How Do Special Needs Trusts Work?

Special needs trusts (SNT) are critical tools for protecting a beneficiary with disabilities’ benefits while providing for their needs.

Special needs trusts (or supplemental needs trusts) have been used for many years. However, there are two factors that are changing and clients need to be aware of them, says the article “Special-Needs Trusts: How They Work and What Has Changed” from The Wall Street Journal. For one thing, many people with disabilities and chronic illnesses are leading much longer lives because of medical advances. As a result, they are often outliving their  primary caregivers. This makes planning for the long term more critical, and the use of special needs trusts more critical.

Second, there have been significant changes in tax laws, specifically laws concerning inherited retirement accounts.

Special needs planning has never been easy because of the many unknowns. How much care will be needed? How much will it cost? How long will the person with disabilities need them? Tax rules are complex and coordinating special needs planning with estate planning can be a challenge. A 2018 study from the University of Illinois found that less than 50% of parents of children with disabilities had planned for their children’s future. Parents who had not done any planning told researchers they were just overwhelmed.

Here are some of the basics:

A special needs trust, or SNT, is created to protect the assets of a person with a disability, including mental or physical conditions. The trust may be used to pay for various goods and services, including medical equipment, education, home furnishings, etc.

A trustee is appointed to manage all and any spending. The beneficiary has no control over assets inside the trust. The assets are not owned by the beneficiary, so the beneficiary should continue to be eligible for government programs that limit assets, including Supplemental Security Income or Medicaid.

There are different types of Special Needs Trusts: pooled, first party and third party. They are not simple entities to create, so it’s important to work with an experienced estate elder law attorney who is familiar with these trusts.

To fund the trust after parents have passed, they could name the Special Needs Trust as the beneficiary of their IRA, so withdrawals from the account would be paid to the trust to benefit their child. There will be required minimum distributions (RMDs), because the IRA would become an Inherited IRA and the trust would need to take distributions.

The SECURE Act from 2019 ended the ability to stretch out RMDs for inherited traditional IRAs from lifetime to ten years. However, the SECURE Act created exceptions: individuals who are disabled or chronically ill are still permitted to take distributions over their lifetimes. This has to be done correctly, or it won’t work. However, done correctly, it could provide income over the special needs individual’s lifetime.

The strategy assumes that the SNT beneficiary is disabled or chronically ill, according to the terms of the tax code. The terms are defined very strictly and may not be the same as the requirements for SSI or Medicaid.

The traditional IRA may or may not be the best way to fund an SNT. It may create larger distributions than are permitted by the SNT or create large tax bills. Roth IRAs or life insurance may be the better options.

The goal is to exchange assets, like traditional IRAs, for more tax-efficient assets to reach post-death planning solutions for the special needs individual, long after their parents and caregivers have passed.

Reference: The Wall Street Journal (June 3, 2021) “Special-Needs Trusts: How They Work and What Has Changed”

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Why Won’t My Power of Attorney Work?

Powers of attorney are critical estate planning tools, but there are some instances they don’t work, such as with SSA and the IRS.

Powers of Attorney (POAs) are excellent and often overlooked estate planning documents.  They name an agent to act on your behalf if you cannot do so yourself, such as due to incapacity.  However, there are some instances where traditional POAs won’t work.  The IRS and the Social Security Administration (SSA) are two examples of entities that don’t recognize traditional POAs. Forbes’s recent article entitled “Two Times When Your Power of Attorney Isn’t Going to Work” explains why.

The IRS says that you must use Form 2848, “Power of Attorney and Declaration of Representative” to allow anyone to act on your behalf. This form requires you to state the tax matters and years for which the agent is authorized to act. That’s different from a traditional POA for financial matters, which usually has blanket statements allowing the agent to take any or a broad range of actions on your behalf in certain matters.  For this reason, we often include language in our POAs to create a Form 2848 specifically to deal with the IRS.

A married couple that files joint tax returns must also have each spouse separately complete and sign a form. There is no joint form.

Technically, the IRS might accept other POAs as the instructions to Form 2848 indicate this. However, the POA must meet the requirements of Form 2848 to be accepted as a substitute. That can be a tall order.

The Social Security Administration is similar. It says on its web site that it doesn’t recognize POAs. When you need someone to manage your Social Security benefits, you contact the SSA and make an advance designation of a representative payee.

A 2018 law created this feature that lets you name one or more individuals to manage your Social Security benefits. The Social Security Administration must usually work with the named individual or individuals. You can rank up to three people as advance designees. Therefore, if the first one isn’t available or is unable to perform the role, the SSA will move to the next person on your list.

