Category Archives: special needs trusts

Client Update – The SECURE Act

At the end of December, Congress passed a new law – the SECURE Act – that dramatically changes the post-death income tax treatment of retirement accounts, including IRAs and 401(k) plans.  The new law affects many clients, and may require you to make changes to your estate plan.

Changes to distributions after death

The SECURE Act eliminated the “Stretch IRA” – the opportunity for most retirement account beneficiaries to receive distributions slowly over the remainder of their lifetime.  Now, most beneficiaries who inherit a retirement account in 2020 or later must withdraw all the assets within ten (10) years of the account owner’s death.  In most cases, the 10-year required withdrawal period will increase income taxes.

Some beneficiaries are still eligible for a lifetime payout period.  These “Eligible Designated Beneficiaries” are exceptions to the 10-year required withdrawal rule and include:

  • The surviving spouse of the retirement account owner;
  • A disabled or chronically ill beneficiary;
  • A minor child of the retirement account owner (but not a minor grandchild); and
  • A beneficiary who is less than 10 years younger than the retirement account owner.  

Other changes during account owner’s lifetime

The SECURE Act also amended the laws governing retirement accounts in other important ways.  It increased the age at which the account owner must begin required minimum distributions from 70 ½ to 72 for those who did not reach 70 ½ by the end of 2019.  It also eliminated the age limit for deductible IRA contributions. 

Under the new law, if you are over 70 ½, you may still make qualified charitable distributions up to $100,000 per year from your IRA.  However, that amount is reduced by deductible IRA contributions you made in the same year. 

Do these changes impact you?

The SECURE Act has broad impact.  Many clients will need to make changes to their beneficiary designations or their estate plans.   If you have a retirement account, you may need to make changes to your estate plan if:

  • Your retirement accounts are large (valued at several million dollars and more).  The impact of the increased income tax will be significant.
  • You named as beneficiary a minor or young adult, or a trust for his or her benefit. 
  • You named as beneficiary a disabled or chronically ill person, or a trust for his or her benefit.
  • You want your retirement account to provide long term support to a beneficiary who is disabled, ill, or unable to manage money.

Please reach out to us so we can provide specific, expert advice to benefit your family.

How can we help you?

The SECURE Act also offers some new estate planning opportunities to consider.

  • You may wish to do a Roth conversion of all or part of an existing IRA to save your beneficiaries income taxes.  Although income taxes will be due at conversion and the 10-year rule will still apply, the beneficiaries will not pay income taxes on the accelerated distributions.
  • If you are charitably inclined, you may wish to leave all or part of your retirement account to charity or to a charitable remainder trust, which do not pay income taxes, and leave other assets to individual beneficiaries.
  • You may want to reconsider the division of assets among your beneficiaries.  For instance, you may want to leave your retirement account to a disabled child (who is an Eligible Designated Beneficiary and qualifies for a lifetime payout period) and leave other assets to other beneficiaries.
  • You may consider purchasing additional life insurance to replenish retirement assets lost to income taxes.

What about your trust?

Most clients will not have to revise their trust to accommodate the new law, even if retirement benefits will pass to the trust at death.  The trust provisions will still work.  Nonetheless, an amendment to the trust may be required if a trust beneficiary is disabled or chronically ill. 

Will My Trust Affect My College Financial Aid?

1280px-Harvard_University_Old_HallDo you have a college age child (or soon to be college age child)?  Are you (or might you become) the beneficiary of a Trust funded with gifted or inherited assets?  Is your child the beneficiary of a trust funded with gifted or inherited assets?  If your answers to these questions are “Yes”, you may be concerned about the impact of the Trust on your child’s eligibility for college financial aid.  As an estate planning attorney, I am often asked this question by the adult children of elderly estate planning clients who anticipate inheriting assets and are concerned about qualifying for financial aid.

The (Very Basic) Nuts and Bolts of Financial Aid

The Free Application for Federal Student Aid (FAFSA) is the financial aid form that most colleges and universities require students to complete to determine eligibility for financial aid.  Some select colleges also require students to complete the CSS Profile.  Most money and property owned by and earned by the student and his or her parents is counted as an asset, will be used to determine financial aid eligibility, and must be reported on the forms.

The information reported is used to calculate the Expected Family Contribution (EFC), which then determines the student’s financial need.  There are several different calculation methodologies, and the total countable assets vary slightly depending upon the methodology the school uses.  But, generally speaking, the student is expected to use 20% of his or her assets each year toward the cost of college and the parents are expected to use 5.64%.  The percentage of annual income expected to be contributed will likely be higher.

