What Do I Need to Know about Estate Planning? – Annapolis and Towson Estate Planning

Your idea of planning for the future may include vacations and visits to family and friends—estate planning, not so much. However, it should, advises Real Simple in the article “Everything You Need to Know About Estate Planning—and Why You Should Start Now.” Estate planning concerns decisions about distributing your property when you die, and while that is not as much fun as planning a trip to an adventure park, it has become increasingly important for adults of all ages.

A survey by caring.com found that the number of young adults with a last will (ages 18-34) increased by 63 percent since 2020. Many tough lessons were learned through the pandemic, and the importance of having an estate plan was one of them.

An estate plan is more than documents for when you die. There are also documents for what should happen if you become disabled. The last will is one piece of the larger estate plan. An estate plan is also an opportunity to plan for wealth accumulation and building generational wealth, at any level.

Estate planning is for everyone, regardless of their net worth. People with lower incomes actually need estate planning more than the wealthy. There is less room for error. Estate planning is everything from where you want your money to go, to who will be in charge of it and who will be in charge of your minor children, if you have a young family.

It may be rare for both parents to die at the same time, but it does happen. Your last will is also used to name a guardian to raise your minor children. With no last will, the court will decide who raises them.

If you have filled out 401(k) and life insurance paperwork at work, you have started estate planning already. Any document that asks you to name a beneficiary in case of your death is part of your estate plan. Be certain to update these documents. Young adults often name their parents and then neglect to change the beneficiaries when they get married or have children.

For single people, estate planning is more important. If you have no estate plan and no children, everything you own will go to your parents. What if you have a partner or best friend and want them to receive your assets? Without an estate plan, they have no legal rights. An estate planning attorney will know how to plan, so your wishes are followed.

Estate planning includes planning for disability, also known as “incapacity.” If you become too sick to manage your affairs, bills still need to be paid. Who can do that for you? Without an estate plan, a family member will need to go to court to be assigned that role—or someone you do not even know may be assigned that role. Your last will names an executor to manage your affairs after you die.

Work with an experienced estate planning attorney to have your last will, power of attorney, medical power of attorney and other parts of your estate plan created. The court system and processes are complex, and the laws are different in every state. Trying to do it yourself or using a template that you download, could leave you with an invalid last will, which will cause more problems than it solves.

Reference: Real Simple (May 12, 2021) “Everything You Need to Know About Estate Planning—and Why You Should Start Now”

 

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What is not Covered by a Will? – Annapolis and Towson Estate Planning

A Last Will and Testament is one part of a holistic estate plan used to direct the distribution of property after a person has died.  A recent article titled “What you can’t do with a will” from Ponte Vedra Recorder explains how Wills work, and the types of property not distributed through a Will.

Wills are used to inform the probate court regarding your choice of Guardians for any minor children and the Executor of your estate. Without a Will, both of those decisions will be made by the court.  It is better to make those decisions yourself and to make them legally binding with a will.

Lacking a Will, an estate will be distributed according to the laws of the state, which creates extra expenses and sometimes, leads to life-long fights between family members.

Property distributed through a Will necessarily must be processed through a probate, a formal process involving a court.  However, some assets do not pass through probate.  Here is how non-probate assets are distributed:

Jointly Held Property. When one of the “joint tenants” dies, their interest in the property ends and the other joint tenant owns the entire property.

Property in Trust. Assets owned by a trust pass to the beneficiaries under the terms of the trust, with the guidance of the Trustee.

Life Insurance. Proceeds from life insurance policies are distributed directly to the named beneficiaries.  Whatever a Will says about life insurance proceeds does not matter—the beneficiary designation is what controls this distribution, unless there is no beneficiary designated.

Retirement Accounts. IRAs, 401(k) and similar assets pass to named beneficiaries.  In most cases, under federal law, the surviving spouse is the automatic beneficiary of a 401(k), although there are always exceptions.  The owner of an IRA may name a preferred beneficiary.

Transfer on Death (TOD) Accounts. Some investment accounts have the ability to name a designated beneficiary who receives the assets upon the death of the original owner.  They transfer outside of probate.

Here are some things that should NOT be included in your Will:

Funeral instructions might not be read until days or even weeks after death. Create a separate letter of instructions and make sure family members know where it is.

