PBM
A Warning on Beneficiary Designations
Patricia Bloom-McDonald • Apr 28, 2014

There are numerous ways to leave your estate to your named beneficiaries. A Will is the most common, though if you have considerable assets, retirement plans, stocks, brokerage accounts, bank accounts, real estate or other property, you may not want your estate to be probated since it is time consuming and all public.

Instead, many individuals use alternate methods of leaving their assets to avoid probate. These include trusts, payable on death accounts (POD), Transfer on Death registrations (TOD) for stocks and bonds, US savings bonds, life insurance and retirement plans. You can name whomever you want as your beneficiary along with contingent or secondary beneficiaries.

Problems arise, however, when the beneficiaries named in these various trusts, accounts or plans conflict with your overall estate planning for distributing your estate, especially if you remarry, have children from more than one marriage, or wish to leave your estate to charities, trusts, and various other individuals.

This can all become extremely confusing since many of these accounts could have been established years earlier when your financial and marital status may have been very different. Also, some named beneficiaries may have passed away with no contingent beneficiary named or the named beneficiary may be a former spouse, disabled person, lover, estranged friend, or charity that is no longer in business.

Do All Accounts or Plans Need to have Beneficiaries?

You do not have to name anyone to receive the funds from a bank account, retirement plan or other account. Most people, however, do name individuals, trusts or organizations. If you do not, the funds could become just part of your estate that may have to be probated.

Naming Different Beneficiaries for Different Accounts

There is nothing wrong with spreading the wealth among friends, family, trusts, or organizations but this could result in inequities and resentment among family members. For example, your Will may state that your assets will be distributed equally among your children, but you may have named only one child to receive your life insurance benefits, POD or TOD account, or to a special needs child who is unable to manage the funds.

Retirement Accounts

Make sure you have a retirement plan, consider naming your spouse since he or she can roll-over the account to his or her own plan and thus defer withdrawals until age 70 1/2 and then take minimum distributions. Problems arise, however, if your spouse is incapable of managing the account, if your children are experiencing financial problems and need funds, or if you are in a second marriage but do not want to ignore your first family.

A trust can solve some of these problems if you name a person or organization to manage the trust should your spouse become incapacitated. Also, in this instance, the surviving spouse can refuse any part of the assets through a disclaimer and allow the funds to stay with the trust and benefit future beneficiaries.

If a child has special needs, name a special needs trust as the beneficiary but have an elder law or trusts and estates attorney set this up for you as it can be very complicated, especially if your child is receiving public benefits.

Another concern regards Thrift Savings Plans (TSP) and if you have an inherited 401(k), IRA or TSP account. There are spousal beneficiary and non-spousal TSP beneficiary participant accounts and the rules differ for each. Death benefits have to be paid directly to the beneficiaries and have to pay taxes for the year in which the funds were received. Your surviving spouse can avoid this by rolling the TSP into an IRA upon your death and then having your children set up an inherited IRA and thus stretch the tax payments over their own life expectancies.

Review Your Accounts and Beneficiaries

Have a trusts and estates attorney handle your estate to maximize your distributions without the need for probate. Before you do this, you should make a list of all your assets and accounts where beneficiaries have been named and review them every year.

Consider what your wishes are for the eventual distribution of your estate. As noted herein, some beneficiaries may have died or are people or organizations with whom you no longer have a relationship. Further, if you do want your assets to be distributed equally, you may have to re-designate the beneficiaries of your POD and TOD and other accounts to reflect your true wishes.

Consult Elder Law Attorney Patricia Bloom-McDonald

Patricia Bloom-McDonald is a Massachusetts Elder Law and Estate Planning lawyer who can assist you in all facets of your estate planning and who can advise you regarding how best to maximize the distribution of your estate. Call her today for a consultation to ensure that your estate plan is consistent with your overall wishes.

The post A Warning on Beneficiary Designations appeared first on .

