Funding a special needs trust (SNT) with enough money to pay for the living expenses of a child with special needs can be a daunting task for many families. The costs of providing a home and care, as well as a care manager to take the place of the parents when they are no longer around, exceed the resources of most families. A solution for many parents is to fund a special needs trust with life insurance. In these instances, a parent will take out a life insurance policy on his or her life to ensure that once the parent is gone, monies will be available to care for the child with special needs.

There are many benefits to funding a SNT with life insurance. For example, life insurance proceeds can be paid to a SNT free of taxation. Life insurance also typically pays proceeds in a short time period and so can ensure that the special needs child has the cash needed to provide for his or her long-term care. Further, a paid-up life insurance policy will guarantee future funding of a SNT while keeping the parents’ estate intact for other family members.

The various types of life insurance that can be used to fund a SNT include:

Term Life Insurance: Term life insurance provides coverage for a defined period of time, normally the time in which premiums are paid. After that period ends, the policyholder can choose to continue to pay for the policy or end coverage. A term policy pays a benefit should the policyholder die within the period covered under the policy. The premiums for term policies typically increase each year as the insured gets older or are level for a specified number of years, such as 20, after which the policies are typically dropped due to the steep increase in premiums at the end of the guaranteed term.

Whole Life Insurance: Unlike term insurance, a whole life policy lasts for the policyholder’s entire lifetime and provides both death benefit protection and cash value. Part of the premium paid by the policyholder goes into a cash account which accumulates over time. The cash value tends to accumulate at a higher rate when the policyholder is younger and lessens as she ages. Further, many of these policies pay dividends, which add additional value to the policy. Policyholders may withdraw money from their whole life policy but will be charged a fee or, in the case of a loan, the holder will be obligated to pay back the borrowed amount with interest.

Universal Life Insurance: A universal life policy permits the policy holder to adjust death benefits and premium payment to fit any change of circumstances for the holder. Premiums can be credited to an accumulation fund from which premium costs are deducted and to which interest is credited.

Variable Life Insurance: The variable life insurance policy’s cash value is tied to the performance of financial markets.

Survivorship Life Insurance: Also known as a second-to-die life insurance, this policy is taken out on the lives of two people and provides benefits only upon the death of the second insured person.

Some insurance advisors and financial planners recommend survivorship life insurance for funding a SNT trust due to:

• The lower cost of the policy;
• The funds become available upon the death of the second insured, when the funds would be most needed;
• Underwriting (i.e., the process by which an insurance company determines the insurability of the policyholder and rate of premiums) of the policy is less strict since two lives are being insured;
• Policies are available as either whole or universal life; and
• Estate taxes can be delayed until both parties die.

Is a Survivorship Policy a Good Idea?

Some insurance advisors and financial planners advise their clients to use care when funding a SNT with survivorship life insurance. For those families that have financial constraints, a survivorship policy could leave the living spouse with significant financial hardship.

Some insurance advisors and financial planners recommend against survivorship insurance. They point out that there is no guarantee that the survivor will provide for the SNT beneficiary. The survivor may dilute the assets, give them to another favored party, and may not have the ability or inclination to set up a SNT.

While funding a SNT with life insurance may be the best bet for many families, it is essential to ensure that all factors are considered by consulting with an insurance advisor, financial planner and attorney, each of whom is experienced in working with individuals with special needs and their families.

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LegalZoom, a seller of do-it-yourself wills and other estate planning documents, is the target of a class action lawsuit in California charging that the company engages in deceptive business practices and is practicing law without a license.

The lawsuit was filed in Los Angeles Superior Court on May 27, 2010, by Katherine Webster, who is the niece of the late Anthony J. Ferrantino and the executor of Mr. Ferrantino’s estate.

Knowing that he had only a few months to live, Mr. Ferrantino asked Ms. Webster in July 2007 to help him use LegalZoom to execute a will and living trust. Based on LegalZoom’s advertising, Ms. Webster says she believed that the documents they created would be legally binding and that if they encountered any problems, the company’s customer service department would resolve them.