Provisions for a special needs family member need to be made separately from a Will.  A special needs trust is used to ensure that the family member can inherit assets but does not become ineligible for government benefits.  Talk to an elder law estate planning attorney about how this is best handled.

Conditions on gifts should not be addressed in a will. Certain conditions are not permitted by law.  If you want to control how and when assets are distributed, you want to create a trust. The trust can set conditions, like reaching a certain age or being fully employed, etc., for a Trustee to release funds.

Reference: Ponte Vedra Recorder (April 15, 2021) “What you can’t do with a will”

 

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What Is a Living Trust Estate Plan? – Annapolis and Towson Estate Planning

Living trusts are one of the most popular estate planning tools. However, a living trust accomplishes several goals, explains the article “Living trusts allow estates to avoid probate” from The Record Courier. A living trust allows for the management of a beneficiary’s inheritance and may also reduce estate taxes.  A person with many heirs or who owns real estate should consider including a living trust in their estate plan.

A trust is a fiduciary relationship, where the person who creates the trust, known as the “grantor,” “settlor,” “trustor” or “trustmaker,” gives the “trustee” the right to hold title to assets to benefit another person. This third person is usually an heir, a beneficiary, or a charity.

With a living trust, the grantor, trustee and beneficiary may be one and the same person. A living trust may be created by one person for that person’s benefit. When the grantor dies, or becomes incapacitated, another person designated by the trust becomes the successor trustee and manages the trust for the benefit of the beneficiary or heir. All of these roles are defined in the trust documents.

The living trust, which is sometimes referred to as an “inter vivos” trust, is created to benefit the grantor while they are living. A grantor can make any and all changes they wish while they are living to their trust (within the law, of course). A testamentary trust is created through a person’s will, and assets are transferred to the trust only when the grantor dies. A testamentary trust is an “irrevocable” trust, and no changes can be made to an irrevocable trust.

There are numerous other trusts used to manage the distribution of wealth and protect assets from taxes. Any trust agreement must identify the name of the trust, the initial trustee and the beneficiaries, as well as the terms of the trust and the name of a successor trustee.

For the trust to achieve its desired outcome, assets must be transferred from the individual to the trust. This is called “funding the trust.” The trust creator typically holds title to assets, but to fund the trust, titled property, like bank and investment accounts, real property or vehicles, are transferred to the trust by changing the name on the title. Personal property that does not have a title is transferred by an assignment of all tangible property to the trustee. An estate planning attorney will be able to help with this process, which can be cumbersome but is completely necessary for the trust to work.

Some assets, like life insurance or retirement accounts, do not need to be transferred to the trust. They use a beneficiary designation, naming a person who will become the owner upon the death of the original owner. These assets do not belong in a trust, unless there are special circumstances.

Reference: The Record Courier (April 3, 2021) “Living trusts allow estates to avoid probate”

 

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Can a Charity Be a Beneficiary of an Estate? – Annapolis and Towson Estate Planning

The interest in charitable giving increased in 2020 for two reasons. One was a dramatic increase in need as a result of the COVID pandemic, reports The Tax Advisor’s article “Charitable income tax deductions for trusts and estates.” The other was more pragmatic from a tax planning perspective. The CARES Act increased the amounts of charitable contributions that may be deducted from taxes by individuals and corporations.

What if a person wishes to make a donation from the assets that are held in trust? Is that still an income tax deduction? It depends.

The rules for donations from trusts are substantially different than those for charitable contribution deductions for individuals and corporations. The IRS code allows an estate or nongrantor trust to make a deduction which, if pursuant to the terms of the governing instrument, is paid for a purpose specified in Section 170(c). For trusts created on or before October 9, 1969, the IRS code expands the scope of the deduction to allow for a deduction of the gross income set aside permanently for charitable purposes.

If the trust or estate allows for payments to be made for charity, then donations from a trust are allowed and may be tax deductions. Otherwise, they cannot be deducted.

If the trust or estate allows distributions for charity, the type of asset contributed and how it was acquired by the trust or estate determines whether a tax deduction for a charitable donation is permitted. Here are some basic rules, but every situation is different and requires the guidance of an experienced estate planning attorney.

Cash donations. A trust or estate making cash donations may deduct to the extent of the lesser of the taxable income for the year or the amount of the contribution.

