10 Costly Mistakes to Avoid in Helping Families with Special Needs

This article examines the unique planning requirements of families with children, grandchildren or other family members (such as parents) with special needs. There are many misconceptions in this area that result in costly mistakes in planning for these special needs beneficiaries. It is therefore incumbent upon us - the client's advisors - to ensure that clients understand all of their options.

COSTLY MISTAKE #1: Disinheriting the child.Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. Your clients may have been advised to disinherit their disabled child - the child who needs their help most - to protect that child's public benefits. But these benefits rarely provide more than basic needs. And this "solution" does not allow your clients to help their child(ren) after the client becomes incapacitated or is gone. When a child requires, or is likely to require, governmental assistance to meet his or her basic needs, parents, grandparents and others who love the child should consider establishing a Special Needs Trust.

Planning Tip: It is unnecessary and in fact poor planning to disinherit a special needs child. Clients with special needs beneficiaries should consider a Special Needs Trust to protect public benefits and care for the child during the client's incapacity or after the client's death.

COSTLY MISTAKE #2: Procrastination.Because none of us knows when we may die or become incapacitated, it is important that your clients plan for a beneficiary with special needs early, just as they should for other dependents such as minor children. However, unlike most other beneficiaries, a child with special needs may never be able to compensate for a failure to plan. A minor beneficiary without special needs can obtain more resources as he or she reaches adulthood and can work to meet essential needs, but a child with special needs may never have that ability.

Planning Tip: Parents, grandparents, or any other loved ones of a special needs child face unique planning challenges when it comes to that child. This is one area where the client simply cannot afford to wait to plan.

COSTLY MISTAKE #3: Failure to coordinate a planning team effort.It is critical that the advisor assisting with special needs planning include in the planning team: an attorney who is experienced in this planning area; a life insurance agent who can ensure that there will be enough money to maintain the benefits for the special needs child; a CPA who can advise on the Special Needs Trust's tax return; an investment advisor who can ensure that the trust fund's resources will last for the child's lifetime; and any other key advisors that may support the goals of the trust going forward.

Planning Tip: Special needs planning dictates that the client's advisors work together to ensure that there are sufficient trust assets to care for the child throughout his or her lifetime.

COSTLY MISTAKE #4: Ignoring the special needs when planning for the child's benefit.Planning that is not designed with the child's special needs in mind will probably render the child ineligible for essential government benefits. A properly designed Special Needs Trust promotes the special needs person's comfort and happiness without sacrificing eligibility.Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (for example, a specially equipped van), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment & appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses: the sorts of things your clients now provide to their child or other special needs beneficiary.

Planning Tip: When planning for a child with special needs, it is critical that the client utilize a Special Needs Trust as the vehicle to pass assets to that child. Otherwise, those assets may disqualify the child from public benefits and may be available to repay the state for the assistance provided.

COSTLY MISTAKE #5: Creating a "generic" special needs trust that doesn't fit.Even some "special needs trusts" are unnecessarily inflexible and generic. Although an attorney with some knowledge of the area can protect almost any trust from invalidating the child's public benefits, many trusts are not customized to the particular child's needs. Thus the child fails to receive the benefits that the parent provided when they were alive.Another frequent mistake occurs when the Special Needs Trust includes a "pay-back" provision rather than allowing the remainder of the trust to go to others upon the death of the special needs child. While these "pay-back" provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your clients hundreds of thousand of dollars, or more.

Planning Tip: A Special Needs Trust should be customized to meet the unique circumstances of the child and should be drafted by a lawyer familiar with this area of the law.

COSTLY MISTAKE #6: Failure to properly "fund" and maintain the plan.When planning for children with special needs, it is absolutely critical that there are sufficient assets available for the special needs beneficiary throughout his or her lifetime. In many instances, this requires utilization of a funding vehicle that can ensure liquidity when necessary. Oftentimes permanent life insurance is the perfect vehicle for this purpose, particularly if the clients are young and healthy such that insurance rates are low.Also, because this is an ever-changing area, it is also imperative that the clients revisit their plan frequently to ensure that it continues to meet the needs of the special needs beneficiary.

