UNDERSTANDING SPECIAL NEEDS TRUSTS ▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬ 2016 Seminar Material ▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬▬

S0014.16

New Jersey Institute for Continuing Legal Education

A Division of the State Bar Association NJICLE.com c

UNDERSTANDING SPECIAL NEEDS TRUSTS

Moderator/Speaker Lawrence A. Friedman, Esq. Certified as an Elder Law Attorney by the National Elder Law Foundation FriedmanLaw (Bridgewater) Speakers Mark R. Friedman, Esq. FriedmanLaw (Bridgewater)

Richard H. Greenberg, Esq. Greenberg & Schulman (Woodbridge)

S0014.16

© 2016 New Jersey State Bar Association. All rights reserved. Any copying of material herein, in whole or in part, and by any means without written permission is prohibited. Requests for such permission should be sent to NJICLE, a Division of the New Jersey State Bar Association, New Jersey Law Center, One Constitution Square, New Brunswick, New Jersey 08901-1520. Table of Contents Page

Design & Administration of Special Needs Trusts Lawrence A. Friedman 1

Disability Benefits 1 Financial Eligibility for Disability Benefits 4 Trusts & Means Tested Aid 5 Special Needs Trusts to Protect Means Tested Aid 6 SNT Administration 11

UTC and ABLE Impact on Elder Law & Special Needs Lawrence A. Friedman Mark R. Friedman 15

Uniform Trust Code 15 Achieving a Better Life Experience Act (ABLE Act) 21

Retirement Planning Update Leonard J. Witman, Esq. 27

Detailed Table of Contents [page numbers at bottom] 28

Understanding the Affordable Care Act’s Impact on Special Needs Practice Mark R. Friedman, Esq. 67

Understanding New Achieving Better Life Experience (ABLE) Accounts 69

Professional Responsibility in an Elder Law/Special Needs Practice Lawrence A. Friedman 73

Description of Elder Law 73 Key Professional Responsibility Concerns 74 Common Elder/Special Need Fact Patterns Raising RPC Concerns 77

About the Panelists… 81

Design & Administration of Special Needs Trusts ©2016 Lawrence A. Friedman/FriedmanLaw/SpecialNeedsNJ.com/Bridgewater, NJ Reprinted by NJICLE with Permission of FriedmanLaw Download additional articles and Q&As at SpecialNeedsNJ.com

I. DISABILITY BENEFITS A. Disabled people potentially can qualify for several government benefits such as cash assistance, health care, housing, vocational training, and various other programs. 1. Disabled for purposes of various government disability benefits (including SSI, SSD, and Medicaid) means unable to engage in almost any kind of work (SS Disabled).

2. An individual is presumptively not SS Disabled if he/she is capable of earning at least an income threshold that varies depending on various circumstances and is inflation adjusted.

3. A former surgeon who suffers tremors that prevent him from operating but who can practice other kinds of medicine or teach is not SS Disabled but may be disabled for other purposes such as private disability insurance.

B. Federal Programs 1. Social Security Administration Programs a. Supplemental Security Income (SSI) is cash assistance to or for people who are aged, blind, or disabled and have income and resources within program limits.

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b. Social Security Disability (SSD) is cash assistance to or for people who are disabled and have sufficient work history to qualify for SSD or who became disabled before age 22 and can qualify for SSD under a parent’s work record. SSD has no income and resource limits but more than modest earned income usually indicates that a person isn’t disabled.

2. Medicare is available to people with sufficient work history upon reaching age 65, after qualifying for SSD for two years, or upon contracting ALS or End Stage Renal disease. a. Some Medicare benefits are free while others require premium payments.

b. Delaying enrollment in a Medicare part that requires a premium triggers additional fees unless alternative creditable coverage applies. Typical creditable coverage is through employer of working Medicare participant or spouse but not COBRA or retiree health insurance.

c. Medicare can be but isn’t always available to people with Medicaid.

C. Federal/State Shared Programs 1. Medicaid a. Medicaid is far and away the most commonly encountered shared program that benefits SS Disabled people. Medicaid also is available to aged and blind people, and the Affordable Care Act allows states to offer Medicaid to people with modest incomes. Limited Medicaid programs also are available to other classes of people like children and pregnant women. New Jersey and many other states provide Medicaid automatically to SSI recipients.

b. Medicaid is state administered and eligibility requirements and benefits vary to some extent from state

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to state.

c. To qualify for Medicaid, an individual must have income and resources within program limits.

d. Medicaid non-nursing facility level benefits (NNF) cover preventive and acute care in hospitals and the community. Medicaid nursing facility level benefits (NF) cover long term care in a nursing home, assisted living facility, or in the community.

e. To qualify for NNF Medicaid, an individual’s income and resources must be very modest (but the Affordable Care Act allows for higher incomes in participating states). To qualify for NF Medicaid, an individual must show a need for long term care typically through issues with activities of daily living as well as satisfy income and resource limits which, while higher than for NNF Medicaid, still are quite modest.

f. When one spouse seeks NF Medicaid, finances of both spouses are taken into account even if the couple has a prenuptial agreement stating that funds shall be separate and spouses aren’t liable for one another’s expenses. (1) While prenuptial agreement terms limiting spousal responsibility for one another’s care are ignored for Medicaid purposes, the agreement still governs in case of divorce and for substantive law purposes

(2) Limited exceptions may apply where a married couple separates well before either spouse needs NF services such as where a couple splits in their 50s but doesn’t divorce and the wife enters a nursing home in her 70s.

2. Other federal/state shared programs include SNAP (formerly called food stamps), certain housing aid, and certain energy aid.

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D. State Programs 1. The New Jersey Department of Human Services Division of Developmental Disabilities provides various benefits to people who are developmentally disabled and their families. New Jersey Department of Human Services also provides some similar benefits to people with mental illness a. Benefits range from day programs to group homes, supervised apartments, counseling, family support services, respite care, and a host of other social aid.

b. People who can afford to pay for certain DDD benefits (such as group home costs) and their legally responsible relatives (spouse, parent of a minor child) must do so.

c. When a participant in certain DDD programs receives more than nominal amounts, DDD may claim against those funds for prior and ongoing care costs.

d. DDD requires people who can qualify for Medicaid to do so and there is a special Medicaid community care waiver program for developmentally disabled people.

2. PAAD/Senior Gold- State funded prescription aid for seniors and SS Disabled people who meet financial requirements.

II. FINANCIAL ELIGIBILITY FOR DISABILITY BENEFITS A. Many programs for disabled people limit eligibility based on income, resources or both (Means Tested Aid) including SSI, Medicaid, housing aid, group homes and other programs for people with developmental disabilities and mental illness, and PAAD/Senior Gold.

B. Receipts by a Means Tested Program participant, certain relatives, or a trust that isn’t exempt are disqualifying. 1. Gifts, devises, inheritances, recoveries (settlements, awards, trial judgments, Etc.), equitable distributions, alimony, child support, and most other kinds of receipts can disqualify a

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recipient and family members for Means Tested Aid.

2. Lawyers who don’t plan such receipts with government benefits in mind harm their clients and may risk malpractice liability.

III. TRUSTS & MEANS TESTED AID A. Trust Principal Countable- The Social Security Administrations’ Program Operations Manual System (commonly called “POMS”) SI 01120.200.D. says that for SSI purposes a trust is a resource to an individual who can 1. Revoke or terminate the trust and then use the funds to meet his/her food or shelter needs,

2. Direct the use of the trust principal for his/her support and maintenance under the terms of the trust, or

3. Sell his/her beneficial interest in the trust.

B. Trust Principal Not Countable- SI 01120.200.D. also says that a trust is not an SSI resource where individual cannot revoke or terminate the trust or direct the use of the trust assets for his/ her own support and maintenance.

C. Trust Income Not Countable- SI 01120.200.D. says where principal of a trust isn’t SSI countable to the trust beneficiary, undistributed trust income also isn’t SSI countable to the beneficiary. 1. As a corollary trust income probably will countable where trust principal is countable although unusual drafting can split the two.

2. Generally, undistributed trust income isn’t countable if the beneficiary has no legal right to access it for support, but special rules make income of certain beneficiary funded trusts countable subject to statutory exceptions.

D. Non-assignable Income Paid Into Trust- POMS SI 01120.200.D. also says that amounts that can’t be assigned by law are income to the

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person entitled to payment even if they are paid directly into trust. 1. Thus, pensions subject to the Employee Retirement Income Security Act (ERISA) are income to the plan participant even if paid into a special needs trust or other kind of trust directly by plan because ERISA forbids assignment of pensions.

2. Similarly, statutes prohibit assignment in trust of Social Security and various other government benefits payments.

E. Alimony Paid Into Trust- Alimony payments into a trust also would be income to the former spouse where the spouse has a legal right to receive the payment or access it for support. However, if the payment is to be made directly into trust and the trust beneficiary has no right to receive the payment or access it for support, the payment in trust wouldn’t be income. Thus, POMS SI 01120.200.G. notes that child support or alimony payments paid directly to a trust as a result of a court order, are not income, but are income if pursuant to an assignment that can be revoked.

IV. SPECIAL NEEDS TRUSTS TO PROTECT MEANS TESTED AID A. A trust intended to protect Means Tested Aid may be called special needs trust/supplemental needs trust/supplemental benefit trust/or some other name depending who drafted it and which state’s laws govern. Below special needs trust means SNT containing assets contributed by the beneficiary (e.g. personal injury settlement) while supplemental needs trust means SNTs funded solely by persons other than the beneficiary (e.g. devise directly into SNT under a parent’s will).

B. A trust protects Means Tested Aid only if its income and/or resources are not available to the beneficiary for support. Thus, an SNT protects Means Tested Aid only if it is drafted and administered so that undistributed principal and income aren’t resources or income to the beneficiary. However, the SNT still will be disqualifying if it isn’t drawn in accordance with rules governing particular Means Tested Aid programs. 1. For instance to avoid SSI and Medicaid disqualification, a special needs trust must satisfy requirements under 42 U.S.C.

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§1396p(d)(4)(A), (B), or (C) and state counterparts that don’t apply to supplemental needs trusts.

2. However, even though an SNT satisfies special requirements under 42 U.S.C. §1396p(d)(4)(A), (B), or (C) and avoids SSI and Medicaid disqualification, it still can be disqualifying for developmental disability benefits that may have other requirements.

C. An SNT disqualifies a beneficiary for SSI, Medicaid (and some other Need Based Aid programs) to the extent the beneficiary has a legal right to access the SNT to fund his/her support. Thus, a trust that mandates distributions for support is disqualifying while a trust that leaves all distributions to the trustees’ discretion may not be disqualifying.

D. It isn’t clear whether a trust that says the trustees shall distribute for the beneficiary’s health and support within the trustees’ discretion has support obligations or is discretionary. 1. The 2011, New Jersey Supreme Court may have shed guidance in affirming the Appellate Division opinion Tannen v. Tannen, 416 N.J. Super. 248, 3 A.3d 1229, (App. Div. 2010), aff’d, 208 N.J. 409 (2011).

2. Tannen may indicate that trustees have no distribution obligation where a trust gives the trustees full discretion over distributions even if it also says the trustees shall distribute for health, support, maintenance, and education. However, it isn’t clear whether the opinion applies generally to trusts with hybrid support/discretionary terms because the Appellate Division opinion says plaintiff conceded that the trust gave trustees total discretion and defendant couldn’t force the trustees to make distributions to her. We don’t know whether the opinion may have changed if plaintiff had maintained that the trust was obligated to distribute for the beneficiary’s support.

3. The Tannen trust says:

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The Trustees shall pay over to or apply for the benefit of the beneficiary's health, support, maintenance, education and general welfare, all or any part of the net income therefrom and any or all of the principal thereof, as the Trustees shall determine to be in the beneficiary's best interests, after taking into account the other financial resources available to the beneficiary for such purposes that are known to the Trustees. The term “best interests” shall include, without limitation and in the Trustees' sole discretion as to need and amount, payments from the Trust to help meet educational expenses, medical expenses or other emergency needs of the beneficiary, to enable the beneficiary to purchase a home, and to enable the beneficiary to enter into a business or profession · The time or times, amount or amounts, manner and form in which said distributions shall be made, or sums so expended, shall be left to the sole discretion of the Trustees and shall be made without court order and without regard to the duty of any person to support such beneficiary.... Notwithstanding any other provision in this Trust Agreement to the contrary, it is the express intention of the Grantors in creating this Trust that the beneficiary shall not be permitted, under any circumstances, to compel distributions of income and/or principal prior to the time of final distribution.

E. Of at least equal importance to avoiding disqualification, an SNT must be compatible with the beneficiary’s individual needs. While an SNT must be drafted in a manner that won’t disqualify the beneficiary for crucial government aid, the trust must not be so restrictive that it can’t buy needed goods and services. For instance, a trust for a person with mental illness may be of little benefit if it can’t pay for his housing in the community.

F. Well drafted SNTs are much more than mere forms drawn primarily to preserve Medicaid eligibility. 1. For instance, form trusts often prohibit a trust from funding support to ensure the trust isn’t Medicaid disqualifying. SNTs should be sufficiently flexible to meet the beneficiary’s needs. For instance, a trust that prohibits expenditures that can lead to a reduction of benefits may be precluded from funding housing costs (including rent, mortgage, property tax, property insurance when required by a lender, water, electricity, sewer, gas, heat, and garbage removal; including any portion of such costs included in condominium association charges). That kind of prohibition isn’t necessary and may prevent a huge

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settlement from meeting a seriously disabled individual’s goal to live in a nice condominium.

2. A better approach is to draft an SNT so that the trust has no obligation to pay for support but doesn’t prohibit desirable expenditures. However, the drafting must be is very tight to ensure the trust isn’t obligated to pay for support, which would result in disqualification.

G. Supplemental needs trusts can be established in a will or stand alone, but stand alone often is preferable because it can be funded by different family members even while the grantor is living.

H. A special needs trust funded with a litigation recovery, worker compensation award, or other amount attributable to the beneficiary (such as certain divorce payments) is SSI and Medicaid disqualifying unless it complies with 42 U.S.C. §1396p(d)(4)(A) or (C). 1. A 42 U.S.C. 1396p(d)(4)(A) SNT is a traditional trust with just one disabled beneficiary while a (d)(4)(C) SNT is a pooled trust sponsored by a non-profit organization.

2. A 42 U.S.C. 1396p(d)(4)(A) SNT can be more flexible and allows the beneficiary to choose his own trustee but it may be more expensive to establish.

3. Both 42 U.S.C. 1396p(d)(4)(A) and (C) special needs trusts also must comply with applicable state requirements. For instance, New Jersey Medicaid regulations require special needs trusts to include numerous technical record keeping, reporting, and other requirements while Pennsylvania limits special needs trust expenditures. New York’s Estates, Powers, and Trusts Law’s supplemental needs trusts provisions nearly always should be included in New York supplemental needs trusts but would not be appropriate for a New Jersey trust. Similarly, New Jersey Medicaid regulation requirements shouldn’t be included in New York trusts.

4. While structuring a settlement for a disabled plaintiff can

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provide tax and other benefits, it is almost never desirable to entirely structure a settlement. While a case is pending, families often are forced to defer expensive purchase they greatly desire for lack of funds. Therefore, it is important to keep liquid sufficient settlement proceeds to meet pent up demand for such big ticket items as a disability modified van, disability modified bathroom, computers, adaptive technology, disabilities camps, etc..

5. Payback Requirements- 42 U.S.C. 1396p(d)(4)(A) requires a d4A trust to repay Medicaid when the beneficiary dies. Some advocates claim (and some courts have held) only Medicaid expenditures after establishment of the trust must be repaid. However, POMS SI 01120.203 prohibits trust provisions limiting the Medicaid payback period.

6. Parents and grandparents don’t have inherent authority to place a descendant’s assets/income in trust. A competent adult can authorize others to place his assets/income in trust such as via power of attorney.

7. Court authorization is required to place in trust assets/income of minor or adult who lacks capacity. Where parents place a minor or incapacitated child’s funds in SNT without court authorization, the beneficiary should have a legal right to terminate and recover the trust. Therefore, the SNT should be SSI and Medicaid disqualifying (unless a court authorizes the trust after the fact).

8. 42 U.S.C. 1396p(d)(4)(A) does not permit a special needs trust to be established by the beneficiary. Acts by an agent acting under power of attorney are attributed to the principal. Therefore, an SNT established by an agent acting under power of attorney is treated as if established by the principal of the power of attorney.