Noncash assets purchased by the trust/estate: If the trust or estate purchased marketable securities with income, the cost basis of the asset is considered the amount contributed from gross income. The trust or estate cannot avoid recognizing capital gain on a noncash asset that is donated, while also deducting the full value of the asset contributed. The trust or estate’s deduction is limited to the asset’s cost basis.

Noncash assets contributed to the trust/estate: If the trust or estate acquired an asset it wants to donate to charity as part of the funding of the fiduciary arrangement, no charity deduction is permitted. The asset that is part of the trust or estate’s corpus, the principal of the estate, is not gross income.

The order of charitable deductions, compared to distribution deductions, can cause a great deal of complexity in tax planning and reporting. Required distributions to noncharitable beneficiaries must be accounted for first, and the charitable deduction is not taken into account in calculating distributable net income. The recipients of the distributions do not get the benefit of the deduction. The trust or the estate does.

Charitable distributions are considered next, which may offset any remaining taxable income. Last are discretionary distributions to noncharitable beneficiaries, so these beneficiaries may receive the largest benefit from any charitable deduction.

If the trust claims a charitable deduction, it must file form 1041A for the relevant tax year, unless it meets any of the exceptions noted in the instructions in the form.

These are complex estate and tax matters, requiring the guidance of an experienced estate planning attorney for optimal results.

Reference: The Tax Advisor (March 1, 2021) “Charitable income tax deductions for trusts and estates”

 

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What are the Stages of Probate? – Annapolis and Towson Estate Planning

Probate is a court-supervised process occurring after your death. It takes place in the state where you were a resident at the time of your death and addresses your estate—all of your financial assets, real estate, personal belongings, debts and unpaid taxes. If you have an estate plan, your last will names an executor, the person who takes charge of your estate and settles your affairs, explains the article “Understanding Probate” from Pike County Courier. How exactly does the probate process work?

If your estate is subject to probate, your estate planning attorney files an application for the probate of your last will with the local court. The application, known as a petition, is brought to the probate court, along with the last will. That is also usually when the petitioner files an application for the appointment of the executor of your estate.

First, the court must rule on the validity of the last will. Does it meet all of the state’s requirements? Was it witnessed properly? If the last will meets the state’s requirements, then the court deems it valid and addresses the application for the executor. That person must also meet the legal requirements of your state. If the court agrees that the person is fit to serve, it approves the application.

The executor plays a very important role in settling your estate. The executor is usually a spouse or a close family member. However, there are situations when naming an attorney or a bank is a better option. The person needs to be completely trustworthy. Your fiduciary will have a legal responsibility to be honest, impartial and put your estate’s well-being above the fiduciary’s own. If they do not have a good grasp of financial matters, the fiduciary must have the common sense to ask for expert help when needed.

Here are some of the tasks the fiduciary must address:

  • Finding and gathering assets and liabilities
  • Inventorying and appraising assets
  • Filing the estate tax return and your last tax return
  • Paying debts, managing creditors and paying taxes
  • Distributing assets
  • Providing a detailed report of the estate settlement to the court and any other parties

What is the probate court’s role in this part of the process? It depends upon the state. The probate court is more involved in some states than in others. If the state allows for a less formal process, it is simpler and faster. If the estate is complicated with multiple properties, significant assets and multiple heirs, probate can take years.

If there is no executor named in your last will, the court will appoint an administrator. If you do not have a last will, the court will also appoint an administrator to settle your estate following the laws of the state. This is the worst possible scenario, since your assets may be distributed in ways you never wished.

Does all of your estate go through the probate process? With proper estate planning, many assets can be taken out of your probate estate, allowing them to be distributed faster and easier. How assets are titled determines whether they go through probate. Any assets with named beneficiaries pass directly to those beneficiaries and are outside of the estate. That includes life insurance policies and retirement plans with named beneficiaries. It also includes assets titled “jointly with rights of survivorship,” which is how most people own their homes.

Your estate planning attorney will discuss how the probate process works in your state and how to prepare a last will and any needed trusts to distribute your assets as efficiently as possible.

