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Benefits Of A Family Trust As Part Of My Estate Plan

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Many people think trusts are for the affluent, but in actuality, family trusts are a powerful planning tool for individuals and families across the wealth spectrum.

We encourage you to carefully consider the differences between a will and a trust when crafting your estate plan. A will distributes assets outright upon your death. A trust allows you more customization and control over when and how your assets are distributed.

Here are a couple examples:

  • In a will, you can state that you’d like a certain sum of money to be given to each of your grandchildren. They will receive that sum upon your death. In a trust, you can state that your grandchildren only receive the sum once they turn 18 and that it may only be used for technical school or college tuition.
  • In a will, you can dictate that each of your children receive a portion of your assets. They will inherit those assets upon your death.
  • In a trust, you can control how and when the assets are received. For example, you can dictate in your trust that children receive payments in thirds after reaching the ages of 30, 35 and 40.
  • In a will, you might leave assets to a sibling. If that sibling is in a nursing home, the home could end up with your assets or they could kick your sibling off federal benefits. If you establish a trust, you can dictate that the assets will not be distributed if your sibling is in a nursing home or receiving Medicaid.

In This Article:

What Is A Family Trust?

Put simply, a family trust is a set of instructions that tell others what you want to happen to your assets after you’ve passed, and in some cases, while you’re still living.

A family trust is different from other types of trusts in that the beneficiaries are limited to family members, like a surviving spouse or children.

Whether a family trust is right for you will depend on your financial situation, your family’s unique needs and your goals.

How Does A Family Trust Work?

To protect, manage and distribute assets, there are three key roles.

  1. A grantor establishes the trust.
  2. A trustee (an individual or third-party fiduciary) manages the trust and makes decisions or hires someone to make decisions about investments, distributions and other financial matters. Trustees are bound by legal obligations to act in the best interest of the beneficiaries. They distribute assets or income generated from the trust’s assets to the beneficiaries based on the terms of the trust.
  3. Beneficiaries – in this case family members – benefit from the assets in the trust.

What Are The Types of Family Trusts?

There are two main types of family trusts: revocable and irrevocable.

Revocable family trusts are often used as living trusts to document how you want your assets to be managed and distributed both while you’re living and after you’re gone. They allow you to retain more control because you can change the trust’s terms at any time and can add or withdraw assets.

With a revocable trust, you can serve as trustee and name a successor trustee to take over when you are no longer able to. This can be especially helpful to your family if you reach a point in your lifetime where you become ill or are unable to manage your assets. Your successor trustee can make distributions on your behalf, pay bills, file tax returns and more.

An irrevocable family trust cannot be changed once created. It is often used as an estate planning tool to reduce estate taxes or protect assets from creditors.

There are many additional types of family trusts for specific purposes or benefits. Some common types include:

Testamentary trusts are created in the grantor’s will and take effect after he or she dies. They can be used to distribute assets to beneficiaries according to the grantor’s wishes and to help protect assets from creditors.

Special needs trusts help parents or grandparents ensure that children with disabilities have the financial resources they need to maintain their quality of life without jeopardizing their eligibility for government benefits.

Asset protection trusts help protect assets from creditors and lawsuits. They are often used by individuals and families at a high risk of being sued, such as business owners.

If you are considering setting up a family trust, an estate planning attorney can help you determine which type of trust is right for you.

They will evaluate your needs and goals to not only set up the trust, but also to maintain it properly over time.

What Are The Benefits Of A Family Trust Vs. A Will?

Family Trusts Avoid Probate

Having a will is better than having no plan at all; however, a last will and testament does not avoid probate. Probate is a court system designed to administer your will and pay creditors. All of the assets controlled by your will go through probate to be verified and distributed according to your wishes.

The probate court can be costly and time consuming. According to the AARP, the average estate will lose 5-10 percent of assets when administered through probate. For example, if you have a five hundred thousand dollar estate, at a minimum, you’re going to spend twenty-five thousand dollars administering it through probate.

Not only is it costly, but also it is time consuming. The minimum time to administer a will in probate court is six months, but the average time in most counties is eleven months.

If established properly, a family trust can transfer assets to your heirs while avoiding probate. There will be no probate fees and no no minimum administration time.

