Estate & Trust Planning
Estate Planning is the process of organizing your personal and financial affairs to be prepared in the event of disability and to arrange for the orderly transmittal of your property to your intended beneficiaries. The key is to fashion a plan specifically designed to your needs and desires. Our trust & estate lawyers work with our clients, taking the time necessary to ascertain those needs and desires, and to explore various ways to implement a tailor-made estate plan.
Estate planning can be complex for numerous reasons: there may be complexity due to the state and/or federal tax laws; there may be a need to protect resources for minor children and to construct a mechanism for those children to increasingly step into the responsibility of handling their inheritance as they reach maturity; there may be a desire to protect assets from an heir’s potential creditors; there may be concern for caring for a special needs child; concerns may arise due to a second marriage and the need to balance providing for one’s spouse with caring for children from an earlier marriage. Proper estate planning involves understanding a client’s unique circumstances and constructing a plan that will cover a client’s specific concerns.
Some of the documents your estate planning attorney can prepare are: simple and complex wills, revocable trusts, life insurance trusts, special needs trusts, family partnerships, charitable remainder trusts, powers of attorney, heath care directives, and many other documents.
Special Planning Considerations For Seniors:
Estate Planning in Maryland As We Age
A recent Census Bureau study shows that the “senior” population (65 plus) is growing in the U.S. at a rate surpassing that of the total population under that age.
Seniors Are Redefining Aging
Although the older population is becoming a larger segment of the U.S. population, many refuse to self-define as “seniors” or “senior citizens” except when necessary to secure special senior discounts or other economic benefits. Part of the reason is that the social norms traditionally associated with old age are no longer applicable: individuals are remaining in the work force past the traditional retirement age of 65, many are able to stay active and healthy, and many are opting to stay longer in their own homes instead of retirement or assisted care communities. These “seniors” do not “feel” old and refuse to be pigeonholed as “senior citizens.” However described or categorized, there are special estate planning considerations as we age.
Special Considerations As We Age
Regardless of age or physical condition, of course, you need legal documents to implement your wishes as to how your estate will transfer upon your death. As you age this planning takes on a different focus. More and more, estate planning documents should act as a hedge against possible disability with an eye to protecting your financial independence and security. Also, documents communicating your preferences for medical care and end of life care if you become unable to meaningfully participate in treatment decisions take on a greater immediacy. “Although the core principles of estate planning remain constant regardless of a client’s age, establishing a safe and workable mechanism for surrogate decision-making if the client becomes disabled becomes an increasingly important part of the estate plan as the client ages.” Says, David Sessions, a principal of the Maryland estates and trusts law firm of Franke, Sessions & Beckett, LLC.
Revocable Trusts As A Hedge Against Disability
Much is made of the usefulness of revocable trusts to “avoid probate.” In Maryland, probate is not an onerous process that forces one into the use of revocable trusts for basic estate planning. Indeed, in Maryland as well as in other jurisdictions with efficient probate processes, wills (rather than revocable trusts) are more commonly used as the “standard” estate planning and transmittal documents. As you age, however, the revocable trust becomes an important document for disability planning as well as a document that can serve as a will “substitute.”
Traditionally, a will was the basic legal document to direct one’s estate to his or her intended beneficiaries. In Maryland, the Register of Wills (the administrative “arm” of the Orphans’ Court, Maryland’s probate court) oversees the transmittal of wealth passing under a will. This probate process in Maryland is not particularly burdensome. In other jurisdictions (California, of course, comes to mind) probate is so difficult that avoiding probate by the use of revocable trusts has become commonplace.
A revocable trust avoids probate because the trust, not a will, directs how your assets are transferred at death. The trust acts as a “will substitute” but without being subject to the probate process. It works to the extent you transfer your assets to the revocable trust. “Revocable trusts do, in fact, avoid probate if properly funded. Yet, revocable trusts tend to be over sold as the be-all and end-all of planning. In jurisdictions like Maryland where the probate process is not overly difficult, avoiding probate may not be a driving force in proper planning. A revocable trust, after all, is not just a will substitute but it is an actual trust created and funded during the client’s lifetime. It introduces a bit of complexity. As a disability planning technique, however, especially for clients with significant assets, geographically distant children, or other situations, a revocable trust is pretty much an essential tool,” says, Fred Franke, a principal of the Annapolis estates and trusts law firm of Franke, Sessions & Beckett, LLC.
There are other ways that probate can be avoided – for example, by naming a beneficiary to a retirement plan. The contract under which the retirement plan is created controls the disposition of the asset and it goes directly to the named beneficiary at your death, thereby avoiding probate. (A retirement plan should never be transferred to a trust during the lifetime of the participant or it will trigger a disastrous income tax event.) Other non-probate transfers include joint or tenants by the entirety titling of real property or other assets and pay-on-death or transfer-on-death accounts. Although these designations avoid probate upon an owner’s death, they do not include a mechanism for managing the asset during the owner’s lifetime.