But after the living trust documents were created and signed, Ms. Webster could not transfer any of her uncle’s assets into the trust because the financial institutions that held his money refused to accept the LegalZoom documents as valid. Ms. Webster tried to get help from LegalZoom, with no success. The trust was still not funded when Mr. Ferrantino died in November 2007.

Ms. Webster was forced to hire an estate planning attorney, who petitioned the court to allow the post-death funding of the trust. The attorney then had to convince the banks to transfer the funds — a more difficult task following Mr. Ferrantino’s death. The attorney also discovered that the will LegalZoom created for Mr. Ferrantino had not been properly witnessed. All this cost Mr. Ferrantino’s estate thousands of dollars.

The lawsuit claims that Ms. Webster and others like her relied on misleading statements by LegalZoom, including that LegalZoom carefully reviews customer documents, that it guarantees its customers 100 percent satisfaction with its services, that its documents are the same quality as those prepared by an attorney, and that the documents are effective and dependable.

“Nowhere in the [company's] manual do defendants explain that using LegalZoom is not the same as using an attorney and that its documents are only ‘customized’ to the extent that the LegalZoom computer program inputs your name and identifying information, but not tailored to your specific circumstances,” the lawsuit states, adding that “the customer service representatives are not lawyers and cannot by law provide legal advice.”

Ms. Webster is suing not only on her behalf but on behalf of anyone in California who paid LegalZoom for a living trust, will, living will, advance health care directive or power of attorney. The lawsuit estimates this class embraces more than 3,000 individuals.

“LegalZoom’s business is based on nurturing the false sense of security that people do not need to hire a traditional attorney,” says San Francisco attorney Robert Arns, one of the attorneys who filed the lawsuit. “The complaint points out that LegalZoom advertises that you don’t need a real attorney because its work is legally binding and reliable. That’s misleading. Improperly prepared estate planning documents are a ticking time bomb that can result in improper tax consequences and other items that could cost the estate and heirs huge sums.”

“LegalZoom preys on people when they’re at their most vulnerable, when they are of advanced age or poor health and need a will or a living trust,” adds San Francisco elder abuse attorney Kathryn Stebner, Ms. Webster’s lead counsel.

One of the defendants named in the suit is LegalZoom co-founder Robert Shapiro, who appears on the LegalZoom Web page and TV ads and who is best-known for being one of O.J. Simpson’s attorneys.

This is not the first suit against LegalZoom. In December 2009, a Missouri man who paid LegalZoom to prepare his will sued the company for engaging in the unauthorized practice of law (Janson v. LegalZoom). The lawsuit is also seeking class action status.

For a copy of Ms. Webster’s complaint, please email Kurt Zimmerman at kurt@zimmermanlaw.com.

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The IRS just raised the stakes when it comes to using beneficiary trusts for IRAs and other retirement plans.

In Private Letter Ruling 201021038, the IRS imposed new requirements for these trusts. Make a mistake, and the income tax “stretchout” of required minimum distributions may be lost.

To make matters worse, the IRS proclaimed its unwillingness to accept a post-death court modification intended to cleanup drafting mistakes!

In other words, make sure you are working with a lawyer who is up to speed on these new requirements and is capable of drafting your IRA beneficiary trust right the first time.

Contact us to find out what proper planning and “backup language” needs to be put in your IRA beneficiary trust to satisfy this new ruling from the IRS.

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Although your life insurance policy may pass to your heirs income tax-free, it can affect your estate tax. If you are the owner of the insurance policy, it will become a part of your taxable estate when you die. While the federal estate tax is currently zero, that won’t last long — the exemption will be $1 million and the rate will increase to 55 percent on January 1, 2011, if Congress fails to act in the interim. And state estate taxes are still in effect now. You should make sure your life insurance policy won’t have an impact on your estate’s tax liability.

If your spouse is the beneficiary of your policy, then there is nothing to worry about. Spouses can transfer assets to each other tax-free. But if the beneficiary is anyone else (including your children), the policy will be a part of your estate for tax purposes. For example, suppose you buy a $200,000 life insurance policy and name your son as the beneficiary. When you die, the life insurance policy will be included in your taxable estate. If the total amount of your taxable estate exceeds the estate tax exemption, then your policy will be taxed.

In order to avoid having your life insurance policy taxed, you can either transfer the policy to someone else or put the policy into a trust. Once you transfer a policy to a trust or to someone else, you will no longer own the policy, which means you won’t be able to change the beneficiary or exert control over it. In addition, the transfer may be subject to gift tax if the cash value of your policy (the amount you would get for your policy if you cashed it in) is more than $13,000. If you decide to transfer a life insurance policy, do it right away. If you die within three years of transferring the policy, the policy will still be included in your estate.

If you transfer a life insurance policy to a person, you need to make sure it is someone you trust not to cash in the policy. For example, if your spouse owns the policy and you get divorced, there will be no way for you to get it back. A better option may be to transfer the life insurance policy to a life insurance trust. With a life insurance trust, the trust owns the policy and is the beneficiary. You can then dictate who the beneficiary of the trust will be. For a life insurance trust to exclude your policy from estate taxes, it must be irrevocable and you cannot act as trustee.

If you think you want to transfer a current life insurance policy to someone else or set up a trust to purchase a policy, call us first and we’ll help you handle the transaction properly.

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A recent Special Report from the Tax Foundation, a nonpartisan group that describes itself as favoring simplicity, transparency, neutrality, stability, etc. in our tax system, concludes that the federal estate tax will “return from the dead” on January 1, 2011 even though “the arguments for making repeal permanent are strong.”

According to the report, before 2010 the estate tax raised revenue (approx. $25 billion per year), but this revenue “is largely diverted from other government accounts, generating a small net collection.” The report adds that “[t]he estate tax is complex to the point of absurdity, to the point where even a savvy lawyer or accountant would be a fool to plan his own estate if he had substantial wealth.”

A full copy of this report is available via link from the Tax Foundation website at http://taxfoundation.org/publications/show/26360.html.

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One of the most important decisions a special needs trust’s donor (the person who supplies the funds for the trust) makes is the choice of a trustee for the trust. A trustee typically manages the day-to-day operations of the trust, often making distributions to the trust’s beneficiary, investing the trust’s assets, and paying the trust’s bills. But how can the donor make sure that the trustee will properly manage the trust when the donor is no longer around to keep an eye on the trustee, especially if the trust’s beneficiary is not capable of supervising his own trustee? In many cases, a trust protector can ensure that a beneficiary is protected from trustee mismanagement.

Once she assumes office, a trustee almost always serves in a “fiduciary capacity,” meaning that she is in a position of trust and confidence and has a legal duty to properly manage the trust’s assets while keeping in mind the best interests of the trust’s beneficiary. A fiduciary is held to a high standard of conduct, and she owes the trust’s beneficiary a strict duty of loyalty. However, in many cases involving special needs trusts, the beneficiary of the trust is unable to properly enforce this fiduciary duty because of his special needs. This is where a trust protector comes in.

A trust protector is a person chosen by the donor who is responsible for monitoring the trustee’s actions. The trust protector’s duty is to the trust’s beneficiary as an additional pair of eyes, making sure that the trustee is properly performing her job. The trust protector typically has access to the trust’s accounts, and can compel a trustee to produce a summary of what she has done for the beneficiary. If a trust protector believes that the trustee is not properly performing her duties, he can usually fire the trustee. Depending on how the trust is drafted, the donor can even give the trust protector the power to name a new trustee if the donor has not done so himself in the trust document. (Most of the time, however, the trust protector must name an independent trustee as the new trustee, avoiding the scenario where the trust protector fires a trustee only to name himself as the new trustee).

