Posts tagged with "trusts"

Estate Planning in Connecticut

You may be thinking that if you have a simple will, and you have already planned for your children, there’s no reason to update your estate plan.   But there are lots of good reasons to revisit your estate planning documents, including the following:

 

  • Are you in a high-risk profession, such as being a physician, attorney, or business owner? You may want to consider a Domestic Asset Protection Trust, a tool that the legislature gave Connecticut residents in January 2021, that can be used to protect assets and minimize transfer taxes, while shielding trust assets from future creditors of the grantor.  Gen. Stat. Sec. 45a-487j, et seq.
  • Are you a woman of childbearing age? In 2019, the Probate Code was updated to provide specific options in an advance healthcare directive if a decision must be made about whether to provide life support for a pregnant woman.  If you are a woman of childbearing age, laying out your wishes and discussing them with your loved ones could save them a heart-wrenching decision in an unimaginably difficult situation.  Gen. Stat. 19a-575.
  • Did you get a job that offers stock options as compensation? Startups and even established tech giants now regularly offer stock options as part of compensation packages to lure and retain top talent.  Your Power of Attorney can now include giving your agent the power to —or prohibiting your agent from—buying, selling, exchanging, or assigning your hard-earned stock options.  Gen. Stat. Sec. 1-351f.
  • Did you start your own business or company during the pandemic? A good estate plan incorporates business succession instructions so that your family and business partners do not wind up litigating your stake in a business.
  • Have you acquired new property or opened bank accounts? To minimize probate court involvement after your death, it is important to review your assets and make sure that they are properly titled, and that you’ve designated the right beneficiary where appropriate, so that the accounts pass to your beneficiaries with as little entanglement as possible.
  • Have your children gone through major life changes? Maybe your life has been stable, but if you have young children, children with financial challenges such as bankruptcies or creditor difficulties, children who gotten married/divorced, or children with either physical or mental health issues, you may want to consider whether to put their inheritance (no matter how small) into a trust so you can control how the trust assets are spent  A trust can also protect the trust assets – either from creditors or even from your own children or their spouses.  There are many different types of trusts, and a skilled attorney can help you decide whether one of them might fit your needs.
  • Are you interested in so-called “Dynasty Trusts”? Connecticut recently extended the vesting period required by the so-called Rule Against Perpetuities (RAP) to 800 years, instead of the customary 90 years.  Gen. Stat. Sec. 45a-491(f).  While explaining this technical jargon could be the subject of an entire textbook, the bottom line is that this new, super-sized RAP gives Connecticut residents with significant assets some of the greatest flexibility in the nation to retain wealth within families.  But there’s a catch: it only applies to trusts created on or after January 1, 2020.  Because of these new options, it is critical to sit down with an estate planning attorney to determine whether a “Dynasty Trust” would be suitable for your estate.

These are just a sample of the new developments and tools that should be considered in designing an estate plan that fits your unique needs.  The rules governing estate planning are like a complicated jigsaw puzzle.  If just one piece of your estate plan does not fit into the puzzle, your beneficiaries will suffer the consequences, whether they are emotional, financial, or legal.  The attorneys at Maya Murphy, P.C. can assist Connecticut and New York residents with estate planning matters to make sure that your estate plan is drafted carefully and with an eye to the future.  Attorney Joseph C. Maya may be reached at Maya Murphy, P.C., 266 Post Road East, Westport, Connecticut (located in Fairfield County), by telephone at (203) 221-3100, or by email at JMaya@mayalaw.com.  The above is not intended to constitute tax advice, and to discuss the potential tax implications of a will or trust, you should consult with a tax professional.

Special Needs Trusts in Connecticut

A special needs trust is set up for a person with special needs to supplement any benefits the person with special needs may receive from government programs. A properly drafted special needs trust will allow the beneficiary to receive government benefits while still receiving funds from the trust. There are three main types of special needs trusts, but first it is important to understand how a typical trust works.

What is a trust?