Planning Tip: Clients should consider permanent life insurance as the funding vehicle for special needs beneficiaries, particularly when the beneficiary is young given the often staggering costs anticipated over that beneficiary's lifetime.If the client may be subject to estate tax, consider having an Irrevocable Life Insurance Trust own and be the beneficiary of the policy, naming the Special Needs Trust as a beneficiary. Alternatively, in a non-taxable situation, consider naming the client's revocable trust as the beneficiary to help equalize inheritances if that is the client's objective.

COSTLY MISTAKE #7: Choosing the wrong trustee.During your client's life, he or she can manage the trust. When the client is no longer able to serve as trustee, they can choose who will serve according to the instructions that they have provided. They may choose a team of advisors and/or a professional trustee. Whomever they choose, it is crucial that the trustee is financially savvy, well-organized, and, of course, ethical.

Planning Tip: The trustee of a Special Needs Trust should understand the client's objectives and be qualified to invest the assets in a manner most likely to meet those objectives.

COSTLY MISTAKE #8: Failing to invite contributions from others to the trust.A key benefit of creating a Special Needs Trust now is that the beneficiary's extended family and friends can make gifts to the trust or remember the trust as they plan their own estates. For example, these family members and friends can name the Special Needs Trust as the beneficiary of their own assets in their revocable trust or will, and they can also name the Special Needs Trust as a beneficiary of life insurance or retirement benefits.

Planning Tip: Creating a Special Needs Trust now allows others, such as grandparents and other family members, to name the trust as the beneficiary of their own estate planning.

COSTLY MISTAKE #9: Relying on siblings to use their money for the child with special needs' benefit.Your client may be relying on their other children to provide for their child with special needs from their own inheritances. This can be a temporary solution for a brief time, such as during a brief incapacity if their other children are financially secure and have money to spare. However, it is not a solution that will protect the child with special needs after your client has died or when siblings have their own expenses and financial priorities.What if the inheriting sibling divorces or loses a lawsuit? His or her spouse (or a judgment creditor) may be entitled to half of it and will likely not care for the child with special needs. What if the sibling dies or becomes incapacitated while the child with special needs is still living? Will his or her heirs care for the child with special needs as thoughtfully and completely as the sibling did?Siblings of a child with special needs often feel a great responsibility for that child and have felt so all of their lives. When your clients provide clear instructions and a helpful structure, they lessen the burden on all their children and support a loving and involved relationship among them.

Planning Tip: Relying on siblings to care for a special needs beneficiary is a short-term solution at best. A Special Needs Trust ensures that the assets are available for the special needs beneficiary (and not the former spouse or judgment creditor of the sibling) in a manner intended by the client.

COSTLY MISTAKE #10: Failing to protect the child with special needs from predators.An inheritance from parents who fund their child's special needs trust by will rather than by revocable living trust is in the public record. Predators are particularly attracted to vulnerable beneficiaries, such as the young and those with limited self-protective capacities. When you plan with trusts rather than a will, your client decides who has access to the information about their children's inheritance. This protects their special needs child and other family members, who may be serving as trustees, from predators.

Planning Tip: A Special Needs Trust created outside of a will ensures that information about the inheritance is not in the public record, protecting the special needs beneficiary from predators.
Conclusion Planning for special needs beneficiaries requires particular care and the participation of all of the client's wealth planning advisors. A properly drafted and funded Special Needs Trust can ensure that the beneficiary has sufficient assets to care for him or her, in a manner intended by the client, throughout the beneficiary's lifetime.

The Secret Stretch IRA

It may seem like a contradiction, but there is a way to leave a lot of money to your heirs even if you're not rich. Individual retirement accounts (IRAs) were established to let you save tax-deferred until age 70 1/2, after which you were required by law to begin withdrawing funds. But new rules define how you can pass on your wealth for two generations and reduce the amount you must take out. Called a stretch IRA, this new version has become a popular estate-planning tool.