Trust protectors may be useful in a variety of situations. Take the case of Jennifer and her son, Adam. Jennifer is elderly and would like to make sure that her son, who has special needs, is cared for at home for as long a possible when she is gone. So Jennifer decides to establish a special needs trust that will hold her home for Adam’s benefit, and she funds this trust with enough money to make sure that the property is well kept and that the bills are paid. However, Jennifer’s closest relative, her niece Margaret, does not want to serve as trustee of Adam’s trust because she does not want the added responsibility of managing a home. Jennifer decides to name John, a friend of hers who knows Adam and who runs a property management company, as the trustee instead. Although Jennifer trusts John, she decides to name Margaret as a trust protector to review his yearly accounts and make sure that he charges the proper amount for his services and is keeping the property in good shape.

Every special needs trust is different, and in many cases, especially when a donor is serving as trustee, a trust may not initially need a trust protector. The best way to decide if your special needs trust should include one is to speak with your qualified special needs planner.

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No one wants to face the fact that our loved ones will not be with us forever. Facing our own mortality is frightening as well. Although none of us wants to contemplate a time when we or a loved one might become disabled or die, it is important to be prepared. There are many steps families can take in advance of death or disability to avoid future conflicts or uncertainties:

• Don’t be afraid to start the conversation. Whether you are a parent talking to your children, a husband talking to a wife, or an adult child talking to an aging parent, bringing up the topic of death and disability can be difficult, but it is an important conversation to have. A study by The Hartford found that parents were more willing to discuss estate planning issues than their children.
• Make sure you or your loved ones have done estate planning. All estate plans should include, at minimum, two important estate planning instruments: a durable power of attorney and a will. The first is for managing property during your lifetime, in case you are unable to do so yourself. The second is for the management and distribution of property after death. Revocable (or “living”) trusts can also help you avoid probate and manage your estate both during your life and after you’re gone. In addition, you or your loved ones should consult with an estate planning professional about the best way to minimize estate taxes.
• Plan for the worst. You and your loved ones need to be prepared in the event that one of you becomes disabled and will no longer be able to make your own decisions. The durable power of attorney mentioned above is an important instrument. You will also need a health care proxy (sometimes called a health care power of attorney), which gives someone else the medical authority to communicate your wishes about medical treatment.
• Make sure you or your loved ones draw up a list to help your executors carry out your estate plans. The list should contain information on the location of assets, such as bank accounts, property, and stocks and bonds; the location, keys, and passwords to any safe deposit boxes; the identity of important professionals who might have information about your estate; and the location of important records, such as loan, insurance, and tax documents. The list can also contain things you want done immediately after you die, such as calling relatives or notifying employers.
• Determine you or your loved ones’ wishes regarding funeral arrangements. You may want to pay for your funeral ahead of time to take the burden off of family, but you need to be careful and shop around. If you can’t make arrangements ahead of time, put your wishes in writing so the whole family knows what you want.
• Figure out who is going to get what personal property and heirlooms. Preparation and planning in advance can avoid family squabbles after you or your loved ones die.

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In a recent article (click here), the Wall Street Journal tells how to leave your Roth IRA to kids and grandkids.  Featured in the article is what we call a “retirement benefits trust,” which offers asset protection and other benefits provided by traditional trusts.

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To the surprise of many, the estate tax expired on January 1, 2010. It remains to be seen whether Congress will reinstate it before it returns in 2011, but the fact that there is currently no estate tax can have surprise consequences for spouses.

Standard language found in many estate plans could leave spouses without assets via outright distribution or through a marital trust. It is important to check with an estate planning attorney to make sure your estate plan does what you want it to do.

In previous years, estates could pass a certain amount of assets tax-free (up to $3.5 million in 2009). In addition, spouses can receive an unlimited amount tax free. To take advantage of these rules, estate plans often contain a “bypass trust” (or “credit shelter trust”) and a will with language in it that is designed to allow estates to pass without any estate tax. For example, the will may state something along these lines: “I leave to my trustees the maximum amount that can pass free of estate tax and leave the residual to my spouse.” Because there is currently no estate tax, individuals who die in 2010 with language of this sort in their estate plan could wind up leaving nothing to their spouses via outright distribution or through a marital trust.