Reference: Pike County Courier (March 4, 2021) “Understanding Probate”

 

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The Stretch IRA Is Diminished but Not Completely Gone – Annapolis and Towson Estate Planning

Before the SECURE Act, named beneficiaries who inherited an IRA were able to take distributions over the course of their lifetimes. This allowed the IRA to grow over many years, sometimes decades. This option came to an end in 2019 for most heirs, but not for all, says the recent article “Who is Still Eligible for a Stretch IRA?” from Fed Week.

A quick refresher: the SECURE ActSetting Every Community Up for Retirement Enhancement—was passed in December 2019. Its purpose was, ostensibly, to make retirement savings more accessible for less-advantaged people. Among many other things, it extended the time workers could put savings into IRAs and when they needed to start taking Required Minimum Distributions (RMDs).

However, one of the features not welcomed by many, was the change in inherited IRA distributions. Those not eligible for the stretch option must empty the account, no matter its size, within ten years of the death of the original owner. Large IRAs are diminished by the taxes and some individuals are pushed into higher tax brackets as a result.

However, not everyone has lost the ability to use the stretch option, including anyone who inherited an IRA before January 1, 2020. This is who is included in this category:

  • Surviving Spouses.
  • Minor children of the deceased account owner–but only until they reach the age of majority. Once the minor becomes of legal age, he or she must deplete the IRA within ten years. The only exception is for full-time students, which ends at age 26.
  • Disabled individuals. There is a high bar to qualify. The person must meet the total disability definition, which is close to the definition used by Social Security. The person must be unable to engage in any type of employment because of a medically determined or mental impairment that would result in death or to be of chronic duration.
  • Chronically ill persons. This is another challenge for qualifying. The individual must meet the same standards used by insurance companies used to qualify policyowners for long-term care coverage. The person must be certified by a treating physician or other licensed health care practitioner as not able to perform at least two activities of daily living or require substantial supervision, due to a cognitive impairment.
  • Those who are not more than ten years younger than the deceased account owner. That means any beneficiary, not just someone who was related to the account owner.

What was behind this change? Despite the struggles of most Americans to put aside money for their retirement, which is a looming national crisis, there are trillions of dollars sitting in IRA accounts. Where better to find tax revenue, than in these accounts? Yes, this was a major tax grab for the federal coffers.

Reference: Fed Week (March 3, 2021) “Who is Still Eligible for a Stretch IRA?”

 

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Can You Be Forced to Inherit a Timeshare? – Annapolis and Towson Estate Planning

Ask anyone who ever purchased a timeshare and changed their mind about it. Getting rid of a timeshare can be problematic. However, imagine if your parents purchased a timeshare and left it to you, with all the financial obligations? Some timeshare companies are now trying to make people continue to pay after they have died, warns a cautionary article “How to Avoid Inheriting a TImeshare You Don’t Want” from KSL-TV

One woman’s parents loved their timeshare. They travelled to one for skiing, another to relax in the sun, and others according to availability and their travel plans. The entire family went on trips and all enjoyed the flexibility. However, when both parents passed away just a few months apart, the timeshare company started sending letters demanding payment. The siblings did not want any part of it.

There had not been any discussions with their parents about what would happen to the timeshare. One of the daughters decided to put the monthly fee onto her credit card to be paid automatically, thinking this would be a short-term issue. When the timeshare company did not respond to the children’s attempt to contact the company to shut down the account, she had the automatic payments stopped. A collection notice showed up and demanded payment immediately.

However, is the family legally obligated to pay for the parental timeshare?

If you die owning a timeshare, it does become part of your estate and obligations are indeed passed onto the next-of-kin or the estate’s beneficiaries. However, they do not have to accept it, in the same way that anyone has the right to refuse any part of an inheritance. No one is legally obligated to accept something just because it was bequeathed to them. This is known as the right to disclaim, but it is not automatic.

A local estate planning attorney will know how your state governs the right to disclaim. Generally speaking, a disclaimer of interest must be filed with the probate court, stating that you reject the timeshare. There are time limits–in some states, you have only nine months after the death of a loved one to file.

When the next-of-kin rejects the timeshare, it may go to the next heir, and the next, and the next, etc. Every family member must file their own disclaimer. If the timeshare is disclaimed by all heirs, it is likely that the timeshare company will foreclose on the timeshare. There may be leftover debts for unpaid fees, and the estate may have to fork over those payments.