I. The common law Doctrine of Worthier Title (DWT) makes a so- called irrevocable trust revocable when the same person is grantor

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and life beneficiary and the life beneficiary’s heirs are the remainder beneficiaries. 1. Social Security Administration guidance says a special needs trust that is revocable due to the DWT fails and, therefore, is SSI and Medicaid disqualifying.

2. A trust that names remainder beneficiaries can avoid the DWT, but NJ law automatically makes the grantor/life beneficiary’s heirs where the life beneficiary lacks capacity and life beneficiary funds the trust. Consequently, in 2000, I drafted a statute on behalf of the Bar Association that says DWT doesn’t apply to special needs trusts in New Jersey. The Social Security Administration recognizes the statute at POMS SI NY01120.200. However, a special needs trust can fail due to DWT if the SNT names as governing law one of the many states that still apply the DWT or the trust situs is changed from New Jersey to a state that applies the DWT.

J. As originally drafted, the Uniform Trust Code contained provisions that could jeopardize special needs trusts and supplemental needs trusts by forcing them to fund a beneficiary’s support. Therefore I drafted a provision on behalf of the Bar Association that says the UTC bill currently under consideration in the New Jersey Legislature does not require a properly drafted special needs trust or supplemental needs trust to fund a beneficiary’s support

V. SNT ADMINISTRATION A. Even if undistributed SNT income and principal does not disqualify the beneficiary for Need Based Aid, SNT distributions can be disqualifying.

B. Amounts that an individual has a right to access and that are available to meet his/her support needs generally are SSI and Medicaid disqualifying. Other Need Based Aid programs have similar terms.

C. Since cash always can be used to fund the recipient’s support, SNT cash distributions normally are income for purposes of Need Based Aid.

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1. SNT cash distributions reduce SSI

2. Depending on the program, very small cash distributions may not affect eligibility for programs other than SSI.

3. More than modest SNT cash distributions usually are disqualifying.

D. Distributions in-kind usually don’t constitute income for purposes of Need Based Aid unless they are certain high value assets, result from payments for food, shelter (i.e. rent, mortgage, property tax, property insurance when required by a lender, water, electricity, sewer, gas, heat, and garbage removal); including any portion of such costs included in condominium association charges), or are other items depending on the program.

E. In-kind support and maintenance (ISM) usually is treated as income equal to either a of the SSI federal benefit rate (FBR) or a the FBR + $20 even if true value is much higher.

F. The total value of ISM for a month is limited to approximately one third the FBR even though fair value can be much higher. Thus, it usually is preferable for an SNT to provide ISM than cash that the beneficiary uses to fund support.

G. Credit Cards- POMS SI 01120.201 provides that a trust’s payment of a credit card bill for food or shelter provided to the beneficiary (e.g. restaurant charge) triggers in-kind support and maintenance income, but payments for charges other than food or shelter usually don’t result in income. Thus, an SNT can provide “big ticket” items without jeopardizing the SNT beneficiary’s Need Based Aid by paying vendors directly.

H. Contributions After Age 65- 42 U.S.C. 1396p(d)(4)(A) applies only to a trust established for an individual under age 65. POMS SI 01120.203 clarifies that a trust established per 42 U.S.C. 1396p(d)(4)(A) before the beneficiary reaches age 65 doesn’t lose its exemption merely because the beneficiary reaches age 65.

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Nevertheless, contributions in trust after age 65 are not exempt in testing SSI and Medicaid eligibility. However, per the POMS, typical trust earnings on pre-age 65 contributions in trust and periodic payments from pre-age 65 structured settlements aren’t considered post-age 65 contributions in trust even if received by the trust after the beneficiary reaches age 65.

I. Exclusive Benefit- POMS SI 01120.201 says a 42 U.S.C. 1396p(d)(4)(A) qualifying trust must be for the exclusive benefit of the disabled beneficiary, which is more limited than the statutory language. 1. The POMS says trust payments of reasonable compensation for typical services rendered on behalf of the trust beneficiary don’t violate the exclusive benefit rule.

2. The POMS goes on to say Social Security Administration (“SSA”) staff shouldn’t routinely question compensation amounts unless payment is to family or there is another reason to question reasonableness of compensation.

3. In late 2011, the POMS were revised to say a trust violates the exclusive benefit requirement where it may pay for the beneficiary’s family to fly in to visit the beneficiary because the trust would then authorize expenditures that financially benefit the family. Responding to advocates’ concerns, the Social Security Administration again revised the POMS by removing the example whereby flying in family would violate the exclusive benefit rule.

4. Finally, after meeting with advocates, SSA revised POMS SI 01120.201's exclusive benefit rule to strike a more reasonable balance authorizing payment of third party travel expenses– a. when necessary for the trust beneficiary to obtain medical treatment; or

b. to visit a trust beneficiary who resides in an institution, nursing home, or other long-term care facility (e.g.,

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group homes and assisted living facilities) or other supported living arrangement in which a non-family member or entity is being paid to provide or oversee the individual’s living arrangement. The travel must be for the purpose of ensuring the safety and/or medical well- being of the individual.

***

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UTC & ABLE Impact on Elder Law & Special Needs NJICLE Webinar May 5, 2016 ©2016 Lawrence A. Friedman & Mark R. Friedman, FriedmanLaw, SpecialNeedsNJ.com Reproduced with permission of FriedmanLaw, Bridgewater, NJ by NJ ICLE

Uniform Trust Code

I. UTC Generally A. The UTC took effect in New Jersey July 17, 2016 and per N.J.S. 3B:31-84 applies to trusts established now.

B. The NJ version of the UTC is codified at Title 3B subtitle 31 of the New Jersey Revised Statutes (i.e. R.S. or N.J.S.)

C. Very little of the UTC is specific to elder law and special needs, but since the UTC applies to trusts generally, it will have a tremendous impact on design and administration of special/supplemental needs/benefits trusts, income only Medicaid planning trusts, ILITs, credit shelter trusts, QTIP trusts, trusts for children and grandchildren and other trusts commonly drawn by New Jersey elder, special needs, and T&E lawyers.

D. The UTC permits trusts to opt out of many provisions but not out

© 2016 FriedmanLaw / 12 Cushing Drive, Bridgewater, New Jersey 08807 / 908-704-1900 / SpecialNeedsNJ.com 16 of trust formation, trustee good faith, certain creditor rights, and various other fundamental UTC provisions.

E. N.J.S. 3B:31-6 says trust common law and equity principles still apply to trusts.

F. N.J.S. 3B:31-7 & 8 permit a trust to choose situs and governing law subject to limitations.

G. N.J.S. 3B:31-10 gives the NJ Attorney General notice rights when a charity may be a beneficiary of certain trusts.

H. N.J.S. 3B:31-11 authorizes settlement of trustee accounts on agreement of beneficiaries.

I. N.J.S. 3B:31-14- 16 permit virtual representation of a potential beneficiary by others who have similar interests [e.g. similarly situated beneficiaries] or reason to look out for the potential beneficiary’s interests [e.g. parent, guardian, agent, trustee, or executor]. In the alternative N.J.S.A. 3B:31-17 authorizes courts to appoint guardians ad litem.

II. N.J.S. 3B:31-18- 20 govern how a New Jersey Trust can be created A. Under the NJ UTC, a trust may be created by: 1. transfer of property under a written instrument to another person as trustee during the settlor's lifetime;

2. by will or other written disposition taking effect upon the settlor's death;

3. written declaration by the owner of property that the owner holds identifiable property as trustee; or

4. written exercise of a power of appointment in favor of a trustee.

© 2016 FriedmanLaw / 12 Cushing Drive, Bridgewater, New Jersey 08807 / 908-704-1900 / SpecialNeedsNJ.com 17 B. The key take aways for elder law attorneys are 1. A writing is required to create an NJ trust.

2. Medicaid gift penalties can’t be contested on grounds that a transfer was via an oral trust.

C. In order for a written trust to be valid, N.J.S. 3B:31-19 mandates 1. The settlor must have capacity and intend to create a trust;

2. Non-charitable trusts usually must have a definite beneficiary or authorize the trustee to select beneficiaries per N.J.S. 3B:31-25; and

3. The same person may not be both sole trustee and sole beneficiary.

D. The NJ UTC generally recognizes trusts that don’t satisfy the preceding requirements but were created in other jurisdictions where the settlor, trust, or trust property has a reasonable connection to the other jurisdiction when the trust was created and would be valid under the law of the locale in which the trust was created.

E. N.J.S. 3B:31-21 says a trust may be enforced only to the extent its purposes are lawful, not contrary to public policy, and possible to achieve.

F. N.J.S. 3B:31-42 says the capacity required to create, amend, revoke, or add property to a revocable trust, or to direct the actions of the trustee of a revocable trust, is the same as that required to make a will.

III. Terminating or Modifying a Trust A. Where a settler may not have taken account of a beneficiary’s disability in funding a trust, it may be desirable to reform the trust into an SNT.

B. N.J.S. 3B:31-27 permits a trust to be modified or terminated upon consent of the trustee and all beneficiaries if the modification or termination is not inconsistent with a material purpose of the trust or even without all of above where the court is satisfied that interests of dissenters are adequately protected. Thus, in limited cases, it may be possible to amend a defective SNT without court involvement.

C. N.J.S. 3B:31-28 permits a court to modify the administrative or dispositive terms of a trust in accordance with a settler’s probable intent (where practical) or terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust.

D. N.J.S. 3B:31-30 permits termination of trusts under $100,000.

E. N.J.S. 3B:31-31 and 32 permit courts to reform or construe trusts to satisfy settlor’s probable intent.

F. N.J.S. 3B:31-34 permits trustees to divide or combine trusts where consistent with trust purposes and beneficiary rights.

IV. UTC SNT Savings Clause A. The pure Uniform Trust Code implements the Restatement of Trusts Third which has a philosophy that even fully discretionary trusts should have an implied reasonableness standard that can force distributions for support and public purposes in some cases.

B. In affirming the Appellate Division opinion Tannen v. Tannen, 416 N.J. Super. 248, 3 A.3d 1229, (App. Div. 2010), aff’d, 208 N.J. 409 (2011), New Jersey’s Supreme Court confirmed that New Jersey law follows the Restatement of Trusts Second, which elevates settler intent over reasonableness and public good when interpreting a private trust. 1. Tannen may indicate that trustees have no distribution

© 2016 FriedmanLaw / 12 Cushing Drive, Bridgewater, New Jersey 08807 / 908-704-1900 / SpecialNeedsNJ.com 19 obligation where a trust gives the trustees full discretion over distributions even if it also says the trustees shall distribute for health, support, maintenance, and education.

2. However, it isn’t clear whether the opinion applies generally to trusts with hybrid support/discretionary terms because the Appellate Division opinion says plaintiff conceded that the trust gave trustees total discretion and defendant couldn’t force the trustees to make distributions to her. We don’t know whether the opinion may have changed if plaintiff had maintained that the trust was obligated to distribute for the beneficiary’s support

C. In proposing the UTC to the Legislature, NJSBA crafted the UTC to remain true to Restatement of Trusts Second. This is particularly important in the context of SNTs.

D. Since the pure UTC could jeopardize SNTs by imposing a support obligation in some circumstances, I drafted what became N.J.S. 3B:31-37 on behalf of the NJSBA to ensure that New Jersey’s version of the UTC would not require a properly drafted SNT to fund a beneficiary’s support.

E. N.J.S. 3B:31-37 builds on N.J.S. 3B:31-35, 36 & 38, which protect spendthrift trusts, and limit the ability of a beneficiary’s creditors to force a discretionary trust to distribute.

F. In addition to the general protections that the UTC accords spendthrift trusts, N.J.S. 3B:31-37 further protects SNTs: 1. Trustees of a special needs trust have broad discretion over distributions;

2. No creditor of a disabled SNT beneficiary may reach or attach his/her interest in a special needs trust and no creditor may require the trustees to distribute to satisfy a protected person's creditor's claim; and

4. Nevertheless, SNT trustees must exercise their discretion in good faith to further trust purposes and courts may exercise their equity authority to remedy trustee abuses of discretion.

G. Per N.J.S. 3B:31-39, the UTC does not insulate 1st party [i.e. self funded] SNTs against creditors of the settlor as of SNT creation.

V. Trustee Powers and Obligations A. N.J.S. 3B:31-48 provides that co-trustees may act by majority vote generally.

B. N.J.S. 3B:31-56 generally requires trustees to be impartial, but it may make sense to opt out where a trust is intended to favor a life beneficiary over remainder beneficiaries or other favoritism is desirable.

C. N.J.S. 3B:31-59 requires a trustee with special skills (e.g. lawyer) to use those skills.

VI. New law caveat A. Internal Revenue Code §529A enacted 2014.

B. IRS issued implementation guidelines in 2015.

C. New Jersey enabling legislation N.J.S. §54A:6-25 enacted 2016.

D. Because ABLE is a new program, its parameters are in flux and information below can become stale quickly.

VII. Similar to 529 Plan accounts but for people who become disabled before reaching age 26 and subject to Medicaid payback. A. ABLE accounts avoid federal and state income tax in similar manner to 529 plans. 1. Earnings on money within ABLE account are free of federal and state tax while in account

B. Withdrawals up to qualified disability expenses (“QDE”) are tax- free, but withdrawals beyond QDE’s are taxable income and subject to a 10% penalty.

C. QDE’s are expenditures that 1. Relate to the designated beneficiary's (“DB”) blindness or disability

2. Are reasonably likely to maintain or improve the DB’s health, independence, or quality of life– such as expenses for a. Education, b. Housing, c. Transportation, d. Employment training and support, e. Assistive technology and personal support services, f. Health, prevention and wellness,

© 2016 FriedmanLaw / 12 Cushing Drive, Bridgewater, New Jersey 08807 / 908-704-1900 / SpecialNeedsNJ.com 22 g. Financial management and administrative services, h. Legal fees, i. Oversight and monitoring, and j. Funeral and burial.

D. At ABLE beneficiary’s death, ABLE account must repay Medicaid expenditures after establishment of ABLE account.

VIII. ABLE account limits A. ABLE contributions each year are limited to the then current federal gift tax annual exclusion ($14,000 in 2016).

B. Up to $100,000 in ABLE account is not counted as a resource in testing eligibility for Supplemental Security Income (“SSI”). ABLE balance over $100,000 is an eligibility resource for SSI purposes but is not a resource for Medicaid purposes.

C. An ABLE account can be opened by beneficiary, agent under power of attorney, parent, or legal guardian.

D. Contributions by someone other than beneficiary are present interest gifts and may incur gift tax.

E. Beneficiary can’t have more than one ABLE account

F. Beneficiary must have become disabled before age 26

IX. To qualify for an ABLE account an individual must be disabled before reaching age 26. A. To meet the age 26 requirement, an individual can 1. Show that he received Social Security Disability (“SSD”) or SSI before age 26 or

2. Certify that he/she became an SSD/SSI disabled person before age 26 as supported by medical records

© 2016 FriedmanLaw / 12 Cushing Drive, Bridgewater, New Jersey 08807 / 908-704-1900 / SpecialNeedsNJ.com 23 a. Ideally, medical records should show impairments similar to Social Security listed impairments.

b. It’s also theoretically possible to satisfy the general disabled person requirements whereby an individual must be unable to engage in almost any kind of work and earn more than $1,090 ($1,820 if SS blind) per month (subject to inflation adjustment after 2016) due to a medically determinable condition expected to last a year or result in death.

c. Should be similar to proving eligibility for disability benefits.

X. When beneficiary dies, ABLE must repay Medicaid for expenditures since ABLE account was opened.

XI. How do you open an ABLE account?

A. You can’t... yet. No states have ABLE programs in place yet, but some states are expected to begin their ABLE programs soon.

B. New Jersey should be rolling out its program in late 2016.

C. Ohio’s ABLE program (www.stableaccount.com) will allow people who meet the requirements nationwide to open ABLE accounts in Ohio, and sign up online.

D. Ohio will offer a few different investment options, most through Vanguard, from more aggressive (mostly stocks) to more conservative (FDIC bank account). NJ may follow suit.

XII. ABLE account vs. Special Needs Trust (“SNT”) A. Advantages of ABLE 1. Investments grow tax free.

2. Withdrawals up to QDEs are tax free.

3. Easy to create with little or no cost.

4. ABLE account payments for food and shelter appear not to trigger SSI reductions for in-kind support or maintenance, which can open up a new planning tool.

