduction often bumps the grantor down to a lower tax bracket for the year. Additionally, capital gains are avoided when the trustee liquidates trust assets for reinvestment.  

Regarding annual personal income tax for monies distributed from the trust, this is usually paid per your individual income tax rate, however, often at this point in people’s lives, when they are no longer personally working, and most money and assets have already been transferred into various estate planning tools, people are often in the lowest tax bracket. Further, though distributions from a charitable remainder trust are taxable income, often, if proper estate planning was implemented, the total amount for a taxable estate is so low for a person that distributions for a charitable remainder trust are, for all intents and purposes, tax free. 

  • Do I give up control over what I put in my Charitable Remainder Trust? 

No, the trustee you select to manage the trust will govern the trust and its assets according to the rules and terms you dictate at creation. You are always in control. Further, grantors may retain the right to change the trustee if they are doing a poor job or change the charity to another qualified charity without losing any past or future tax advantages.  

  • If I help out my favorite charity with a Charitable Remainder Trusts, won’t my children be mad? 

The happiness of your friends and family all comes down to proper planning. For those people with sizable estates, it is no problem to leave significant money to both children and favorite charities, there’s more than enough for everyone. There is a common concern, however, that people with modest estates don’t have the option to charitably bequest anything, I mean, there’s only so much to go around right?  

Not exactly. Yes, it is correct that money and assets are finite, but, with the income tax savings inherent in using a charitable remainder trust, a person always has the option to either fund an irrevocable life insurance trust or buy a life insurance policy outright. Either way, the life insurance purchased with the tax savings can replace the full value of any assets left to charity and make sure any surviving children receive their full inheritance as well. Using life insurance, via trust or ordinary policy, also avoids probate concerns and income taxes. Estate tax and asset protection concerns, however, on any policy proceeds will only be addressed through the use of a life insurance trust. Ensuring children aren’t left out in the cold when it comes to inheritance is a major concern for most people, make sure your Ohio estate planning attorney is giving a comprehensive rundown of all of your estate planning options, life insurance options included.      

If you think a charitable remainder trust could help you and your family, speak with your Ohio estate planning attorney. You can convert appreciated assets into lifetime income. You can receive an immediate charitable income tax deduction. You can remove assets from your estate, thus reducing estate taxes. And since no capital gains apply when the assets are sold, you receive more to reinvest in income generating property. All of which is in addition to make a substantial gift to your favorite charity.  

Helping You and Your Loved Ones Plan for the Future

Estate Planning Lawyer

Common Questions With Inherited IRA’s

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Most of us don’t have millions of dollars in liquid assets to fund our retirements. Ordinary people use common investment tools such as traditional IRAs, Roth IRAs, simplified employee pension plans (“SEPs”), and savings incentive match plans for employees (“SIMPLE IRAs”) to pay for healthcare and living expenses in old age. The main goal for any retirement plan is for an individual or couple to outlive their savings, and often, if proper planning is implemented, this is the case. So, what happens to these retirement accounts after their owners pass away? What do sons, daughters, brothers, sisters, or even close friends do with these accounts if they are named beneficiaries? This is often where inherited IRAs and their confusing rules regarding mandatory distributions come into play. Though creating an IRA is simple, when it comes to inheritance and asset distribution, most people don’t know where to start. That is why an advance discussion with a Cleveland estate planning attorney or tax advisor can give you the information needed to avoid unintended consequences with inheriting an IRA.    

  • What is an Inherited IRA? 

A cavalier attitude for IRA owners and their beneficiaries can lead to paying higher taxes, triggering penalties, or giving up future opportunities for tax-advantaged, or tax-fee, growth. This first step to avoiding these outcomes is to know what an inherited IRA is. 

In a nutshell, an inherited IRA is a retirement account that is opened when a person inherits an IRA or employer-sponsored retirement plan after the account holder dies. The assets held in the deceased individual’s IRA is transferred into a new inherited IRA in the beneficiary’s name. Usually, the account is transferred, inherited, via a beneficiary designation. This is why inherited IRAs are also referred to “beneficiary IRAs.” The rules that govern the transfer of the account assets, however, depends heavily on whether the beneficiary is a spouse or non-spouse. 

The big concern with inherited IRAs is the schedule for required mandatory distributions, namely when do they have to begin. When required mandatory distributions must begin and how they are measured is nuanced and depends on a variety of factors such as beneficiary age, age of the deceased own, type of IRA, income needs, and creditor protection concerns. Most people are unfamiliar of all the rules and considerations associated with inheriting IRAs, as such, always talk to an experienced Ohio estate planning attorney if you have any doubt with the proper course of action in your circumstances.  

