NJ Phone: 609-818-1555 * FL Phone: 561-247-1557

Wednesday, December 12, 2018

What is the first thing an executor of a Will should do?

I am happy to announce that we have finally finished creating a series of short videos regarding the estate planning and estate administration process.  Here is our second video in which Elizabeth Ketterson, Esq., the Director of our estate administration department, is being interviewed by Kevin A. Pollock, Esq., LL.M. regarding the first things a person who is in charge of an estate should do.

If the person is named under a Will, that person is known as the executor.  If there is no Will, that person can apply to the court to be appointed as an administrator of the estate.

We recommend that you meet with an attorney that your are comfortable with to help you prepare the paperwork necessary to be appointed as Executor or Administrator.  The Court will then give you the necessary paperwork to speak with banks, set up an account, and make any claim for funds owed to the estate.  Once you have started collecting assets, then you can arrange to pay the estate's bills.

We strongly recommend that you do NOT distribute money to any beneficiaries until all the bills have been paid and you have received a waiver or release from the beneficiaries stating that they approve of your actions as executor.

To learn more about estate administration or hiring a probate Attorney, please visit us at: https://pollockfirm.com/estate-administration-2/

Wednesday, October 31, 2018

Why You Should Have A Will

I am happy to announce that we have finally finished creating a series of short videos regarding the estate planning and estate administration process.  Here is our first video on the importance of having a Will.

Wednesday, October 3, 2018

Why Repeal of the NJ Estate Tax Means Married Couples Should Update Their Wills

Effective January 1, 2018, New Jersey repealed its estate tax.  The question then become how does this affect you and do you need to do anything about it?  For most people the change is a positive one because it means their heirs pay less taxes and they do not need to do anything to update their documents.

Generally, You are Unaffected by the Repeal of the NJ Estate Tax If...

  1. You do not have children and plan on leaving money to siblings, nieces, nephews, friends or charity.
  2. You are NOT married but have surviving descendants.
  3. You are married couples with children and you plan to leave everything outright to your surviving spouse on the first to die.
In all three situations above, the repeal of the New Jersey estate tax should not affect you and you generally will not need to update your Will or Revocable Living Trust.*  In the first situation, if you are leaving money to siblings, nieces, nephews and friend, be aware that NJ did NOT repeal its inheritance tax, so you still are affected by that.

For married couples who have a Disclaimer Trust plan, your documents are also generally unaffected.

Repeal of the NJ Estate Tax Can Dramatically Affect Married Couples Who Set up a Trust for the Surviving Spouse

To understand why the repeal of the New Jersey Estate Tax can adversely affect married couples who set up a trust for the surviving spouse, I will take a step back to discuss why we often recommend a trust be created for a surviving spouse.

Reasons to Create a Trust for a Surviving Spouse

  1. The first spouse to die wants to ensure that if the surviving spouse gets remarried, the children are protected from future spouse and still receive an inheritance.
  2. You have children from a previous relationship and want to ensure that upon the death of your spouse, your children receive whatever is left over.
  3. The surviving spouse isn't good with money and needs assistance managing the wealth.
  4. Estate Tax Efficiency - Prior to 2017, New Jersey had a ‘use it or lose it’ state estate tax exemption of $675,000.  

Why Was It Tax Efficient to Create a Trust for a Surviving Spouse

Protecting money for the benefit of the your children or from a spendthrift spouse are still very valid reasons to set up a trust, so I will spend the rest of the article talking about how trusts for a surviving spouse in older Wills and Revocable Trusts are usually no longer tax efficient.  

Let's presume it's 2016 and we have a married couple with $1,350,000 of assets.  One spouse dies leaving everything to survivor outright.  The surviving spouse then dies shortly after leaving everything to the children.  In this scenario, we would lose the NJ estate tax exemption of the first spouse to die and the children would only benefit from the $675,000 NJ estate tax exemption of the Surviving Spouse.  Assuming no growth in assets, the children inherit the full $1.35M, but $675,000 would be subject to a tax of almost $55,000.

To minimize the NJ estate tax, attorneys would advise clients to set up a trust for the surviving spouse instead of having funds go outright.  So, in the example above, when one spouse dies, he could leave everything to a trust for the survivor.  The surviving spouse then dies shortly after leaving everything to the children.  In this scenario, by funding a trust for the surviving spouse, we are utilizing each spouse's NJ estate tax exemption.  Upon the death of the surviving spouse, children would receive $675,000 from the trust tax free and the other $675,000 from the surviving spouse tax free.  This type of planning could easily save $55,000 in NJ estate taxes.