B. Advantages of SNT over ABLE 1. Annual exclusion ($14,000 in 2016) contribution limit makes ABLE useless for many lawsuits and wills.

2. Only first $100,000 in ABLE account is exempt for SSI - no limit for special needs trust.

C. ABLE account must repay Medicaid, but a third party SNT has no Medicaid repayment obligation.

XIII. Bottom Line A. ABLE accounts may be a great option where a person who became Social Security disabled by age 26 has modest savings that disqualify him/her for SSI, Medicaid, or possibly other disability benefits. 1. With a small account, simplicity and low cost could be paramount concerns.

2. Medicaid payback probably won’t be an issue since a modest ABLE account easily can be spent.

3. An ABLE account can avoid SSI reductions due to in-kind support or maintenance which may permit parents to subsidize support without triggering SSI redactions

B. ABLE accounts should make little sense in most estate plans, personal injury settlements, and other high value settings.

2. Only first $100,000 is exempt in testing SSI eligibility.

3. Annual contribution limit is a major impediment in estate planning and special needs settlement planning.

4. However, it may make sense to couple an ABLE account with an SNT in order to avoid SSI reductions due to in- kind support or maintenance.

***

Retirement Planning Update

Leonard J. Witman, Esq.

TABLE OF CONTENTS

Introduction ...... 1

Outright Distribution to a Surviving Spouse vs. Conduit QTIP Trust Arrangement ...... 3

The Conduit IRA QTIP Trust vs. an Accumulation IRA QTIP Trust ...... 5

Using a Qualified Retirement Plan to Fund a Qualified Domestic Trust (QDOT)...... 7

The Disadvantage of Having a Roth IRA Payable to a Trust (QTIP or Credit Shelter Trust) ...... 9

Benefits Payable to Grandchildren Trusts Utilizing the Generation Skipping Transfer (GST) Tax Exemption ...... 11

Benefits Payable to a Credit Shelter Trust for the Surviving Spouse and Children ...... 13

Benefits Payable to a Surviving Spouse via a Disclaimer (Credit Shelter) Trust ...... 15

The Conduit IRA Bypass Trust vs. a Traditional IRA Bypass Trust ...... 17

Benefits Payable to Non-Spouse Beneficiaries (Credit Shelter or Other Trusts) ...... 19

Should I Fund my Credit Shelter Trust with a Roth IRA or a Traditional IRA? ...... 21

The Estate Distribution in Multiple Marriage Situations ...... 23

Using the Portability Option in Lieu of a Credit Shelter Trust when the Primary Asset is a Qualified Retirement Plan Benefit...... 25

Analysis of Stretch Out IRAs under Different Spousal Beneficiary Options (Death after RBD) ...... 27

Using a Qualified Retirement Plan or IRA Death Proceeds to Fund a Charitable Remainder Trust with a Wealth Replacement Option ...... 33

Leaving an IRA to a CRAT for the Surviving Spouse ...... 35

A. Lifetime Required Minimum Distributions – Uniform (Joint Life) Table ...... 37

Cost of Living Adjustments (COLA) 2016……………………………………………………… ...... 38

29 INTRODUCTION

Many attorneys prepare detailed and complex estate documents for their clients. But often a significant portion of a client’s assets will not be governed by his or her will. The qualified plan and IRA assets are included in this category. The qualified plan and IRA assets normally do not go through probate. They are payable directly to the designated beneficiary of the plan pursuant to the terms of the plan or IRA document. In many cases the beneficiaries of these assets are not consistent with the original intent of the owner.

The rules pertaining to qualified retirement plans and IRAs are complex, and many financial advisors fail to take all the necessary steps that are required to achieve an overall estate strategy. The advisor must first determine who can be named as beneficiary under the terms of the qualified plan or IRA. Under many retirement plans, a surviving spouse is automatically deemed to be the participant’s designated beneficiary of all or a portion of the amount of the participant’s interest in the plan, unless the participant’s spouse consents otherwise. Some qualified plans do not have any death benefit, while others will only provide benefits in the form of an annuity. For IRAs, the customary beneficiary designation form controls not only who the owner’s designated beneficiary is, but also what options are available for withdrawal of those funds upon death.

There are several fundamental steps that must be taken before any final determination can be achieved.

1. Determine whom the client has named as the beneficiary of his or her retirement plan, 403(b) plan and/or IRA and obtain a file copy. If the client has not named a beneficiary, use the underlying plan document to determine who is deemed as the client’s beneficiary (e.g., his or her spouse, children or estate).

2. Obtain a copy of the most recent plan document and summary plan description to determine the manner and mode of distribution upon separation from service, disability or death.

3. If the client is married, determine the plan requirements with regard to a surviving spouse. The plan may require that a surviving spouse be paid all or a portion of the assets upon the client’s death.

4. Ascertain the current present value of the accrued benefit (in a defined benefit plan) or current account balance (in a defined contribution plan, 403(b) plan or IRA).

5. Determine if the client is fully vested in his or her retirement benefit and, if not, when full vesting will occur.

After the advisor has determined what the available options are with respect to the retirement strategy and/or IRA assets, he or she should then consider the available options as part of the overall estate strategy. Some of the questions that need to be addressed are:

1. Does the client want to leave those assets to his or her surviving spouse outright or in some other way (e.g., to a marital qualified terminable interest property trust (QTIP) or qualified domestic trust (QDOT))?

2. Does the client want to use the pension assets to fund a credit shelter or disclaimer trust?

3. Does the client want those assets to be paid to his or her children or grandchildren outright, or would a trust be preferable?

4. Does the client want to pay the assets to another relative (e.g. nieces, nephews or parents) or to a charity?

30 Many clients have established complicated trusts for the benefit of their spouse or beneficiaries to ensure that their assets end up with the intended beneficiaries. However, if the client’s qualified plan or IRA pays the benefits directly to a designated beneficiary, the trust may be completely ineffective. Pension and IRA distributions are non-probate assets. The clients will does not dictate to whom the assets are paid. This is done by the terms of the qualified plan or beneficiary designation forms.

In order for a trust to be treated as a designated beneficiary, the trust must satisfy four requirements:

1. It must be a valid trust under state laws.

2. The beneficiaries of the trust must be identifiable.

3. The trust must be irrevocable, or will become so at the participant’s death.

4. The required documentation must be furnished to the plan administrator by the Oct. 31st of the year following the calendar year in which the participant died.

The following are other issues that need to be addressed:

1. It is important to understand whether the assets will remain in the qualified vehicle after death, or whether they will be distributed at that time. Assets remaining in the qualified vehicle remain tax sheltered. Once they are distributed, income tax is accelerated, and the assets will no longer grow tax deferred.

2. It is also important to coordinate where any estate or income tax is going to be paid from at death. For example, if all of the IRA assets are payable to a child, and the balance of the estate is left to the spouse in a QTIP trust, there may be a problem getting enough cash into the estate to pay the tax.

3. In addition, it is important to keep track of the estate tax deduction available under Internal Revenue Code Section 691(c). This is one of the most overlooked deductions on an individual’s tax return. When an individual withdraws money from a qualified retirement plan or IRA and that money is included as part of a taxable estate, there is a partial tax deduction.

After all the information has been obtained, the plan must be implemented. The advisor’s job has become more complicated in recent years, because he has to understand both retirement and estate concepts. Each case is unique. Certain general rules may exist, but each qualified plan and IRA must be looked at individually to determine if the options available fit within the framework of the overall estate strategy.

The required distribution regulations have given greater flexibility in determining the ultimate beneficiaries even after death. Electing beneficiaries who are younger enables the greatest period of deferral. This may be most advantageous for the family unit providing it is consistent with the participant’s objectives.

It may actually be advantageous to defer the final decision until after death through the use of disclaimers. This is true because after death, many of the issues that seemed so complicated in the initial sessions will be clearer. In addition, the assets, health and financial status of the named beneficiaries may change between the initial sessions and the client’s death.

Things are different in Community Property states. In a Community Property state, a participant’s spouse is generally deemed under state law to own a share of the participant’s interest in the qualified plan or IRA. Therefore, the participant’s decision is only applicable to the portion (half) of the retirement plan owned by the participant.

It is important to remember that if a participant separated from service before 1985, the benefits in his qualified plan may be in whole or in part excludable from his taxable estate. Generally, if the participant separated from service prior to 1985 and did not change the form of benefit before death, the benefits may be excludable (See Private Letter Ruling 9221030).

2 TO SURVIVING SPOUSE 31 OUTRIGHT DISTRIBUTION TO A SURVIVING SPOUSE VS. CONDUIT QTIP TRUST ARRANGEMENT CONDUIT QTIP PERTINENT INFORMATION

 Mrs. Kugler, age 79, has an IRA with $1,000,000 value as of December 31 of last year.

 She is receiving minimum distributions.

 Mr. K, also age 79, is the designated beneficiary (DB) and their son, age 49, is the contingent beneficiary.

GOALS AND OBJECTIVES

 The Kuglers want to maximize the IRA accumulations and the duration of the stretch out to their son.

 Mrs. Kugler wants to know if she should, 1) leave the IRA outright to Mr. Kugler or, 2) to a QTIP trust that will be structured to pay all IRA distributions to Mr. Kugler during his lifetime.

PROPOSED ARRANGEMENT

 If Mrs. Kugler leaves the IRA outright to Mr. Kugler he will be the outright DB and is allowed to roll the IRA into his name and become the new IRA owner.

 As the new IRA owner he will be allowed to take RMDs under the Uniform (joint life) Table. Since the table is based on the age of the IRA owner and an assumed joint life 10 years younger, this arrangement will produce lower RMDs and maximize the accumulations and stretch out of the IRA.

 The Uniform Table is based on a re-determined life expectancy. Therefore, there will always the life expectancy remaining at Mr. Kugler's subsequent death.

 Mr. Kugler would then name the son as the DB of his IRA.

 If Mrs. Kugler were to name a conduit QTIP trust for the sole benefit of Mr. Kugler during his lifetime as the DB and name their son as the remainder trust beneficiary, the duration of the stretch out would change dramatically.

 First, the RMDs would be based on Mr. Kugler's (DB) re-determined single life expectancy table (not the more favorable Uniform Joint Life Expectancy Table.

 The DB is the person that inherits the IRA from the IRA owner. Mr. Kugler is the sole DB but not the outright DB. Therefore, he is not allowed to roll the IRA into his name and become the owner.

 This is true even though Mr. Kugler is entitled to all IRA distributions during his lifetime.

 Since Mr. Kugler is not the IRA owner (he is the DB), at his death the life expectancy of his son (next beneficiary) cannot be used to measure the duration of the remaining IRA payout.

 Note: Only the IRA owner or DB may be used as a measuring life.

 Therefore, at Mr. Kugler's (DB) death, his fixed period (non-redetermined) single life expectancy (based on his age in the year of death) must be utilized for the calculation of the RMDs to the son.

32 RESULTS AND BENEFITS

 If the objective is to maximize the stretch out, naming Mr. Kugler as the outright DB will allow the IRA rollover and use of the Uniform (joint life) Table.

 The uniform table would produce a longer life expectancy which means lower RMDs and more funds accumulating in the IRA.

 Also, the IRA rollover means that Mr. Kugler will be the IRA owner at his death. Therefore, at Mr. Kugler's death the measuring life for RMD calculations would be the son (DB) rather than Mr. Kugler.

 The son would have the longer life expectancy and produce a longer stretch out.

 Example: Assume Mrs. Kugler dies at age 90 (life expectancy 5.5 years) and his son is age 60 (life expectancy 25.2 years) the year following his death.

 Assume further that Mr. Kugler has not received his RMD for age 90 (1/5.5 or 18.2%) prior to his death.

Duration of RMDs at Mr. K’s Death

Mr. K is Sole Beneficiary But No Lump Sum Option is Mr. K is Outright Beneficiary and Implements Rollover Available via a Conduit QTIP Trust

Rollover to Mr. K’s IRA IRA Remains in Mrs. K’s Age 79 Mrs. K’s Name If QTIP IRA If Mr. K Mr. K (age 79) Takes Is DB $1,000,000 Is DB Mr. K Takes Reduced RMDs via at Death RMDs via Uniform Redetermined Single (joint life) Table Life Expectancy

Mr. K is DB Mr. K is IRA Owner

Death at Age 90 Death Age 90

Son is Next Son is DB Beneficiary Duration of RMDs But not the DB Son’s (age 60) 25.2 year Duration of RMDs life expectancy in year Based On Mr. K’s after Mr. K’s death (DB age 90) 5.5 year life expectancy in the year of his death

1/5.5 Years (18.2%)* RMD for Year of Mr. K’s Death Paid to Son 1/5.5 Years (18.2%)

4.5 Years Life Expectancy for RMD Calculation 25.2 Years 1/4.5 (22.2%) RMD for Year One 1/25.2 (3.9%) 1/3.5 (28.6%) Year Two, and so on... 1/24.2 (4/1%)

* Since the RMD (18.2%) was not taken by Mr. K (DB) for the year of death, it must be taken by his son (next beneficiary). The re-determined life expectancy terminates at Mr. Kugler’s death and his life expectancy in the year of death becomes a fixed period payout to the son.

33 THE CONDUIT IRA QTIP TRUST VS. AN ACCUMULATION IRA QTIP TRUST

PERTINENT INFORMATION

 Mr. Kugler has an IRA.

GOALS AND OBJECTIVES

 Mr. Kugler wants Mrs. K to have the enjoyment of the IRA assets during her lifetime but upon her death, he wants any remaining value to be paid for the benefit of his children.

 Mr. K wants to know the difference between a conduit IRA QTIP and an accumulation IRA QTIP.

PROPOSED ARRANGEMENT

 Both the conduit QTIP and the accumulation QTIP should qualify for the estate tax marital deduction.

 Under either arrangement, the beneficiary designation would provide that the IRA would pay the greater of the income earned by the IRA or the RMDs to the QTIP trust.

 The identity of the designated beneficiary for retirement purposes will determine if the surviving spouse qualifies as the sole designated beneficiary.

RESULTS AND BENEFITS

 Under the conduit IRA QTIP trust, the terms of the trust would provide that Mrs. K receives the greater of the IRA income or the RMDs.

 This allows Mrs. K to be treated as the sole designated beneficiary and recognized as the surviving spouse for RMD purposes.

 As a result, RMDs may be deferred until Mrs. K would have attained her 70½ birthday.

 Each year Mrs. K’s single life expectancy would be redetermined for RMD calculation purposes.

 Upon her death, RMDs are based on Mrs. K’s fixed period life expectancy in the year of her death.

 Note: Many state laws provide that a unitrust payout of 3% to 5% is deemed the equivalent of all trust income.

 Under the accumulation IRA QTIP trust, the terms of the QTIP would provide that Mrs. K receive the IRA income paid to the QTIP. However, the RMDs do not have to be paid to Mrs. K.

 If the RMDs exceed the IRA income, the excess may be accumulated in the QTIP trust (taxed to trust) and retained for the remainder beneficiaries.

 Therefore, the QTIP is considered to have multiple beneficiaries. Thus, the IRA has multiple beneficiaries.

 The oldest trust beneficiary (Mrs. K) is considered the designated beneficiary for IRA purposes.

 However, Mrs. K (surviving spouse) is not the sole designated beneficiary. Thus, she is treated as any other IRA (non-spousal) beneficiary.

 RMDs are based on Mrs. K’s fixed period (not redetermined) life expectancy (oldest QTIP trust beneficiary).

 At Mrs. K’s subsequent death, the RMDs to the remainder beneficiaries of the QTIP trust would then be based on Mrs. K’s remaining unused fixed period, which commenced at Mr. K’s prior death.

Greater of Mr. K’s IRA Greater of Conduit QTIP Income (Deceased) income Accumulation Retain in Earned or Earned on QTIP IRA Assets Mr. K’s name IRA assets or RMDs or RMDs Greater of Income Income only or RMDs Mrs. K

Conduit QTIP IRA Beneficiary Accumulation QTIP

Mrs. K – surviving spouse is Designated beneficiary for QTIP Trust is sole beneficiary** deemed the sole beneficiary* retirement distribution purposes

Not available, as Mrs. K is not Rollover Not available, as Mrs. K is not the outright beneficiary the sole outright beneficiary

Later of Mr. K’s age 70½ or end RBD End of year following Mr. K’s of year following death if over death 70½

Mrs. K’s single life expectancy RMDs during Mrs. K’s lifetime Mrs. K’s fixed period single life recalculated Table V expectancy Table V (no recalculation)

Based on Mrs. K’s fixed period RMDs at Mrs. K’s death Based on Mrs. K’s remaining single life expectancy in year of unused fixed period (if any) in her death year following Mr. K’s death***

* Mrs. K is deemed the sole beneficiary because she is entitled to all IRA distributions during her lifetime.