Revocable Trusts And Trusts Contained In Wills
In jurisdictions like Maryland, most estate planning still involves wills for assets individually held. One can do almost everything in a will that could be accomplished in the revocable trust. For example, wills can create testamentary trusts that will come into being upon your death to hold assets in trust for minors, individuals under disabilities, or to provide asset protection for the beneficiaries. Estate tax planning also can be easily accomplished in a will. The primary benefit of a revocable trust in jurisdictions (like Maryland) where probate is not difficult has nothing to do with post-death disposition of assets. The main advantage of a revocable trust in these jurisdictions is as a disability planning tool. If you lose the ability to competently manage your assets, the revocable trust permits your assets to be managed and payments be made on your behalf by the individual or entity you designate as trustee.
Key Decisions When Creating A Revocable Trust
In a revocable trust you, as the settlor of the trust, generally are the initial trustee. Upon your disability, a successor trustee or trustees take over management of the trust for your benefit. The trust needs to provide a mechanism for that succession. Many trusts provide that the succession takes place if the settlor becomes “incompetent” or “incapacitated.” Because legal “capacity” is such a low standard, use of “incapacity” as a triggering event is not recommended. Instead, the trustee succession needs to be tailored to allow a successor trustee to act if the settlor becomes unable to prudently manage his or her own affairs (even if the settlor still technically has legal “capacity”). Successor trustee selection, of course, is another critical decision when setting up a revocable trust for disability planning. “Two of the most important decisions that a client makes when establishing a revocable trust are who becomes the trustee if the client is no longer able to act and how to structure that transfer of trusteeship. We are amazed at how often we handle trust litigation where insufficient consideration was given to how these essential aspects of the trust would work in practice. Often this is a failing by the lawyer advising the client and preparing the revocable trust. The estate planning lawyer should help the client with successor trustee selection and whether checks and balances ought to be built-in to protect the client’s interests.” says Jack Beckett, a principal of the Maryland estates and trusts law firm of Franke, Sessions & Beckett, LLC. If individuals are selected for the task of successor trustees, it may be best practice to have two acting at all times to provide a check and balance. There are other techniques to increase protecting the settlor from financial misconduct by scam artists and/or an unfaithful trustee. With all planning, no universal solution fits every person and you should work with your Maryland estate planning lawyer to work through a solution that will work for you.
Durable Powers of Attorney As An Essential Planning Tool
Another important tool for disability planning is the durable power of attorney. Maryland statutory law regulates aspects of durable powers of attorney. The Maryland statute (officially known as the “Maryland General and Limited Power of Attorney Act” clarifies that an agent under a power is to act in the principal’s best interest with care, competence and diligence. Additionally, unless otherwise provided in the power of attorney, an agent is to act loyally for the principal’s benefit. This is the traditional duty of a trustee (often referred to as a “fiduciary” duty). The importance of this statutory provision is that it imposes upon an agent the same duty of care as a trustee and therefore centuries of case law setting forth the parameters of the trustee’s duty is applied to the agent’s actions. Surprisingly, prior to the enactment of the Maryland statute, there is very little guidance as to the role of agents and the nature of their responsibilities.
Trust and confidence in your agent is obviously a must. As with revocable trust drafting, one technique is to provide that two persons act jointly. This provides a “check-and-balance” safeguard.
The power of attorney statute enumerates a list of individuals who can intervene to protect the principal if he or she cannot supervise the acts of the agent. Per Maryland case law, this broad list includes descendants of the principal. This provision provides an oversight mechanism. Clearly, picking reliable agents to begin with is better than relying on later court action to intercede to protect your interest.
Often clients prefer a power of attorney that is not effective when signed but “springs” into effectiveness upon the event of incapacity. This presents the same issue discussed above relating to how to construct a triggering event for the successor trustee to become engaged if the settlor cannot prudently act on his or her own behalf.
Powers of attorney are powerful but important documents. Indeed, they are commonplace and Maryland law supplies a suggested form. Often people simply sign a power of attorney without thinking through exactly what provisions it contains and how the document would work if ever needed. A power of attorney, however, is a very powerful document regardless of how ordinary they may be or regardless of the fact that the state statute provides a form. As with any estate planning document, you must make certain decisions to make sure that the document works for you. An experienced Maryland estate planning lawyer can offer options that you should consider, guide you through the use of a power of attorney as an integral part of estate planning process, and help you make decisions that address your circumstances while meeting your planning goals.
Advanced Medical Directives and Living Wills in Maryland
Maryland statutory law formally recognizes the right of persons to give advanced directives as to medical treatment to become effective if they become incompetent. These written advanced medical directives are popularly called “living wills.”
Although not a limiting provision, the Maryland advanced medical directive statute defines three set categories of medical conditions: “end-stage condition,” “persistent vegetative state,” and “terminal condition.” These three conditions are used in the Maryland statutory form to delineate one’s medical intervention preferences if you fall into one of those three categories in the future.
The Maryland statutory form is optional and other forms are also valid in Maryland. Because the statutory form is widely used in Maryland and therefore recognizable by Maryland health care providers, it is a good starting point when designing your advanced medical directive.
The statutory form, however, needs to be supplemented. The very nature of attempting to define three conditions and to specifically address only those three conditions limits the form’s usefulness. Another approach to an advanced directive is to move away from the “diagnostic approach” as used in the Maryland form and to move to one based on a series of typical scenarios of illness with preferences as to treatment options. This model makes it clearer what the person probably would want even if he or she does not match exactly the situation of one of the scenarios. This form would more clearly indicate the person’s preferences under a wider range of medical conditions than are set forth in the Maryland form.