  • Options for Spouses 

The name of the game for spouses is rollover. Spouses can transfer the deceased spouse’s IRA into their name and defer distributions until required mandatory distributions are triggered. (When, however, these distributions must start is a fact sepcfiic question to bring up with your attorney). This rollover allows tax-advantaged growth of the IRA funds to continue with no interruption. It is critical, however, that the spouse take no direct control of inherited IRA funds or else a taxable event will be triggered. The good news is surviving spouses have 60 days from receiving inherited distributions to roll them into their own IRAs without a problem as long as no issues regarding required minimum distribution are present. Note, though rollover is often the most popular option, you always have the option to cash out the IRA, just be aware of what benefits you’re forfeiting and also any potential penalties and/or personal tax liabilities.   

  • Options for Non-Spouses 

Unfortunately, non-spouses do not have the option to rollover and the rules for them are quite a bit more complex. Option one for non-spouses is to disclaim all or part of the deceased owner’s IRA assets. This decision must be made within nine months of the original IRA owner’s death and before possession of the assets occurs. This is usually done by named beneficiaries who wish to avoid being kicked up to a higher tax bracket which, in turn, would practically eat everything inherited anyways via state and federal taxation. 

Option two is to cash out the IRA either immediately or within five years. Taxes will be paid on the amount of distribution, but no 10% IRA early withdraw penalty will accrue. With this option the IRA assets must be exhausted by December 31st of the fifth year following the original IRA owner’s death. This five-year period allows some planning to occur to mitigate any potential tax hit, but, if an IRA is large enough, state and federal taxes will eat a large part regardless.  

Option three is to transfer assets from the deceased owner’s IRA into an inherited IRA and take required minimum distributions in order stretch out the potential tax hit and fully exploit the tax-advantage status of an inherited IRA. As a general rule, the IRS requires non-spouse inherited IRA owners to start taking required minimum distributions starting December 31 after the year of death of the original account owner, and each year thereafter. Also, distributions from inherited IRAs taken before age 59½ are not subject to a 10% early withdrawal penalty in most cases. The rules and guidelines regarding these required mandatory distributions can be confusing and are highly dependent on the particular facts surrounding the IRA inheritance.  

The calculated amount of required mandatory distributions for non-spouses is determined via IRS life expectancy tables, IRS required mandatory distribution guidelines, and IRS criteria based on your age, life expectancy, number of named beneficiaries, type of original IRA, and age of deceased IRA owner. When distributions must start, if at all, how much each distribution must be, and whose life expectancy will govern the distribution schedule are each questions that all competent estate planning attorneys will discuss with you and plan for. Planning IRA inheritance for non-spouses is no easy task but it represents an often critical retirement issue that goes unaddressed and causes massive tax problems for beneficiaries.  

Most people who use retirement accounts are at least semi-knowledgeable when it comes to creating and managing IRAs, but very few are concerned about what happens after they pass on. This is where your legal and tax advisers come in. Proper planning and conversation with your estate planning attorney can avoid higher taxes for beneficiaries, triggering penalties, and giving up future tax-advantaged, or tax-fee, growth. Properly planning for retirement not only is a concern for you, but also for the friends and family you leave behind.  

Disclaimer: 

The information contained herein is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice. The author nor Baron Law LLC cannot and does not guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable in a given situation may impact the applicability, accuracy, or completeness of the preceding information. Further, federal and state laws and regulations are complex and subject to change. Changes in such laws often have material impact on estate planning and tax forecasts. As such, the author and Baron Law LLC make no warranties regarding the herein information or any results arising from its use. Furthermore, the author and Baron Law LLC disclaim any liability arising out of your use of, or any financial position taken in reliance on, such information. As always consult an attorney regarding your specific legal or tax situation.  

Helping You and Your Loved Ones Plan for the Future

Baron Law Cleveland Ohio

Planning for Crisis: Advance Directives

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Estate planning is an expansive concept. Fundamentally, estate planning seeks to create a detailed plan for your finances, healthcare, and assets for the reminder of life and after death, to the extent physically possible and within the means of the estate planner. Though it would be nice if a crystal ball existed and told us what to do, how to do it, and when to do it, estate planning must resort to educated guesses and client preference.

An experienced Cleveland estate planning attorney knows there are limitations on his abilities. Some matters can’t be foreseen or preplanned for, such as changes in relevant law or undisclosed heirs or assets. There are also limitations brought on by estate planning clients themselves, such as financial restrictions or outright refusal to take the advice of experienced counsel or professionals.  These limits aside, most people looking to plan their estate are concerned with the usual issues affecting us all. Principally, ways to ensure money exists for the rest of life and instructions and preferences regarding necessary medical care. For most, the extent necessary medical care is planned for extends only to telling adult children whether or not they want to be kept alive in the event of a coma or other traumatic injury. Needless to say, this is not good enough and will most likely be forgotten or disregarded. Any Ohio estate planner worth their salt would not let you get away with such half-measures regarding critical medical treatment, and this brings us to advance directives.

What are advance directives and why do I need them?

Simply put, advance directives are legal documents that provide detailed instructions about who should oversee your medical treatment and what your end-of-life or life-sustaining wishes are. Thus, in the event you are unable to speak for yourself, such in the event of coma, traumatic injury, or terminal disease, your family and medical professionals can refer to your advance directives and find out what you want to do.

There are multiple advance directive documents which convey your medical wishes and/or gives authority to another to make medical decisions on your behalf. Which particular document is needed is highly dependent on your medical circumstances, usually focusing on the type of medical treatment contemplated/needed and whether or not you have capacity to make medical decisions yourself. Though there exists many advance directive documents out there, the two most common are healthcare powers of attorney and living wills.

Durable Healthcare Power of Attorney

A healthcare power of attorney allows you to appoint a trusted person to make all healthcare decisions in the event that 1) you become terminally ill and are unable to make your own healthcare decisions or 2) are either temporarily or permanently unable to make medical decisions for yourself. The person you designate with this authority has the power to carry out your wishes and make all other necessary decisions about your medical treatment and other healthcare matters.

Make sure after completing your healthcare power of attorney to at least file it with your primary care physician/provider. The document cannot act to protect you if no one knows about it or knows where it is. Though similar to your financial power of attorney, a healthcare power of attorney only concerns issues of medical treatment. Both work in concert to provide whomever you chose to act in your best interest the legal authority to do so. Talk with your Cleveland estate planning attorney to make sure your powers of attorney are valid and up-to-date.

Living Will

Your living will, sometimes called a healthcare proxy, is almost always paired with your healthcare power of attorney. A living will is a document that conveys your particular instructions to certain medical situations, principally impending death or prolonged terminal conditions, i.e. accepting or declining of life saving medical care. Lesser issues, such blood transfusions or non-life threatening organ or tissue transplants are covered under a healthcare power of attorney. That is why it is important to have both in effect, so all your bases are covered.

Often estate planning clients say that they have communicated their wishes about life sustaining treatment, however, often how it really turns out, friends and family are unaware of an incapacitated person’s medical directives or they may choose to discount or ignore previous conversations, believing that you will pull through against all odds and medical advice. By memorializing your medical directives via a living will, medical staff will consult the document at the appropriate time and carry out your wishes. This takes the stress of critical care decisions off the shoulders of loved ones and removes any opportunity for foul play or misinterpretation. Be sure to consult with your Ohio estate planning attorney to make sure your living will is up-to-date and complies with any recent changes in Ohio law.

Other Types of Advance Directives: DNR’s and Donor Registry Forms

 It is worth noting a few additional advance directive documents as well, namely Do Not Resuscitate Orders and Organ/Tissue Donor Registry Enrollment Forms. Both documents respectively seek to further clarify your medical wishes. DNRs are used when a medical emergency occurs and alerts medical personnel that a person does not wish to receive CPR in the even that the heart or breathing stops.  Organ/Tissue Donor Registry Enrollment Forms supplement your healthcare power of attorney and living will in that it ensures your wishes concerning organ and tissue donation will be honored.

 The general rule is advance directives only come into effect when you are unable to make you own decisions about medical treatment. All advance directive documents allow you to plan ahead by sharing your healthcare instructions with your doctors and family if you become unable, even only temporarily, to make medical decisions yourself. Advance directives help ensure your wishes are followed if you become seriously injured or unconscious. Contact a local estate planning attorney and make sure your have these important documents in place.

About the author: Mike E. Benjamin, Esq.

Mike is a contracted attorney at Baron Law LLC who specializes in civil litigation, estate planning, and probate law. He is a member of the Westshore Bar Association, the Ohio State Bar Association, the Cleveland Metropolitan Bar Association, and the Federal Bar Association for the Northern District of Ohio. He can be reached at mike@baronlawcleveland.com.

Family Law

Divorcing Late In Life? Estate Planning Considerations You Need To Know.

