It is increasingly common these days that families have a child or a relative who has some form of disability or special need. In estate planning, "special needs" or "disability" refers to the different circumstances and challenges people encounter. Usually the term refers to a physical, mental, or developmental impairment, but it can also include a lack of sound financial judgment or a lack of discipline in the ability to plan for the future. It can involve circumstances where someone may believe an individual might not be able to manage money in a way the client believes is trustworthy. Creative estate planning will be necessary to address these special needs. It is therefore critical that persons review their assets and how they will pass to their beneficiaries.
PROBLEMS WHEN A RETIREMENT PLAN PASSES TO A PERSON WITH A DISABILITY
Ineligible for Government Benefits
Sometimes the beneficiary will be receiving or will expect to receive Medicaid or a special housing allowance for persons with disabilities. In these circumstances, the beneficiary is likely relying on these benefits for support and health care. Importantly most government benefit programs have very strict rules on the type and level of assets that a recipient may have in order to qualify for benefits. A retirement account left directly to the beneficiary may cause the beneficiary to become ineligible for the government benefits which may be essential to their care.
Questionable Financial Decisions
Sometimes a family member planning for their estate believes the beneficiary squanders their money or spends without consideration of consequences. Hard-earned retirement money may not be wished to be left to someone who might spend it unwisely or in a wasteful manner.
Addiction
A beneficiary may have alcohol, drug, gambling addictions or some other destructive tendencies which gives concern as to how the retirement benefits may be used.
PLANNING SOLUTIONS FOR SPECIAL NEEDS
Many problems can be avoided by planning solutions in advance.
Designate a Trust as Beneficiary
A trust can be designated as the beneficiary of retirement benefits instead of an individual with special needs. Using a trust vehicle to receive and distribute retirement benefits has several advantages because the benefits are not given outright. The funds can be invested and distributed over time. When payments are made they can be made directly to the beneficiary or to third parties for their benefit. However, there are limitation on the use of a trust. Unless the trust qualifies as a pass-through trust for a designated beneficiary, the entire retirement account will have to be paid out either (1) within five years of the end of the calendar year of the account owner's death (if the owner died prior to his or her required beginning date), or (2) over the owner's remaining life expectancy as if the owner had not died (if the owner died on or after his or her required beginning date) (26 U.S.C Sec 401(a)(9) (IRC), both of which may cause excessive income tax liabilities.
Structure the Plan to Pay Out Benefits Over the Life Expectancy of the Beneficiary
This plan prevents the beneficiary from incurring excessive income taxes and it also ensures a steady stream of funds over the beneficiary's lifetime. Two examples of this are a "pass through" trust named as the designated beneficiary and creating a special needs payback trust for a designated beneficiary.
These ideas as well as others should be discussed with your attorney and the Law Offices of Michele A. Peters will be happy to schedule an appointment to discuss your specific estate planning needs.
