Special Needs Trusts - A Unique Concern

More and more families seem to have a need/use for Special Needs Trusts for someone with a disability whether minor or major.

To qualify for Medicaid (not MediCare for seniors but healthcare for disadvantaged and poor):

The government says you can have a house, a car, a prepaid funeral, and $2,000 to your name.

Don't you (and don't let your parents, grandparents or others) leave items to your "special needs" dependent child in wills but specify that this portion go to a "special needs" trust. It does not have to be as much money as with other children, since it will cover only the "extras" the child needs and not maintenance and support (see a planner and a lawyer).

Estate Taxes for 2010

As of this writing, March 1st 2010, Congress has still not fixed the Federal Estate Tax issue. The limits that passed tax-free to heirs has increased over the years and at 12/31/2009 was $3.5 million (easily $7 million for a married couple with a simple by-pass trust in their will). The tax rate in 2009 was 45% on estates over these amounts.

In 2010, there is no Federal Estate Tax. Many know this, but fewer know that there are two exceptions to this "no" tax.

(1) On death, the first $1.3 million receives no taxes but the excess does not receive a "step-up" in basis. In other words, your heirs receive the original cost basis of assets over $1.3 million and, if they sell them, they must realize a capital gain. (Prior to 12/31/09, all assets passed to heirs at their market value, so if then sold, there would be no gains)

(2) If you are married, then an additional $3 million can pass to heirs with the "step-up" in cost basis so heirs can avoid further capital gains treatment.

Let's hope that Congress fixes this soon (and the AMT tax, too) because trying to calculate the original cost of something that may have been purchased many, many years ago could be difficult if records are not properly maintained.

Keep in mind, this is the gross estate which includes items like life insurance proceeds, too, and home equity values. Some can reach these limits pretty quickly.

2010 Estate Tax Issues

Senator Baucus says that once Congress presents a bill for President Obama to sign, the estate tax changes will be retroactive to January 1st. Hopefully, this can be done.

Through December 31, 2009, $3.5 million ($7 million for a married couple if the will is drafted properly) of an estate's value was free of Federal estate taxes (for some states however a state tax may still apply - but not in VIRGINIA; MARYLAND still has a $1 million limit, for example).

Effective January 1, 2010, however, there is no estate tax. But what does go away is the "step-up" in basis for estate values. That is, if more than $1.3 million (plus an additional $3 million for a spouse).

Yes, it is complicated but it is important to realize that high-value estates could result in the heirs having to calculate the "original cost" of property and then, if sold later, may have to pay a 15% capital gains tax based on the heir's tax return.

Confusing? Thank Congress. Hopefully it will be resolved by the time I post this.

Do Not Try to Manage Your Estate from the Grave

Here is an interesting story from www.elderlawanswers.com that shows the futility, sometimes, of trying to govern from the grave:

"...Illinois High Court Rules Trust Assets May Be Withheld From Heirs Who Married Non-Jews
Last Updated: 9/30/2009 4:53:02 PM..."

"...Reversing an appeals court, the Illinois Supreme Court has ruled that assets in a trust may be withheld from grandchildren who married outside the Jewish faith, as the original trust document required. However, the ruling does not address the issue of whether the provision of the original trust disinheriting someone if they married a non-Jew is invalid because it is against public policy..."

"...Max Feinberg established a trust that contained a clause disinheriting any of his grandchildren if they married outside the Jewish faith. Despite this clause, four of his five grandchildren chose to marry spouses who were not Jewish. After both Max and his wife, Erla, had died, one of the grandchildren sued her father and an aunt and uncle -- the co-executors of Max and Erla's estates -- claiming that the three had conspired to evade estate taxes and had misappropriated millions of dollars from the estates...A trial court ruled that the clause disinheriting the grandchildren was invalid because it was against public policy by placing a significant limitation on the grandchildren's freedom to marry...In June 2008, the Appellate Court of Illinois...[agreed] that the provisions are against public policy. The Feinberg children appealed the ruling...In reversing the lower courts, the Illinois Supreme Court based its decision on the fact that Erla had a "power of appointment" that allowed her to reassign which descendants could benefit from the trust...disinheriting the grandchildren who had married outside the Jewish faith...the court did not address the broader question of whether the restrictions in Max's estate plan run counter to public policy..."

To read the Illinois Supreme Court's decision in In re Estate of Feinberg (Ill., No. 106982, Sept. 24, 2009), click here.

The lesson here is that the assets of the estate remain in limbo - years later - and only the attorneys are getting rich so be thoughtful (using a licensed attorney) about how much you want to control people who might inherit your remaining wealth. There are so many scary stories like this one.