A few tips: if you are planning on refusing a timeshare, you cannot use it. Do not try it out, let a friend use it or go one last time. If you wish to disclaim something, you cannot receive any benefit of the thing you are disclaiming. Once you receive a benefit, the opportunity to disclaim it is gone.

Unwanted timeshares usually sell for far less than the original purchase price. Selling a timeshare involves a market loaded with scammers who promise a quick sale, while charging thousands of dollars upfront.

If possible, speak with your parents and their estate planning attorney to head the problem off in advance.

Reference: KSL-TV (Jan. 25, 2021) “How to Avoid Inheriting a TImeshare You Don’t Want”

 

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Your Estate Planning Checklist for 2021 – Annapolis and Towson Estate Planning

If you reviewed or created your estate plan in 2020, you are ahead of most Americans, but you are not done yet. If you created a trust, gave gifts of real estate, business interest or other assets, you need to address the loose ends and do the follow up work to ensure that your planning goals will be met. That is the advice from a recent article “Checklist 2020 Planning Follow Through: You Have More Work To Do” from Forbes.

Here are few to consider:

Did you loan money to heirs? If you made any loans to heirs or had any other loan transactions, you will need to calendar the interest payment dates and amounts and be sure that interest is paid promptly as described in the promissory notes. Correct interest payments are necessary for the IRS or creditors to treat the transaction as a real loan, otherwise you risk having the loan recharacterized or worse, being disregarded completely.

Did you create an irrevocable trust? If so, you need to be sure that gifts are made to the trust each year to fund insurance premiums. If the trust includes annual demand powers (known as “Crummey powers”) to allow gifts to qualify for the gift tax annual exclusion, written notices for 2020 gifts will need to be issued. This can be much more complicated than you expect: if you have transfers made to multiple trusts and outright gifts made directly to heirs, those gifts may need to be prioritized, based on the terms of the trusts and the dates of the gifts to determine which gifts qualify for the annual exclusion and which do not.

If you made gifts to a trust that is exempt from the generation skipping transfer tax (GST), you may have to file a gift tax return to allocate the GST exemption, so the trust remains GST exempt. Talk to your estate planning attorney to avoid any expensive mistakes.

Do you own life insurance? Or does a trust own life insurance for you? Either way, do not ignore your coverage after you have purchased a policy or policies. Your broker should review policy performance, the appropriateness of coverage for your plan, etc., every few years. If you did not do this in 2020, make it a priority for 2021. Many people create SLATS—Spousal Lifetime Access Trusts—so that their spouse benefits from the trusts. However, if your spouse dies prematurely, the SLAT no longer works.

Paying trustee fees. If you have institutional trustees, their fees need to be paid annually. If you pay the fees directly, the fee becomes an additional gift to the trust, requiring the filing of a gift tax for that year. If the trust pays the fee directly, there might not be a tax implication. Again, check with your estate planning attorney.

Did you make transfers to a trust with a disclaimer mechanism? If you made transfers to a trust that has a disclaimer mechanism and you want to reconsider the planning, it may be possible for beneficiaries or a trustee to disclaim gifts made to the trust within nine months of the transfer, thereby unwinding the planning.

Did you create any GRATs in 2020? If you created a Grantor Retained Annuity Trust, be certain that the trustee calendars the required annuity payments and that they are paid on a timely basis. Missing payments could put the GRAT status in jeopardy. You should also confirm also how the payment is calculated, which should be in the GRAT itself.

The best estate plan is one that is reviewed on a regular basis to ensure that it works, throughout changes that occur in law and life.

Reference: Forbes (Dec. 27, 2020) “Checklist 2020 Planning Follow Through: You Have More Work To Do”

 

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Estate Planning Is Best When Personalized – Annapolis and Towson Estate Planning

Just as a custom-tailored suit fits better than one off the rack, a custom-tailored estate plan works better for families. Making sure assets pass to the right person is more likely to occur when documents are created just for you, advises the article “Tailoring estate to specific needs leads to better plans” from the Cleveland Jewish News.

The most obvious example is a family with a special needs member. Generic estate planning documents typically will not suit that family’s estate planning.

Every state has its own laws about distributing property and money owned by a person at their death, in cases where people don’t have a will. Relying on state law instead of a will is a risky move that can lead to people you may not even know inheriting your entire estate.