Someone who already is receiving Social Security benefits can designate an advance designee at any point, and a person claiming benefits for the first time can name the designee during the claiming process. The designation can be made using your “my Social Security” account on the Social Security web site or by contacting the Social Security Administration by phone (800-772-1213) or at the local field office. A designee can also be named through the mail by using Form SSA-4547 – Advance Designation of Representative Payee.

Representative payees generally must be individuals, but it also can be a social service agency, nursing home, or one of a number of other organizations recognized by the SSA to serve as payees. If you don’t name any representatives, the SSA will name a representative payee for you, if it decides you need help managing your money. A relative or friend can apply to be representative payees, or the SSA can make the selection.

These are two very common scenarios where a POA may not work, though there are others.  Aside from the obvious cases of badly prepared or defective POAs, the Veterans Administration has their own representative system as well. But, careful planning and the advice of competent counsel can help tremendously by preparing a POA that can address as many scenarios and contingencies as possible.  Counsel can also help you identify tools outside of the POA that can assist with financial management such as trusts.  Also, before addressing your POA it might be helpful to get an idea as to the types of POAs and issues to consider with them, which you can find here.  https://galligan-law.com/what-is-the-right-kind-of-financial-power-of-attorney-for-you/

If you encounter problems using your power of attorney, consult with a lawyer who can help you navigate the system you are coping with and can advise you on how to take action for your loved one.

Reference: Forbes (Jan. 28, 2021) “Two Times When Your Power Of Attorney Isn’t Going To Work”

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Three Retirement Myths to Avoid

 There are three common retirement myths relating to retirement age, medical coverage and social security that clients often suffer from.

While you’re busy planning to retire, chances are good you’ll run into more than a few retirement myths, things that people who otherwise seem sincere and sensible are certain of. However, don’t get waylaid because any one of these retirement myths could do real harm to your plans for an enjoyable retirement. That’s the lesson from a recent article titled “Let’s Leave These 3 Retirement Myths in 2020’s Dust” from Auburn.pub.

You can keep working as long as you want. It’s easy to say this when you are healthy and have a secure job but counting on a delayed retirement strategy leaves you open to many pitfalls, especially with the effect COVID-19 has had on the workplace. Nearly 40% of current retirees report having retired earlier than planned, according to a study from the Aegon Center for Longevity and Retirement. Job losses and health issues are the reasons most people gave for their change of plans. A mere 15% of those surveyed who left the workplace before they had planned on retiring, said they did so because their finances made it possible.

Decades before you plan to retire, you should have a clear understanding of how much of a nest egg you need to retire, while living comfortably during your senior years—which may last for one, two, three or even four decades. If your current plan is far from hitting that target, don’t expect working longer to make up for the shortfall. You might have no control over when you retire, so saving as much as you can right now to prepare is the best defense.

Medicare will cover all of your medical care. A common retirement myth is that Medicare will cover all of your medical costs and consequently retirees under plan for their needs.  Medicare will cover some of costs, but it doesn’t pay for everything. Original Medicare (Parts A and B) covers hospital visits and outpatient care but doesn’t cover vision and dental care. It also doesn’t cover prescription drug costs. Most people do not budget enough in their retirement income plans to cover the costs of medical care, from wellness visits to long term care.   Clients often insist they can afford or don’t believe they will need long term care expenses,  but often are mistaken.  You can see this article for a flavor of those issues.  https://galligan-law.com/can-i-afford-in-home-elderly-care/   Medicare Advantage plans can provide more extensive coverage, but they often come with higher premiums. The average out-of-pocket healthcare cost for most people is $300,000 throughout retirement.

Social Security may disappear.  A final retirement myth is that social security will cover or mostly cover a retirees needs.  Nearly 90% of Americans depend upon Social Security to fund at least a part of their retirement, according to a Gallup poll, making this federal program a lifeline for Americans. Social Security does have some financial challenges. Since the early 1980s, the program took in more money in payroll taxes than it paid out in benefits, and the surplus went into a trust fund. However, the enormous number of Baby Boomers retiring made 2020, saw the first year the program paid out more money than it took in.

To compensate, it has had to make up the difference with withdrawals from the trust funds. As the number of retirees continues to rise, the surplus may be depleted by 2034. At that point, the Social Security Administration will rely on payroll taxes for retiree benefits. Assuming Congress doesn’t find a solution before 2034, benefits may be reduced or severely impacted.

Saving for retirement is challenging but focusing on the facts will help you remain focused on retirement goals, and not ghost stories. Your retirement planning should also include preparing and maintaining your estate plan.  This is an excellent time to sit with your financial advisor to determine whether your retirement planning is safe from these three myths.

Reference: Auburn.pub (Dec. 13, 2020) “Let’s Leave These 3 Retirement Myths in 2020’s Dust”

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