The Connecticut Estate Planning Blog

Special Needs Trusts and "Regular" Distributions

Special Needs Trustees beware!  It's vitally important for you to become familiar with the type of government benefit(s) your special needs beneficiary is receiving, particularly if they are the types of programs that have income limitations, such as Supplemental Security Income (SSI) and subsidized housing.

The income generated by the special needs trust may be taxable, but it is not considered as "countable" income for the special needs beneficiary.  But if you start making "regular" distributions to the beneficiary then you will have an income problem that will reduce government benefits or eliminate them altogether if the distributions are large enough.

The word, "regular" income, in the world of government benefits, is defined as distributions that are received on a periodic basis, at least two or more times per quarter or in consecutive months.  In contrast, "irregular" distributions are not periodic or predictable and should not cause a problem with benefits.

This type of income would reduce the SSI benefits dollar-for-dollar, less the $20 disregard (a topic for another post).  There would also be a problem if the special need beneficiary is living in federally subsidized housing since those programs have income limits.

Lawyer Jokes!

How can you tell a lawyer is lying?  His lips are moving.

Santa Claus, the tooth fairy, an honest lawyer and an old drunk were walking along when they simultaneously spotted a one hundred-dollar bill on the ground.  Which one gets it?  The old drunk, of course, since the other three don't exist.

News Flash! The Postal Service was recently forced to recall its new stamp issue.  Lawyers were part of the design and the public couldn't figure out which side of the stamp to spit on.

Be Specific with Charitable Bequests in your Will...

If you don't have any family members to leave your estate to, or you do have family members but you don't care to leave them anything (which happens way more often than you'd think!) then it's always nice to consider naming any charitable organizations or churches that have some personal meaning to you. 

Unfortunately, I see many wills which have very simple language when it comes to charitable bequests.  For example, and I'm not promoting donations to this particular organization, but let's look at the statement, "I leave my estate to the American Cancer Society."  Brevity is wonderful, but in this case it can cause some problems.

First of all, the American Cancer Society (like most large charities) has a central headquarters and many regional offices.  Did the person want the money to benefit the headquarters or her local regional office since it's closer to home?   

Second, what did the person want the money to be used for once it arrives at ACS?  In all likelihood, a simple statement like the one above will result in the charity using the money for its general purposes.  This could include administrative things like purchasing paper clips.  And if that's what the person wanted then that's fine, but maybe she wanted her money to be used for a higher purpose like research funding, establishing a scholarship or to support a particular fund-raising event, like ACS's Relay for Life.

The message is that some things should not be kept simple, like a charitable bequest in a will.  Be specific and detailed to ensure that your true wishes are followed.

The Evolving Will

Many of my clients tend to procrastinate when it comes to finalizing their estate planning documents.  They struggle over who to appoint as guardians for the kids, or who should be the "back up" executor if the surviving spouse can't act, or who's going to end up with the tool collection.  Sometimes these questions can be tough ones and people "freeze up" and stress out over whether or not they're making the right decision.

As the estate planner I'm always concerned that the famous bus is going to run my clients over while the drafts of the wills sit on my desk unsigned.  So I try to gently nudge my clients along towards finalizing everything. 

One factor that I try to impress upon my clients is the fact that their wills are not set in stone; that my clients should conceptualize their wills as evolving documents.  As developments occur in the family (if people pass away, someone becomes disabled, someone gets divorced, there's a "falling out", etc.) it is possible to tweak the documents in order to address the new family situation.

I also emphasize that tweaking the documents ("amending" the documents, in legalese) is very easy and very inexpensive, assuming that the change is not overly-complicated.  I always keep the documents on my computer, or stored digitally, so re-printing the documents with a new date and a new name here or there is very easy.  My fee for doing something like that runs in the two figures, not three figures.

So, don't stress out about it too much when you set up your will and other documents.  Make the best decision you can given the current circumstances and facts.  Then schedule a signing date with your attorney knowing that you can easily change things later if you need to. 

And remember that once your documents are signed you will experience a wonderful peace-of-mind, and that's what estate planning is all about.

A Tip on Funeral Instructions...

Many clients ask me whether they should include their funeral instructions in their wills.  I always tell them that's a good start, but they need to go beyond that as well. 

The problem with stating your wishes in your will is that in most cases, no one looks at the will until sometime after the funeral.  At that point, learning your wishes regarding your funeral isn't very helpful. 

So by all means, document your funeral instructions in your will, but make sure to follow that up with verbal instructions to close family members and friends which will prompt them to refer to your will before the funeral arrangements are made. 

Better yet, consider purchasing a pre-paid funeral contract with the funeral home of your choice.  That's a great way to guarantee that your wishes are well known...not only are they in writing, but they're also backed up with some funds!  This is also a great tool if you need to spend down your assets for Medicaid planning purposes.

Lawyer Joke!

A man calls a lawyer and asks, "How much would you charge for just answering three simple questions?"

The lawyer replies, very matter-of-factly, "A thousand dollars."

"A thousand dollars!" exclaims the man.  "That's very expensive, isn't it?"

"It is," says the lawyer.  "Now, what's your third question?"

Differentiating "Domicile" and "Residence"

In the legal world there is a big difference between one's "domicle" and one's "residence".  For starters, you can have as many residences as you want, but you can have only one domicile (legally speaking).  So your domicile is your legal home, which you treat as your fixed and permanent location.  It's your principal establishment.  Residence is more of a transient concept; your temporary place of abode.

For instance, I have a lot of senior "snow bird" clients who "fly south for the winter", meaning that they spend the winter months in Florida to avoid all of the blizzards up here in New England, but then they spend the other three seasons in Connecticut.  So their domicile is in Connecticut while they have a residence in Florida.

I suppose the obvious question is, "Who cares?"  Well, the various state agencies in charge of raising revenue care very much.  Your domicile's location will determine which state can tax your income and your estate when you pass away.  So...if minimizing or eliminating such state taxes is important to you then you should make it clear to everyone that your domicile is in a low (or no) tax state. 

But domicile is, to borrow a legal term, a "question of fact".  This means that you need to look at the facts of each case to make a determination, and many times the determination is not so cut-and-dry.

How do you make sure that your domicile is crystal-clear to an objective observer?  Well, you should keep in mind that if your domicile becomes a legal question then courts tend to look at the following facts: (1) residence at death, (2) your proclamation of domicile in your wills, trusts, deeds, etc. (3) ownership of real estate, (3) place of automobile registration, (4) place to which you return to from trips, (5) where you're registered to vote, (6) the address you use in tax returns and whether you file them as a "resident" or "non-resident", (7) locations of bank accounts and safe deposit boxes, (8) hobby materials, (9) the location of your valuable personal property, (10) where your pets are kept, (11) location of deceased family members, (12) membership in clubs and religious organizations, (13) location of volunteer activity, (14) location of political activity, (15) place of birth, and (16) local newspaper subscriptions.

Remember, many times there are some big bucks involved in this question so there are plenty of important court cases that focus on this issue.  So if this is one of your concerns then discuss this topic with your accountant and estate planning attorney.

Attention All Summer Cottage Owners!

Since it's still early January it might be a little early to start thinking about your summer cottage.  I always try to avoid catching "spring fever" until late February at the earliest!  But if you own real estate outside the state of Connecticut then I'd like to take this opportunity to alert you to a potential "probate pitfall" that may be an issue for you.

When you pass away with real estate in your name (either solely or jointly) your name has to be officially removed from the title to the property.  Otherwise, you have what's called a "cloud on title" which will make it impossible to pass on good title to someone else if someone tries to sell or transfer the property.  The only way to remove a decedent's name from the property is to go through a probate procedure, the extent of which will be determined by the size of the estate and how it's titled.

This process of removing a decedent's name from a deed is true in all states.  So...if you happen to own real estate in more than one state then you will be leaving your family with not just one probate headache, but multiple probate headaches since each state will require a probate process.  Yikes.

Now, I don't agree with many attorneys who believe that every person needs a revocable living trust no matter what.  But in a case where a client owns real estate in Connecticut and another state, I almost always recommend a living trust, and I do so strongly.  That's because if you set up a living trust and you transfer ownership of both houses into the name of the trust then you end up with no probate for either property instead of double probate.

It's also worth mentioning that I'm talking about probate, not taxes.  Each state would be able to levy an estate tax, if the state has one, and the trust wouldn't avoid that (unless it has some special tax planning provisions).  Still, avoiding double-probate for your loved ones is usually more than enough reason to set up a living trust to own both houses.

Check Those Beneficiaries!

OK, let's start the year out right and invest some time in making sure that the beneficiaries that are listed for your assets make sense in light of your current circumstances.  I'm talking about any financial asset that has a "designated beneficiary", such as life insurance, qualified retirement accounts (IRA's, 401K's, etc.) annuities and any bank account that has been established as a "POD" (payable on death) account. 

If you remember nothing else from this post remember this: Your will or living trust does not control the distribution of the assets listed above.  If an asset has a designated beneficiary, then upon your death the remaining funds are going to that beneficiary (or beneficiaries) and no one else.  The company in charge of the account doesn't give a hoot about what your will or living trust says.

One perfect example of when this can cause an enormous problem is when there is a divorce.  If you don't update your beneficiary designation after the divorce then your ex could end up with the proceeds upon your death.  Wow.

Please look at that list in the first paragraph again and note that we're not talking about small change here.  If you're like most of the population then your retirement accounts are probably the largest assets you have with the possible exception of your house.  Also, the pay-out of your life insurance may represent the largest percentage of your estate.  So it's worth it to sit down with your estate planning attorney and make sure that you get your beneficiaries right.

What Does "Per Stirpes" Mean, Anyway?!

"Per Stirpes"?  What the heck does that mean?  That may be the singlemost common question I hear from clients when they receive drafts of their estate planning documents for their review.  It's certainly a fair question since it doesn't tend to come up in everyday conversation.  But it's one of those necessary evils in the world of estate planning since writing out the meaning of the term would add another large paragraph to everyone's will.

First of all, it's a Latin phrase (a working knowledge of Latin is practically mandatory in the legal industry for some reason) which means "by the roots".  Interesting perhaps, but not very helpful yet.

OK, it essentially means that descendants of the next generation following a beneficiary will each receive an equal share of the beneficiary's share of the estate if the beneficiary has predeceased the decedent.  Well, if you read that last sentence very slowly it may start making sense.

So let's finish it off with an example:  Jerry dies without a spouse, but he has one son, Kramer.  Actually he had one son, but Kramer tragically died before Jerry.  BUT, Kramer had two kids, George and Elaine, and they survived both Kramer and Jerry. 

Can you guess what happens next?  Yes, Jerry dies with a will stating that his estate goes to Kramer "on a per stirpes basis". 

The result: since Kramer's not around to get his inheritance, George and Elaine will take it on Kramer's behalf, 50/50.  It doesn't matter if George and Elaine have kids of their own because those kids (Jerry's grandkids) would get nothing since their parents survived them.

That's the simplest way I can explain "per stirpes" (complete with a Latin translation!).  But if it's still as clear as mud, please ask your estate planning attorney to walk you through how your estate distribution works if the beneficiaries of your will receive their shares on a per stirpes basis.