While most states allow spouses to claim a portion of the estate (usually one-third), even if they don’t receive anything under a will or trust, this can be a time-consuming and expensive process. Similarly, dealing with “disclaimers” and other post-death planning options can be fraught with potential pitfalls.

Some states are considering legislation to fix the problems created by congressional inaction regarding estate taxes, but to ensure your spouse is covered, you should talk to your attorney.

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A million low-income seniors have become eligible for a big assist on prescription drug expenses this year under a newly expanded federal program. The subsidy can defray thousands of dollars in costs, and in many cases eliminate prescription drug expenses entirely for participating seniors.

The Extra Help program which is administered by the Social Security Administration subsidizes Medicare Part D prescription drug premiums for eligible seniors. While the program isn’t new, eligibility rules have been changed this year in a way that expands its availability dramatically.

The government estimates the average annual benefit to Extra Help participants at $3,900. That should be welcome news for low-income seniors coping with soaring Part D premiums. Average monthly premiums jumped 11 percent for 2010, and they’ve risen 50 percent since 2006, according to the Kaiser Family Foundation.

Seniors are eligible for Extra Help if their income is no greater than $16,245 a year for singles, and $21,855 for married couples living together. The value of stocks, bonds and bank accounts cant exceed $12,510 for singles and $25,010 for married couples. The income definition doesn’t include the value of homes or automobiles.

But there are two significant changes in eligibility rules this year. The cash value of life insurance policies is no longer counted as a resource, and assistance received from friends and relatives to pay for household expenses such as food or utilities also no longer are included. The Social Security Administration is urging anyone who didn’t meet the income standards in the past to re-apply.

The assistance helps with monthly premiums, any annual deductibles, co-insurance and co-payments. The program even plugs the notorious doughnut hole the current coverage gap in Part D that starts when beneficiaries exceed $2,830 in total drug costs for the given year. At that point, the beneficiary pays 100 percent of costs up to $6,440, when so-called catastrophic coverage kicks in.

Unlike standard Part D enrollment which occurs annually between Nov. 15 and Dec. 31 seniors can apply for Extra Help anytime during the year. But you’ll receive the maximum benefit if you’re in a Part D plan with a monthly premium below a certain benchmark monthly premium set by Medicare for each region of the country.

“If you enroll in one of these plans, you receive no bills and don’t have to pay up front and get reimbursed,” says Kelly Brantley, a senior program manager for Health Assistance Partnership, a non-profit Medicare education organization.

If you’re already enrolled in a Part D plan and enter the Extra Help program, you’ll be informed whether your premium is entirely covered, or that you need to pay the difference between the premium and the benchmark amount. However, you also have the right to change to a different plan at any time.

Low-income seniors who aren’t already enrolled in a Part D plan should apply for the Extra Help subsidy, and simultaneously enroll in a drug plan. “If you are eligible, the benefit is retroactive to the first day of the month when you apply,” Brantley explains.

If you’re switching plans or enrolling in Part D for the first time, use the Medicare websites plan finder to select a plan that maximizes your Extra Help benefit. You’ll input data about your specific prescriptions and some other personal data; the tool will take into account the expected subsidy when it presents Part D plan options to you. You’ll be looking for the plan with the fewest restrictions on your specific prescriptions, and one that works with a pharmacy you want to use. To learn more about shopping for plans, visit our page on how to shop for Medicare plans.

You can also get free counseling and assistance in selecting a plan from your local State Health Insurance Assistance Program (SHIP), a government-sponsored counseling service for Medicare beneficiaries. To find the SHIP near you, visit http://www.hapnetwork.org/ship-locator/.

To apply for Extra Help, visit this page Social Security Administration website, call Social Security at 1-800-772-1213 or visit your local Social Security office.

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