** Look through the trust terms to ascertain the beneficiaries of the trust. You must use the oldest trust beneficiary (shortest life expectancy) as the measuring life for all retirement distribution calculations. Since Mrs. K is the oldest trust beneficiary, her life will be used. However, since the surviving spouse (Mrs. K) is not the sole designated beneficiary, her life expectancy may not be redetermined.

*** Mrs. K’s fixed period life expectancy in year following Mr. K’s death. If she survives that period, all RMDs will have been paid during her lifetime. If she dies during the period, RMDs continue for the duration of the fixed period.

35 USING A QUALIFIED RETIREMENT PLAN TO FUND A QUALIFIED DOMESTIC TRUST (QDOT)

PERTINENT INFORMATION

 Mr. Kugler (age 67) is married and has a $7,000,000 estate.

 Included in his estate is his qualified 401(k) retirement plan, which is valued at $1,570,000 and is being rolled into an IRA.

 Mrs. Kugler is not a U.S. citizen.

 Mr. Kugler has a will that provides a maximum bequest to a credit shelter trust to arrive at a zero estate tax.

 If the IRA passes to Mrs. Kugler, there will be no marital deduction available, as she is not a U.S. citizen.

 Since the AEA for estate tax purposes is $5,430,000, there would be estate tax at Mr. Kugler’s death.

GOALS AND OBJECTIVES

 Mr. Kugler wants Mrs. Kugler to be certain that the IRA will pay out the RMDs to prevent imposition of the 50% excise tax.

 He also wants the IRA to qualify for the estate tax marital deduction.

PROPOSED ARRANGEMENT

 At Mr. Kugler’s death, provide that the IRA will pay the greater of the income earned on the IRA or the RMDs to the trustees of the QDOT.

 An IRA can qualify as a QDOT trust (Private Letter Rulings 9321032 and 9322005).

 The QDOT would require that Mrs. Kugler be entitled to all income from the QDOT assets during her lifetime.

 Only Mrs. Kugler (surviving spouse) may be the beneficiary of the QDOT during her lifetime.

 Since Mrs. Kugler is the oldest trust beneficiary, her fixed period single life expectancy (not redetermined) may be used for retirement distribution purposes.

 As an alternative, if Mrs. Kugler were outright beneficiary, she could roll the IRA over to her own name and sign an agreement that all future distributions would be paid to the QDOT (Treasury Reg. 20.2056A-4(c)).

 Note: if within 9 months following Mr. Kugler’s date of death Mrs. Kugler becomes a U.S. citizen and the beneficiary designation form so provides, she could roll the assets over to an IRA in her name.

 This would be a more economical arrangement because 1) it will allow the more favorable Uniform Table to be used for RMDs to Mrs. Kugler during her lifetime and 2) it will allow the children’s fixed period life expectancy to be used at Mrs. Kugler’s subsequent death for RMD purposes.

 The IRA payout of the RMDs eliminates any potential 50% excise tax.

 The IRA payout of the income on the IRA assets and the subsequent payment of the income tax from the QDOT to Ms. Kugler will satisfy the estate tax marital deduction requirement.

36 RESULTS AND BENEFITS

 The RMD payout eliminates the possibility of the 50% excise tax.

 The IRA has qualified for the QDOT deduction at Mr. Kugler’s death (no estate tax).

 At Mrs. Kugler’s death, the RMDs continue for the balance of the fixed period payout (if any remaining).

 The assets in the IRA remain tax sheltered until distributed.

USING IRA TO FUND QDOT

Mr. Kugler $7,000,000

$1,570,000 Marital Deduction

$5,430,000 Applicable Exclusion Retain Mr. K’s Amount IRA $1,570,000

Payout Greater of IRA Income or RMDs

QDOT Credit Shelter Estate Tax

Trust Income Trust RBD in Year After $0 Mrs. K $5,430,000 Mr. K’s Death

Note: The QDOT could be structured as a conduit QDOT. This arrangement would require all IRA distributions to the QDOT to pass through to Mrs. K. The conduit QDOT has a potential problem in that the distributions of QDOT principal are subject to U.S. estate tax (except for hardship distributions), and the payout of the RMDs may be considered trust principal to the extent the distribution exceeds the IRA income. This would not be a problem if the QDOT payout is limited to trust income.

Note: The QDOT will be subject to estate tax at Mrs. K’s subsequent death. The assets in the QDOT will be taxed as though they were included in Mr. K’s estate for estate tax calculation purposes.

Note: The QDOT trust could be structured to provide that if Mrs. K subsequently becomes a U.S. citizen, the QDOT restrictions applicable to a non-citizen spouse would lapse. This should allow the trust to function like a QTIP trust for a surviving spouse that is a U.S. citizen (IRC Section 2056A(b)(12)).

THE DISADVANTAGE OF HAVING A ROTH IRA PAYABLE TO A TRUST (QTIP OR CREDIT SHELTER TRUST)

PERTINENT INFORMATION

 Mr. Kugler is age 70 and has a Roth IRA worth $1,000,000.

 Mrs. Kugler is age 72 and has a substantial estate of her own.

 Mr. Kugler's will provides for a marital QTIP trust for sole benefit of Mrs. Kugler during her lifetime. The QTIP trust is structured to pay all trust income to Mrs. Kugler during her lifetime.

 Mr. Kugler's other assets are sufficient to fund his credit shelter trust.

 Mrs. Kugler does not need any income from the IRA to maintain her standard of living.

GOALS AND OBJECTIVES

 Mr. Kugler wants to be assured that at his death the IRA will qualify for the estate tax marital deduction.

 Since the Roth IRA accumulates on a tax-free basis and subsequent distributions are also tax-free, Mr. Kugler wants to allow the IRA accumulations to grow to the maximum extent possible for the ultimate benefit of the children and grandchildren.

 Since Mrs. Kugler is the sole beneficiary of the QTIP trust during her lifetime, Mr. Kugler plans to name the QTIP trust as the beneficiary of his IRA.

PROPOSED ARRANGEMENT

 Generally, any type of trust beneficiary (QTIP trust, credit shelter trust etc.), even a conduit trust that mandates the payment of the greater of the trust income or RMD to Mrs. Kugler, will eliminate the possibility of an IRA rollover.

 Therefore, unless Mrs. Kugler is the sole outright designated beneficiary (trust is beneficiary) an IRA rollover is not allowed.

 Result: RMDs must commence in year following Mr. Kugler’s death.

 At Mrs. Kugler’s death the RMDs are based on Mrs. Kugler’s age rather than the ages of the children.

 Note: The RBD and RMD situation would be the same for a traditional tax deductible IRA.

CURRENT ARRANGEMENT

At Mr. K’s Death

QTIP Trust Mr. K IRA Mrs. K Age 72 From QTIP Age 70 Payable to Sole Beneficiary Trust $1,000,000 Mrs. K of QTIP Trust To Mrs. K Roth IRA during Her Lifetime

 If the objective is to allow maximum accumulations in the Roth IRA, Mrs. Kugler (the surviving spouse) must be the sole outright designated beneficiary.

RESULTS AND BENEFITS

 As the sole outright designated beneficiary Mrs. Kugler can implement an IRA rollover and become the new owner of Mr. Kugler's Roth IRA.

 Note: only a surviving spouse that is the sole designated beneficiary may implement an IRA rollover and become the new owner.

 As the new owner of Mr. Kugler's Roth IRA there will be no RMDs during Mrs. Kugler's lifetime.

 This will allow the maximum amount to accumulate tax-free in the Roth IRA until Mrs. Kugler subsequent death.

 Mrs. Kugler will more than likely name the children (or grandchildren) as the IRA designated beneficiaries.

 Since the IRA is a Roth IRA all distributions will be tax-free.

PROPOSED ARRANGEMENT

At Mr. K’s Death At Mrs. K’s Death

Mrs. K RMDs Mr. K IRA Rollover to Commence Age 70 Children Payable to Mrs. K’s in Year $1,000,000 Designated Mrs. K Roth IRA During Following Roth IRA Beneficiaries Mrs. K’s Lifetime Mrs. K’s No RMDs Death

 Result: No RMD during Mrs. Kugler’s lifetime.

 RMDs commence at Mrs. Kugler’s death. Therefore, maximum tax-free accumulation and subsequent elongated tax-free payout to the children.

 RMDs based on ages of children rather than Mrs. Kugler’s age.

39 BENEFITS PAYABLE TO GRANDCHILDREN TRUSTS UTILIZING THE GENERATION SKIPPING TRANSFER (GST) TAX EXEMPTION

PERTINENT INFORMATION

 Mr. Kugler is a widower and has a substantial estate that includes $6,000,000 in a rollover IRA.

 His daughter (only child) has a very substantial estate of her own.

GOALS AND OBJECTIVES

 He wants to leave his granddaughter the maximum amount possible without paying a GST tax.

 The balance of his estate will pass to his daughter.

PROPOSED ARRANGEMENT

 Establish a GST trust in his will for the maximum GST exemption amount (assume $5,450,000).

 Change the IRA beneficiary to allow a formula which allows a fraction of the death proceeds to go to the GST Trust. The amount should be the maximum GST amount possible without incurring a GST tax.

 At Mr. Kugler’s demise the IRA will be separated into 2 IRAs. The fraction going to the GST trust will remain in Mr. Kugler’s name and RMDs will be paid to the GST trust.

 The GST trust must provide that all RMDs will be paid to the granddaughter (either outright or accumulated for her exclusive benefit in trust) to qualify as a designated beneficiary.

 This will allow the granddaughter to qualify as the sole designated beneficiary for calculation of RMDs.

 The balance of the IRA proceeds would be payable to his daughter.

 The beneficiary designation form must be detailed and exact, almost like a Will substitute, with the terms of the trust contained therein.

 Be careful to provide specific language on how the benefits are to be paid from the IRA to the trust.

 Note: it must be clear that there is a transfer of a fractional interest in the IRA (not taxable) rather than a lump sum distribution from the IRA, which would be a taxable event.

RESULTS AND BENEFITS

 The beneficiary designation will preclude the possibility of over funding the GST trust, thereby incurring unnecessary GST taxes.

 RMDs must be paid from the IRA to the GST trust. The trust in turn will make the distributions to the granddaughter.

 Note: The IRA is not the ideal asset to fund the GST trust (especially if the trust is a dynasty trust). The IRA will require minimum distributions, which will ultimately diminish the trust principal.

 If two IRAs are established (one IRA divided into two), then each IRA is paid out over the life expectancy of the designated beneficiary.

BEQUEST OF FRACTIONAL INTEREST IN IRA TO FUND GST TRUST

Mr. K’s Estate

Includes $6,000,000 IRA

At Mr. K’s Death

Mr. K’s IRA Fractional Interest in IRA Maximum GST Bequest Without Incurring GST Tax $5,450,000

Balance of IRA RMDs

Balance of Mr. K’s GST Trust RMDs RMDs IRA Daughter $5,450,000 Granddaughter $550,000

Retains tax sheltered Retains tax sheltered growth growth

RMD based on RMD based on daughter’s fixed period granddaughter’s fixed life expectancy period life expectancy following year of death following year of death Table V Table V

Note: If Mr. Kugler was married, he may want to leave the GST portion of the IRA (RMDs) to a Unified Credit Trust (equal to maximum unified credit amount) and the balance of the GST exemption to a marital reverse QTIP trust. This would maximize the GST exemption and still provide a zero estate tax at his death. The QTIP trust would be included in the surviving spouse’s estate for estate tax purposes.

Note: The IRA for the GST trust and the IRA for the daughter must remain in Mr. K’s IRA account. The accounts are divided and re-named, Mr. Kugler’s IRA, deceased, for the benefit of (1) daughter and (2) granddaughter’s trust.

Note: If the IRA is a Roth IRA there would be no income tax on the surrender to pay the estate tax. However, all the future tax-free growth would be lost.

41 BENEFITS PAYABLE TO A CREDIT SHELTER TRUST FOR THE SURVIVING SPOUSE AND CHILDREN

PERTINENT INFORMATION

 Mr. Kugler (age 68) has a $1,700,000 estate, which includes a $500,000 IRA.

 Mr. K wants Mrs. K (age 65) and the children to receive the benefits (income and/or principal) from the IRA during their lifetimes.

 Mr. K has a credit shelter trust under his will, which provides the trustee total discretion to sprinkle trust income and limited principal amounts to Mrs. K and/or the children.

GOALS AND OBJECTIVES

 Mr. Kugler would like to have a portion of his IRA used to fund the credit shelter trust at his death.

PROPOSED ARRANGEMENT

 Mr. Kugler would name the credit shelter trust for the amount (fraction) of the IRA necessary to fund the trust to arrive at a zero estate tax.

 Any IRA balance would be paid outright to Mrs. K and would be eligible for a spousal IRA rollover.

 The trust will qualify as a designated beneficiary for the portion of the IRA paid to the credit shelter trust.

 The beneficiary form should be clear that Mrs. K’s IRA will remain intact and that all annual RMDs will be payable to the trustees of the credit shelter trust.

 Since the trust allows distributions to be accumulated or paid to beneficiaries (children) other than Mrs. K, the surviving spouse is not the sole designated beneficiary.

 Therefore, RMDs must commence by Dec. 31 of the year following Mr. K’s death.

 Distributions will be based on the oldest beneficiary’s (Mrs. K’s) fixed period life expectancy (not redetermined) in the year after Mr. K’s death.

 Note: The surviving spouse must be sole designated beneficiary and entitled to all RMDs to utilize a redetermined life expectancy.

 At Mrs. K’s subsequent death any account balance must be paid over the remaining unused fixed period.

 If desired, the credit shelter trust could be structured to retain the RMD (taxable to trust) rather than pay it out to the trust beneficiaries.

 Note: The IRA is not the ideal asset to fund the credit shelter trust because it eliminates the possibility of an IRA rollover. Also, it is generally preferable to fund the trust with assets that receive a step-up in cost basis when the estate owner dies. The IRC generates income in respect of a decedent.

42 RESULTS AND BENEFITS

 The credit shelter trust will be fully funded.

 Since the credit shelter trust will not be included in Mrs. K’s subsequent estate, her estate taxes will be reduced.

 The credit shelter trust (oldest beneficiary) will be recognized as the designated beneficiary for retirement plan purposes.

 Example: Assume Mrs. K is age 65 at Mr. K’s demise and she dies 15 years later.

CREDIT SHELTER TRUST AT MR. KUGLER’S DEMISE

Mr. K

IRA $500,000

At Mr. K’s death, trust is beneficiary, but not owner

RMDs Mr. K’s IRA Mrs. K’s (age 65) RBD 21.0 year fixed Credit Year Following period life Shelter Trust RMDs Mrs. K Mr. K’s Death expectancy and/or (Table V) (not children redetermined)

Assume Mrs. K’s death at age 80 trust principal (IRA) not Mrs. K is the oldest included in her estate beneficiary of the trust; therefore, her fixed period life expectancy is used for retirement distributions. RMDs based on Mrs. K’s 6 year remaining unused fixed period single life expectancy

Children

Note: The terms of the beneficiary designation form control the IRA distribution methodology. The trustees of the credit shelter trust could be granted the power to accelerate distributions to the trust beneficiaries.

43 BENEFITS PAYABLE TO A SURVIVING SPOUSE VIA A DISCLAIMER (CREDIT SHELTER) TRUST

PERTINENT INFORMATION

 Mr. Kugler has a $1,000,000 IRA as part of his $1,300,000 estate. Mrs. Kugler has a substantial estate.

GOALS AND OBJECTIVES

 Mr. Kugler wants Mrs. Kugler to have access to the entire IRA death proceeds if she wants them.

 If the IRA death proceeds pass to Mrs. Kugler, her subsequent estate will pay an estate tax at her death.

 Mr. and Mrs. Kugler want to minimize the estate tax at the death of the surviving spouse.

PROPOSED ARRANGEMENT

 Mr. Kugler would establish a disclaimer credit shelter trust under his will. The trust will be for the lifetime benefit of Mrs. Kugler with the children as remainder beneficiaries.

 Mr. Kugler would name Mrs. Kugler the primary beneficiary of his IRA and name the disclaimer trust as the contingent beneficiary for the fraction of the IRA necessary to fund the trust (zero estate tax).

 After Mr. Kugler’s death, Mrs. Kugler can elect to receive the IRA or disclaim all or a portion which will pass to the disclaimer trust.

 The trust will be structured as a traditional credit shelter trust – all income to Mrs. Kugler during her lifetime with trust principal to the children at her death.

 The IRA beneficiary form will provide that if Mrs. Kugler disclaims all or a portion of the outright IRA bequest, the disclaimed IRA will pay to the credit shelter trust annually, the greater of the income earned on the IRA or the Required Minimum Distributions (RMDs).

 Note: Only a surviving spouse is allowed to disclaim an asset that subsequently passes to a trust that includes the individual filing the disclaimer (surviving spouse as a beneficiary).

RESULTS AND BENEFITS

 At Mr. Kugler’s death, Mrs. K will decide if she wants to roll over to a newly created IRA or disclaim.

 If Mrs. Kugler disclaims, the IRA distributions will fund the disclaimer (credit shelter) trust.

 Mrs. K will only receive the income earned on the IRA assets from the credit shelter trust.

 If the RMD exceeds the income, the difference will be accumulated in the trust for subsequent distribution to the children after Mrs. K’s death.

 Since Mrs. K is not the sole beneficiary of the trust during her lifetime, (RMD in excess of income may be accumulated), she will not qualify as the sole designated beneficiary for retirement purposes.

 RMDs for Mrs. K will be based on her fixed period single life expectancy (no re-calculation). At age 60, her life expectancy would be 25.2 years and reduced by one for each subsequent year.

 At Mrs. K’s death, any remaining unused fixed period becomes the distribution period for the children.

AT MR. KUGLER’S DEMISE

IF OUTRIGHT TO IF DISCLAIMER TRUST MRS. K (Credit Shelter Trust)

Mr. K Mr. K

IRA IRA $1,000,000 $1,000,000

At Mr. K’s death, if Mrs. K disclaims her interest At Mr. K’s death, in Mr. K’s IRA, trust is rollover to contingent beneficiary but

not owner

Mrs. K RMD to Mrs. K RMDs Mr. K’s IRA Disclaimer IRA based on Mrs. K’s RBD End of (Credit $1,000,000 Uniform single life Mrs. K Year Following Shelter Income Table at expectancy Mrs. K Trust) only RBD at Mrs. Mrs. K’s age Mr. K’s Death (Table V) not K’s Age 70½ 70½ re-determined

At Mrs. K’s death, At Mrs. K’s death, Example at age 60: Mrs. K’s single IRA included trust principal (IRA) life expectancy is 25.2 years at Mr. in her estate excluded from her estate K’s death if she dies in 15 years. Pay 1/10.2 year one, 1/9.2 year two, etc. Maximum payout 10 years to RMDs based on RMDs based on children’s fixed remaining unused fixed children. period single life period that commenced expectancy (Table V) at Mr. K’s death

Children Children

Note: If Mrs. K were the sole designated beneficiary of the trust (conduit trust), then her single life expectancy under Table V would be redetermined every year. At her death, the payout to the children would be based on her life expectancy in the year of her death.

Note: The IRA is not the ideal asset to fund the bypass trust because it prevents a rollover by the surviving spouse, which generally means an earlier RBD and more accelerated payout to the surviving spouse and children.

Note: The trustees of the credit shelter trust could be granted the power to accelerate distributions for the benefit of the beneficiaries.

Note: Income retained by the credit shelter trust would be taxed at trust (rather than individual) tax rates. Trust tax rates are generally higher.

45 THE CONDUIT IRA BYPASS TRUST VS. A TRADITIONAL IRA BYPASS TRUST

PERTINENT INFORMATION

 Mr. Kugler has $500,000 in his IRA that will be payable to a credit shelter (bypass) trust under his will.

 The beneficiary designation provides that the IRA will pay all RMDs to the credit shelter trust.

 The credit shelter trust provides that all trust income must be paid to Mrs. Kugler at least annually during her lifetime.

GOALS AND OBJECTIVES

 Mr. K is considering changing the trust to provide that the trust must pay the greater of the trust income or RMDs to Mrs. K.

 Mr. K wants to know how this change would impact the IRA distributions after his death.

PROPOSED ARRANGEMENT

 Under either arrangement the credit shelter trust would function as a bypass trust.

 Therefore, at Mrs. Kugler’s demise the trust principal should not be included in her estate.

 The proposed change will guarantee that Mrs. K will receive all RMDs. This causes the identity of the designated beneficiary to change for retirement distribution purposes.

 The designated beneficiary affects the RBD and the RMDs applicable to the beneficiary.

RESULTS AND BENEFITS

 If the terms of the credit shelter trust require that Mrs. K receives the RMDs (conduit trust), then:

 Mrs. K will be treated as the sole designated beneficiary and recognized as the surviving spouse for retirement distribution purposes.

 As a result, RMDs may be deferred until Mr. K would have attained his 70½ birthday.

 Each year Mrs. K’s single life expectancy would be redetermined for RMD calculation purposes.

 Upon her death, RMDs are based on Mrs. K’s fixed period life expectancy in the year of her death.

 If the terms of the credit shelter trust require that Mrs. K only receive the IRA income paid to the trust (traditional credit shelter trust) then:

 The credit shelter trust is considered to have multiple beneficiaries. Thus, the IRA has multiple beneficiaries.

 The oldest trust beneficiary (Mrs. K) is considered the beneficiary for retirement distribution purposes.

 However, since Mrs. K is not the sole designated beneficiary, she is treated as any other IRA beneficiary and not as a surviving spouse.

 RMDs are based on Mrs. K’s fixed period (not redetermined) life expectancy.

 At Mrs. K’s subsequent death, RMDs to the remainder beneficiaries of the QTIP trust would then be based on Mrs. K’s remaining unused fixed period, which commenced at Mr. K’s prior death.

Mr. K’s IRA

Conduit RMD (Deceased) Accumulation RMD Credit Shelter Trust Distributions Retain in Distributions Credit Shelter Trust Mr. K’s Name

Trust will pay the greater of RMDs IRA will pay greater of the IRA Trust will pay IRA income to Mrs. or IRA income to Mrs. K income RMDs to trust K

Conduit Credit Shelter Trust IRA Beneficiary Traditional Credit Shelter Trust

Mrs. K – surviving spouse is Designated beneficiary for Trust is sole beneficiary** deemed the sole beneficiary* retirement distribution purposes

Not available, as Mrs. K is not the Rollover Not available, as Mrs. K is not the outright beneficiary sole outright beneficiary

Mr. K’s later age of 70½ or end of RBD End of year following Mr. K’s year following death if over 70½ death

Mrs. K’s single life expectancy RMDs during Mrs. K’s lifetime Mrs. K’s fixed period single life redetermined Table V*** expectancy Table V***

Based on Mrs. K’s fixed period RMDs at Mrs. K’s death Based on Mrs. K’s remaining single life expectancy in year of unused fixed period (if any) in Mrs. K’s death year following Mr. K’s death****

* Mrs. K is deemed the sole beneficiary because she is entitled to all IRA distributions during her lifetime.

** Look through the trust terms to ascertain the beneficiaries of the trust. The oldest trust beneficiary (shortest life expectancy) must be used as the measuring life for all retirement distribution calculations. Since Mrs. K is the oldest trust beneficiary, her life expectancy will be used. However, since the surviving spouse (Mr. K) is not the sole designated beneficiary, his life expectancy may not be redetermined.

*** Use Single Life Expectancy Table (redetermined).

**** Mrs. K’s fixed period single life expectancy in year following Mr. K’s death. If she survives that period, all RMDs will have been paid out during her lifetime. If she dies during the period, RMDs continue for the duration of the fixed period.

Note: Unlike a QTIP trust the surviving spouse does not have to be given the right to income on the IRA assets or require the trustees to invest in income producing assets.

Note: If the RMDs exceed the IRA income, the excess may be accumulated in the trust (taxed to trust) and retained for the remainder beneficiaries.

47 BENEFITS PAYABLE TO NON-SPOUSE BENEFICIARIES (CREDIT SHELTER OR OTHER TRUSTS)

PERTINENT INFORMATION

 Mr. Kugler (age 70) has $1,000,000 in an IRA.

 Mr. and Mrs. K both have substantial estates.

GOALS AND OBJECTIVES

 Mr. Kugler wants to designate 30% of the IRA to a trust for his daughter (age 45) and 70% to Mrs. K.

 Mrs. K will be the trustee of the trust.

 Mr. K wants to qualify the trust as a designated beneficiary for the IRA.

 He wants to know how the trustees are required to withdraw the money from the trust upon his death.

PROPOSED ARRANGEMENT

 At Mr. Kugler’s death split the IRA into two separate IRAs.

 The 70% ($700,000) IRA will pass intact to Mrs. K.

 The 30% ($300,000) will remain in Mr. K’s IRA and benefits will be paid for the daughter.

RESULTS AND BENEFITS

 Mrs. Kugler may roll over the 70% ($700,000) IRA to an IRA in her own name.

 The $300,000 IRA will make all annual distributions to the trustee (Mrs. K) who will in turn distribute to the daughter (sole beneficiary or trust).

 As the sole beneficiary of the trust, the daughter’s life may be utilized for calculation of all future RMDs from this IRA.

 Leave the IRA intact and take distributions starting by Dec. 31 of the year following the year of Mr. K’s death over the daughter’s 37.9 year fixed period life expectancy (not redetermined) based on her life expectancy determined in year following her father’s death.

 At the daughter’s demise, the remaining IRA balance would pass to her designated beneficiary (i.e. her children) over remaining unused life expectancy. Assume she dies 27 years after her father, there still remains 10.9 years of payment to the beneficiaries of the trust: 1/10.9 for year one, 1/9.9 for year 2, etc. for maximum of 10.9 years.

48 BENEFITS PAYABLE TO NON-SPOUSE BENEFICIARY (IN TRUST)

Mr. Kugler Age 70

IRA $1,000,000

Separate into two IRAs

Mrs. K’s $700,000 IRA Retain Mr. K’s IRA $300,000 Outright bequest may roll over to IRA IRA distributions in Mrs. K’s name

RMDs based on Mrs. Kugler RMDs based Daughter’s daughter’s 37.9 on Uniform year (age 46) fixed IRA Mrs. K Trust Daughter Table period life (lower RMDs) expectancy (Table V) in year following death (higher RMDs) Trust may limit her At Mrs. K’s death, RMDs rights and provide based on fixed period life expectancy of daughter creditor protection Table V (lower RMDs) At daughter’s death, any remaining IRA values may be paid over daughter’s remaining unused fixed period (higher RMDs)

Designated Beneficiary Designated Beneficiary Daughter Trust Remaindermen

Note: The trust may be structured to permit the trustee and/or beneficiary to request accelerated payments from the IRA. If the trust was established to prevent his daughter from receiving all of the proceeds in an accelerated manner, then the right to accelerate should be limited to the trustee. If the reason the trust was established was for tax-deferred accumulation, then the right to accelerate (take additional withdrawals) may be granted to the beneficiary.

49 SHOULD I FUND MY CREDIT SHELTER TRUST WITH A ROTH IRA OR A TRADITIONAL IRA?

PERTINENT INFORMATION

 Mr. Kugler has $100,000 in a Roth IRA and $100,000 in a traditional IRA.

 At Mr. K’s demise, Mrs. K wants to accumulate the maximum amount in each IRA.

 Mr. K does not have sufficient assets to fund the credit shelter trust established under his will.

 He needs the $100,000 of IRA proceeds payable to the credit shelter trust.

 The assets in the credit shelter trust will not be subject to estate tax at Mrs. K’s subsequent demise.

GOALS AND OBJECTIVES

 Mr. K wants to know if he should use the Roth IRA or traditional IRA to fund his credit shelter trust.

 Whichever IRA is utilized, Mr. Kugler wants the funds to remain in the IRA for as long as possible to permit the growth to accumulate on a tax deferred basis.

 Note: the IRA may not be the ideal asset to fund the credit shelter trust. The RMDs will diminish the IRA value (trust principal).

PROPOSED ARRANGEMENT

 If you have to use qualified assets, use the traditional IRA rather than the Roth IRA.

 The traditional IRA beneficiary designation would provide that 1) the fraction required to fund the credit shelter trust pass to a separate IRA, and 2) that IRA would pay the RMDs to the credit shelter trust, otherwise there would be a 50% excise tax.

 Assume Mrs. K will be the sole beneficiary of the credit shelter trust during her lifetime and will be entitled to the greater of trust income or all RMDs.

RESULTS AND BENEFITS

 RMDs are required from a traditional IRA.

 The distributions from the traditional IRA are subject to income tax. However, this is not a factor because they are taxable regardless of the beneficiary designation.

 Upon death of Mr. K, the RBD rules apply to both the Roth IRA and the traditional IRA.

 However, if the IRA is paid to Mrs. K, she may roll it to an IRA in her own name.

 Once the spousal rollover takes place, Mrs. K is the owner of the IRA. If the IRA is a traditional IRA, the RMDs must begin at Mrs. K’s age 70½ (RBD).

 If the IRA is a Roth IRA, it could be rolled over by Mrs. K, and there would be no RBD and thus no RMDs during Mrs. K’s lifetime.

50  The rollover is more advantageous for the Roth IRA because it does not require lifetime distributions for the IRA owner.

 Under the Roth, the tax-free growth would be allowed to continue with no distributions until after Mrs. K’s death.

 If the Roth IRA is paid to the credit shelter trust, the rollover opportunity is lost because the surviving spouse is not the outright owner.

 If the objective is to accumulate the greatest amount in the IRA, then the ability to roll over the Roth IRA is critical.

FUNDING CREDIT SHELTER TRUST

TRADITIONAL IRA OR ROTH IRA

Mr. K Traditional Roth IRA Tax Deductible $100,000 IRA $100,000

Retain IRA in Mr. K’s name $100,000 Rollover to RMDs paid to

Credit Shelter Trust Mrs. K Roth RBD at End of IRA $100,000 No RMDs Mrs. K Year After Mr. K’s Death Mrs. K No RBD RMDs

RMDs would be subject If no distributions, then Roth will to income tax maximize tax-free growth

RMDs based on Mrs. K’s fixed If Roth paid to a spousal credit shelter period life expectancy trust, the option to do Roth rollover is (Not redetermined each year) lost. If RMDs are not necessary, the Table V Roth IRA rollover will provide greater accumulations.

22 51

THE ESTATE DISTRIBUTION IN MULTIPLE MARRIAGE SITUATIONS

PERTINENT INFORMATION

 Mr. Kugler (age 70) has a $10,000,000 estate, which includes $4,000,000 in a rollover IRA.

 Mrs. Kugler (age 55) has a modest estate, which includes the residence they live in.

 Mr. and Mrs. Kugler have one child (teen age). Mr. Kugler also has three children (ages 40 to 50) from a previous marriage.

 Mr. Kugler's will provides for all his assets to pass to a credit shelter (assume $5,450,000 estate tax exemption amount) bypass trust and a marital QTIP trust. Mrs. Kugler is the income beneficiary of both trusts.

 Mr. Kugler plans to name the QTIP trust and credit shelter as the beneficiary of his IRA and he wants to limit the IRA payout to the greater of the RMDs or income earned on the IRA assets. Each trust will in turn only pay the income to Mrs. Kugler.

GOALS AND OBJECTIVES

 Mr. Kugler is concerned because the children of his first marriage are between 5 and 15 years younger than Mrs. Kugler and they will not inherit their portion of the trust assets until her subsequent death.

 He is also concerned because at his death the IRA distributions will be paid to the QTIP and credit shelter trusts. Therefore, the IRA stretch-out will be determined by Mrs. Kugler's (measuring life) life expectancy rather than the children’s. As a result, the children will never have the benefit of using their greater life expectancies to determine the duration of the IRA stretch-out.

 Mr. Kugler does not want to leave the IRA outright to Mrs. Kugler because of the possibility that the children of the first marriage may not inherit any portion of Mrs. Kugler's estate at her subsequent death.

 Mr. Kugler does not want to pay an estate tax at his death. However, if his estate were structured to provide each of the children of his first marriage a minimum of $2,000,000 inheritance (after-tax) he would be content to have the entire IRA pass to Mrs. Kugler and subsequently to their teenage child.

PROPOSED ARRANGEMENT

 Mr. Kugler should consider the following:

 Naming Mrs. Kugler as the outright beneficiary of his $4,000,000 IRA.

 Leaving the $5,450,000 credit shelter amount outright to the children of his first marriage.

 Structuring his will to provide a bequest to Mrs. Kugler or a marital QTIP trust for the remainder of his estate.

 Gifting a sufficient amount of cash to the children of the first marriage to allow them to pay the premium for the purchase of an additional $550,000 of life insurance on his life.

ESTATE DISTRIBUTION AT MR. K’S DEATH

IRA Rollover Results in Lower RMDs during $4,000,000 Mrs. K’s Lifetime, and a IRA to Longer Stretch-Out at IRA Mrs. Kugler her Death, since the For IRA Rollover Youngest Child Is Mr. Kugler’s the Sole Designated Beneficiary $10,000,000 Estate $5,450,000 Other Assets Credit Shelter (Assume Estate Tax Bequest

Exemption Amount of To Children of $5,450,000) Previous Marriage $6,000,000 Tax-free $550,000 to Children of Life Insurance Previous Marriage Owned By Children of Previous Marriage

RESULTS AND BENEFITS

 By naming Mrs. Kugler as the outright beneficiary of the IRA she will have the option to rollover the IRA to her own name and utilize the favorable uniform table to determine the RMDs during her lifetime.

 At her death the stretch out may be continued because the youngest child will be the sole designated beneficiary. Paying the RMDs over the youngest child's life expectancy will increase the duration of the stretch-out.

 By having the children of the first marriage purchase a $550,000 of life insurance on his life this should bring their tax-free inheritance to $6,000,000 ($5,450,000 credit shelter amount plus $550,000 of life insurance).

53 USING THE PORTABILITY OPTION IN LIEU OF A CREDIT SHELTER TRUST WHEN THE PRIMARY ASSET IS A QUALIFIED RETIREMENT PLAN BENEFIT

PERTINENT INFORMATION

 Mr. and Mrs. Kugler are both age 65 and have estates of $5,000,000 each.

 The primary asset in Mr. Kugler's estate is a $4,000,000 IRA.

 Mr. Kugler is considering a new will that provides a bequest to a credit shelter trust equal to the unused Applicable Exclusion Amount (AEA).

GOALS AND OBJECTIVES

 IRA Objectives: Mr. Kugler wants 1) Mrs. Kugler to receive all IRA income during her lifetime, 2) postpone the Required Minimum Distributions (RMDs) as long as possible (age 70½), 3), take only RMDs, and 4) maximize the duration of the payout.

 Estate Objective: He wants to minimize any future estate tax. To do this he realizes he must take advantage of the AEA at death. He does not anticipate making taxable gifts during lifetime.

 Mr. Kugler is not sure if naming Mrs. Kugler as a beneficiary of the IRA, or naming the credit shelter trust as a beneficiary is the better choice to accomplish his goals.

PROPOSED ARRANGEMENT

 Credit Shelter Trust as Beneficiary of the QRP: The trust will have several beneficiaries (Mrs. K and children). Since Mrs. Kugler is not the outright beneficiary, the trust is considered a non-spousal beneficiary and not entitled to the favorable treatment provided to an outright spousal beneficiary.

 Required Beginning Date (RBD): The RMDs will begin at the earlier of his attainment of age 70½ or the year following his death if before age 70½.

 RMDs: Mrs. Kugler will be the income beneficiary and receive the RMDs from the trust. The payout will be based on the life expectancy of the oldest trust beneficiary (Mrs. K). Assume she is age 65. Her life expectancy under the single life table is 21 years. The RMD will be 1/21 of the account balance for year 1, 1/20 for year 2 and so on until 21 years.

 Duration of Payout: If she dies before 21 years, the payout to the children will continue just as though she were still living for the balance of the 21 year period. The maximum duration is the same 21 years.

 Surviving Spouse as Beneficiary: When the surviving spouse is the designated beneficiary, he/she is entitled to favorable treatment for the RBD, RMDs and is able to maximize the duration of the payout.

 RBD: As the surviving spouse, Mrs. Kugler is allowed to roll over the IRA into her name. If Mr. Kugler predeceases, as the IRA owner, her RMDs may be postponed until she reaches age 70½.

 RMDs: As the IRA owner, Mrs. Kugler's RMDs will be based on the favorable Uniform Table. This is a joint life table based on the age of the IRA owner and assumed joint life that is 10 years younger. This means a substantially lower RMD that continues for Mrs. Kugler's lifetime.

 Duration of Payout: At her death, the payout to the children will be based on each child's life expectancy. If for example, her son is age 58 when she dies, the life expectancy on the single life table is 27 years. The payout will be 1/27 for year 1, 1/26 for year 2 and so on. The duration of the payout will be 27 years. And bear in mind that is 27 years after Mrs. Kugler has died.

54 At Mr. K’s Death

Spousal Beneficiary Outright Mr. K’s Favorable Treatment Distribution for IRA $4,000,000 to Mrs. K RBD, RMDs and Duration of Payout

 Of course, naming Mrs. Kugler as the designated beneficiary allows the distributions to be postponed until age 70½, produces the lowest RMD, and provides the longest payout duration.

 Note: If the plan involves a Roth IRA, it is even more important that Mrs. Kugler be the designated beneficiary. As the spousal beneficiary she will not be required to take any distributions during her lifetime. If the trust is named as designated beneficiary, the RMDs begin in the year following Mr. Kugler's death.

 It should be noted that the trust offers considerable non-tax advantages. The trust may be structured to limit any potential invasion of trust principal by creditors, an ex-spouse, or due to subsequent incompetence of trust beneficiaries. In addition, any appreciation in the trust will not be subject to estate tax at the death of the Mrs. Kugler. However, the RMDs may decrease the estate value by more than the appreciation.

 Minimize the Estate Tax: The other primary objective is to minimize the estate tax at the death of the surviving spouse. This can be accomplished by naming Mrs. Kugler as the sole designated beneficiary and having the executor of Mr. Kugler's estate exercise the portability option.

 Surviving Spouse as Beneficiary: The portability option allows Mr. Kugler's unused AEA to be transferred to Mrs. Kugler at his death. The unused AEA transferred is referred to as DSUE (Deceased Spouse’s Unused Applicable Exclusion). When the DSUE is added to Mrs. Kugler's AEA, she will not have an estate tax unless her subsequent estate is greater than $10,500,000, plus any potential indexing.

 Credit Shelter Trust as Beneficiary: Since the trust value is not included in Mrs. Kugler’s estate, Mr. Kugler wants an asset that will grow in value. The RMDs will generally cause a decrease in trust value. And if the Mrs. Kugler lives to her 21 year life expectancy, there will be a zero value.

 Since the IRA distributions are taxable as ordinary income, the credit shelter trust and the outright spousal designated beneficiary will produce the same income tax results. At Mr. K’s Death

Mr. K’s RMDs Cause IRA Credit Shelter Decreased Value $4,000,000 Trust as Beneficiary

 Conclusion: All of the favorable treatment applicable to a spousal designated beneficiary is lost when qualified retirement assets are used to fund a credit shelter trust. And since the RMDs cause a reducing trust value, the spousal beneficiary appears more favorable. Therefore, the spousal beneficiary is generally the better option.

 Note: The credit shelter trust does provide some non-tax advantages that are not applicable to the outright spousal beneficiary. For example, the trust can be structured to limit any potential invasion of trust principal by creditors, an ex-spouse, or due to the subsequent incompetence of a trust beneficiary. The trust can also guarantee that the trust principal will ultimately pass to the children and, if desired, grandchildren.

An alternate arrangement might be to name the credit shelter trust as the secondary beneficiary of the QRP. This gives Mrs. Kugler the option to disclaim the QRP proceeds and allow the QRP to pass to the trust. 26

55 ANALYSIS OF STRETCH OUT IRAs UNDER DIFFERENT SPOUSAL BENEFICIARY OPTIONS (DEATH AFTER RBD)

PERTINENT INFORMATION

 There are four Kugler brothers.

 Each has a traditional IRA and expects to accumulate $1,000,000 by age 70.

 At age 70 each brother expects to commence taking Required Minimum Distributions (RMDs).

 They believe their IRA will earn 7% and they will only take the RMDs during their lifetime. The 7% growth rate will consist of 3% income and 4% appreciation.

 Note: The definition of trust income will vary based on state laws.

 Estate tax on the IRA will be paid from other estate assets or life insurance.

GOALS AND OBJECTIVES

 Each brother would like an illustration showing the payout and accumulations for the IRA under the following assumptions.

 The payout to each brother (age 70) is for 16-years (Mr. K dies age 85).

 The surviving spouse is 7 years younger (age 63) and will survive by seven years and also die at age 85.

PROPOSED ARRANGEMENT

 Assume the following designated beneficiaries are applicable:

 Kugler brother No. 1 – Mrs. K is the outright beneficiary, and she will name their son as designated beneficiary. Their son will be age 50 in the year following Mrs. K’s death (34.2 year life expectancy).

 Kugler brother No. 2 – A Conduit QTIP Trust will be beneficiary. Mrs. K will qualify as sole designated beneficiary. The son is the remainder interest beneficiary.

 Kugler brother No. 3 – An Accumulation QTIP Trust will be the beneficiary. Mrs. K will be the oldest Trust beneficiary. However, under this arrangement she does not qualify as the sole designated beneficiary. She is considered a non-spousal designated beneficiary. At Mrs. K’s death the son is the remainder interest beneficiary.

 Kugler brother No. 4 – Assume Mrs. K is the outright beneficiary, and she will name their grandson* as the designated beneficiary. The grandson will be age 30 (53.3 year life expectancy) in the year following Mr. K’s death.

* Assume the son has predeceased Mrs. K so there would be no generation skipping transfer.

Note: A credit shelter bypass trust, structured with the same payout requirements to the surviving spouse as a QTIP, could produce the same results for retirement distribution purposes. However, the trust principal would not be included in the surviving spouse’s subsequent estate.

Note: In each situation the RMD will be greater than the income earned within the IRA.

56 Kugler Brother 1 Beneficiary: Mrs. K outright During Mr. K’s Lifetime (Uniform Table life expectancy) Mr. IRA Uniform IRA Ending Applicable Year Kugler’s Beginning Table Life RMD Balance Percentage Age Balance Expectancy 7% Growth 1 70 $1,000,000 27.4 3.65% ($36,496) $1,033,504 2 71 1,033,504 26.5 3.77% (39,000) 1,066,849 ------10 79 1,277,882 19.5 5.13% (65,532) 1,301,801 ------15 84 1,369,220 15.5 6.45% (88,337) 1,376,728 16 (year 85 1,376,728 14.8 6.76% (93,022) 1,380,077 of death) Total RMDs ($986,008) At Mr. K’s death, Mrs. K is the outright beneficiary of the IRA.

In year following Mr. K’s death, Mrs. K (age 79) will roll IRA into her own name and take first RMD (if Mrs. K were under age 70½ at the time of the rollover, the RMDs would begin at her age 70½). Mrs. IRA Uniform IRA Ending Applicable Year Kugler’s Beginning Table Life RMD Balance Percentage Age Balance Expectancy 7% Growth 1 79 $1,380,077 19.5 5.13% ($70,773) $1,405,909 2 80 1,405,909 18.7 5.35% (75,182) 1,429,141 3 81 1,429,141 17.9 5.59% (79,840) 1,449,340 4 82 1,449,340 17.1 5.85% (84,757) 1,466,037 5 83 1,466,037 16.3 6.13% (89,941) 1,478,719 6 84 1,478,719 15.5 6.45% (95,401) 1,486,828 7 85 1,486,828 14.8 6.76% (100,461) 1,490,445

Total RMDs ($596,356)

At Mrs. K’s death, the son is the sole designated beneficiary. However, the RMDs will now be based on the son’s (age 50) fixed period life expectancy in the year following Mrs. K’s death.

At Mrs. K’s Death: Payout to son for 34.2 year fixed period life expectancy IRA Fixed Life IRA Ending Applicable Year Son’s Age Beginning Expectancy RMD Balance Percentage Balance Table V 7% Growth 1 50 $1,490,445 34.2 2.92% ($43,580) $1,551,195 2 51 1,551,195 33.2 3.01% (46,723) 1,613,056 -- 10 59 2,060,444 25.2 3.97% (81,764) 2,122,911 -- 20 69 2,529,047 15.2 6.58% (166,385) 2,539,696 -- 30 79 1,833,037 5.2 19.23% (352,507) 1,608,843 -- 35 84 147,674 0.2 100.00% (158,011) (0)

Total RMDs ($6,337,349) If son dies before 34.2 years, RMDs will continue to son’s designated beneficiary (assume Mr. K’s grandson).

57 Kugler Brother 2 Beneficiary: Conduit QTIP During Mr. K’s Lifetime (Uniform Table life expectancy) Mr. IRA Uniform IRA Ending Applicable Year Kugler’s Beginning Table Life RMD Balance Percentage Age Balance Expectancy 7% Growth 1 70 $1,000,000 27.4 3.65% ($36,496) $1,033,504 2 71 1,033,504 26.5 3.77% (39,000) 1,066,849 ------10 79 1,277,882 19.5 5.13% (65,532) 1,301,801 ------15 84 1,369,220 15.5 6.45% (88,337) 1,376,728 16 (year 85 1,376,728 14.8 6.76% (93,022) 1,380,077 of death) Total RMDs ($986,008) At Mr. K’s death, Mrs. K (then age 78) will be recognized as sole designated beneficiary via conduit QTIP. However, she is not the IRA owner (cannot roll over); therefore, her single life expectancy (redetermined) in the year of Mr. K’s death under Table V may be used for RMD calculations. She is not required to take the first distribution until the following year (if Mr. K died prior to age 70½, then RMDs may be deferred until he would have reached age 70½).

At Mr. K’s Death; payout to Mrs. K via conduit QTIP (redetermined single life expectancy) Mrs. IRA Table V IRA Ending Applicable Year Kugler’s Beginning Single Life RMD* Balance Percentage Age Balance Expectancy 7% Growth 1 79 $1,380,077 10.8 9.26% ($127,785) $1,348,897 2 80 1,348,897 10.2 9.80% (132,245) 1,311,075 3 81 1,311,075 9.7 10.31% (135,162) 1,267,688 4 82 1,267,688 9.1 10.99% (139,306) 1,217,120 5 83 1,217,120 8.6 11.63% (141,526) 1,160,793 6 84 1,160,793 8.1 12.35% (143,308) 1,098,741 7 85 1,098,741 7.6 13.16% (144,571) 1,031,081 Total RMDs ($963,903) At Mrs. K’s death, the son is the sole designated beneficiary. However, the RMDs are based on Mrs. K’s fixed period single life expectancy in the year of her death.

* The RMD is greater than the assumed 3% income earned by the IRA. However, if the IRA income were greater, the distribution from the IRA would be increased to satisfy the QTIP spousal income requirement.

At Mrs. K’s Death: Payout to son for Mrs. K’s 7.6 year fixed period life expectancy IRA Fixed Life IRA Ending Applicable Year Son’s Age Beginning Expectancy RMD Balance Percentage Balance Table V 7% Growth 1 $1,031,081 7.6 13.16% ($135,669) $967,588 2 967,588 6.6 15.15% (146,604) 888,715 3 Not 888,715 5.6 17.86% (158,699) 792,226 4 A 792,226 4.6 21.74% (172,223) 675,459 5 Factor 675,459 3.6 27.78% (187,627) 535,114 6 535,114 2.6 38.46% (205,813) 366,759 7 366,759 1.6 62.50% (229,224) 163,208 8 163,208 0.6 100.00% (174,632) (0) Total RMDs ($1,410,492)

58 Kugler Brother 3 Beneficiary: Accumulation QTIP During Mr. K’s Lifetime (Uniform Table life expectancy) Mr. Kugler IRA Uniform IRA Ending Applicable Year Married Beginning Table Life RMD Balance Percentage (Age) Balance Expectancy 7% Growth 1 70 $1,000,000 27.4 3.65% ($36,496) $1,033,504 2 71 1,033,504 26.5 3.77% (39,000) 1,066,849 ------10 79 1,277,882 19.5 5.13% (65,532) 1,301,801 ------15 84 1,369,220 15.5 6.45% (88,337) 1,376,728 16 85 1,376,728 14.8 6.76% (93,022) 1,380,077 (year of death) Total RMDs ($986,008) At Mr. K’s death, Mrs. K (age 78) will be the oldest beneficiary of the QTIP Trust. Therefore, her life expectancy will be used for retirement distribution calculations. However, she is not the sole designated beneficiary. As a result, her single life expectancy is not redetermined under Table V. Thus the payout is for a fixed period based upon her life expectancy (10.8 years) in the year following Mr. K’s death.