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Unfortunately, “till death do us part” doesn’t seem to have the same weight or meaning that it had back in the day. Per the American Psychological Association, more than 90 percent of people marry by the age of 50, however, more than 50 percent of marriages end in divorce. Further, the divorce rate for subsequent marriages is even higher. An often-neglected aspect of divorce is the chaos it often makes of a well-crafted estate plan. Usually, the consequences of divorce in the context of estate planning isn’t realized until too late and significant time and money are wasted. The good news, however, is that these problems are easily avoided with a little foresight, or at least competent counsel from your Ohio estate planning attorney. Note, your estate planning attorney can only protect you if he knows what is going on, so, if any significant life events have occurred recently in your life, call your attorney and see if anything needs to be done.  

  • Why divorce matters in estate planning.  

First step in fixing or avoiding a problem is understanding what the problem is. So, why is divorce so significant in the context of estate planning? At the end of the day, it all focuses around who gets what and when. With marriage, in the eyes of the law, two people become one. Thus, both are owners, and both have entitlements when they split. Figuring out a fair split of all the property of marriage is regularly a contentious, long, and expensive process.  

This commingling of assets is what makes divorce so difficult, even if prenuptial agreements are in place. What’s considered separate property? What’s considered joint? Definitions vary by state, but in general separate property includes any property owned by either spouse prior to the marriage and any inheritances or gifts received by either spouse, before or during the marriage. Trusts can be used to house assets in separate ownership from a spouse, but this is not an airtight defense. Careful management and access restrictions must be drafted in the trust documents because, in the event of divorce, you can bet your bottom dollar your soon-to-be ex-spouse’s attorney will use all his wit and guile to get at whatever is in trust. 

On the opposite side, marital property is typically any property that is acquired during the marriage, regardless of which spouse owns or holds title to the property. This is almost always subject to equitable division during divorce, again, a prenuptial is no guarantee, recent case law is full of court decisions disregarding these agreements for a variety of reasons.  

Always remember that marital property isn’t just houses and cars but also pension plans, 401(k)s, IRAs, stock options, life insurance, closely held businesses and more. Further, if separately owned property increases in value during the marriage, that increase is also considered marital property. As a rule, if something holds value, it will be fought over during divorce.  Due to the complexities involved when it comes to dividing assets, a marital property agreement can help clear up any confusion surrounding the ownership of assets, but this alone is insufficient protection if you fall on the wrong side of the 50 percent divorce rate.  

  • Divorce Estate Planning Strategies  

After the long and arduous task of dividing assets, the next step is to reorganize an estate plan to match the new realities of your life. After divorce, but especially if remarriage is a possibility trusts should be established to protect your self-interests and children of your previous marriage, wills must be rewritten, often to at least counter an existing will which named a now ex-spouse as executor, and beneficiary designations must be changed, designations which often were made years ago and given little, if any, thought.   

  • Establish Trusts  

A trust, to put it simply, is a private agreement that allows a third party, a trustee, to manage the assets that are placed inside the trust for the benefit of trust beneficiaries. There are innumerable types of trusts, each with own its respective legal conventions and purposes. Trusts come in many forms and are established to accomplish many different things. A revocable living trust fits most situations and can serve as the foundation of your estate plan. While not all trusts are created equally and not all trusts afford the same level of protection, without fail trusts provide greater protection for beneficiaries than outright distributions. 

  • Update Beneficiary Designations 

To guarantee your estate planning goals are met and your money goes where you want it to, ensure that all beneficiary forms and designations are updated following marriage, divorce, or re-marriage. Life insurance proceeds and retirement accounts often represent significant portions of your estate, as such, beneficiary designations should generally pay the proceeds to your trust, if designated correctly. Trust utilization allows control while allowing these proceeds pass directly to an individual represents a risk of mismanagement or squandering. 

  • Update Last Will and Testament  

At the beginning of every will there is language specifically disavowing all previous wills and codicils. This is included as boilerplate language because people forget to do it regularly. In the same vein, especially in the context of divorce or remarriage, update your will to reflect your current familial situation. Personal property bequest, executor appointments, and guardian designations all should be current and accurately reflected in your will.   

  • Adequate Bookkeeping  

Knowledge is power and what you don’t know can hurt you. Regularly go through documents, make important designations current, and account for all of your assets. Outdated information and kill a well-drafted will, trusts, and/or beneficiary designation form. Oversights and neglect can cause estate planning headaches that are easily avoided with a little effort and regular meetings with your Cleveland estate planning attorney. 

Helping You and Your Loved Ones Plan for the Future