Wednesday, May 5, 2010

The Increased Need for Special Needs Trust Planning

There is no doubt that the need for special needs planning is increasing. Just look at these statistics:

  • In 1992, there were 15,580 children ages 6-22 who were diagnosed as having what is now called an Autism spectrum disorder. In 2006, the number was 224,594.
  • In 2006, there were an estimated 24.9 million adults in the United States with serious psychological distress.
  • Approximately 4.4 % of U.S. adults may have some form of bipolar disorder during some point in their lifetime.
  • In 2006, an estimated 22.6 million people in the U.S. (9.2% of the population age 12 or older) were substance dependent or abusive in the previous year.

Almost every family has at least one member (child, grandchild, nephew, niece, parent, grandparent) who will always need help managing personal care and/or finances. And since most of these conditions do not decrease life expectancy, many families are seeking answers on how to provide the best quality of life for their loved ones for the rest of their lives . . . which could, for a young child, be 70 years or longer.

Fewer Programs Are Available
At the same time that the need for support services is increasing, government and non-government programs are being reduced and even eliminated due to the strain on state budgets, competition among entitlement programs, and pressures to reduce deficit spending. Once a program is cut, it may be difficult if not impossible to restore it in the future.

Families Are Motivated
Even families who are using them now do not trust that the programs that are benefitting their special loved one will be there to provide the needed benefits in the future. They are wisely (and fearfully) looking at alternatives to provide those services. Common concerns are:

  • Who will care for my loved one when I am gone?
  • Who will be my loved one's advocate?
  • Where will my loved one live?
  • How much independence can be maintained?
  • Will the money last for my loved one's lifetime?
Preserving Government Benefit Entitlement
Are government benefits for a special needs person worth preserving? For families of lesser means, the answer is almost always, "Yes, absolutely!" For more affluent families, however, maybe not.

It may be better to privatize the special needs person's care instead of spending thousands of dollars to protect a few hundreds in benefits that may not be available in the future. In the past, many practitioners focused exclusively on preserving public benefits at all costs. Today, special needs planning is not necessarily "poverty planning." The proper focus today is, on a case-by-case basis, how to provide the best quality of life throughout the life of the loved one.

Saturday, May 1, 2010

Estate Planning Update - No News

It is now May and so far it looks like the Senate is to busy to deal with Estate Tax Reform before November. It is looking more and more like 2010 will be the year when one can die without the imposition of any Estate taxes regardless of the size of one's estate. However, starting January 1, 2011 taxpayers will be limited to an exemption of only $1M dollars. Everything else above that number will be taxed at 55%.

I never dreamed that we would see the actual repeal of the Estate Tax. Nor did I imagine we would ever go back to exemptions and rates that were in effect in 2002. The Federal Estate Tax is like a sponge. It soaks up everything that one owns: cash, bank accounts, CD's, stocks, bonds, investment accounts, retirement plans, real estate and life insurance owned by the person who dies. When one totals up everything on this kind of basis, there are many more "millionaires" today than there were in 10 years ago. Your next door neigbbor might be a millionaire?

Married people get a special break called the "Unlimited Marital Deduction". Any property that passes at death to one's spouse, whether outright, as a designated beneficairy or as the beneficiary of a Marital trust, will qualify for deduction. Often this means there will be no tax at the first spouse's death! But, the IRS is not being that generous. They will just wait until the second spouse dies, subtract the $1M exemption, and then tax the excess at 55%. We often refer to the Federal Estate Tax as the "Tax on the 2nd spouse's life".

It is imperative that when the first spouse dies, that he or she use whatever exemptions are available to the deceased spouse in the year of death. Jointly held property will not get one there. The first spouse needs to set up a Family Trust(sometimes referred to also as a "By-Pass" trust, or a "Residuary Trust" or a "B-Trust"....lawyers just love to call the same thing by different names to confuse people!) at the death of the first spouse. That trust can be for the surviving spouse's benefit during his or her life. But, when the surviving spouse dies, this Family Trust can pass tax free to the heirs as it is not deemed to be "owned" by the 2nd spouse during his or her lifetime. This savings is huge! It could be as much as 55% of $1M dollars =$550,000 starting next year. Jointly held property in this set of circumstances actually increases one's taxes and becomes a trap. Planning before one becomes disabled or dies is essential.

It is entirely possible that we will get a new Tax bill after November's elections. A lot will depend on who is elected. Stay tuned. This is going to be a wild ride for millions of Americans.