At Mr. K’s Death; 10.8 year fixed period (life expectancy at age 79) payout to traditional QTIP IRA QTIP 3% IRA Difference Cumulative 3% from RMD Year Beginning Ending Income to Between after Tax prior year’s paid Balance Balance Mrs. K via RMD and (40%) QTIP to QTIP QTIP 3% QTIP difference balance to Mrs. K 1 $1,380,077 ($127,785) 1,348,897 ($41,402) ($86,383) ($51,830) $0 2 1,348,897 (137,643) 1,305,678 (40,467) (97,176) (110,135) (1,555) 3 1,305,678 (148,372) 1,248,703 (39,170) (109,202) (175,656) (3,304) 4 1,248,703 (160,090) 1,176,022 (37,461) (122,629) (249,234) (5,270) 5 1,176,022 (172,944) 1,085,399 (35,281) (137,664) (331,832) (7,477) 6 1,085,399 (187,138) 974,239 (32,562) (154,576) (424,577) (9,955) 7 974,239 (202,966) 839,469 (29,227) (173,739) (528,821) (12,737)* Total $(1,136,939) ($255,570) ($40,298) At Mrs. K’s death, the son is the sole designated beneficiary. However, the RMDs are now based on Mrs. K’s remaining unused fixed period life expectancy in the year of her death.

At Mrs. K’s Death: Payout to son is for Mrs. K’s remaining unused 3.8 year life expectancy IRA QTIP 3% IRA Difference Cumulative 3% from RMD Year Beginning Ending Income to Between after Tax prior year’s paid Balance Balance Son via RMD and (40%) QTIP balance to QTIP QTIP & 3% QTIP difference to son 1 $839,469 ($220,913) $677,319 (25,184) (195,729) (646,258) (15,865) 2 677,319 (241,900) 482,832 (20,320) (221,580) (779,206) (19,388) 3 482,832 (268,240) 248,390 (14,485) (253,755) (931,459) (23,376) 4 214,592 (265,777) 0 (7,452) (258,326) (1,086,455) (27,944) Total (996,830) (67,440) (86,572)

Note: The RMD is greater than the assumed 3% income earned by the IRA. The excess (after-tax) is accumulated in the QTIP trust to eventually be paid to the remainder beneficiary. However, if the IRA income were greater, the distribution from the IRA would be increased to satisfy the QTIP spousal income requirement.

Kugler Brother 4 Beneficiary: Mrs. K outright

During Mr. K’s Lifetime (Uniform Table life expectancy) Mr. IRA Uniform IRA Ending Applicable Year Kugler’s Beginning Table Life RMD Balance Percentage Age Balance Expectancy 7% Growth 1 70 $1,000,000 27.4 3.65% ($36,496) $1,033,504 2 71 1,033,504 26.5 3.77% (39,000) 1,066,849 ------10 79 1,277,882 19.5 5.13% (65,532) 1,301,801 ------15 84 1,369,220 15.5 6.45% (88,337) 1,376,728 16 (year 85 1,376,728 14.8 6.76% (93,022) 1,380,077 of death) Total RMDs ($986,008) At Mr. K’s death, Mrs. K is the outright beneficiary of the IRA.

In year following Mr. K’s death, Mrs. K (age 79) will roll IRA into her own name and take her first RMD (if Mrs. K were under age 70½ at the time of the rollover, the RMDs would begin at her age 70½). Mrs. IRA Uniform IRA Ending Applicable Year Kugler’s Beginning Table Life RMD Balance Percentage Age Balance Expectancy 7% Growth 1 79 $1,380,077 19.5 5.13% ($70,773) $1,405,909 2 80 1,405,909 18.7 5.35% (75,182) 1,429,141 3 81 1,429,141 17.9 5.59% (79,840) 1,449,340 4 82 1,449,340 17.1 5.85% (84,757) 1,466,037 5 83 1,466,037 16.3 6.13% (89,941) 1,478,719 6 84 1,478,719 15.5 6.45% (95,401) 1,486,828 7 85 1,486,828 14.8 6.76% (100,461) 1,490,445

Total RMDs ($596,356)

At Mrs. K’s Death: Payout to grandson for 53.3 year fixed period single life expectancy Grand- IRA Fixed Life IRA Ending Applicable Year son’s Age Beginning Expectancy RMD Balance Percentage Balance Table V 7% Growth 1 30 $1,490,445 53.3 1.88% ($27,963) $1,566,812 10 39 2,305,431 44.3 2.26% (52,041) 2,414,769 20 49 3,571,389 34.3 2.92% (104,122) 3,717,264 30 59 5,092,612 24.3 4.12% (209,573) 5,239,523 40 69 6,108,868 14.3 6.99% (427,194) 6,109,295 50 79 3,929,373 4.3 23.26% (913,808) 3,290,622 54 83 482,183 0.3 100.00% (515,936) 0

Total RMDs ($16,320,607) If grandson dies before 53.3 years, RMDs will continue to the designated beneficiary.

RESULTS AND BENEFITS

 Brother No. 1, outright to spouse and subsequent rollover with son as remainder beneficiary.

Years RMDs IRA Balance 16 During Mr. K’s Lifetime $986,008 $1,380,077 7 During Mrs. K’s Lifetime 596,356 1,490,445* 34 During Son’s Lifetime 6,337,349 0 57 $7,919,713

 Brother No. 2, conduit QTIP trust (spouse is sole designated beneficiary) with son as remainder beneficiary. Years RMDs IRA Balance 16 During Mr. K’s Lifetime $986,008 $1,380,077 7 During Mrs. K’s Lifetime 963,903 1,031,081* 8 During Son’s Lifetime 1,410,492 0 31 $3,360,403

 Brother No. 3, an accumulation QTIP trust (spouse is not sole designated beneficiary) with son as remainder beneficiary.

3% IRA Ending After-Tax 3% IRA & Years RMDs Income via IRA QTIP Income QTIP QTIP Balance Balance from QTIP Balance Balance 16 During Mr. K’s lifetime (986,008) $0 1,380,077 $0 $0 1,380,077 7 During Mrs. K’s lifetime (1,136,939) 255,570** 839,469 528,821 $40,298** 1,368,290* 4 During son’s lifetime (996,830) 67,440 0 1,086,455 86,572 1,086,455 27 ($3,119,777 $323,011 $126,870 )

 Summary of RMD Payout: 16 years to Mr. K $986,008; 7 years to the QTIP Trust during Mrs. K’s lifetime $1,136,939; and 3.8 additional years to the QTIP Trust after Mrs. K dies for the balance of her 10.8 year life expectancy $996,830.

 Note: the QTIP balance is the cumulative after-tax (assume 40%) RMDs in excess of 3% QTIP income paid out to Mrs. K for her lifetime and then to their son for four years. The QTIP trust is assumed to grow by a net 4% each year (7% growth less 3% income payout).

 Brother No. 4, outright to spouse and subsequent rollover with grandson as remainder beneficiary.

Years RMDs IRA Balance 16 During Mr. K’s lifetime $986,008 1,380,077 7 During Mrs. K’s lifetime 596,356 1,490,445* 54 During Grandson’s 16,320,607 0 lifetime 77 $17,902,972

* Estate tax is assumed to be payable from other estate assets or life insurance.

** The total payout to Mrs. K would be $295,868 (3% income from IRA $255,570 plus 3% income from QTIP $40,298). Mrs. K is entitled to income earned on IRA and QTIP assets, but not the RMD. 32

USING A QUALIFIED RETIREMENT PLAN OR IRA DEATH PROCEEDS TO FUND A CHARITABLE REMAINDER TRUST WITH A WEALTH REPLACEMENT OPTION

PERTINENT INFORMATION

 Mr. Kugler is considering a charitable remainder trust in his will.

 The CRT will be the beneficiary of his $1,000,000 non-contributory qualified retirement plan.

 At Mr. K’s demise the CRT will provide a lifetime payout to Mrs. K, with the remainder interest passing to charity at Mrs. K’s death.

GOALS AND OBJECTIVES

 Mr. and Mrs. Kugler are concerned that a $1,000,000 gift to the charitable remainder trust will reduce their children’s inheritance.

PROPOSED ARRANGEMENT

 Mr. and Mrs. Kugler may want to consider purchasing a permanent survivorship life insurance policy as a “wealth replacement” vehicle for the charitable gift.

 If the children or an irrevocable “wealth replacement” trust were to purchase and own the policy, the proceeds should be excluded from Mr. and Mrs. K’s taxable estate.

RESULTS AND BENEFITS

 Under the $1,000,000 “wealth replacement” trust funded with life insurance, the children will receive the $1,000,000 tax-free.

 Since the policy would be owned by an irrevocable life insurance trust, it would not be subject to estate tax.

 Life insurance proceeds are generally not subject to income tax (IRC 101(a)).

 If the qualified retirement plan death proceeds were payable to the children, it would be subject to both estate and income tax at the death of the surviving spouse.

 Thus, the children would receive considerably more after-tax via the life insurance arrangement.

 Therefore, Mr. and Mrs. Kugler may want to consider a wealth replacement option for something less than the full value of the $1,000,000 qualified retirement plan.

CHARITABLE REMAINDER TRUST

WITH WEALTH REPLACEMENT OPTION

Mr. Kugler Irrevocable

Gift of Annual Premium Life Insurance Trust $1,000,000 Mr. & Mrs. K Qualified Retirement $1,000,000 Plan Proceeds

At Mr. K’s Death

Charitable Remainder Lifetime Trust Annuity Mrs. Kugler $1,000,000 Income

Demise of Mrs. K Demise of Both Mr. & Mrs. K

Remaining Children CRT Value $1,000,000 to Charity Tax-free

63 LEAVING AN IRA TO A CRAT FOR THE SURVIVING SPOUSE

PERTINENT INFORMATION

 Mr. Kugler (age 76) died and left his $1,000,000 IRA to a testamentary Charitable Remainder Annuity Trust (CRAT).

 The CRAT is structured to provide Mrs. Kugler (age 75) a lifetime annuity payout of $50,000.

 Mr. Kugler’s RMD for the current year was paid prior to his death.

GOALS AND OBJECTIVES

 The Kuglers would like to provide a generous charitable bequest at the death of the second spouse.

 They also want to reduce their estate settlement costs.

 Mrs. Kugler wants to know how she will be taxed on the $50,000 annuity payout.

 She also wants to know if Mr. Kugler’s estate will receive an income and/or estate tax deduction for the charitable bequest.

 Assume the IRS Section 7520 interest rate is 3% in the year Mr. Kugler died and that the CRAT assets will also grow by 5% for the entire duration of the CRAT.

PROPOSED ARRANGEMENT

 Prepare a summary of the taxable aspects for Mrs. Kugler’s annuity payout lifetime and Mr. Kugler's estate.

RESULTS AND BENEFITS

 Mrs. Kugler will have a guaranteed lifetime annuity of $50,000 from the CRAT.

 Upon Mr. Kugler's death the IRA will be paid to the CRAT. Since the IRA is classified as IRD, there is no step-up in cost basis for the $1,000,000 IRA.

 Since the CRAT is a charitable trust, the trust will not pay income tax when the $1,000,000 IRA is received.

 The trust will record the $1,000,000 IRA proceeds as IRD. The taxable income is held in abeyance until the annuity payout commences

 The first $1,000,000 (20 years at the $50,000 annuity) will be taxed as ordinary income to Mrs. Kugler.

 If Mrs. Kugler survives beyond the 20 years, the subsequent annuity payouts will be taxed in accordance with the so-called tier system (e.g. ordinary income first, capital gain next, and then non-taxable cost basis).

 The entire $1,000,000 IRA will be included in Mr. Kugler's estate. The estate will be allowed to deduct the entire value of the IRA. The $1,000,000 value will be divided between the marital deduction for the amount expected to pass to Mrs. Kugler during her lifetime, and a charitable deduction for the amount that is expected to go to the charity at Mrs. Kugler's subsequent death.

 Under the testamentary CRAT, the charitable income tax deduction goes to the estate of the deceased, not to the beneficiary of the CRAT.

64  The marital deduction will be equal to the present value (at 5%) of the annuity payout to Mrs. Kugler ($505,000). The charitable deduction will be equal to the present value (at 5%) of the remainder interest going to the charity ($495,000). The two deductions will equal the $1,000,000 IRA value.

 Note: In this case the $50,000 annuity payout is less than the assumed 3% IRS interest rate applicable to the CRAT. Therefore, the $1,000,000 CRAT value will change during the assumed duration (Mrs. Kugler's life expectancy) of the CRAT.

 Note: if the CRAT assets grow by more than 5%, the remainder value paid to the charity will be more than $1,000,000. If they grow by less than 5%, the charitable remainder value will be less than $1,000,000.

TESTAMENTARY CHARITABLE REMAINDER TRUST (Funded Via IRA or Qualified Retirement Plan)

Mr. Kugler Charitable Deduction $495,000 IRA (Present Value of Remainder Interest) $1,000,000 Marital Deduction $505,000 (Present Value of Income Interest)

At Mr. Kugler’s Death

CRAT $1,000,000 $50,000 Mrs. Kugler Mrs. K Annual Lifetime DB Age 65 Annuity Payout

At Mrs. Kugler’s Death

Remaining CRAT Value to Designated Charity

 Since the CRAT is not included in Mrs. Kugler’s subsequent estate, the estate settlement costs will be reduced accordingly.

 Note: If the CRAT were created during lifetime, the grantor (typically the beneficiary) would be entitled to the income tax deduction for the charitable remainder interest. However, if an IRA or qualified retirement plan were used to fund the lifetime CRAT, the IRA owner or plan participant would have to surrender the IRA first. The IRA surrender value would immediately generate taxable income of $1,000,000. The IRA owner could subsequently create the CRAT and receive an income tax deduction for the charitable interest (assume $472,500).

APPENDIX A – UNIFORM TABLE LIFETIME REQUIRED MINIMUM DISTRIBUTIONS

Used by QRP plan participant, IRA owner, or surviving spouse who rolls IRA to his/her name (not applicable to Roth IRA), RBD is generally age 70½.

Joint life table based on the redetermined life expectancy of the plan participant or the IRA owner and an assumed joint life that is 10 years younger.

At the death of the IRA owner the individual that inherits the IRA from the IRA owner would be the designated beneficiary and his/her age (life expectancy) may be used to determine the duration of the IRA payout.

Redetermined Redetermined Starting Joint Life Applicable Starting Joint Life Applicable Age Expectancy* Percentage Age Expectancy* Percentage

70 27.4 3.65% 94 9.1 10.99%

71 26.5 3.77% 95 8.6 11.63%

72 25.6 3.91% 96 8.1 12.35%

73 24.7 4.05% 97 7.6 13.16%

74 23.8 4.20% 98 7.1 14.08%

75 22.9 4.37% 99 6.7 14.93%

76 22.0 4.55% 100 6.3 15.87%

77 21.2 4.72% 101 5.9 16.95%

78 20.3 4.93% 102 5.5 18.18%

79 19.5 5.13% 103 5.2 19.23%

80 18.7 5.35% 104 4.9 20.41%

81 17.9 5.59% 105 4.5 22.22%

82 17.1 5.85% 106 4.2 23.81%

83 16.3 6.13% 107 3.9 25.64%

84 15.5 6.45% 108 3.7 27.03%

85 14.8 6.76% 109 3.4 29.41%

86 14.1 7.09% 110 3.1 32.26%

87 13.4 7.46% 111 2.9 34.48%

88 12.7 7.87% 112 2.6 38.46%

89 12.0 8.33% 113 2.4 41.67%

90 11.4 8.77% 114 2.1 47.62%

91 10.8 9.26% 115 or 1.9 52.63%

92 10.2 9.80% older

93 9.6 10.42%

This table determines their annual lifetime RMDs regardless of who the beneficiary is. The only exception is if the employee’s sole beneficiary as of 1/1 of the year is the spouse who is more than ten years younger. In that case, the employee is allowed to use the longer distribution period measured by the redetermined joint life and last survivor life expectancy of the individual and spouse.