Another missing piece to the Maryland form is that Alzheimer’s or other forms of dementia are not specifically addressed. Given the prevalence of these illnesses and the serious concerns that they reasonably raise, a comprehensive advanced directive should discuss that potentiality head on. Geriatric physicians have described at least three stages of dementia (mild, moderate, and severe), and each stage of the disease may well suggest a different treatment preference. A comprehensive medical directive should address this issue as well.
Health care directives also permit you to choose a surrogate and to empower that surrogate to make medical decisions on your behalf if you are unable to do so. Given that no one can predict the future, the most powerful approach to preserving your control over future medical decisions is to name a surrogate and empower that surrogate by communicating your wishes while you are still able to formulate those wishes. Because there is a Maryland advance medical directive form, the temptation is to simply complete that form and believe that your wishes are adequately expressed. As noted above, the Maryland form ought to be treated as a starting point which needs to be supplemented if you wish to be precise when communicating your heath care preferences. As with other estate planning matters, an experienced Maryland estate planning lawyer should be able to guide you through this process.
Once having completed a written health care document, having a conversation with your chosen health care surrogate is very important. This conversation, however, should not be just limited to your surrogate but a conversation that should be had with all of the family members and others who are important to you. It may be difficult to talk about your wishes for end of life care but the conversation is at least as important as putting the proper documents in place. If you are no longer able to participate directly in your own health care and/or end of life treatment options, you should have a skilled estate planning lawyer create the plan, and help communicate the details of that plan, that will guide those who must make those decisions on your behalf.
Contact a Maryland Estate Planning Lawyer for Personalized Attention.
As you grow older your estate planning needs change. The basic transmittal of assets to your intended beneficiaries does not change. What changes is a shift in focus from those issues to planning for potential disability and to put in place mechanisms to provide for handling of your finances if you cannot safely fend for yourself and to clarify how you want health care decisions to be made if you cannot make those decisions yourself.
The Maryland estate and trust attorneys at Franke, Sessions and Beckett LLC understand that needs change over time and are prepared to assist you in constructing a personalized estate plan for any stage of life. For over 35 years, the law firm of Franke, Sessions & Beckett LLC has concentrated on the law of estates and trusts – including meeting the unique needs of clients with complex estates. Because we do it all within the niche of estates & trusts, we are better prepared to help you construct an estate plan that will protect you, your family, and your assets. In order to schedule a consultation with an experienced Maryland estate and trust attorney, call 410-263-4876 to get in touch with our Annapolis office.
Maryland Estate Planning With Young Children
Ideally, a parent will be able to provide for their children from infancy to adulthood. Parenting is the process of providing encouragement and support for the child’s physical, emotional, social and intellectual development. Although statistically unlikely, parents with young children should establish a plan if this process is untimely interrupted by their deaths. A surviving parent of a minor child may appoint a guardian of a minor child by Will. A trust is the best means to provide for your young children’s financial needs. .
Appointing A Guardian For A Minor Child
For parents with minor children, the first estate planning consideration is to decide who would be the appropriate person to be the guardian of the children if neither parent survives. Under Maryland statute, a parent of a minor child may appoint one or more guardians in their Will and the person(s) so designated need not be approved by or qualify in any court. Because of the inherent power of the equity court, however, this statutory privilege is not absolute and the court always retains the power to intervene protect the minor’s best interests.
If there is a surviving parent, of course, that person will have the right to be guardian unless their parental rights have been terminated by a court. Occasionally a non-custodial parent with little or no contact with the child will not want to take on the responsibility of raising the child. Thus it is a best practice to always appoint a contingent guardian in those situations In most other cases, the person or persons named by the surviving parent to be guardian will, in fact, become the guardian. From a planning perspective, every parent ought to have a will designating who would become the guardian if neither parent is living or able to act.
A Trust Should Handle Assets For The Benefit Of Minor Children
A trust should be created to manage the financial resources of the parent or parents for the benefit of the children. Such trusts may be either testamentary (created as part of the will) or inter vivos (created separate from the will). In either case, the terms of the trust should be structured with the individual needs of each child in mind. If there is more than one child, often a trust (a “pot” trust—i.e. a single fund for multiple beneficiaries) will be created for the benefit of all of the children (at least initially). This mirrors how funds would be employed by parents for the benefit of their children to permit all assets to be used for the needs of each child instead of splitting those assets into separate shares for each child. The pot trust provides that the younger children will receive economic support that older children may have already received—for example, for education. Once all of the children become older, the trust fund may be separated into separate trusts for each child. Depending on the level and nature of the trust assets and the needs of the children, however, the general pattern may not work well. There is no one way that will be appropriate for all cases.
Considerations In Choosing a Trustee for Your Child
A critical decision is who should serve as trustee. Obviously, as the name implies the trustee should be trustworthy. The trustee invests and manages the assets and makes distributions in accordance with the terms of the trust for the benefit of the beneficiaries. If using individuals instead of a trust company or other professional trustee, it is generally a good practice to provide that two individuals serve concurrently as co-trustee. One of the trustees, of course, could also be the guardian. If professional management is warranted, trust companies or others can be appointed. If non-family members are serving as trustee, however, we recommend that a trusted advisor with a good understanding of the family be given the power to remove and replace the non-family trustee with another appropriate institutional or other third-party trustee. This is particularly important given the modern tendencies of banks and trust companies to merge, or otherwise change their identity and to assure that the trustee is a good fit for the beneficiary.
