In his article titled Estate Planning for a Family with a Special Needs Child, Sebastian V. Grassi, Jr. lists five estate planning options for parents of a special needs child:
1. Distributing assets directly to the special needs child;
2. Disinheriting the special needs child;
What is a Trust?
Example: You are visiting your sister in Australia for six months and your son needs $5000 for living expenses while you are gone.
You could deposit $5000 in his checking account. But what if you are concerned that he might spend it on a wall size plasma television and have nothing left for food?
Instead of giving him the money outright, you could give it to your best friend with instructions regarding how the money is to be spent for your son’s benefit.
By giving the money to your best friend for your son’s benefit, you have established a Trust. You are the Grantor because you gave the money to your friend. Your friend is the Trustee because she is the one responsible for the management and distribution of the money according to your instructions. Your son is the Beneficiary because he will receive the benefit of the money you have put in the Trust. The list of instructions you gave your friend is the Trust Agreement. It tells your friend (Trustee) what to do. The $5000 is the Principal of the trust.
There are many types of trusts: revocable, irrevocable, living, testamentary and other distinctions. Illinois law sets forth requirements for all of them.
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When considering how to minimize or avoid the time and expense of going to court and becoming involved in the probate process, it is important to be familiar with the distinction between probate and non-probate property.
Upon death, an individual’s assets are divided into two categories: probate property and non-probate property. Those assets which are non-probate property bypass the probate process. Examples are real estate held in joint tenancy or tenancy by the entirety and any asset which has a designated beneficiary (other than the estate) such as an insurance policy, IRA account, Keogh plan, 401(k) plan and pension and profit sharing plan.
Another asset which is non-probate in Illinois is real estate held by a land trust. A separate agreement is entered into which provides that the trustee holds title to the property and the beneficiary has a power of direction over the trustee. It can be provided in the agreement, that upon the death of the beneficiary, his interest passes to a particular person thereby avoiding probate.
In addition, bank accounts can be set up in a way that avoids probate. These accounts are sometimes referred to as P.O. D. (payable on death) accounts to which a named beneficiary has the right to the balance in the account upon the death of the account holder. The beneficiary presents a certified copy of the death certificate of the account holder to receive the balance in the account.
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Asset protection for a business can be straight forward and a relatively simple matter to implement. At the same time, it can protect a large chunk of the assets of a business.
For example, in the case of a company that runs a manufacturing business, the usual business structure is for the manufacturing company to be organized as a corporation. That is fine as far as it goes.
But if a second corporation were to be formed as a trucking corporation, all of the assets the manufacturing corporation has in the fleet of fifty trucks could be transferred to the trucking corporation. As long as this trucking corporation is fully capitalized and fully insured, the effect of creating the trucking corporation would be to remove all of the other assets of the manufacturing corporation from exposure to a judgment regarding an accident involving one of the fifty trucks in the shipping fleet.
This protection could be taken a step further by creating a third corporation which leases the trucks. With a fully capitalized and fully insured leasing corporation in existence, the capital tied up in the fifty trucks owned by the trucking corporation could be protected from judgment in the event that a truck driver employed by the leasing corporation were involved in an accident.
Thus, layers upon layers of protection can be added to accommodate whatever the needs of the business are. The only limitation is the bookkeeping involved with keeping the corporations’ assets separate and keeping the corporations fully insured. As long as the owner of the business is able to keep up with the bookkeeping aspects of the arrangements, the protection afforded by this type of asset protection planning is substantial and completely within what the law allows.
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A Charitable Remainder Unitrust (CRUT) has advantages over a Charitable Remainder Asset Trust (CRAT).
Unlike the CRAT, a CRUT allows you to make as many contributions as you would like. Also the asset’s current market value is not its value on the date it was transferred to the CRAT but it is the asset’s current market value.
The CRAT allows you to benefit from a financial market that is doing well. In years when the financial market is not doing well, a make-up provision can be included in a CRAT to allow for additional income in future years which makes up for the down years.
A CRUT requires that you receive a minimum income of 5% of the asset’s current market value and not more than 50%. You can choose a percentage or the trust’s net income, whichever is less.
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Conservative investors who want a predictable income year after year may prefer a Charitable Remainder Annuity Trust (CRAT) to a Charitable Remainder Trust (CRT).
A CRT pays a fixed annuity which equals a percentage of the fair market value of the assets transferred to the CRT or a percentage of the fair market value of the CRT’s assets as they are revalued annually. However, a CRAT provides a fixed annual income regardless of the investment performance of its assets. Because the tax deductions and income are based on the value of the asset as of the day it is transferred to the Trust, a CRAT is better if you expect the CRAT’s assets to lose value in the future.
Regardless of what happens to the economy, the income is fixed. If the CRAT’s assets do not earn enough to pay your annual income, more principal will be used to make up the difference. But if the market improves and the CRAT’s assets outperform expectations, the surplus will be added to the principal and benefit the charity in the end.
The CRAT protects against swings in the financial markets. In a stagnant or declining market, you come out head. In a strong market experiencing investment growth, the charity will benefit.
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A Charitable Remainder Trust (CRT) allows you to donate to your favorite charity while benefitting yourself. It allows you to defer capital gains on the sale of appreciated asset, receive income, take advantage of a current income tax charitable deduction and receive future estate tax deductions.
A CRT works best with a highly appreciated assets like real estate or stocks which provide little or no income. Owning this kind of asset has problems because you cannot sell it without paying high state and federal capital gains taxes. But if the asset is still in your estate when you die, it will increase your estate taxes. If you donate the asset to a charity today you will enjoy the tax deduction but you will miss out on the income the asset could generate. A CRT overcomes all of these problems.
A CRT is created as follows: You designate your trustee so you remain in control of the investment decisions. The term of the CRT is based on a term of years (not to exceed 20) or over an individual’s lifetime. The CRT states that whenever the term of years or the lifetime is over, the remaining trust assets go to the charity.
You transfer the highly appreciated asset to the CRT in return for the trust’s obligation to pay you an income stream over the term or lifetime in an amount computed using expected length of the income stream and the expected earnings rate.
The CRT sells the appreciated asset but pays no tax because of its favorable tax status. It pays from its liquid assets an income stream for the term you have designated. After the term is over, the CRT distributes any remaining assets to the charity and the CRT terminates.
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One way which a parent, relative or friend can help fund the education of a child is by the creation of a Crummey Trust. This kind of trust, which qualifies the parent or other donor for the gift tax annual exclusion ($14,000 per beneficiary), gives the trust beneficiary the power to withdraw contributions for a limited time (usually 30 days) after a contribution is made to the trust. It is unlikely that the withdrawal powers will be used while a child is a minor because only the child’s parents (or guardians) can exercise the withdrawal rights.
Once the withdrawal period passes, the property can be held in trust for the child’s benefit for whatever time period the grantor of the trust chooses, including for the child’s lifetime or beyond.
Crummey Trusts are good creditor protection vehicles because they can contain language which does not give the child rights to income or principal which can be garnished or attached by a creditor or made part of a property settlement in a divorce.
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The annual gift tax exclusion is a simple estate planning option that reduces federal estate taxes. You can give away $14,000 tax free each year to as many people as you would like. If you are married, you and your spouse can each make annual exclusions gifts thereby doubling the amount you can gift tax free each year.
In addition to the annual exclusion, there is an unlimited gift tax exclusion for direct payments of qualifying medical and educational expenses. This is an unlimited exclusion which applies regardless of your relation to the recipient of the medical or educational services. To qualify the payments must be made directly to the medical provider or educational institution.
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You do not have to sell your home in order to qualify for Medicaid coverage of nursing home care in Illinois; however the state can file a claim against your house after you die.
You can freely transfer your home to the following individuals without incurring a transfer penalty which will make you ineligible for Medicaid for a period of time. Those individuals are:
• Your spouse • A child who is under age 21 or who is blind or disabled • Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances)
• A sibling who has lived in the home during the year preceding the applicant’s institutionalization and who already holds an equity interest in the home • A “caretaker child”, who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant’s institutionalization and who during the period provided care that allowed the applicant to avoid a nursing home stay.
Medicaid can put a lien on your house for the amount of money spent on your care. If the property is sold while you are still living, you would have to satisfy the lien by paying back the state. The exception to this rule is the case where a spouse, a disabled or blind child, a child under age 21 or a sibling with an equity interest in the house is living there.
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Illinois Estate Planning and Elder Law Blog