Life insurance — a useful tool for estate planning and management

An illiquid estate can be very difficult to administer. If the estate assets include real estate or a business to be sold,  there can be a need for substantial cash to maintain these pending sale. If the beneficiaries of the Estate are Class C (siblings) or Class D (all others), New Jersey Transfer Inheritance Tax will need to be paid. Many Wills direct that these taxes be paid from the estate itself, rather than paid by the beneficiary who receives the inheritance. The Executor may need to pay for the funeral bill.  401Ks or IRAs generally have designated beneficiaries, and therefore are not used to pay estate expenses. There may be  substantial debts to clear up as well, or unfiled income taxes. So there’s often a need for cash in the estate so that the Executor can reasonably take care of the Estate’s obligations.  Life insurance that is payable “to my Estate” can be used to create the liquidity that’s needed.

If the estate plan needs to balance the amounts being left to different people, and certain people are receiving, let’s say, the tax-deferred accounts, the beneficiary designations on the life insurance can take care of the others.

Perhaps there is a Trust within the Will to protect the inheritance for certain heirs, or a supplemental needs trust for a disabled heir, or an unfunded standby trust for another person’s benefit. Life insurance can be made payable  to the Trustee of the Trust, to ensure that there will be an inflow of dollars to fund the trust. This is a particularly useful technique when the Trust includes a house that the beneficiary will live in.

Life insurance is one of many tools in the toolbox for an effective estate plan. Call us for advice to design the plan that meets your needs ….. 732-382-6070


The new New Jersey Uniform Trust Code and Special Needs Trusts

The new uniform trust code which goes into effect in New Jersey on July 17th has a section dedicated to “special needs trusts.”  See NJSA 3B:31-37.  The section concerns both first-party trusts (often called “Special Needs Trusts” or even “d(4)a trusts,” referring to the section of federal Medicaid law which authorizes them) and third party trusts (often called Supplemental Needs Trusts or Supplemental Benefits trusts).

This section is broadly designed to encompass trusts that are intended to provide discretionary benefits to individuals with disabilities or who are aged or blind, to “supplement rather than replace or impair government assistance that the protected person receives or for which he otherwise may be eligible.”  The definition of a special needs trust in this section of the code refers to trusts in which the protected person/ beneficiary cannot compel distributions and the trustee has no duty to use the trust to provide primary support. The section makes it clear that the trustees have “broad power over distributions,” and that creditors of the beneficiary cannot get at the trust funds to pay for a debt, and a creditor cannot compel a trustee to make a distribution in order to pay that creditor’s claim. It also says that for third party trusts, if the trust is terminated prior to the death of the beneficiary, the trust does not have to repay the government for benefits that were provided unless the document says so. These provisions in the new code should help to prevent certain problems that practitioners have encountered, in which government agencies or creditors have attempted to get to the trust assets despite the limiting language in the trust document.

There is another section of the new code — NJSA 3B:31-27 that enables a trust to be amended by consent of the trustee and the qualified beneficiaries. The protected person who is the current beneficiary of the trust would be a qualified person. That section of the new code may afford the flexibility to beef up, clarify or improve a poorly-written trust which was clearly intended to be handled as a discretionary, spendthrift, supplemental needs fund.

As is the case today, a trustee or beneficiary can always petition the court to amend, modify, correct a mistake, interpret the language to match the proven intent of the grantor, or terminate a trust which is too small to justify the costs. Those types of actions are dealt with in  NJSA 3B:31-28, 31-31 and 31-32.

Many of the sections of the law just codify what has long been the “state of the law” in New Jersey based on caselaw decisions by the courts. Having these things codified in statutes should prove to be useful.