Funding a Trust for the Surviving Spouse May Be Tax Inefficient after the Repeal of the NJ Estate Tax.

Now that you know why it was advisable to set up a trust for a spouse and why it was tax efficient, you need to know why most older trusts should be amended.  Basically, now we can make it even MORE tax efficient.  This time, however, we are not talking about estate tax efficiency - now we are trying to make the trusts more efficient for income tax and capital gains tax purposes.  Let me give you two examples again:

Let's presume it's 2010 and we have a married couple with $1,350,000 of assets.  Dad dies leaving everything to Mom.  Mom lives another 20 years before dying and leaving everything to the children.  Since Mom lived another 20 years, let's presume the assets grew by $1M and were now worth $2,350,000. We do not have to worry about the NJ estate tax anymore, so the assets would go to the children completely free tax.  Additionally, when the children receive their inheritance, it is eligible for a step-up in basis.  This means that the children can effectively sell their inheritance the day after Mom dies and pay no capital gains tax on the $1M+ of appreciation.  (Please read this post to better understanding basis.)  

Now, let's presume the same facts as above except that when Dad died, he left $675,000 to Mom in trust.  Let's also presume that the trust received the benefit of all the appreciation, so that when Mom died, she had $675,000 in her own name and $1,675,000 in trust.  The children would still receive a step-up in basis from the $675,000 in assets that came from Mom, but the basis in the trust fund assets would only be $675,000 (the value on Dad's date of death).  So when the children sold the assets that were in the trust, there would be a capital gains tax (up to 23%) on the $1M.  

Most older Wills and Revocable Trusts used this formula for a trust for a surviving spouse, so hopefully it is easy to see why it is no longer tax efficient to continue using it.

Do I Need to Update My Estate Planning Documents?

If you have a Will or Trust created prior to 2017 leaving money in trust to a surviving spouse, the short answer is probably yes.  The one major exception to this is if you have a Disclaimer Trust plan.  If money goes outright to the surviving spouse, and the survivor has to make an affirmative election to fund a trust, then the plan most likely is fine the way it is written.

How You Can Fix Your Older Trusts

If you have an estate plan that automatically leaves money in trust for the surviving spouse, there are two easy ways you can fix it so that it is more tax efficient. 

  1. Option one is to get rid of the trust for the surviving spouse and leave everything to the survivor outright.  This is an easy solution when the estate isn't very large or complex.  However if you are in a second marriage situation or if you are concerned about the surviving spouse getting remarried or spending away the children's inheritance, then you should consider the second option.
  2. Option two is to revise the formulas in the Will or Trust so that it gets a step-up in basis when the surviving spouse dies.  (There are hundreds of ways to do this which are far beyond the scope of this post.)

To further complicate things, most tax attorneys like me will also build in a fail-safe so that if the NJ estate tax comes back, we can have the option of funding an old-style trust.


If you have an older Will or trust that leaves money to a surviving spouse in trust - have it looked at.

* Regardless of whether you have a trust for a surviving spouse, always have your own estate planning documents reviewed by your attorney just to be sure it matches your wishes and still complies with state law.  The purpose of this blog post is to discuss who is most likely to be affected by the repeal of the New Jersey estate tax.

Tuesday, October 2, 2018

What is a Disclaimer Trust?

A Disclaimer Trust is a special type of trust often created under a Will (or as a sub-trust of a revocable living trust) that generally allows a person to refuse an asset and still benefit from it under a trust.  In order to understand Disclaimer Trusts, you first need to understand what a disclaimer is and what happens when you make a disclaimer so that you can understand the purpose and mechanics of Disclaimer Trusts.

What is a Disclaimer?

A disclaimer is literally when someone refuses to accept money or an inheritance.  A person can disclaim a gift, an inheritance, an interest in a trust, or certain powers.  (Let's call this the "Disclaimed Interest".) A person can also make a partial disclaimer, such as disclaiming half of their inheritance (although special rules apply to this).

What Happens When a Disclaimer Is Made?

When a Disclaimer is done correctly, it has the affect of treating the person who disclaims as if he or she died prior to the Disclaimed Interest being made.  So, if a Wife is disclaiming an inheritance from her Husband, it treats the Wife as if she had died before the Husband for whatever amount Wife disclaims.  Generally, in order for a disclaimer to be effective for tax purposes, it must be done within nine months from the date of death AND the beneficiary cannot have accepted the Disclaimed Interest.

Since the Disclaiming party is treated as if he or she died before the gift or bequest was made, the Disclaimed Interest will pass to the next person in line who is suppose to receive that.  For example, if a Will says, everything to my spouse, and upon the death of my spouse, it all goes to my children, then if the surviving spouse disclaims her inheritance, it would all go to the children.  However, that may not be the result the surviving spouse wants.  She might want to have access to that money during her lifetime and only have it go to the children upon her death.

What is the Purpose of a Disclaimer Trust?

The purpose of a Disclaimer Trust is that it allows a surviving spouse to inherit money, but to do so in a way that would be more tax efficient for the descendants of the person creating the Will.

This tax efficiency is probably best illustrated by two examples of how it affected NJ residents prior to 2017.  Back when NJ had a state estate tax, it often wasn't beneficial for the surviving spouse to inherit everything outright. New Jersey had a 'use it or lose it' state estate tax exemption of $675,000.  So, if a married couple owned $1,350,000 of assets, and when one spouse dies they wish everything to go for the benefit of the survivor and then down to the children:
  1. Example 1 - Upon the first to die, everything goes to surviving spouse outright.  When the second spouse dies, she would only have one NJ estate tax exemption of $675,000.  So assuming no growth in assets, the remaining $675,000 would have been subject to the NJ estate tax, resulting in a tax of almost $55,000.
  2. Example 2 - Upon the first to die, everything goes into trust for the surviving spouse.  This utilized the estate tax exemption of the first person to die.  The surviving spouse still had access to the funds in trust, but when she died and everything went to the children, there was no NJ estate tax because she also had an estate tax exemption.

Under What Circumstances Should a Surviving Spouse Disclaim Assets into a Disclaimer Trust?

A surviving spouse should disclaim an inheritance into a Disclaimer Trust when it would be tax efficient to do so.  If we go back to our example above, let's say the couple with $1,350,000 has their estate dwindle down to $500,000, or they move to another estate without a state estate tax, or the estate tax exemption has increased well beyond what they expect to have when the surviving spouse dies, there would be no point in the surviving spouse disclaiming. 

If it is highly like that the surviving spouse will live in a state that has a state estate tax, and it the surviving spouses assets (including the inheritance) would be above that state's estate tax thresh-hold, then it often beneficial for the surviving spouse to disclaim the assets into a Disclaimer Trust.

(Incidentally, before the federal government had portability between spouses of the federal estate tax exemption, this was a part of practically every single Will for married couples.  Since portability and the increase the federal estate tax thresh-holds, fewer attorneys are including these clauses unless the state has an estate tax.)

When Should a Surviving Spouse Disclaim Assets into a Disclaimer Trust?

For a disclaimer to be effective for tax purposes, it must be done within nine months from the date of death.  The nice thing about Disclaimer Trust planning for couples is that it allows the surviving spouse to take a look at all the facts and circumstances when the first spouse dies.  

It is important to remember that the funding of a Disclaimer Trust is always optional.  A disclaimer Trust will NOT get funded unless the surviving spouse makes files a qualified disclaimer according to local state rules.  You can analyze your wealth situation, need for cash, look at the tax laws and figure out what is best for your situation.

What are the Tax Consequences of a Disclaimer?

If a Surviving Spouse disclaims within the nine period and does so according the rules set out by the IRS (basically not taking the property first, not directing where the disclaimed property goes, and complying with state rules on disclaimers), then the disclaimed amount will be includible in the decedent's taxable estate.  This is generally what you want as you are disclaiming to utilize the decedent's estate tax exemption amount.

The person disclaiming must be careful not to disclaim too much, otherwise that might trigger an estate tax on the first to die.

It should be noted that failing to disclaim in a timely fashion or in a way proscribed by the IRS will result in the disclaimer be treated as a taxable gift by the Disclaimant.  Basically, it's as if the surviving spouse accepted the property and then gifted it away.

Alternatives to a Disclaimer Trust Plan

The question I always ask my clients is whether or not they want to guarantee that money go into trust for the surviving spouse.  If they want to guarantee the use of an estate tax exemption or if they want to protect the money from a future spouse, we wouldn't do a Disclaimer Trust plan, we would just automatically fund a trust for the benefit of the surviving spouse upon the death of the first spouse instead of giving the surviving spouse the option to fund it upon the first to die.

However, many people aren't concerned about the surviving spouse remarrying, and they want to keep things simple.  Usually in those cases, we would allow the surviving spouse to disclaim their inheritance into a Disclaimer Trust upon the first to die if there is a tax reason to do so.

If the surviving spouse really doesn't need the money, he or she can also take the money and gift it to the children (or wherever you wish). Remember, this can result in a taxable gift.  However, with the high estate and gift tax exemption limits ($11.2M per person in 2018), most people will not actually incur a gift tax unless you make a very large gift.

Who Can Make a Disclaimer?

Throughout this post I have talked about the ability of a Surviving Spouse to make a disclaimer, and while anyone can disclaim an asset, only a Surviving Spouse can disclaim an asset in to a trust for the benefit of himself or herself.  The general rule for anyone other than a surviving spouse is that you cannot disclaim money and still benefit from it.  Accordingly, your child can never disclaim into a trust for his or her benefit.  

On the other hand, attorneys frequently create estate plans that give money to child, but if child dies, her share goes to grandchild in trust.  If the child is wealthy, she might not want or need the money and then Child can disclaim funds into grandchild's trust and act as trustee of that trust.

Problems With Disclaimer Trust Planning

The biggest problem with Disclaimer Trust planning is that the surviving spouse often fails to make an effective disclaimer.  If the surviving spouse doesn't seek counsel within nine months of the first spouse's date of death, or they transfer money into their own name, then an effective disclaimer cannot be made.

Balancing Estate Tax Planning and Capital Gains Tax Planning

One of the trickiest aspects of deciding whether or not to do a disclaimer is calculating whether a disclaimer will minimize overall taxes and expenses.  If the assets are in the surviving spouse's name, it can be subject to extra estate taxes.  If the assets are titled in the name of a Disclaimer Trust, it could produce additional capital gains taxes, accounting fees and other costs.  I would strongly urge you to consult with a tax attorney before exercising a disclaimer.

How Do I Know if My Estate Plan Includes a Disclaimer Trust?

The Will or Revocable Trust usually says something to the effect of "I leave everything to my spouse, but if my spouse disclaims all or a part of his or her inheritance, such disclaimed portion will be distributed pursuant to the Disclaimer Trust created hereunder."

A surviving spouse should be careful of disclaiming if no Disclaimer Trust is established under the Will or Revocable Living Trust as a disclaimer could have the effect of sending everything to the children.

If a Disclaimer Trust is Primarily for Married Couples Living in a State That Has a State Estate Tax, Why Do My Documents Have a Disclaimer Trust?

Disclaimer Trust planning is most useful in states still have a state estate tax.  However, many attorneys will automatically put it in the estate planning documents for a married couple even if they live in a state that doesn't have a state estate tax just in case the client moves to a jurisdiction that does have the tax.  Moreover, it was common practice to do Disclaimer Trust planning prior to 2001 when the federal government allowed spouses to port their unused federal estate tax exemption to the surviving spouse.  Accordingly, there is a historical component to this in all states.

Is there Any Harm to Having a Disclaimer Trust in my Will or Revocable Trust Even Though I Know I Will Never Use It?

Attorneys never like to use the word "never".  So, I will say that it would be very surprising if there is any harm in having a Disclaimer Trust in your Will or other estate planning documents.  It is a great failsafe.

Friday, August 24, 2018

7 Simple Ways to Minimize the Pennsylvania Inheritance Tax

It's been a little while since I have written an article on the Pennsylvania inheritance tax.  However, before I discuss ways to minimize the PA inheritance tax, it is important to understand that the tax rate is affected by who receives money upon your death.

As a refresher, Pennsylvania has an inheritance tax on most assets that are transferred at the time of your death if they are going to anyone besides a spouse or a charity.  There is also no inheritance tax if a child under age 21 dies and leaves their estate to their parent or step-parent.

Pennsylvania Inheritance Tax on Assets Passing to your Children, Grandchildren, Parents and Grandparents

  • There is a flat 4.5% inheritance tax on most assets that pass down to your children, grandchildren, great-grand children or your other descendants.
  • There is a flat 4.5% inheritance tax on most assets that pass up to your parents, grandparents or your other lineal ascendants. (Exception if the decedent is under age 21.)
  • Pennsylvania treats a son-in-law or daughter-in-law as if they are a child for purposes of the inheritance tax.  As a result, there is a flat 4.5% PA inheritance tax on assets that pass to the wife or widow and husband or widower of the decedent's child. 

Pennsylvania Inheritance Tax on Assets Passing to your Brothers, Sisters, Nieces, Nephews, Friends and Others

  • There is a flat 12% inheritance tax on most assets that pass to a sibling (brother or sister).  
  • There is a flat 15% inheritance tax on most assets that pass up to nieces, nephews, friends and other beneficiaries. (This means there will be 15% tax on money you leave to your dog, cat or horse.)

7 Simple Ways to Minimize the Pennsylvania Inheritance Tax

  1. Set up joint accounts with the people you wish to benefit.  Pennsylvania will only tax the percentage of assets owned by the decedent, not the full amount.  
    • This is a particularly useful strategy if you have one child that you trust completely as only one-half of the jointly owned assets will be taxed.  However, if you have more than one child, it is possible that you and all the children are joint owners of the account, so if you have three children, only 1/4 of the account will be subject to the PA inheritance tax.
    • If you have more than one child, be careful of setting up a joint account with just one person (because you may accidentally cut your other children out)
    • Be sure that you don't have any concerns that your child will take your money and it won't be available for you to use.
    • Transfers must occur more than one year before death to achieve the maximum tax benefit.
  2. Gift your assets to your children.  This can be a very dangerous strategy, so I strongly recommend consulting with a tax attorney or accountant before making the gift.
    • Dangers include giving away an asset that has a low basis resulting in a capital gains tax which could be far more expensive than simply paying the PA inheritance tax.
    • If you give away too much, you could be subject to federal gift taxes or generation skipping transfer taxes.
    • This could potentially cause problems if you wish to qualify for Medicaid.
  3. Buy extra life insurance.  Life insurance is not subject to the Pennsylvania inheritance tax, so converting non-life insurance assets to life insurance will reduce the tax.
    • An interesting planning opportunity is to by a long term care insurance policy that has a life insurance rider.  This way if you don't use up the LTC policy, it can pass tax free to your heirs.  
  4. Utilize life insurance to give money to beneficiaries who are taxed at the highest tax rates.  So let's say you have total assets of $1.1 million dollars including a life insurance policy worth $100,000, and you want to leave $100,000 to your nieces and nephews and you want to leave the rest of your estate to your children.  
    • If you have name your nieces and nephews the beneficiary of the life insurance and give the rest of your assets to your children, there will be a total PA inheritance tax of $45,000 (4.5% x $1M).  
    • If you give the children the life insurance money, and have a will leaving your nieces and nephews $100,000 from your Will with the rest to the children, the total PA inheritance tax will be $55,500 (15% x $100,000 + 4.5% x $900,000). 
  5. Buy real estate outside of Pennsylvania.  OK, maybe this isn't very simple, but Pennsylvania only taxes assets located in Pennsylvania, so a shore property in New Jersey will pass free of the PA inheritance tax.
    • Beware of taxes in other states
    • Don't put the real estate in an entity such as an LLC - Pennsylvania reserves the right to tax an interest in business.  (The legal theory is that you no longer own real estate, but the LLC, which is subject to a PA inheritance tax.)
  6. Pay the PA inheritance tax early.  If you pay the Pennsylvania inheritance tax within 3 months from date of death, you are entitled to a 5% discount.
  7. Convert your IRA to a Roth IRA.  The conversion will come at a cost to your current non-retirement assets, thereby reducing your PA taxable estate for inheritance tax purposes.
    • This strategy works best when you have enough funds outside your retirement account to pay for the income taxes on the conversion.
    • This strategy is especially valuable if your children are high income earners, this way they can receive distributions from the ROTH, after your death, free of income tax.
    • I strongly recommend consulting with a tax attorney or accountant though before doing the conversion.  

Other Not-So-Simple Ways to Minimize the PA Inheritance Tax

  1. Move to another state.  Again, this may not be simple for many people, but if you already have a property in another jurisdiction, consider whether you should change your domicile for tax purposes.  (Obviously you must actually meet the requirements of changing your domicile.)
  2. Invest in farmland or a family business.  Pennsylvania exempts certain farmland and small businesses from the inheritance tax.  The problem with this may be getting your money back out of the business.
  3. Setting up a GRAT or GRUT (setting up a special type of trust that creates an annuity back to you and gives excess investments to your heirs).
  4. Setting up a CLAT or CLUT (setting up a special type of trust that creates an annuity to charity and leaves the rest to your heirs).
  5. Setting up a CRAT or CRUT (setting up a special type of trust that creates an annuity to your heirs and leaves the rest to charity).
  6. Setting up a spousal access trust.  These are typically over-funded life insurance trusts.  Money can be used for your spouse and children while your alive and then it goes completely tax free to your children.  This is a fantastic way to minimize the federal estate tax as well as minimizing the PA inheritance tax.

Simple is Never Simple

As always, be very careful that any changes you make to beneficiary designations or joint ownership of accounts could dramatically alter your overall plan.  So it never hurts to run what might seem like a simple change by an estate planning attorney.

Monday, July 2, 2018

New Jersey Estate Tax - Permanent Repeal?

As many of you know, the new Democratic Governor of New Jersey, Phil Murphy, was engaged in a recent budget showdown with members of his own party.  A last minute government shutdown was avoided, however, as the legislature and the Governor came to terms on a variety of tax increases and spending priorities.  For more specifics, NJ.com has a good article here.

From the perspective of estate planning attorneys, what is noteworthy is that there was never any mention of bringing the New Jersey estate tax back.  One of the concerns with many lawyers was whether, with a new Governor, the estate tax repeal would be lifted.  This does not appear to be the case any time soon, so it looks as if we should continue to plan as if New Jersey will not have a state estate tax, at least for the time being.

Remember, New Jersey still does have an inheritance tax though.

As a reminder, this permanent change means people who have older Wills and Trusts should bring them in for a review.  It is possible that the tax formulas are outdated and that there are new planning opportunities to simply your documents or minimize capital gains taxes upon your death.

Monday, May 14, 2018

Reasons to set up a Third Party Supplemental Needs Trust as an Accumulation IRA Stretch Trust

In a previous post, I described the Reasons to Set up a 3rd Party Supplemental Needs Trust as an Irrevocable Life Insurance Trust.  The same Third Party Supplemental Needs Trust can also be set up as an IRA Stretch Trust

 If a Special Needs person is named as beneficiary of an IRA, 401k, 403b or any other asset, that could ruin their ability to qualify as for SSI and Medicaid.  However, paying retirement money to a traditional Third Party Supplemental Needs Trust can cause income tax problems.  Accordingly, we usually recommend that the Supplemental Needs Trust be created with provisions that allow a slow withdrawal of the retirement account over the lifetime of the beneficiary into a trust for the following reasons:
  • A traditional Third Party Supplemental Needs Trust can be named as a beneficiary of a retirement account, however, that is usually very tax inefficient from an income tax perspective as the IRS will require the retirement money to be paid to the trust within 5 years, and it will be taxed and the very high trust rates.  
  • To minimize income tax consequences, the trust should be designed as a modified IRA Stretch Trust.
  • An IRA Stretch Trust requires the Trustee to withdraw a certain amount each year from the retirement accounts which name the trust as the beneficiary.  The amount the Trustee is required to withdraw from the retirement account into the Supplemental Needs Trust is known as the Required Minimum Distribution (RMD) Amount.  The Required Minimum Distribution Amount is a based upon a formula set by the IRS that is tied to the life expectancy of the beneficiary of the trust (the Special Needs person). 
  • By taking out only the RMD each year, the IRA can continue to grow tax deferred. After the trustee withdraws the RMD from the retirement account into the Third Party Supplemental Needs Trust, the trustee may leave the money in the trust or distribute it to the Special Needs person subject to the normal limits of Special Needs Trusts.  
  • PLANNING NOTE: This should never be set up as a Conduit Stretch Trust as that will ruin the benefits of the Special Needs Person.  A Conduit Stretch Trust requires the RMD be distributed to the beneficiary every year.
  • PLANNING NOTE: In order to establish the Special Needs Person's life as a measuring life for IRS tax purposes, and have the Third Party Supplemental Needs Trust be treated as an Accumulation Trust, upon the death of the Special Needs Person, the balance of the trust and the retirement money can ONLY be paid to a person who is younger than the Special Needs Person.  
  • PLANNING NOTE: If you think that the client may wish to benefit an older sibling of Special Needs Person, consider making that older sibling the measuring life.
One downside to naming a properly designed Third Party Special Needs Trust with accumulation provisions as the beneficiary of a retirement account is that the income tax rates for trusts is higher than that of an individual.  However, if you wish to engage in special needs trust planning and provide a special needs person access to money from a retirement account, this appears to be one of the most tax efficient ways of doing so while also preserving the the government benefits of the special needs person.  

It should be noted that when doing Special Needs Trust Planning, sometimes, if parents have more than one child, they will name name a non Special Needs child as beneficiary of retirement money and a trust for the Special Needs Child as beneficiary of other assets. This is a completely viable alternate type of plan, but care should be considered regarding what happens if that other child predeceases the parents.