"Stretch" is a bit complicated, but at its heart is the miracle of compounding. Over the course of 60 years, assuming an 8% rate of return, $200,000 in an IRA can pay out more than $4.9 million, according to Putnam Investments.

Here's one way a stretch IRAcould work: A father names his son as a beneficiary. When the father reaches age 70 1/2, he elects to have the benefits stretched over his life and his son's life. When he dies, the son gets the IRA and can take the money out slowly by spreading withdrawals over his remaining life expectancy. He has to pay income taxes only on the amount he withdraws every year. That's a huge tax benefit considering that if the father died without naming a beneficiary, the IRA would be liquidated and more than a third could be eaten up by taxes. Spreading the payments out over more time and thus reducing the withdrawals means the beneficiary won't have to take such a big tax hit right away. The son can also name his own beneficiary, perhaps his daughter, and spread the remaining proceeds to a third generation (although that's where it stops). Talk about the gift that keeps on giving. "It could grow exponentially," says financial planner Lee Rosenberg of ARS Financial Services in Jericho, N.Y.

Even though the IRS offers these provisions, some financial institutions won't let you stretch out your IRA. So before you open an account or decide to keep the IRA where it is, make sure your firm will allow it. If so, designate the beneficiary before you are required to start taking distributions. And keep the paperwork in a safe place. "People lose their IRA assets after death because they can't find the documents. If you can't find your beneficiary forms, the firm may treat it as if you don't have a beneficiary," says Ed Slott, a Rockville Centre, N.Y., accountant and editor of Ed Slott's IRA Advisor.

Another problem: you or your parents may have already hit the age that requires you to start taking IRA benefits, which is generally April 1 of the year following the year you turn 70 1/2. Right now, if you missed the deadline, you're out of luck. But there's legislation working its way through Congress that would give everyone a chance to start anew. If enacted, the fresh-start rule would go into effect on Jan. 1, 2002.

Keeping track of all these provisions can be confusing, and there are serious tax implications. So you might want to seek the advice of a retirement planner to determine if the stretch IRA works for you. It may not make sense if you're planning to live off your IRA assets in retirement. But if you have a sizable nest egg, taking the stretch can be a valuable option for you and your heirs. You can't take it with you, so you might as well leave as much as you can.

THE PROBATE PROCESS IN NJ

Probate is the process whereby a Will is proved to be valid by a Surrogate, who has the authority to determine the authenticity of such a document. It also involves appointing an individual for an Estate when someone dies without a Will.

Probate is done when someone dies with assets in their name alone. The individual named in the Will as the Executor/rix (hereinafter referred to as the personal representative) would come to the office of the Surrogate with the original Will and a certified copy of the death certificate.

Application is made to the Surrogate of the County where the decedent resided at the time of death. If the Will is self- proving (language added to the will that allows the document to prove itself), no further proof or testimony will be necessary to probate the Will.

If the Will is not self-proving, a proof of one of the witnesses is necessary to complete the probate.

Certain qualification forms would need to be signed by the personal representative. No probate can be completed until the day following the tenth day after death. Fees will be charged as set forth by the New Jersey legislature. It is a relatively inexpensive process.

If someone dies without a Will, an individual can make application to be appointed as Administrator/rix (also hereinafter referred to as the personal representative) to represent the Estate.

After signing qualification papers, the Administrator/rix would need to post a bond that represents the full value of the Estate and file renunciations from any individual that has a prior or equal right to be appointed.

The Surrogate, as part of the process, will issue letters and certificates evidencing the appointment of the individual to the Estate which will allow them to access and transfer assets such as bank accounts, stocks, bonds, etc.

Once the probate is complete, the personal representative of the Estate has sixty days in which to notify the heirs at law, next of kin and beneficiaries that application was made for probate.