Give Flexibility To The Trustee In Making Discretionary Distributions
Generally it is a good practice to give the trustee flexibility in meeting the beneficiaries’ needs. Such flexibility permits the trustee to respond to future circumstances not contemplated by the deceased parent when designing the trust. The flexibility may be framed within a standard for making such distributions. A traditional trust standard to guide the trustee in making distributions is one for “health, education, maintenance and support” of the beneficiary (the “HEMS” standard). One benefit of using the HEMS standard is that it has been used in many trusts and accordingly there is a developed history of court interpretations of that standard under many different circumstances. This gives a predictability to the scope of the distribution standard.
How To Give Specific Direction To A Trustee
While it is important that a trustee be selected that the client has absolute confidence will exercise discretionary distributions for the benefit of the child, often a client wishes to give more specific direction to the trustee. The best practice is to structure this direction as a “precatory” direction (non-binding direction but suggestions) so that the trustee understands what is expected of them but still preserves the ability of the trustee to be flexible if the situation so dictates. Some clients are tempted to use the distribution standard in a trust as a way to promote, perhaps even compel, certain behaviors by the beneficiary. Such trusts might be designed to encourage certain positive behavior such as obtaining a college education or to encourage hard work. Other trusts are designed to discourage negative or self-destructive behavior by tying distributions to indications that the beneficiary is not engaging in such negative lifestyles or actions. These type of trusts are generally referred to as “incentive” trusts which may or may not achieve their objectives. Generally it is best to trust one’s trustee to promote positive achievements and to discourage negative lifestyles by the beneficiaries and set out broad precatory standards for distributions either in the trust document or in a side letter to the trustee. .
Encouraging Financial Responsibility By Trust Design
There is a technique, however, that we believe shows great promise. Most trusts cease at some point and the money will be distributed outright to the beneficiary. A common approach is to distribute the assets in two or more terminating distributions separated by several years. The theory is that if a beneficiary mishandles the first of those distributions then he or she will have “learned their lesson” before the second or additional distributions.
Another approach would be to set out a time when the beneficiary becomes in control of their own trust. In this scenario, a trusted advisor can exercise discretion to accelerate the time at which the beneficiary becomes in charge of his or her trust (e.g., the trust may say that the beneficiary takes control at age 35, but this can be accelerated to age 25). The trusted advisor, in turn, is given objective standards by which to gauge whether the beneficiary should come into control earlier than the outside date set in the trust document. This provides incentive to the beneficiary to attain those objective standards in order to gain control of their financial lives earlier rather than later. The objective standards are not usually educational or business achievement but whether the beneficiary has demonstrated he or she can handle money.
Another technique is to have the beneficiary become a co-trustee with input on managing the funds but not determining distributions. Once the beneficiary gains more experience, then the trust could be turned over to him or her. This provides something akin to an apprenticeship for the trust beneficiary before he or she becomes responsible for those decisions.
“Traditional “incentive trusts” are geared on doling out money if and when the child reaches a pre-determined milestone -obtaining a certain grade point average or earning a certain threshold income level. These standards test the wrong things. Ultimately you should be most concerned whether the child is able to handle money. By giving the child the ability to accelerate when they can gain direct control over their trust, you have created a strong incentive for the child to become financially responsible.”said David Sessions, a principal of the Maryland estates and trusts law firm of Franke, Sessions & Beckett, LLC.
Using Asset Protection Techniques In Children’s Trusts
While a trustee is managing a minor’s trust for the child, the discretionary nature of the trust protects the assets from creditors. Often we suggest structuring bequests to children in continuing trusts where the child, at some point, becomes her or his own trustee instead of the trust ending with a terminating distribution. Under the Maryland Trust Act, a beneficiary may be her/his own trustee and a “spendthrift” provision contained in the trust may still be respected. A spendthrift provision protects the trust assets from the claims from the creditors of the beneficiary. By this technique, the inheritance may be protected from a child’s professional liability judgments (if the child becomes a doctor, lawyer or other professional) and from the child’s possible creditors from business reversals or other potential hazards. It immunizes, in a different way and, perhaps to a somewhat lesser extent, claims against the inheritance due to the child’s potential divorce.
The Maryland estate and trust attorneys at Franke, Sessions and Beckett LLC understand how important it is to you to protect your children. For over 35 years, the law firm of Franke, Sessions & Beckett, LLC has concentrated on the law of estates and trusts – including meeting the unique needs of clients with minor children and the special considerations that involves. Because we do it all within the niche of estates & trusts, our attorneys are continually applying lessons learned in our estate administration and litigation practices to our estate planning practice. This immersion in every aspect of the law of estates and trusts makes us well prepared to help you construct an estate plan that will protect you, your family, and your assets. In order to schedule a consultation with an experienced Maryland estate and trust attorney, call 410-263-4876 to get in touch with our Annapolis office.
Advanced Health Care Directives in Maryland
The Maryland Health Care Decisions Act defines an “advanced directive” (popularly called “living wills”) very broadly. It can be a written or electronic document executed by the declarant; it can be a witnessed oral statement by the declarant, or; it can a wholly electronic document executed by the declarant and authorized in accordance with law.
By statute, the original health care directives were focused almost exclusively on physical impairments. More recently, the statute was broadened to specifically permit a health care directive addressing mental health services.
No specific form is required for an effective health care directive, although, the Maryland Health Care Directive Act provides a form. For Maryland residents, we think the Maryland statutory form is a good starting point for the construction of a health care directive. We see this as a “starting point” because there are certain deficiencies in the Maryland form that should be addressed if you want your health care decisions when you are not able to make them yourself directed by your wishes.
The Two Most Important Considerations
The two most important parts of the health care directive are 1) the selection of an agent and 2) the instructions or direction given to the agent. Both decisions relate directly to assuring that your wishes will be honored. The more definite that you can make known your wishes, the higher the likelihood that those wishes will be honored. Under Maryland law, the person designated as the surrogate “shall base those decisions on the wishes of the patient” so creating a clear directive is important. On the other hand, the agent ought to have sufficient flexibility to implement those wishes taking into account all of the relevant information at the future time when the decision is made. Thus, the instructions given to the agent should not be strictly binding but should rather allow the agent to deviate somewhat from the instructions if a different course would be in your best interest under the circumstances as present.
The Flaws In the Maryland Health Care Directives Form
Planning for how your future health care decisions will be made after you are no longer able to directly participate in those decision is as important as planning how your estate is to be distributed at your death. Unfortunately, the Maryland Advance Directive form does not do a great job of setting forth how you would want future health care decisions to be made if you are unable to make your own decisions.
The part of the Maryland health care directive form describing your treatment preferences generally addresses three circumstances: (1) if you are in a terminal condition and death is imminent, (2) if you are in a persistent vegetative state, and (3) if you are in “an end-stage condition” which is an incurable condition that will continue on this course until death and has already resulted in loss of capacity and complete physical dependency. The three categories of the situations addressed by the Maryland form hardly touch the vast number of potential situations that your agent may face in the future when you no longer can make your own decisions. This is the main shortcoming of the Maryland form: it follows a “diagnostic” format leaving the agent to extrapolate from one particular circumstance to the one facing the agent when he or she is called into action.
Another, more flexible approach is to set out scenarios of various degrees of incapacity and incorporate the medical options that may be available in those scenarios. The options should address whether treatment has a reasonable expectation of leaving you in the same or better circumstance. We recommend supplementing the form with this other approach in order to more fully inform the agent of how you would respond to a future medical decision necessity.
The other shortcoming of the Maryland form is it does not forthrightly address Alzheimer’s or other forms of dementia and spell out how aggressively you would want to treat that or a secondary illness if you were suffering from a form of dementia. Those decisions ought to be wed to the severity of the dementia. You may have a different preference if the dementia is impacting memory but has not necessarily reached a severe stage where it impacts almost every element of your individual autonomy and quality of life. We recommend supplementing the Maryland form with a form that addresses these issues.
“Your health care directive should give the best guidance possible to your agent. Critical health care decisions are extremely personal — taking into consideration religious, moral beliefs, and personal values. It is difficult for the agent to make a major health care decision for someone who cannot express their wishes. The agent will want to decide like you would if you were able, not base that decision on what the agent might decide for himself or herself,” says, Fred Franke, a principal of the Maryland estates and trusts law firm of Franke, Sessions & Beckett, LLC.
It is certainly not a “fun” exercise to address how you would want your medical decisions to be made if you were unable to make them yourself. This exercise forces you to examine medical situations that none of us wish to encounter but, as we age, becomes increasingly a possibility. Going through the exercise of making your preferences known on a written document is a useful tool to focus your thoughts as to how you would want to have these matters handled. It should be viewed, however, as one piece of the puzzle. You should also be communicating this information to your loved ones and most particularly to the person you are naming as an agent.
The Difference Between a Healthcare Directive and a MOLST Form
Often a health care directive is confused with a medical order for life-sustaining treatment (MOLST) form. Both, of course, address end of life decision-making. The MOLST, however, is a medical order that can only be completed with a doctor or other health care professional who discusses the issue with his/her patient and orders that emergency medical services will not be used to resuscitate you in the event of a cardiac or respiratory arrest. A MOLST form containing a do not resuscitate order (a “DNR order”) is something that must be signed by your doctor, nurse practitioner, or physician assistant. Unlike the health care directive, a DNR order must be in a particular standardized form. MOLST forms are used in health care facilities to document discussions with current life-sustaining treatment issues. It is not the same as the health care directive which is generally used long before you are in a health care facility. That being said, if you are entering a health care facility without a health care directive you should prepare one as soon as possible naming an agent and setting out your health care preferences
The Maryland estate and trust attorneys at Franke, Sessions and Beckett LLC understand that end of life health care is a deeply personal and emotional issue. For over 35 years, the law firm of Franke, Sessions & Beckett, LLC has concentrated on the law of estates and trusts – including guiding clients through their options for advanced health care planning. Anyone who has been in a position of making critical heath care decisions on behalf of a loved one understands the importance of knowing how that person would wish decisions to be made. Our experienced Maryland estate planning attorneys have the experience, training, and knowledge to guide you through the process to ensure that your goals are met. Call 410-263-4876 to get in touch with our Annapolis office.
Estate Planning With Special Needs Trusts
Estate Planning for a child with a developmental disability or with other challenges raises unique planning considerations. No child has the same constellation of symptoms or exactly the same needs. Obviously, any planning needs to be responsive to the particular needs of the child as those needs may evolve over time.
Planning Around The Government Income And Resource Limits
When planning for a child, or other loved one, with a mental or physical disability, it is important to provide financial assistance without endangering their eligibility for government assistance. Other than certain educational assistance programs, most government benefits are means-based. For Supplemental Security Income (“SSI”), for example, there are strict income and asset resource limits to qualify. The income limits vary depending on the state in which the individual lives, her/his living arrangements and other factors. The asset or resource limit for SSI is generally $2,000 for individuals although this may also vary for minor children in single parent households. Medicaid has similar means-based requirements.
Types Of Special Needs Trusts
The basic planning tool is a special needs trust which is designed to hold assets for the benefit of the person with the disabilities without disqualifying him or her from SSI or Medicaid benefits. There are three general types of special needs trusts: a “third party” wholly discretionary special needs trust; a (d)(4)(A) special needs trust, and; a (d)(4)(C) special needs trust. The latter two trusts are named for the statutory provisions in the Social Security Act giving rise to their existence.
“All three of these trusts are popularly called special needs trusts (or a SNT). That can be very confusing. Each is quite different, each is designed to address different circumstances, and each has different rules and requirements.” says Jack Beckett, a principal of the Maryland estates and trusts law firm of Franke, Sessions & Beckett, LLC..
The wholly discretionary trust is governed primarily by the Maryland Trust Act with provisions tailored to meet the federal requirements. The (d)(4)(a) and (c) trusts must track the federal statutory provisions but also be consistent with Maryland law. A Maryland special needs trust lawyer should balance the federal requirements with the Maryland substantive law of trusts to help you identify which trust is the right option for you and prepare such a trust with the provisions that will best fit your circumstances.
The Wholly Discretionary Special Needs Trust
The third party wholly discretionary special needs trust can be funded by parents, grandparents or others. It is designed, however, to preserve potential means-tested government benefits. One key to that preservation is that the trust cannot be controlled by the disabled individual or be revocable by him or her. Another requirement is that the third party special needs trust generally may not have a mandated and enforceable distribution provision. It is theoretically possible to have a requirement that a small amount be distributed to the disabled person every month ($100 per month for example) as long as the payment would not be a disqualifying income stream under the government regulations, but such a provision is generally not advised. Additionally, the trust must provide that the beneficiary’s interest cannot be sold, alienated, or transferred by the beneficiary in any way. This is accomplished by the inclusion of a spendthrift clause
Statutory Special Needs Trusts
The other two special needs trusts are usually funded by assets owed to or held by the disabled person. Typical sources of such funds are monies received from a lawsuit recovery or settlement, distributions of child support under a court order, or distributions from an inheritance that was not structured as a third-party special needs trust. Due to a change in the law in 2015, military members and retirees can direct a Survivor Benefit Plan (SBP) for a dependent child to either a (d)(4)(A) or a (d)(4)(C). An SBP cannot, however, be directed to a third-party special needs trust. Neither the (d)(4)(A) nor the (d)(4)(C) count against the beneficiary’s resource limit when his or her assets are evaluated under SSI or Medicaid.
The d(4)(A) trust is generally a privately managed trust either by a family member or by a for-profit trust company. The d(4)(C) is a “pooled trust” managed by a non-profit organization. One benefit of the d(4)(C) trust is the fact that it will be managed professionally and by an organization that will have deep experience in being a trustee for a disabled individual.
Who May Establish a Special Needs Trust?
Only certain individuals can establish a (d)(4)(A) or (d)(4)(C) trust. These individuals are specified by federal law, and include the beneficiary’s parents, grandparents, legal guardian, and a court. One significant difference between the (d)(4)(A) and the (d)(4)(C) is that, historically, federal law permitted the (d)(4)(C) to be established by the disabled person whereas it was not permitted for the (d)(4)(A) trust. (Federal law has since corrected this discrepancy.) Another significant difference is a (d)(4)(A) trust cannot be established for the benefit of an individual age 65 or older, whereas individuals of any age can establish a (d)(4)(C) trust.
Both the (d)(4)(A) and (d)(4)(C) trusts, if properly constructed, will not trigger disqualification under Medicaid or SSI. Parents should decide whether a third-party wholly discretionary special needs trust as well as the (d)(4)(A) and (d)(4)(C) statutory trusts should fit into their overall estate planning and discuss their choice with a Maryland special needs trust lawyer.
A Common Mistake When Planning for a Special Needs Child
Parents often overlook the necessity of going to court to become a disabled child’s guardian when the child reaches legal age – 18 in Maryland. The reason this is often overlooked is because it seems artificial to have to get state court approval of the parent to continue to act for the best interest of the disabled child – something which they presumably have done throughout the child’s lifetime. Nevertheless, this is essential and important to do before a need arises when it may have to be done on an emergency basis. Even if the disabled child has no assets that need management, a guardian may be needed to make the child’s health care decisions.
Create A Letter Of Intent
Aside from the formal estate planning documents, parents with a child with disabilities should consider writing a “letter of intent” to communicate to the trustee the child’s functional abilities, routines, interests, and particular likes or dislikes. This letter should also identify specific physicians and other resources. Professional trustees often complain that trust documents only describe the legal boundaries for the trustee’s actions and never offer insight to the beneficiary as a person and what the settlor of the trust would want the trustee to know. The letter of intent fills that important gap.
Plan for Your Loved One’s Needs With Maryland Special Needs Trust Lawyer
For over 35 years, the law firm of Franke, Sessions & Beckett, LLC has concentrated on the law of estates and trusts – including helping many clients with structuring third party wholly discretionary trusts, (d)(4)(a) and (d)(4)(c) trusts. Planning for loved ones with special needs is an important part of our estate and asset protection planning practice. The core purpose of all estate planning is protecting your intended beneficiaries. Our Maryland estate planning attorneys and staff have the experience, training and knowledge to guide clients through the process to ensure that your goals are met. Call 410-263-4876 today to schedule a consultation at our Annapolis office.
Estate Planning With Retirement Accounts:
The Importance Of Implementing A Trust
Planning with retirement savings plans should preserve the beneficial income tax treatment for your beneficiaries. Family considerations, however, may require that those retirement accounts flow to a trust. The IRS imposes rules as to how such a trust must be designed for the income tax benefits to be preserved. A fundamental job of an estate and trust planning lawyer is to assist clients in coordinating the design of their wills and trusts with their retirement plans and IRAs.
Retirement Plan Basics
The policy behind the tax provisions governing defined contribution plans and IRAs was to encourage retirement savings. The main thrust of the federal tax provisions encouraged savings by allowing a tax deduction for the contributions into the plan. However, federal tax provisions also mandate an age when the participant has to begin taking funds out so that the plan does not become simply a way to accumulate wealth. Instead the plan creates a (taxable) stream of income during retirement. The point of the minimum distribution amounts are to deplete the savings account over someone’s life expectancy. At age 70 ½ the plan participants must begin withdrawing from the account based on actuarial calculations. As originally enacted, these plans could easily be rolled over to a spouse to provide for his or her retirement upon the death of the primary participant.
The rules governing the retirement savings plan going to non-spouses, however, seemed almost an afterthought of Congress. A trust is often the most effective way to ensure that your retirement account is handled according to your wishes after death if your estate planning does not involve a spousal rollover. “In many cases, a spousal rollover to a surviving spouse is almost a reflexive choice and, in fact, works well from an estate planning perspective. If there is no surviving spouse, or if the spouse is from a second marriage with children from the first, you should consider using a trust as the designated beneficiary. Unlike estate planning with other assets, the use of a trust at your death for retirement assets comes with important income tax considerations,” says David Sessions, a principal of the Maryland estates and trusts law firm of Franke, Sessions & Beckett, LLC.
What Happens to Retirement Accounts When the Owner Dies?
If there is no designated beneficiary to receive the account proceeds at the death of the plan participant, then the post-death distributions are withdrawn over a short period. This accelerated withdrawal period also applies if there is a defective beneficiary designation on the account—for example, if a trust is designated as a beneficiary, but the trust terms violate certain IRS rules (this is discussed below).
If a beneficiary was designated (typically on a form provided by the plan provider or custodian, which is governed by contract law), however, the rules are different. For IRAs, the rule is that a non-spouse beneficiary can elect to treat it as an inherited IRA and therefore take it out over the non-spouse beneficiary’s actuarial life expectancy. Since 2017, all 401(k)s have been treated the same as IRAs and, assuming a person was designated as a beneficiary, the plan was to be liquidated over that beneficiary’s life expectancy. Also, after leaving the company supporting the 401(k), the employee may roll over the plan to an IRA. Thrift Savings Plans (TSP) is the Federal government’s version of the 401(k) plan and can be rolled over to an IRA. Inherited IRA treatment is available to both 401(k) plans and TSPs.
When an IRA or other retirement plan is distributed to a beneficiary, all of the distribution is treated as ordinary income whether it is taken in smaller increments over the beneficiary’s life expectancy or whether it is taken out as a lump sum. Being able to stretch the payments over the beneficiary’s own life expectancy is a benefit, as the beneficiary is typically younger than the plan participant. The amount left in the inherited IRA continues to grow tax free. Additionally, unlike the original plan participant, an inherited IRA beneficiary can take out more than the minimum distribution amount without incurring a penalty (but, of course, must pay income tax on the distribution). Thus, inherited IRA status should be preserved to the extent possible in the estate planning.
Using Trusts As Designated Beneficiaries of Retirement Accounts
A trust can be designated as a beneficiary of an IRA, 401(k), or similar retirement plan. This is advantageous for several reasons. For example, a spendthrift clause can prevent the beneficiary’s creditors from attaching the inherited IRA. Although Maryland law provides inherited IRAs with this protection, the law of where the inheriting beneficiary lives will control, and many states do not have similar protection. So to lock in creditor protection, a Maryland spendthrift trust is worth considering.
Designating a trust as the beneficiary of a retirement account may cause complications. Given that the inherited IRA structure depends on a person with a life expectancy to be calculated, any trust that would be a designated beneficiary has to clearly identify a person as the ultimate beneficiary of that trust.
The “Problem” With A Single Pot Trust
If an IRA or other retirement savings plan is left to a “pot” trust (such as a single trust for the benefit of several children or to a spouse and children) those trust beneficiaries have different actuarial life expectancies. The IRS developed a rule that the life expectancy of the oldest beneficiary would dictate the rate of mandatory withdrawals. An alternative that makes this calculation easier and trust administration more workable is to have separate trusts for each beneficiary, which then would enable each beneficiary’s actuarial life expectancy to dictate the withdrawals. Although separate trusts for children may work well, using this technique instead of a pot trust for a second spouse and children from a prior marriage may defeat the estate planning goal. “The IRS rule using the oldest potential beneficiary to establish the mandatory withdrawals can complicate planning. What is important is that the client understand the income tax ramifications of the various estate planning options so to avoid any unintended consequences,” says Fred Franke, a principal of the Annapolis estates and trusts law firm of Franke, Sessions & Beckett, LLC.
“See-Through” Trusts In General
In determining whether a trust that has been designated as a beneficiary of a retirement account qualifies for the extended withdrawal period (as opposed to the shorter withdrawal period applicable when there is no individual designated as a beneficiary), the trust generally must qualify as a “see-through-trust” under applicable IRS guidance. With a “see-through trust”, the trust beneficiary is treated as if he or she had been designated as the designated beneficiary for the retirement account.
The most common see-through trust is the “conduit” trust. A conduit trust requires that all distributions from the retirement plan or IRA must be distributed by the trustee to the named beneficiary. If there is more than one beneficiary of a conduit trust, as in the case with a “pot trust” for several minor children, as mentioned, the default rule is that the oldest beneficiary is treated as the designated beneficiary. A way around using the oldest as the designated beneficiary is to create separate inherited IRA accounts (as opposed to separate trusts) corresponding to the individual trust beneficiaries. The rule is that the trust agreement and the designation in the IRA or retirement plan must create these separate shares.
Special Needs Trust Planning: The Accumulation Trust
One reason to not use a conduit trust is if you are designing a trust for a special needs child. The conduit process of paying the minimum distribution amount into the hands of the beneficiary or for the benefit of the beneficiary might disqualify that beneficiary from needs-based government assistance. In this situation, to comply with the IRS rules that require the IRA to be drawn down over a period determined by the beneficiary’s actuarial life expectancy, the trust terms must generally limit any successor beneficiaries to persons younger than the primary beneficiary. This type of trust is called an “accumulation trust.” The accumulation trust should not have a power of appointment that is either general in nature (which would effectively result in no designated beneficiary thus triggering an accelerated withdrawal period and negative tax consequences) or a broad special power of appointment that could result in an older individual being the measuring life. Any estate planning documents whether a will or a revocable trust should anticipate that a retirement plan or IRA might be put into a trust under certain circumstances. In that event, special provisions should be included to preserve the income tax planning.
“The difficulty in designing a discretionary special needs trust that will become the beneficiary of a retirement plan or IRA stems from the IRS requirement that there is an identifiable measuring life for calculating distributions. The whole point of the third-party SNT is that distributions to the beneficiary are wholly discretionary. Yet if possible, you want to avoid accelerating the income tax which requires that some person will receive distributions over their actuarial lifetime. One technique, depending on the family structure, is to lock in remainder beneficiaries roughly the same age as the primary beneficiary like siblings. The planning objective is to preserve the stretch-out while not disqualifying the primary beneficiary from needs-based public benefits. This requires thoughtful planning,” comments Jack Beckett, a principal of the Maryland estates and trusts law firm of Franke, Sessions & Beckett, LLC,
Retirement Accounts and Revocable Trusts
If a plan recipient or the owner of an IRA is using a revocable trust to manage the possibility of their own disability, it is important that the IRA or retirement plan not be transferred into the revocable trust. That would trigger an income tax based on the value of the entire account. Accordingly, there should be a power of attorney with authority for the agent to withdraw the minimum distribution amount and turn it over annually to the revocable trust. In certain circumstances, one might consider providing that the agent also have the ability to modify beneficiary designations within a pre-determined scope: for example, changing an outright beneficiary to a trust for the primary benefit of the outright beneficiary for his or her share. This would permit the agent under a power of attorney to direct one of the otherwise designated beneficiaries to a special needs trust if the occasion requires.
Contact a Maryland Trust Lawyer to Ensure That Your Retirement Accounts are Handled Properly
Given the popularity and number of IRAs, 401(k)s, and other qualified retirement savings plans, one would expect that planning with these types of accounts would be straight-forward. If trusts are needed to implement an estate plan involving qualified retirement plans, however, such planning becomes somewhat complex. Experienced estate and trust planning lawyers should be able to guide clients through the process of achieving the estate planning objectives without sacrificing the income tax advantages of inherited retirement plans.
The Maryland estate and trust attorneys at Franke, Sessions and Beckett LLC understand the complexity of various retirement plans and are prepared to guide you in planning to make sure that your retirement assets are coordinated with your wills and trusts. For over 35 years, the law firm of Franke, Sessions & Beckett, LLC has concentrated on the law of estates and trusts – including meeting the unique needs of clients with complex assets or family situations. All of our lawyers are involved in all three aspects of an estates and trusts practice: estate/trust planning; fiduciary litigation; and, estate/trust administration. Because “we do it all” within the niche of estates & trusts, we stay current and bring a wide understanding of the law of estates and trusts to our estate planning engagements. In order to schedule a consultation with an experienced Maryland estate and trust attorney, call 410-263-4876 to get in touch with our Annapolis office.