A trust is really a relationship between three parties — a donor, who supplies the funds for the trust; a trustee, who agrees to hold and administer the funds according to the donor’s wishes; and a beneficiary or beneficiaries who receive the benefit of the funds. Often, but not always, the donor’s wishes are spelled out in a document that gives the trustee instructions about how she should use the trust assets. Trusts have been used for estate planning for a long time, and are highly useful tools for ensuring that a donor’s property is administered as he sees fit. One of the reasons trusts are so popular is that they usually survive the death of the donor, providing a low-cost way to manage the donor’s assets for others when the donor is gone.

What is a Special Needs Trust?

A special needs trust is a trust tailored to a person with special needs that is designed to manage assets for that person’s benefit while not compromising access to important government benefits. There are three main types of special needs trusts: the first-party trust, the third-party trust, and the pooled trust. All three name the person with special needs as the beneficiary. A “first-party” special needs trust holds assets that belong to the person with special needs, such as an inheritance or an accident settlement. A “third-party” special needs trust holds funds belonging to other people who want to help the person with special needs. A pooled trust holds funds from many different beneficiaries with special needs.

What kinds of Special Needs Trusts are there?

The reason there are several different types of trusts has to do with regulations regarding Supplemental Security Income (SSI). SSI is a government program that assists people with low incomes who have special needs. In order to qualify for SSI, an applicant or beneficiary can have only $2,000 in his own name. If the person has more than $2,000 in his own name, (typically because of excess savings, an inheritance or an accident settlement), the government allows him to qualify for SSI so long as he places his assets into a first-party special needs trust.

The trust must be created by the beneficiary’s parent or grandparent, or by a court, but it cannot be created by the beneficiary, even though his assets are going to fund the trust. While the beneficiary is living, the funds in the trust are used for his benefit, and when he dies, any assets remaining in the trust are used to reimburse the government for the cost of his medical care. These trusts are especially useful for beneficiaries who are receiving SSI and come into large amounts of money, because the trust allows the beneficiary to retain his benefits while still being able to use his own funds when necessary.

Third-Party Special Needs Trusts

The third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold any kind of asset imaginable belonging to the family member or other individual, including a house, stocks and bonds, and other types of investments.

The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect an SSI beneficiary’s access to benefits and the funds can be used to pay for the beneficiary’s supplemental needs beyond those covered by government benefits. But a third-party special needs trust does not contain the “payback” provision found in first-party trusts. This means that when the beneficiary with special needs dies, any funds remaining in her trust can pass to other family members, or to charity, without having to be used to reimburse the government.

Pooled Special Needs Trust

A pooled trust is an alternative to the first-party special needs trust. Essentially, a charity sets up these trusts that allow beneficiaries to pool their resources for investment purposes, while still maintaining separate accounts for each beneficiary’s needs. When the beneficiary dies, the funds remaining in her account reimburse the government for her care, but a portion also goes towards the non-profit organization responsible for managing the trust.

Anyone can establish a special needs trust and, if the trust is properly drafted to account for tax planning, in certain situations gifts into the trust could very well reduce the size of the donor’s taxable estate. As if these are not enough reasons to create a trust, elderly people who are attempting to qualify for long-term care coverage through Medicaid can transfer their assets into a properly drafted third-party special needs trust for the sole benefit of a person with disabilities without incurring a transfer-of-assets penalty, allowing the elder to qualify for Medicaid and making sure that the person with disabilities is taken care of in the future.

Of course, every person with special needs is different, which means that every special needs trust is going to be different as well. The only way to determine which special needs trust is right for your family is to meet with a qualified special needs planner to discuss your needs. If you have any questions regarding this topic, or any special education law matter, please contact Joseph Maya at 203-221-3100 or by email at JMaya@MayaLaw.com.

DSUE: The Deceased Spouse’s Unused Exclusion

Many individuals have no idea what the DSUE is. Well, it is a fairly simple term when you break it down. Every individual gets an exclusion amount for estate and gift taxes that is adjusted for inflation, last year is was $5,250,000. That means that on death, or during life, an individual can devise, bequeath, or gift up to that amount without generating any tax liability. (Gifts must be under the annual exclusion amount of $14,000 in order to not be subjected to a 40% tax). If you are married, you and your spouse can combine your exclusion amounts or, when one spouse passes away with some of their exclusion left, the other spouse may use that. This is called portability and the unused amount is called the deceased spouse’s unused exclusion (DSUE for short).