Call us to review your existing trusts or to develop a new estate plan involving trusts … 732-382-6070

Time marches on and the Trust in your Will may no longer be needed

Estate planning can be thought of as a life-long process. A young person may not have much in the way of worldly posessions, but may have particular opinions about who should make the medical and financial decisions for them if they become incapacitated. So a power of Attorney, health Care Directive and basic Will can be signed anytime starting at age 18. Later, you get into a relationship or get married and although you may be leaving everything to your partner or spouse, you wouldn’t want them to have to deal with the hassles of an estate with no Will (including posting a cash bond), so you might make a Will that leaves it all to them and appoints them as Executor with a few backups. After you have children you need a Will that designates their legal guardians (in case your spouse also dies), and if there’s significant assets, you’ll likely want a trust to receive the children’s inheritance (in case your spouse has died).

Things change over time, though. Suppose one of your children is now in their 20s and has become Disabled. That discretionary trust for them may be the wrong trust — they might need their inheritance sheltered in a  Supplemental Needs trust now. The kids may be grown up and doing great – perhaps a trust is no longer needed. Or one of your kids may be strung out or on the verge of divorce.  If your Will doesn’t leave their share in trust, perhaps it should. And it’s also possible that you are in a high-asset situation and signed a Will with certain Trusts for your spouse that just no longer fit the situation because the estate tax laws have changed, or their health situation has changed. Or you’ve been sued for divorce. Or you want to leave charitable bequests.

Just as there’s no one plan that fits everyone, the plan that was the perfect solution when you were in your thirties may be a bad plan now that you’re in you’re 60’s. Bad plans can result in legal and tax and financial headaches that are avoidable with thoughtful planning. Seemingly complicated plans can sometimes be the simpler and perfect  solution, and a ‘simple plan” may not end up simple after all.

Call us for estate planning  at all ages … 732-382-6070


Special Needs Trusts play Vital Role for SSI & Medicaid Recipients

A person with disabilities who is incapable of engaging in substantial gainful activity for self-support in the competititve workplace may be receiving Supplemental Security Income (SSI) and the Medicaid benefits for health care that accompany the SSI.   The person may reside in the community, in an assisted living facility or in a nursing home. Both Medicaid and SSI have strict financial requirements: monthly “income” cannot exceed the SSI amount and “countable resources” cannot exceed $2,000. 

For a person who depends upon these programs, they are the lifelines to survival.

When an SSI & Medicaid recipient suddenly inherits money because a parent, grandparent or other family member dies, they are at risk of losing these vital benefits. If they have been injured and are about to receive a personal injury settlement or jury award, they are at risk of losing these vital benefits. If their inaccessible real estate finally sells, they are at risk of losing these vital benefits. And if they receive alimony as a result of a divorce settlement, their income may exceed the pertinent eligibility level. In all of these situations, careful attention should be placed to starting the necessary court proceedings in a timely way to establish a special needs trust that could preserve the funds and the SSI & Medicaid benefits for the recipient’s long-term protection.

Special Needs Trusts are called “d(4)(a) trusts” for the section of the Social Security Act that allows a recipient’s assets to be transferred to the trust without causing a transfer penalty. These trusts can only be funded before age 65, and the State must be named as the first beneficiary if the Medicaid recipient dies. A Trust document must be prepared which meets many requirements contained in federal and state law.

When relatives of a person on SSI/Medicaid are preparing their estate plans, they can specify that the bequest be funneled into a Supplemental Needs Trust (without a State pay-back) rather than given outright to the heir. Sometimes the Trust is written into the Will. other times, the parents of a young adult disabled person have already established a Supplemental Needs trust for their child with its own taxpayer EIN#, and the other family member can specify this trust to receive the inheritance. This can protect the heir’s benefits. Caution in drafting is warranted, because as discussed in a prior blog post, a general discretionary trust in the Will would not provide the same level of protection as a Supplemental Needs Trust.

If you are receiving SSI or Medicaid and are about to receive money, and you’re under 65, there may be good options for asset preservation using a Special Needs Trust, but specialized legal proceedings will be needed.

For advice and representation regarding SSI, Medicaid and Special Needs Trusts … call 732-382-6070