Are Trust Funds Counted in the Financial Aid Process?

The answer to this question is a very clear “Yes”.  Trusts must be reported on the FAFSA and are counted in calculating the EFC.  Question 42 of the FAFSA asks the prospective student to report the net worth of his or her investments.  Question 91 of the FAFSA asks the student’s parent’s to report the net worth of their investments.  The FAFSA instructions define “investments” as:

“real estate (do not include the home in which you live), rental property (includes a unit within a family home that has its own entrance, kitchen, and bath rented to someone other than a family member), trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certificates of deposit, stocks, stock options, bonds, other securities, installment and land sale contracts (including mortgages held), commodities, etc.”  (emphasis added)

The fact that the Trust Donor placed restrictions or limitations on the beneficiary’s access to the Trust does not matter.  The total Trust assets – income and principal – will be counted, even if the Trust limits the beneficiary to income and/or a small amount of principal per year.  Even the assets in a Special Needs Trust will be counted.

There is one limited exception to this rule.  A Trust that is established by a court to hold assets for the benefit of a disabled person is not counted in the financial aid process.  These types of involuntary court-ordered Trusts are often funded for a beneficiary who is the recipient of a large personal injury settlement.  Although Special Needs Trusts need not be created by court order, preserving the beneficiary’s eligibility for future financial aid may be a good reason to obtain a court order before setting up a Special Needs Trust.

How are Trust Funds Counted?

All of the current year’s Trust income must be reported as income of the beneficiary on the FAFSA, even if the income accumulates in the trust and is not distributed.  Calculating the value of future income and principal from the Trust is more complex.  The future income and principal must be reported as the net present value of such payments.  Reporting the sum of all future payments, without discounting them to calculate present value, will result in an overstatement of the Trust fund value.

My best advice is to be aware that Trusts are not an end run around the financial aid rules.  Trust assets are counted, must be reported, and will be considered available to fund a child’s education.

Image of Harvard Yard from Wikipedia Commons.

ABLE Act Offers New Estate Planning Tool for Families with Disabled Children

527517137_f382df11c4_z (1)At the end of 2014, Congress passed and the President signed a new law – the Achieving a Better Life Experience (ABLE) Act.  The Act was passed as part of the tax credit extension package.  It is intended to give disabled individuals an opportunity to save assets in an ABLE account without risking their eligibility for government benefits (such as SSI and Medicaid) which otherwise limit savings to $2000.

ABLE plans – to be known as “529A” plans – were modeled after the popular 529 college savings plans.  Here is how they work.  A 529A plan is funded for the benefit of a disabled individual.  The assets contributed to the plan grow tax free and distributions can be made tax free provided they are used for “qualified disability expenses” for the disabled individual.  Qualified expenses include housing, transportation, health care, and education, for example.  The distributions must be used to supplement, rather than supplant, the individual’s public benefits so as not to disqualify him or her.  Distributions that are not used for qualified expenses are subject to income taxes and a 10% penalty.

Like traditional 529 plans, 529A plans come with rules.  Only those who became disabled prior to age 26 are eligible.  In addition, a disabled individual can save up to $14,000 per year in the plan and only up to $100,000 total.  Amounts above those limits will disqualify the individual from public benefits.  On the disabled individual’s death, any remaining amounts in the plan must be paid back to the state as reimbursement for benefits received.

529A plans will offer an important saving opportunity for those looking to plan for the future of disabled children.  Typically, I advise clients interested in setting aside money for disabled children to establish a Third Party Supplemental Needs Trust (SNTs) for their benefit.  SNTs are an important estate planning tool because the assets in the Trust will not disqualify the disabled child from benefits.  SNTs still make sense for families wishing to set aside substantial assets and/or to ensure that those assets are managed by a Trustee.  However, SNTs may be costly to establish and administer, and thus may not make sense for families wishing to set aside a small amount of money for their disabled child.  For those families, a 529A plan will be a great alternative.

There are still a lot of unanswered questions about how 529A plans will work and how useful they will be.  The Treasury Secretary is tasked this summer with writing regulations to carry out the ABLE Act.  Those regulations will answer many of those unanswered questions and establish concrete rules for establishing, funding, and using ABLE accounts.  Then, we will need to wait for financial service providers and/or disability rights organizations to begin to administer ABLE accounts and invest the assets in those accounts.  This hopefully will happen by the end of 2015.  Stay tuned for more information.

Image from flickr,