For example, imagine you and your spouse have used none of your exclusion amounts. Now, one spouse passes away and their estate is $2,250,000. The deceased spouse’s estate will not be subject to estate tax because they had an exclusion amount of $5,250,000 in 2013. Therefore, the spouse had $3,000,000 left after their estate was settled. If the surviving spouse, or their executor makes the election, they may use the remaining $3,000,000 from their deceased spouse’s estate in addition to their $5,250,000. This means they can exclude up to $8,250,000 from estate, gift, and generation skipping transfer tax. The DSUE is thus “portable.”

While no estate planner relies on portability (because the government can change the law at any time), it is definitely a useful tool for those with large enough estates to utilize it. In 2013, the government set forth legislation to make portability “permanent” for the foreseeable future.

For more on the DSUE and portability see this article: Lewis Saret, Estate Tax Portability – Date DSUE Amount May Be Taken Into Account, Forbes, Jan. 14, 2014.

Or, if you would like to speak with one of Maya Murphy’s experienced estate planners call 203-221-3100. The head of our estate planning division can also be reached by email at rsweeting@mayalaw.com

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Spendthrift Trusts for You and Your Children’s Own Protection

It’s unfortunate, but clients who meet with me to do their estate planning will sometimes mention that one or more of their children is somewhat of a liability for one reason or another. You see it and hear about it all the time, a troubled youth or just a child who has no idea how to manage their affairs. Often, parents still want to include these children in their wills, but they fear what may happen when the children do get the money.

The answer: A spendthrift trust. Using such a trust as a component of your estate planning is generally a wise approach when a child (or any beneficiary who is not a child) is in one or more of the following cicumstances:

The child is irresponsible with money management, does not have a history of saving and investing, and there is a concern that your hard-earned estate will be wasted;
The child has a history of creditor problems, actually hascurrent creditor problems, or you are reasonably certain that creditor issues will arise in the future based on the child’s behavior;
The child is in an unstable marriage where a divorce is more than likely…the trust can prevent the estate from becoming part of a divorce settlement process;
The child is addicted to drugs, alcohol or gambling;
The child has a history of being influenced by an overbearing spouse in regards to money management;
The child belongs to a religious group or some similar organization and you do not want some/all of your estate to ultimately be donated to such a group;
The child would be prone to “financial predators” and scam artists.

A spendthrift trust is a trust usually established with the object of providing a fund for the maintenance of another person, known as the spendthrift, while also protecting the trust against the beneficiary’s imprudence, extravagance, and inability to manage financial affairs. For example, a settlor establishes a spendthrift trust for his son, a compulsive gambler, who spends money injudiciously with no concern for the future. Under the terms of the $400,000 trust, which is to be administered by the family’s lawyer, the son is to receive $15,000 a year. Any words that indicate the settlor’s intention to impose a direct restraint on the transferability of the beneficiary’s interest can be used to create a spendthrift trust.

Such trusts do not limit the rights of the spendthrift’s creditors to the property after it is received by the beneficiary from the trustee (one appointed or required by law to execute a trust). The creditors cannot compel the trustee to pay them directly. This means that any of the spendthrift’s creditors can seek to have the money the spendthrift has already received applied to satisfy their claims. A creditor’s claims to future payments under the trust, however, are restrained. The spendthrift’s creditors cannot reach the $15,000 that he is to be paid in a subsequent year until it is actually paid out to him. If such a person could dispose of his right to receive income from the trust, his incompetence or carelessness might lead him to anticipate his income and transfer to monetary lenders and creditors the right to receive future income as it became due. By restricting the spendthrift so that he can do nothing with the income until it is paid into his hands by the trustee, he is more likely to be protected, at least to some extent, against impoverishment.

Please note that this is not always the best approach, but those of you in a situation such as this should discuss this issue with an estate planning attorney. Otherwise, your child’s inheritance may tragically disappear…and perhaps make your child’s problem worse. If you have any questions of spendthrift trusts, or are looking for an attorney to plan your estate, call the experience estate planning lawyers of Maya Murphy, P.C. today at 203-221-3100.

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