In the absence of an estate plan, the probate court makes decisions about who will administer the estate and the distribution of property. Without a named executor, the court will appoint a local attorney to take on this responsibility. An appointed attorney who has never met the decedent and does not know the family will not have the insights to follow the decedent’s wishes.

The same risks can occur with online will templates. Their use often results in families needing to retain an estate planning attorney to fix the mistakes caused by their use. Online wills may not be valid in your state or may lead to unintended consequences. Saving a few dollars now could end up costing your family thousands to clean up the mess.

Estate plans are different for each person because every person and every family are different. Estate plan templates may not account for any of your wishes.

Generic plans are very limited. An estate plan custom created for you takes into consideration your family dynamics, how your individual beneficiaries will be treated and expresses your wishes for your family after you have passed.

Generic estate plans also do not reflect the complicated families of today. Some people have family members they do not want to inherit anything. Disinheriting someone successfully is not as easy as leaving them out of the will or leaving them a small token amount.

Ensuring that your wishes are followed and that your will is not easily challenged takes the special skills of an experienced estate planning attorney.

Reference: Cleveland Jewish News (Dec. 9, 2020) “Tailoring estate to specific needs leads to better plans”

 

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SECURE Act has Changed Special Needs Planning – Annapolis and Towson Estate Planning

The SECURE Act eliminated the life expectancy payout for inherited IRAs for most people, but it also preserved the life expectancy option for five classes of eligible beneficiaries, referred to as “EDBs” in a recent article from Morningstar.com titled “Providing for Disabled Beneficiaries After the SECURE Act.” Two categories that are considered EDBs are disabled individuals and chronically ill individuals. Estate planning needs to be structured to take advantage of this option.

The first step is to determine if the individual would be considered disabled or chronically ill within the specific definition of the SECURE Act, which uses almost the same definition as that used by the Social Security Administration to determine eligibility for SS disability benefits.

A person is deemed to be “chronically ill” if they are unable to perform at least two activities of daily living or if they require substantial supervision because of cognitive impairment. A licensed healthcare practitioner certifies this status, typically used when a person enters a nursing home and files a long-term health insurance claim.

However, if the disabled or ill person receives any kind of medical care, subsidized housing or benefits under Medicaid or any government programs that are means-tested, an inheritance will disqualify them from receiving these benefits. They will typically need to spend down the inheritance (or have a court authorized trust created to hold the inheritance), which is likely not what the IRA owner had in mind.

Typically, a family member wishing to leave an inheritance to a disabled person leaves the inheritance to a Supplemental Needs Trust or SNT. This allows the individual to continue to receive benefits but can pay for things not covered by the programs, like eyeglasses, dental care, or vacations. However, does the SNT receive the same life expectancy payout treatment as an IRA?

Thanks to a special provision in the SECURE Act that applies only to the disabled and the chronically ill, a SNT that pays nothing to anyone other than the EDB can use the life expectancy payout. The SECURE Act calls this trust an “Applicable Multi-Beneficiary Trust,” or AMBT.

For other types of EDB, like a surviving spouse, the individual must be named either as the sole beneficiary or, if a trust is used, must be the sole beneficiary of a conduit trust to qualify for the life expectancy payout. Under a conduit trust, all distributions from the inherited IRA or other retirement plan must be paid out to the individual more or less as received during their lifetime. However, the SECURE Act removes that requirement for trusts created for the disabled or chronically ill.

However, not all of the SECURE Act’s impact on special needs planning is smooth sailing. The AMBT must provide that nothing may be paid from the trust to anyone but the disabled individual while they are living. What if the required minimum distribution from the inheritance is higher than what the beneficiary needs for any given year? Let us say the trustee must withdraw an RMD of $60,000, but the disabled person’s needs are only $20,000? The trust is left with $40,000 of gross income, and there is nowhere for the balance of the gross income to go.

In the past, SNTs included a provision that allowed the trustee to pass excess income to other family members and deduct the amount as distributable net income, shifting the tax liability to family members who might be in a lower tax bracket than the trust.

Special Needs Planning under the SECURE Act has raised this and other issues, which can be addressed by an experienced estate planning attorney.

Reference: Morningstar.com (Dec. 9, 2020) “Providing for Disabled Beneficiaries After the SECURE Act”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys