The MLO Minute: By Jillian Zacks, Esq.
The process of creating an estate plan is comprehensive. It typically does not involve simply executing a Last Will and Testament but rather the plan will also include a Financial Power of Attorney, a Health Care Power of Attorney/Living Will and possibly a stand alone trust such as a Special Needs Trust if the individual or a family member has a disability and is receiving means-tested benefits. But, just as crucial as executing the proper documents is coordinating your intent with the non-probate assets, or assets that do not pass under the terms of your Will. Non-probate assets include assets with beneficiary designations, such as retirement accounts, life insurance, annuities, or assets such as jointly-held real estate and joint bank accounts.
With respect to any asset that does not pass under the terms of your Will, but rather by beneficiary designation, the beneficiary designation forms must be reviewed and, if necessary, changed to ensure that the person(s) or trust(s) you wish to receive these monies are accurately identified. Now is a good time to obtain those forms, many are accessible online, and find out if they line up with your intentions for your overall estate plan. Things to look for are making sure you have named the trustee of the trust for your minor children under your Will or the trustee of the Third-Party Funded Special Needs Trust if you have a family member with a disability who is receiving means-tested benefits (remember assets in excess of the resource limits will disqualify the individual from receiving means-tested benefits such as SSI and Medical Assistance).
Another consideration when examining beneficiary designation forms is the changes that come with the recently passed SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019). This Act makes various changes to retirement benefits. One important aspect is that the SECURE Act limits stretching distributions from defined contribution plans and IRAs after the owner of the plan dies. Under prior law, following the passing of the owner of the plan, the beneficiary would stretch the receipt of the benefit over their life expectancy. Now the SECURE Act requires that distributions to the designated beneficiary be made within 10 years. There are, however, exceptions for certain categories of eligible designated beneficiaries. The exceptions include (but are not limited to) the surviving spouse, the minor child of the plan participant (until majority) and a disabled or chronically ill individual.
As planners for individuals with disabilities, prior to the SECURE Act, we often told clients that leaving IRAs or 401(k) s to their family member’s special needs trust was not the most tax efficient choice because in certain trusts, the required minimum distributions would be taxed at the trust’s compressed tax rate. In cases where a parent had other children who were not receiving means-tested benefits, the parent often named their other child(ren) as the beneficiary of the qualified fund. Now, with the changes brought about by the SECURE Act, a Third-Party Funded Special Needs Trust, may now be a more tax efficient option. We encourage you to reach out for an evaluation of your current special needs trust to see if it would qualify as an eligible designated beneficiary to allow payment to the trust over the lifetime of the disabled beneficiary. Keep in mind that the special needs trust needs to be drafted very carefully and possibly more strictly than would otherwise be needed to ensure the best tax treatment.