Family Trusts Minimize Federal or State Taxes

Without a family trust, an individual who finds themselves over the federal exemption limit could face 40-45% in estate taxes. A family trust can significantly reduce or eliminate these taxes by allowing a surviving spouse to make certain tax elections. This is commonly known as “marital deduction planning.”

A family trust allows the surviving spouse to set aside a portion of the estate, including the growth, tax free. For example, if the federal exemption were $1 million, and a surviving spouse is left with $5 million, with the trust, he or she could set aside $4 million in trust and the entire balance (including growth) after the death of the second spouse, would be tax free. Without the trust, the heirs would be paying 40% on $4 million in estate taxes.

Family Trusts Protect & Preserve Your Assets

If you have minor children, then establishing a family trust becomes a must. A minor child cannot legally inherit your assets.

Family trusts provide asset protection by holding assets in trust for your children’s benefit. Even when your children become adults, the trust still provides asset protection against creditors, litigation, and divorce. For example, if you passed away leaving a large sum to your forty-five-year-old child who has spending issues, a pending litigation, or a divorce in process, the trust would hold the assets until your child is in a better place in life.

Another common asset protection measure occurs when individuals are in their second marriage. In this scenario, there is nothing preventing the remaining spouse from disinheriting children from a prior marriage. For example, a husband and wife in their second marriage care for two children the wife has from her prior marriage. The wife passes away and leaves everything to her husband, and the contingent beneficiaries are her two children. Five years later, the husband remarries and creates a new estate plan naming his new spouse as primary beneficiary of his estate and his two step-children as contingent beneficiaries. When the husband dies, the new spouse inherits everything and the children are accidentally or intentionally disinherited.

Family Trusts Offer Privacy

When you go through probate, all of your information – assets, beneficiaries and more – become public record. Establishing a trust will allow you to avoid probate and maintain your privacy.

Family Trusts Are Cost-Efficient

Having a trust is more cost- effective than a will. Because the trust allows you to avoid 6-18 months of probate costs, more of your legacy is preserved for your family.

How Do I Set Up A Family Trust?

The exact process varies, but the following are key steps that your family trust attorney will walk you through.

  1. Decide what assets will be placed in your trust. While you might already have an idea of what you’d like to include, your attorney may help you uncover some additional assets that would benefit from being placed in a trust. Assets can range from cash and investments to real estate and other property.
  2. Choose your beneficiaries. They might include your spouse, your children, grandchildren or other close family members.
  3. Establish the rules of your trust. For example, will assets be distributed with age requirements or terms for how the assets may be used?
  4. Determine who will manage the trust. The manager of the trust, called the trustee, could be yourself, someone you know or a third party, such as a financial institution.

Once you are confident in these decisions, your family trust attorney can draft the trust document.

To learn more about how to set up a family trust with Baron Law or to schedule a free consultation, call 216-573-3723 or submit your request online.

Probate Attorney

Top Reasons Why You Should Avoid Probate

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Whether it was a gathering for a joyous wedding or the passing of a loved one, we’ve all heard about Probate Court at some point or another. We are going to dive into what probate is and why you want to avoid it when it comes to your estate, if you have no plan.

First, what is probate? Probate is the legal process of administering a person’s estate after their death. You’re probably wondering “OK, but what does that mean?” It means:

The court will determine your assets at the time of your death.

The court will determine the value of those assets.

The court will distribute the assets to those that are entitled to them by law.

Probate court, during the process will also appoint someone to supervise the administration of your estate.

Why would I want to avoid this process? The main reasons to avoid probate are the extensive timeline and astronomical expense that are both required for probate. The minimum amount of time that is required by probate court is 6 months, but in actuality this process takes 14 – 18 months on average. The reason for this extensive timeline is to give creditors a chance to make a claim on your estate, this in turn reduces the inheritance intended for your loved ones.

The probate process is very expensive. The average cost for probate court is between 5 – 10% of the estate’s total value. This means if your estate is valued at $500,000 you can expect an average cost of between $25,000 – $50,000.

The probate court appoints someone that they deem “suitable” to administer your estate, if you have no plan. This means that your wishes will not be heard and your assets, including your personal property and belongings will be distributed by the court to whom is legally entitled.

Lastly, probate court is public record. This means that all of your assets, your heirs, and your debts are available for anyone to see. Privacy is something that should be valued during this sensitive period of bereavement.