Using a Credit Card When You Have a Special Needs Trust

25 May, 2023
A special needs trust (SNT) allows you to meet your needs while receiving government benefits, such as Medicaid/MassHealth and Supplemental Security Income (SSI). When you have a special needs trust, you can use it to pay for goods and services government benefits do not cover, such as therapy, education,and housing. Since receiving income directly from your trust would jeopardize your eligibility for benefits, your trustee cannot give you cash from your SNT. When you use a credit card for permitted transactions, and your trustee pays off the balance with funds from your trust, these payments to a credit card company are not considered income. An SSI or Medicaid/MassHealth recipient who is capable of managing their own affairs can therefore use a credit card to make small purchases, and the trustee of the special needs trust need not micromanage every transaction. In the past, beneficiaries of SNTs sent their bills to their trustees for payment. Today, an individual with an SNT who qualifies for a personal credit card may find that using a credit card is more convenient. Credit cards have several benefits. Using a credit card to manage payments from your special needs trust allows you to maintain independence, gain access to some of the advantages of a credit card, and easily keep records while preserving your eligibility for Medicaid/MassHealth and SSI. Although credit cards can help people manage their special needs trusts, there are also several important restrictions and considerations to keep in mind. Consult with a special needs planner to ensure all transactions are acceptable under the trust's rules and comply with government regulations. The Benefits of Using Credit Cards When You Have a Special Needs Trust If you have a special needs trust, using a credit card has many benefits, including: Independence : Allowing you to maintain your independence. You can use your card to make qualifying purchases yourself. Your trustee does not have to make the transactions for you. Access to the Typical Advantages of a Credit Card : Using it responsibly can help you establish or build credit history, which may be important for your future financial needs. Record-Keeping : Credit cards provide easy record-keeping and a convenient way to monitor transactions from your special needs trust, which can also help special needs trustees fulfill their duty to maintain records. When you use your card, your trustee can observe your purchases and ensure that all expenses are allowable under the trust’s rules. Your statements can help your trustee keep track of funds leaving the trust. Benefits Eligibility : While adhering to Medicaid/MassHealth and SSI’s income and asset limits, you can access funds from your SNT. Credit cards can help prevent your trustee from accidentally providing you with cash payments that could affect your eligibility for government benefits. Considerations When Using a Credit Card for Your Special Needs Trust While you can use a credit card to access funds from your special needs trust for certain transactions , restrictions apply. If your trustee sees a charge on your card that could affect your benefits eligibility , they can flag it for review. You cannot use your credit card to pay for food and shelter, which SSI would cover. When administering your funds, your trustee must ensure that any expenditures are for your sole benefit if you have a first-party special needs trust. While using a credit card is appropriate, you should not use a debit card. Debit cards are considered cash income. Best Practices When using a credit card for a special needs trust fund, remember several best practices. Choose a card with low fees and interest rates. Set a clear budget and monitor transactions regularly. Keep thorough records and receipts of expenses. Consult with your special needs planning attorney. A special needs planning attorney can help you navigate the rules that apply to your trust and understand how to use a credit card to preserve your Medicaid/MassHealth and SSI eligibility. 

How an ILIT can help offset estate taxes

12 May, 2023
With the Federal estate tax exemption possibly about to be lowered, it may be time to think about steps you can take to keep your estate from being taxed. An irrevocable life insurance trust allows you to pass on money to your heirs while avoiding both the federal estate tax, as well as any applicable state estate tax which is currently $1 million in the Commonwealth of Massachusetts. Senate Democrats have proposed lowering the current estate tax exemption from $11.7 million for individuals and $23.4 million for couples to $3.5 million for individuals and $7 million for couples. While it is unclear if this proposal will pass, it is likely that some change to the estate tax is coming. Even if Congress does not take any action, the current rate will sunset in 2026 and essentially be cut in half, to about $6 million per individual. In the Commonwealth of Massachusetts, the current estate tax exemption is $1 million for individuals and is taxed at dollar $1.00. A proposal to raise it to $3 Million and the tax to start at $3 Million (not at $1.00) has been submitted in the legislature but has not yet been voted on or enacted. One way to make up for any estate tax your estate may have to pay is by setting up an irrevocable life insurance trust [ILIT]and funding it with a policy that has a death benefit that would pay your heirs some or all of the amount your estate will be taxed. If you purchased such a life insurance policy directly, it could end up being taxed as part of your estate. But if a trust owned the policy, it could pass outside your estate. While a life insurance trust can be highly beneficial, it is also complicated to set up and maintain properly. The following are some of the requirements: Trustee . If you are setting up the trust, you cannot also serve as a trustee. If you are the trustee, you have control of the trust, which could lead to the trust being included in your estate. You will need to name another trusted person or financial institution to act as trustee. Policy ownership . The trust must own the life insurance policy. If you transfer an existing policy to the trust and die within three years, the policy will still be considered a part of your estate. To avoid this risk, the trust can purchase a policy directly rather than receive an existing policy. Premiums . You need to transfer funds to the trust to pay the policy premiums, which creates an issue with gift taxes. A transfer to a trust is usually not subject to the $15,000 yearly gift tax exclusion. For a gift to qualify for the exclusion, the recipient must have a "present interest" in the money. Because a promise to give someone money later does not count as a present interest, most gifts to trusts aren't excluded from the gift tax. To avoid this, you can use something called a “Crummey” power which gives beneficiaries the right to withdraw the funds transferred to the trust for up to 30 days. As part of the process, the trustee needs to send them a letter, known as a Crummey letter, letting them know about the trust funding and their right to withdraw the funds. After the 30 days have passed, the trustee can use the funds to pay the annual insurance premium. You run the risk of the beneficiaries withdrawing the funds, but if they know that by allowing the money to stay in the trust they will receive more money later, it shouldn’t be a problem. Beneficiaries . The beneficiary of the life insurance policy is usually the trust. Once the funds are deposited in the trust, the trustee can distribute the assets to the beneficiaries in the way specified by the trust. For example, if your beneficiaries are minors, you can wait to have the trustee distribute the assets. Keeping the assets in the trust will also protect them from your beneficiaries’ creditors. The downside of an irrevocable life insurance trust is that you do not have the ability to change it once it is set up, although the policy would effectively be canceled if you stopped paying the premiums. If you are considering this type of trust, discuss it with your attorney.
Share by: