Simple Will
A simple will passes your property to specific individuals after your death. It can provide specific gifts of personal items as well as general gifts to groups of individuals. It contains no trusts. Note, the purpose of all wills is to give these gifts to your beneficiaries after probate is completed (ie all wills go through the probate process). Rates for a simple will are generally $100 per document. Each individual needs their own will.
Durable Power of Attorney
When you give someone a power of attorney, you are giving him or her the right to exercise a power that you already have. For example, you have the power to spend money, sell property, cash checks, withdraw money from the bank, and enter into contracts. Normally no other person can exercise these legal rights for you. You have the right, however, to delegate your power to someone else to do those things for you.
You do this by giving that person a “power of attorney.” Granting someone a power of attorney does not limit your rights, it nearly extends your authority to the other person to act on your behalf. The person to whom you give these powers is called your “agent” or “attorney-in-fact.” A “durable” power of attorney grants your agent the power to act on your behalf, even if you should become incapacitated in the future. Because these documents can easily be abused, you should choose your agents with caution."
IRA Trusts
In 2001, certain IRS rulings created the opportunity to place IRA funds into trusts. Prior to this ruling, most professionals had advised against placing IRAs into trust because a trust, not being a natural person, lacked a life expectancy by which to calculate mandatory distribution of the IRA funds. Thus, the IRA fund tended to be distributed to the trust over a more accelerated period causing a greater tax burden. Although the advantages of IRA trusts were immediately apparent to those who spend their lives steeped in tax law, it took the rest of the world a bit longer to digest the benefits. Below please find a general outline on the advantages and drawbacks of these types of trusts. Keep in mind that the vagaries of tax law change rapidly, so please do not consider this handout as either tax or legal advise and contact a professional for the current status of the law as well as a discussion of how your particular situation is affected by the trusts.
The IRA trust begins as a revocable trust during your lifetime. Upon your death, the trust rules become irrevocable. There are three basics types of IRA trusts:
- Conduit Trust - This trust is literally a conduit for the IRA. Your IRA is required to pay the mandatory distributions to the trust and the trustee then pays those distributions to your designated beneficiaries. The mandatory distributions only begin based upon the age of your primary beneficiary. The benefit of this type of trust is that your beneficiaries are not allowed to liquidate the IRA and must wait until the appropriate retirement age to receive their distributions. The IRS has specifically approved this type of trust.
- Accumulation Trust - This trust is designed to hold and accumulate all the mandatory distributions from your IRA. The mandatory distributions are based upon the age of the oldest of any named beneficiary. The benefit to this type of trust is that your trustee determines whether and when to provide funds or assistance to your beneficiaries. If your beneficiary relies on government benefits for health care or other assistance, this trust can be setup as a special needs trust which will provide assistance to your beneficiary without eliminating their government benefits. The IRS has not specially approved this type of trust, though it is widely used by practioners.
- Toggle Trust - This trust is a hybrid of the two above described trusts. At your death, your trustee can choose whether it should be a conduit or accumulation trust based upon the current law and the current situation of your beneficiary.
Special Needs Trusts
Many individuals are in need of special care, often as the result of a disability or age related illness. Though services may be available through public benefit programs, the actual cash benefits are generally quite small and the individual must maintain a standard of living at or below the poverty level. This means that, for an individual with a disability to have any type of meaningful lifestyle, the family or local charities have to provide supplemental assistance.
The majority of public benefits programs are needs based and will be suspended if the individual earns or possesses funds in excess of the program limits. This curtails a family's ability to provide for a disabled individual (through gifts or inheritance) and prevents a disabled individual from working on their own when they earn “too much” money. However, current federal and state regulations can allow such funds to be held in trust for the disabled individual’s benefit. Because these funds belong to the trust and not the individual, they are not counted as part of an individual’s resources and the individual may continue to qualify for the public assistance benefits.
These types of trusts are called Special Needs Trust and have been developed to manage resources while maintaining the individuals eligibility for public assistance benefits. A family can create and fund a special needs trust on their own. When a trust is created this way, any remainder beneficiary can be named at the disabled person’s passing to receive any remaining funds. Alternately if a disabled person is the distinct owner of the resources, the court can be petitioned to establish an Under 65 Disability Trust and the individual’s funds are transferred to this trust. However, any funds remaining in this trust at the disabled person’s passing will be paid back to the state or federal government. Both of these trusts are managed by a trustee on behalf of the person with the disability. The trustee can spend the funds in accordance with the rules set forth in the trust. Those rules often prevent giving funds directly to the disabled individual or providing food or shelter in order to allow the individual to continue to qualify for the public assistance programs. However, funds can be used for such supplemental needs as travel, education, medical expenses not covered by public assistance programs (including dental work and vitamin supplements), pet expenses and many other similar expenses.
A special needs trust is a complex device to create and to maintain and should not be attempted without knowledgeable legal advise. Please contact my office for more information.
IRS Circular 230: Under U.S. Treasury regulations we are required to inform you that any tax advice contained in this communication (including any attachment) is not intended to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code.