This costly and lengthy process can be avoided with a proper estate plan put in place. Your assets should be distributed according to your wishes, not to who is just legally entitled to them. Your heirs should have the ability to access the inheritance you intend on leaving them, and your loved ones deserve the privacy and time it takes to mourn your loss.

If you have not previously considered an estate plan or have questions about how to get started on planning, contact us at Baron Law today. You can go to our website for a free consultation to start planning for the future for yourself and your loved ones.

 Helping You And Your Loved Ones Plan For The Future

 

About the author: Kristy Gross

Kristy is a Legal Assistant at Baron Law LLC kristy@baronlawcleveland.com.

Trust Adminstrator

What is an Administrator of an Estate?

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Managing the affairs and obligation of a recently departed is no easy task. That is why most people take the time to plan their estate. Estate planning, at its fundamental essence, is leaving a plan and instructions for those who survive you regarding what to do with the “stuff” you leave behind. People are living longer than ever before and, consequently, are leaving more behind. Often without a proper plan in place, the loved ones and family members left to organize and account all the leftover worldly possessions are hard pressed to do everything required from them by a probate court within the statutory time limits.

Dying without a will, only exacerbates this difficultly and lengthens the time it takes to administrator an estate. Bluntly, dying without a will, or dying with an invalid will, is never a preferential option. Most people already have a very limited understanding of the probate process, and if you throw intestate succession and administration, with all the accompanying issues and legal winkles, a difficult and trying process only becomes more so. As such, consult with an experienced Ohio estate planning attorney to either properly plan your estate so dying intestate doesn’t happen to you or, for those facing an instate administration, find out all the answers you need regarding what, how, and when to administrate an intestate estate.

What does dying intestate mean?

When a decedent does not have a valid will in existence at the time of death, a decedent is deemed to have died intestate and Ohio intestacy laws govern how estate assets are managed and distributed. There are two primary situations when a person is deemed to have died intestate, 1) there was no last will and testament, or 2) they had a last will and testament, but for some reason or another, it was found invalid.

Ohio intestacy laws may be avoided altogether with proper estate planning, a major aim of which is to ensure you have a will and that it is valid. It is important to note, however, that sometimes intestacy laws will control even if a valid will is subject to probate administration, an experienced estate planning attorney can inform you of these circumstances. Conversely, sometimes Ohio intestacy laws may not apply even if a decedent died intestate. As such, since the controlling law for dying without a last will and testament can vary dependent on circumstance, meeting with an estate planning and/or probate lawyer is highly recommended.

What is an administrator?

In the context of intestate estate administration, an administrator is, for the most part, functionally identical to an executor. Executors, however, are appointed in the last will and testament by the decedent while administrators are appointed by the probate court in the absence of an executor appointment. Note, however, that Ohio has explicit Ohio residency requirements for intestate administrators. Thus, out-of-state residents can only be named executors and cannot serve as administrators.

Why is an administrator needed, what do they do?

The duties of an administrator aren’t easy. The duties of an administrator are specific to each particular estate, however, there is a “core” group of duties and tasks each one must fulfill. Every administrator must:

  • Conduct of thorough search of decedent’s personal papers and attempt to create a complete picture of their finances and family structure.

 

  • Take possession, catalogue, and value all estate property.

 

  • Maintain and protect estate assets for the duration of the probate proceedings.

 

  • Directly notify creditors, debtors, financial institutions, utilities, and government agencies of decedent’s death.

 

  • Publish notices of decedent’s death, usually a newspaper obituary, which serves as notice and starts the clock running on the statute of limitations for creditor claims on the estate.

 

  • Pay or satisfy any outstanding debts or obligations of decedent.

 

  • Represent decedent during probate court proceedings.

 

  • Locate heirs and named beneficiaries and distribute respective assets at the appropriate time.

These duties occur during the probate process, which is a major reason why probate takes many months to complete. Especially within the context of intestate probate administration, where no preplanning, accounting, or collection of information regarding the decedent’s estate was likely done.

Because intestate administration is such a time-intensive and laborious process, many people take the time to plan their estate and attempt to avoid probate entirely. Often trusts are a good option to avoid probate. With trusts, estate assets can be distributed right away, no executor or administrator is needed, and many mornings, which otherwise would be spent in probate court, are freed for personal enjoyment. Contact an Ohio trust attorney to see if avoiding probate through the use of trusts is right for you and your family.

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

Advanced Directives and Your Estate Planning

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What are Advanced Directives?

Advance directives are a set of documents where you are appointing another individual to make medical decisions on your behalf. Typically, we have in these documents a living will, HIPPA authorization, and then health care power of attorney.

How Are These Documents Used?

Living Will- A living, will not to be confused with the last will and testament, is used where you are telling the world that you do not want to be kept on life support in the event that you have little to no brain activity. Instead of leaving that decision on your loved ones, you’re making the decision for yourself that you don’t want to be kept artificially alive.

Healthcare Power of Attorney- The agent of your healthcare power of attorney can make decisions about your health, such as a risky surgery.

HIPPA Authorization- You are giving your loved ones or your agent the ability to obtain medical records as well as something as simple as attending a doctor’s meeting.

How Can You Obtain These Documents?

There are a few ways that you can obtain these documents. One way is through the Cleveland Clinic or Metro Health; any big hospital has standard forms that you can complete.

However, we recommend you discuss these options with an attorney so you can discuss what you want and make sure that is carried out in the right manner.

If you are unsure if you have these advanced directives in place, if you know you need these documents, or if you are putting together some estate planning, this is a really important step. Contact us today to get a free consultation or visit us online to learn more.

power of attorney

Financial Power of Attorney | Baron Law | Cleveland, Ohio

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Financial power attorney (POA) is a set of documents that you’re giving your agent the ability to act and make financial decisions on your behalf. They’re most commonly used in an elder law scenario. They can also be used in a crisis scenario, if you are overseas, a business owner, and you need to elect someone to make those decisions on your behalf.

Are There Different Types of Powers of Attorneys?

General and Limited:

A general power of attorney gives your agent the ability to govern any part of your estate plan. Whereas, a limited power of attorney is restricted from having control over certain aspects of your estate that you deem fit.

Springing and Current:

A springing power of attorney only allows your agent to act when a certain offense occurs. Whereas, a current power of attorney can act at any time. We recommend that clients have a current power of attorney because it can be difficult to really point out a point time when the springing power returning comes into effect.

How Do I Know if My Financial POA is Up-To-Date?

Financial power of attorney laws changed in 2012, so if you have not updated your power of attorney since then, you’ll want to get it updated as soon as possible.

In addition, you’ll want to look for hot powers in your financial power of attorney, which are:

  • Gifting Powers
  • Powers Over Beneficiary designations
  • Powers Over Retirement Accounts
  • Ability to Make Trusts
  • Safety Deposit Boxes

These are the hot powers, and if you don’t have those, then financial institutions may not warrant your financial power of attorney. It’s really important that you look for these in your document.

Estate planning can seem like a big hassle because they are so many levels which require close detail. If you want to make sure your financial POA is up-to-date and can really act on your behalf, contact us at Baron Law today.

Baron Law Estate Planning Attorney

Preventing Children From Blowing Through Their Inheritance

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Blood is thicker than water and we get to pick our friends, not our families. There are a lot of pithy and whimsical sayings that have been passed down through the generations that attempt to explain and characterize the complex and often contradictory nature of family relations. When it comes to deciding who gets the money and stuff after a family member dies, often, tragically, the baser natures of our family members are on full display.

Trusts are an ubiquitous estate planning tool that a lot of people have heard about but not a lot of people know the details of how they work. Trusts afford privacy for trust assets, control over how, when, and if trust assets are distributed, and potential protection against creditors, litigants, divorce, and greedy family members. All these benefits associated with trusts sound great but how exactly is all this accomplished? Once again, consulting with an experienced Cleveland estate planning attorney is always the quickest and best way to get your estate planning questions answered.

  • What are spendthrift trusts/provisions?

A common concern for estate planners is, how do I prevent my descendants from wasting their inheritance? A quick look at any one of the innumerable stories of multi-million dollar lottery winners who end up broke and destitute a few years later illustrates how most who come into vast sums of money quickly tend to spend that money unwisely. Now, if you decide using a trust is right for you and your family, within the structure of your trust, you can write in terms that will lower the opportunities for named beneficiaries to squander their trust distributions. Though not %100 foolproof, spendthrift trusts and spendthrift provisions are very common tools for trust makers to use to protect their trust and protect trust beneficiaries from themselves.

In Ohio a spendthrift trust is a trust that imposes a restraint on the voluntary and involuntary transfer of the beneficiary’s interest in trust assets assigned to that particular beneficiary.

Under Ohio law, specifically the Ohio Trust Code, spendthrift provisions are terms within a trust which restrain the transfer of a trust beneficiary’s interest. Spendthrift provisions block both voluntary transfer of trust assets stemming from the beneficiary action and volition and involuntary transfer of trust assets, usually from creditors or assignees whose claims are usually traceable back to a named trust beneficiary.  See O.R.C. § 5801.01 (T).  As a general rule, a spendthrift provision is valid under the UTC only if it restrains both voluntary and involuntary transfer.

For illustration purposes, here is an example of a bare bones spendthrift provision. Note, an experienced estate planning attorney would not solely rely on the follow language to protect you.

“A. Spendthrift Limits. No interest in a trust under this instrument shall be subject to the beneficiary’s liabilities or creditor claims  or to assignment or anticipation.”

How do they work?

Looking at the legal definition for spendthrift trusts and spendthrift provisions, it may be difficult to understand how these operate and, consequently, how they may be beneficial. In a nut shell, if a trust is or has a spendthrift provision, in most circumstances, trust assets are not subject to enforcement of a judgment until it is distributed to the beneficiary. This means that a trust beneficiary cannot use trust property that is assigned to them as collateral for a loan or to pay off a civil judgment.

 Thus, spendthrifts can prevent creditors, litigants, or the beneficiaries themselves from reaching into the trust to take assets contrary to the terms of the trust. This “reaching in” usually stems from beneficiary misconduct. Note, however, in some circumstances, spendthrift can be circumvented. Namely, in the case of certain child support obligations and claims of the State of Ohio or the United States. Whether spendthrifts can be circumvented depends highly on the nature of the claim against the trust and the nature and language of the trust. An experienced Ohio estate planning attorney is in the best position to determine if and when a particular creditor can reach past a spendthrift and get at trust assets.

Why do I need them?

Put bluntly, no one likes having their money or property taken from them. Or in this instance, by creditors, litigants, or claimants of beneficiaries uncontemplated by the language of the trust. A primary reason for any grantor in making a trust is to ensure control of trust assets. So, if unknown third parties reach into a trust due to a beneficiary doing something unwise, it goes contrary to express wishes of the grantor and all the effort that went into making a trust.

Further, premature distributions of trust assets can have serious consequences for trust management. The “internal finances” of a trust are often based upon assumptions regarding the amount of money/assets within trust accounts and predetermined distribution times. So, if money/assets are taken early this can lead to premature exhaustion of trust funds which may affect the whether future trust distributions can occur at all, in that trustees can’t distribute what isn’t there. Further, premature distribution may leave trustees with insufficient assets to pay trust taxes or administrative costs. There is also the unfairness of premature distribution, why should beneficiaries who followed the terms of the trust get their distributions later or in a lesser amount than the beneficiary who has creditors, civil judgments, or owes back child support.

The importance of comprehensive and effective drafting a trust terms cannot be understated. Often it is what is left out of trust documents which end up hurting grantors and trust beneficiaries. Spendthrift trusts and spendthrift provisions can come in a variety of forms to match the needs and desires of a particular grantor. The utility of spendthrifts, however, can only be enjoyed by grantors if a competent Ohio estate planning attorney is used in the formulation and drafting of a trust. Never underestimate the importance of matching good legal counsel with comprehensive estate planning.

Helping You and Your Loved Ones Plan for the Future.

LTC Medicaid Rejected

My LTC Policy Was Rejected By Medicaid, What Now?

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Common scenario for Cleveland estate planning attorneys. Estate planning client comes in distraught. They did the smart and sensible thing, they purchased a long-term care insurance policy years ago to help cover the cost of later-in-life medical costs. They recently applied for Medicaid thinking their LTC policy wouldn’t be counted for calculating their Medicaid eligibility. Unfortunately for them, they received rejection letter from the Ohio Department of Medicaid saying they didn’t meet the asset requirements. Now, the Medicaid benefits, that they were counting on and always thought were readily available no longer are. Now, their estate plan is seriously threatened, and they are scrambling to make sense of the situation and found out what went wrong.

As the old saying goes, the best-laid plans of mice and men often go awry. The relationship between long-term care insurance polices and Medicaid eligibility is not a simple one. As with anything involving government bureaucracy, what you don’t know can hurt you and an experienced guide is worth his weight in gold. Two lessons often taken to heart far too late to avoid tough decisions and missed opportunities.  So, what happened to the person above? The best way to illustrate what happened is to answer the two most common questions anyone in that situation would ask.

Why did my LTC policy get rejected from Medicaid?

Only certain long-term care policies that comply with the guidelines set by the Ohio Long-Term Care Insurance Partnership program count as qualified policies and therefore aren’t countable Medicaid resources. So, what polices are “qualified?”

Per the Ohio Department of Insurance, for a LTC policy to qualify, insurance companies’ policies must meet several requirements, including:

  • The policy must have been issued after Sept. 10, 2007
  • The insured must be a resident of Ohio when coverage first becomes effective
  • The policy must be a federally tax-qualified plan based on the Internal Revenue Service Code (qualified plans can lower federal taxes, but they have benefit triggers that are less flexible than those required by nonqualified plans)
  • The policy must meet strict consumer protection standards (standard fee-look period, coverage outlines, mandatory informational disclosures, etc.)
  • The policy must include certain protection against inflation (the most common inflation protection automatically increases benefits each year by 5%)

So, if you have a long-term care policy, but don’t know, or worse hope without knowing, if it is a qualified policy, you’re likely in for a rude awaking when you apply for Medicaid.

What do I do now that my LTC policy was rejected by Medicaid?

Before any definitive answer or plan can be formulated, certain information about a Medicaid applicant must be answered definitively. At the very least, the information and/or documents needed are:

  1. LTC policy documents – should be overt on whether it was sold/defined as a qualified LTC policy.
  2. Rejection notice from the department of Medicaid – reasons for reject and any explanation regarding why the submitted policy was rejected.
  3. How does the applicant know their LTC policy is a qualified one?
  4. Contacting the insurance carrier to find out the exact details of the LTC policy in dispute.
  5. Where and how did an applicant purchase the LTC policy.
  6. Did the applicant receive the required CSPA complaint disclosures and documents (if was sold non-qualified policy but received CSPA docs could an indication of potential fraud).
  7. The realities of applicant’s current financial situation and health needs.

This last point is really the starting point and is exactly why you retain the services of experienced estate planning attorneys. Every estate planning attorney starts with the same questions, what do you need, what do you have, and prove it. No intelligent planning or decisions can be made until you know exactly where you stand. Further, in this context, the realities of where you stand are even more important because now your options are limited and you are, in a way, at the mercy of the Ohio Department of Medicaid.

If you have been rejected by Medicaid you are essentially in the realm of Medicaid crisis planning, where important questions must be asked, and tough decisions must be made. If someone is applying for Medicaid, the need is now and a solution must be found. One such critical consideration is the current need for care and the potential penalty period. To illustrate, let’s say a rejected applicant has a $400,000 non-qualified LTC policy. As of right now, with current Medicaid penalty divisor of $6,570, 400K/6,570 = approximately 61 months of Medicaid ineligibility, a little more than 5 years.

With this five-year Medicaid ineligibility period on the horizon, options are limited. Namely you can either appeal the rejection or resort to Medicaid spenddown. Medicaid spenddown is a beast all its own, is never something anyone wants to do, and largely depends on how ineligible for Medicaid you are, based on your current income and assets. For most, however, the good news is this situation and Medicaid spenddown, if the proper Ohio estate planning attorneys are used, will never be a worry because they will have done things the right way and won’t be subject to any nasty surprises. Failure to surround yourself with the right advisors, regretfully, often leads to  uncomfortable discussions and decisions that will have to be made sooner rather than later.

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

Hot Powers

Does Your Power of Attorney Contain the “Hot Powers?”

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Who will manage my finances and investments if I am sick or incapacitated? Who will pick what doctor treats me or if a risky but potentially lifesaving procedure should be performed? What if I am put on life sustaining medical support? These are the sorts of questions and issues typically handled by your power of attorney. As they suggest, these are critically important decisions that shouldn’t be taken lightly. Fundamentally, however, these issues can only be handled by your power of attorney if they possess authority, given by you and in writing, to do so. This is why ever since 2012, when Ohio law changed, “hot powers” are a significant topic for you to discuss with your estate planning attorney.

I. Durable Power of Attorney

To understand what hot powers are, you must understand what a power of attorney is. A financial power of attorney, also known as a durable power of attorney, is a legal document that a person can use to appoint someone to act on his or her behalf, i.e. an agency appointment. A power of attorney comes in many forms, but its primary purpose is to grant authority to one or more responsible parties to handle financial or health decisions of a person in the event of illness or other incapacity. Life, and its associated obligations and burdens, tend to continue regardless of one’s physical or mental health. Powers of attorney are protection that ensures affairs are handled and medical wishes are followed even if you are lacking capacity in mind or body.

As stated, powers of attorneys come in many forms. A financial power of attorney, as the name suggests, grants your agent the authority to make financial decisions for you. Managing investments, buying selling land or property, representing you in business negotiations, etc. Healthcare power of attorney works the same way but with healthcare decisions. If you are incapacitated or otherwise can’t decide for yourself, your agent will decide who your doctor is, what treatment you undergo, what medication should be administered, etc.

As always, the terms, powers, and limits for your agents are decided by you in the documents that appoint your agent. If you want to add limits on how long they are appointed, what issues they can or cannot decide, or when exactly their powers manifest, you can do so. Furthermore, you always possess the authority to dismiss them outright or appoint someone new.

Powers of attorney are important to have because surviving spouses or family members will face difficulty and frustration gaining access to things like bank accounts and property that is in your name only. This can be especially damaging within the context of business or professional relations in which the “gears of industry” must keep moving. Alas, if an individual trusted to handle the business if something happens doesn’t possess the authority to so, significant or even fatal business consequences may result. The same goes for medical decisions, often treatment decisions must be made right there and then. Hesitation may mean permanent damage or death to you and if someone doesn’t have express authority to make those decisions, things get confusing, messy, and take a lot longer.

II. “Hot Powers”

So, where do “hot powers” fit in all this. Effective March 22, 2012, Ohio adopted the Uniform Power of Attorney Act, or UPOAA, which was focused on preventing financial elder abuse. Now, powers of attorney must include a statutory language designed to help prevent agents from abusing their power. Put simply, the law now demands power of use more specific drafting and specific denotation “hot powers.”

“Hot powers” grant extraordinary powers to your agent and often these powers can have the effect of altering your estate plan. As such, these powers must be expressly granted per statutory guidelines before they are used by your agent. The most popular of them is the power to gift money or property. “Hot powers” are often used to continue a plan of gifting, sheltering money or property from costs of late life healthcare. Specified gifting “hot powers” can gift anywhere from a limited dollar amount or unlimited, dependent on the scope of the “hot powers” granted and the goals of your estate plan. Further, this power can also be limited to a class of people, such as spouse or children.

Since this new law, third parties such as a financial institution are not required to honor a general power of attorneys. Now, the law asks that a power of attorney include specifically which types of assets and accounts the agent is allowed to control. The spirit of this change is to 1) ensure individuals specifically know and agree to the powers they are giving, and 2) there will no longer be agents running around with “golden tickets” that allow them to do whatever they want to under the sun.

III. Should you give “hot powers”

Like every question in estate planning, whether you should give “hot powers” is circumstantial. The main consideration is who will be given the powers and under what terms. As stated above, “hot powers” are extraordinary powers meaning in the wrong hands they are really screw up your life and a well-crafted estate plan.

Regardless of whether you give these powers or not, it is probably wise to have your Cleveland estate planning attorney look at your powers of attorney if it has been more than five years. The law and your personal circumstances change quite often. Note, a power of attorney created before the 2012 law change will still be valid, however, it may be deficient in expected ways, ways that could hurt you down the line. In sum, the 2012 change means agents are prohibited from performing certain acts unless the power of attorney specifically authorizes them. Because financial power of attorney documents give significant powers to another person, they should be granted only after careful consideration and consultation with experienced legal counsel.

 

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