The distribution period is divided into 100% to arrive at the applicable percentage for annual withdrawals. The applicable percentage times the account balance (revalued annually) as of the end of the prior year (i.e. 12/31 of the prior year for an IRA) produces the lifetime RMD. The distribution period is redetermined every year as the individual gets older. As a result, if only RMDs are taken every year, the individual will never exhaust the account during lifetime.

For IRAs the account value as of 12/31 of the previous year is used to determine the RMD. For QRPs, the account balance of plan anniversary date is used to determine the RMD. For both IRAs and QRPs, the age of the measuring life for the year the distribution is made, is based on the actual age on 12/31, e.g. use age 60 if the participant is age 60 on or before 12/31.

66 WITMAN STADTMAUER, P.A. COUNSELLORS AT LAW 26 COLUMBIA TURNPIKE, SUITE 100 FLORHAM PARK, N.J. 07932-2246 LEONARD J. WITMAN* GARY D. STADTMAUER* (973) 822-0220 BARBARA S. MURRAY FACSIMILE STEPHEN M. CHARME* (973) 822-1188 LEWIS COHN www.wsmesq.com CATHERINE ROMANIA* TARA S. SINHA JULIE D. ROSEN* ELAINE M. COHEN○ KEVIN R. CENTURRINO RACHEL IANIEIRI♢

* NJ & NY ○ NJ & FL ♢ NJ, PA. & CO

MEMORANDUM

TO: ALL PLAN SPONSORS FROM: WITMAN STADTMAUER, P.A. RE: PENSION 2016 COLAS ------

DETERMINATION LETTER PROGRAM AND THE IRS VOLUNTARY CORRECTION PROGRAM

The Internal Revenue Service (“IRS”) has recently made proposals to significantly curtail the determination letter program pursuant to which individual plans were issued favorable determination letters with respect to the continued qualification of their plan documents. Alternatively, the IRS will be shifting their focus and resources to an increased audit initiative with respect to qualified plans. As such, we are encouraging employers along with their service providers to review their qualified plan program for form or operational defects, and if applicable avail themselves of the IRS sponsored comprehensive system of correction programs for qualified plans known as the Employee Plans Compliance Resolution System (“EPCRS”). As part of the EPCRS, the IRS established the Voluntary Correction Program (“VCP”). This program allows a plan sponsor to voluntarily take corrective action(s) regarding plan failures before being notified by the IRS of a plan audit. Under VCP, an application would be filed with the IRS, a limited sanction would be paid (based on the number of Plan participants) and the IRS would issue a favorable closing letter with respect to the measures taken to correct the plan failure(s). If you know or believe that your plan has suffered a plan document or operational failure and would like further information to determine if filing a VCP application would be advisable for your plan, please do not hesitate to contact Gary D. Stadtmauer, Esq. ([email protected]), Barbara S. Murray, Esq. ([email protected]), Leonard J. Witman, Esq. ([email protected]) or Sandy Vogel ([email protected]) of this office.

2016 COST-OF-LIVING ADJUSTMENTS

The IRS in IR-2015-118 has announced the 2016 cost-of-living adjustments applicable to certain dollar limitations as they apply to benefits and other provisions affecting qualified retirement plans. As the cost of living index did not meet the statutory threshold, the retirement plan limitations were not changed for 2016.

2016 2015 2014 Maximum Pre-tax Contribution by Employees to 401(k) & 403(b)Plans $ 18,000 $ 18,000 $ 17,500 Maximum Pre-tax Catch Up Contribution by Employees Age 50 or Over $ 6,000 $ 6,000 $ 5,500 Defined Benefit Maximum (415(b)) $210,000 $210,000 $210,000 Defined Contribution Maximum (415(c)) $ 53,000 $ 53,000 $ 52,000 Highly Compensated Employees - (Compensation Earned Exceeding 414(q)(1)) $120,000 $120,000 $115,000 Key Employee for Purposes of Code Section 416 Top-Heavy Determination $170,000 $170,000 $170,000 Maximum Includible Compensation (401(a)(17)) $265,000 $265,000 $260,000 FICA Taxable Wage Base (6.20%) $118,500 $118,500 $117,000 Medicare Taxable Wage Base (1.45%) Unlimited Unlimited Unlimited SIMPLE Maximum Contribution $ 12,500 $ 12,500 $ 12,000 SIMPLE Catch Up Contribution by Employees Age 50 and Over $ 3,000 $ 3,000 $ 2,500

38 67

Understanding the Affordable Care Act’s Impact on Special Needs Practice

1. Affordable Care Act (ACA) benefits people with special needs in a number of ways

2. Pre-existing conditions a. Can’t be charged more b. Get coverage immediately c. But can only get coverage during open enrollment i. Unless you have certain special life events ii. So you can’t wait until you get sick to sign up

3. Health insurance exchanges a. Makes buying insurance more transparent b. Bronze - Platinum i. People who need expensive care should buy platinum

4. Essential health benefits a. No lifetime limits b. No annual limits c. Yearly max on what insurance company can charge you in co-pays d. Habilitative care e. Mental health care f. Substance abuse

5. Tax subsidies and Medicaid expansion a. Eligible for tax subsidy if your income is within 400% of federal poverty level b. Eligible for Medicaid if your income is within 138% of federal poverty level 68

6. All this means for the first time, many people with special needs can buy affordable health insurance that provides the care they need

7. Private insurance makes a lot of sense for certain people a. Covers typical acute and preventive care very well b. Does not cover long term care c. Folks who need expensive procedures and drugs i. e.g., someone with a genetic disorder who requires monthly blood transfusions and special drugs for life d. Also folks with mental illness i. covers inpatient treatment, drugs, etc. e. Not folks who need regular supervision i. e.g., won’t cover living costs in a group home for person with developmental disabilities

8. Raises questions for special needs planners

a. Medicaid or private insurance? i. Insurers don’t have to insure people eligible for Medicaid (1) but many of them still will ii. Insurance is more expensive: premiums, co-pays/co-insurance iii. But generally more choices (1) Many doctors don’t accept Medicaid patients because of low reimbursement (2) In NJ, Medicaid uses HMO’s (a) fine for ordinary care (b) but you probably won’t be able to see a renowned specialist iv. Better health outcomes? (1) Some studies have shown better health outcomes for people on private insurance than Medicaid (2) But these studies are somewhat off, because most people on non- institutional Medicaid are poor while people on private insurance run the gamut (3) No secret that wealthy people receive better care than poor people (4) Studies of people of comparable wealth levels show similar outcomes with Medicaid vs. private insurance

b. With private insurance, no Medicaid payback i. Decedent’s estate must repay Medicaid for care rendered at age 55 or later, but only out of estate funds ii. Special needs (d)(4)(A) trust must repay Medicaid for lifetime care when beneficiary dies iii. No similar requirement for private health insurance iv. Calculus: Is it better to exhaust trust funds up front paying for insurance, with no payback, or not spend trust funds during life but have to repay Medicaid on death? (1) Will trust be exhausted during lifetime?

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(a) If so, not much point planning to prevent Medicaid payback (b) How long is beneficiary expected to live? (c) How much are care costs? (d) How much $ is in trust? (2) Will there be a Medicaid payback? (a) Is Medicaid paying for expensive treatment? (b) Third-party trust or first-party trust? (c) Age of Medicaid recipient? (3) Are there heirs to whom beneficiary wants to leave trust remainder? (4) No one can predict the future

Understanding new Achieving Better Life Experience (ABLE) Accounts

1. Achieving Better Life Experience (ABLE) Act is federal law, signed at end of 2014

a. NJ passed ABLE law in early 2016

b. Ohio is first state to open ABLE program, and is accepting accounts from people nationwide at StableAccount.com

2. Broad overview: ABLE account is a new way for families to save money for a person with disabilities

a. You open ABLE account for someone who became disabled before age 26

b. Can contribute up to $14,000 per year

c. Money in ABLE account gets invested

d. Up to $100,000 in ABLE account is not counted as SSI / Medicaid resource

e. Can make withdrawals tax-free, if they are for a qualified disability expense

f. On death, ABLE remainder repays Medicaid

g. Many caveats to that, so let’s examine in more detail

3. Who can open an ABLE account?

a. Under federal regs, can be opened by beneficiary, or by agent under power of

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attorney, or by parent or legal guardian

b. Beneficiary must be resident of state where account is opened

c. Can’t have more than one ABLE account

d. Beneficiary must have become disabled before age 26

4. Proving disability before age 26 - two ways

a. If you’re already receiving disability benefits...

i. If they started before age 26, you’re home free

ii. If they started later, you may be able to submit affidavit swearing condition started before age 26

b. If you’re not yet receiving benefits, have to submit disability certification and medical records

i. Disability cert swears that you have a medical impairment that causes “severe and marked limitations” and that is expected to last longer than a year or result in death

ii. ...and that this condition manifested before age 26

iii. Similar to proving that you qualify for disability benefits

iv. Medical records should show that your medical impairment is equal in severity to SSA’s listed impairments

5. Contributions to ABLE account - anyone can contribute, including person, estate, trust

a. But contributions are limited to annual gift tax exclusion, currently $14,000 / year

b. Excess contributions must be returned

c. Contributions by someone other than beneficiary are gifts and may incur gift tax

6. ABLE can hold up to $100,000 without disqualify from SSI, and unlimited amount without disqualifying from Medicaid

7. ABLE investments: NJ bill creates ABLE Trust, with DDD as Trustee; Division of Investments (part of NJ Treasury) invests ABLE Trust 8. Withdrawals / distributions from ABLE account

a. Distributions for qualified disability expenses (QDE’s) are not taxed as income

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under federal or state law, and are protected from creditors

b. Distributions that exceed QDE’s are taxed as income, and are hit with an extra 10% penalty tax

c. QDE’s according to federal proposed regs: “expenses that relate to the designated beneficiary's blindness or disability and are for the benefit of that designated beneficiary in maintaining or improving his or her health, independence, or quality of life. Such expenses include, but are not limited to, expenses for education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses...”

9. When beneficiary dies, ABLE must repay Medicaid for expenditures since ABLE opened

10. ABLE account vs. Special Needs Trust: Advantages of ABLE

a. Tax savings: Any growth on investments gets withdrawn tax-free if for QDE

b. Simplicity and cost: You (presumably) don’t need a lawyer to create ABLE account, and state administers it (no trustee)

11. ABLE account vs. Special Needs Trust: Disadvantages of ABLE

a. $14,000 contribution limit makes ABLE useless for many lawsuits and wills

b. Only first $100,000 is exempt for SSI - no limit for special needs trust

c. Withdrawals: There will probably be bureaucratic hurdles for ABLE withdrawals, so can’t be used for day-to-day expenses

d. Medicaid repayment; third-party SNT has no Medicaid repayment obligation

(908) 704-1900 ! www.SpecialNeedsNJ.com

Professional Responsibility in an Elder Law/Special Needs Practice ©2016 Lawrence A. Friedman/FriedmanLaw/SpecialNeedsNJ.com/Bridgewater, NJ Licensed to NJICLE Download additional articles and Q&As at SpecialNeedsNJ.com

I. Description of Elder Law- Elder law is a multi-disciplinary approach to address varied legal issues that arise from the time an individual approaches retirement age through death and varied legal issues when an individual has serious disabilities [often called special needs] A. Common elder legal work includes long term care planning, public benefits planning, Social Security planning, advising on IRA and qualified plans, tax planning, estate planning, guardianship, and advising on facility documents.

B. Common special needs work includes public benefits planning, personal injury settlement counseling where plaintiff has serious disabilities, trust preparation, estate planning, guardianship, special education, and mental health issues.

C. Special needs work often involves working with family members of people with mental illness, which can give rise to serious ethics concerns.

D. Elder law and special needs practice often involves other professionals in various fields such as health care, social work,

FriedmanLaw / 12 Cushing Drive, Bridgewater, New Jersey 08807 / 908-704-1900 / SpecialNeedsNJ.com 74

insurance, finance, and accounting. Generally, in this outline elder law includes special needs practice.

II. Key Professional Responsibility Concerns A. Who is the client? 1. Person who consults lawyer vs. subject of consultation

2. Parent vs. disabled child

3. Child who consults lawyer about parents vs. parents vs. siblings of child

4. Person with mental illness or family members

5. Husband vs. wife a. Both in need of long term care

b. Only one needs long term care

c. Both are in good health

B. Clarify whether lawyer represents persons with whom lawyer has more than passing contact or lawyer represents only other persons. Attorney client obligations can arise unintentionally otherwise. 1. Lawyer preparing documents that non-clients may sign

2. Lawyer advice involving non-clients

C. Conflict of interest 1. RPC 1.7 generally prohibits representing clients with conflicting interests but permits waiver of a conflict where the clients make an informed choice

2. Since elder and special needs practice often involves more than one individual there always is potential for conflict of interest

3. Clarifying the client can go far to avoid conflicts of interest

4. Conflicts of interest may be theoretical rather than real where

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clients are close family and in agreement

5. RPC 1.9 generally precludes representing client A where A’s interests are materially adverse to former client B’s interests unless B gives informed consent.

D. Client under disability 1. RPC 1.14 says a lawyer shall, as far as reasonably possible, maintain a normal client-lawyer relationship with a client whose abilities are impaired but the lawyer can seek a guardian or take other protective action when the lawyer reasonably believes that the client cannot adequately act in the client's own interest.

2. Thus in representations involving special needs or clients with dementia, the lawyer must treat the client similarly to clients without disabilities as far as reasonably possible.

E. Competence 1. Elder and special needs work is complicated and can involve issues that rarely come up in other practice areas

2. RPC 1.1 prohibits a lawyer from committing a pattern of negligence or committing gross negligence in a particular manner. a. Therefore, dabbling in elder law can be an ethical violation.

b. On the other hand, as with other areas of the law, an attorney who never has handled an elder or special needs matter is free to do so as long as the lawyer takes reasonable steps to identify the relevant issues and potential appropriate solutions such as partnering with a more experienced lawyer, conducting extensive research, or taking CLE programs.

F. Diligence- Because elder law tasks can take substantial time, a lawyer who isn’t careful could run afoul of RPC 1.3, which requires a lawyer to be diligent.

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G. Communication- RPC 1.4 requires lawyers to keep clients reasonably informed and explain things so the client can make informed decisions. Elder law attorneys should explain reasonable options but the client rather than the attorney should choose from the reasonable options.

H. Fees 1. RPC 1.5 requires fees to be reasonable, which can be an issue if the lawyer has extraordinarily high fees or lacks competence.

2. RPC 1.8(f) provides that a lawyer can accept payment from other than the client only if the client consents, payment doesn’t interfere with the lawyer's independence of professional judgment or with the lawyer-client relationship, and information relating to representation of a client is protected as required by RPC 1.6.

I. Candor and Disclosure 1. RPC 3.3 requires lawyers to be candid to a tribunal while RPC 4.1 prohibits a lawyer from making false statements of material facts or law to a third person

2. This RPC can be particularly implicated in public benefit matters where a client’s prior actions may impact eligibility or it may be tempting to mislead an eligibility worker about facts or law.

J. Trust Account vs. Fiduciary Account 1. RPC 1.21-6 requires lawyers to keep trust accounts

2. Because elder law may involve appointment as a guardian, guardian ad litem, executor, trustee, or attorney-in-fact, the elder law attorney may handle money in a fiduciary capacity.

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3. RPC 1.21-6 provides that the trust account is only for funds the lawyer holds in the capacity of attorney. Funds the lawyer holds as a fiduciary may not be deposited in a lawyer’s trust account.

III. Common Elder/Special Need Fact Patterns Raising RPC Concerns A. Wife consults lawyer to protect assets against long term care costs because husband has advanced dementia 1. Can assets be transferred via power of attorney?

2. Is guardianship required?

3. What if it’s a second marriage and each spouse has children from prior marriage?

B. Parents of an eight year old boy enter into a standard contingent fee agreement with a personal injury lawyer to sue for medical malpractice at birth that allegedly caused severe cerebral palsy. The lawyer negotiates a settlement of $2,000,000 for all claims. 1. Does lawyer have duties to the boy and/or his parents?

2. Are the parents entitled to any of the recovery and if so, how should the relative shares be fixed?

3. What should the lawyer do if concludes that parents or other family may want to benefit improperly from the boy’s settlement.?

4. Does the PI lawyer have any duty to recommend a special needs trust? a. Should the PI lawyer or his firm draft an SNT or must the SNT be drafted by a lawyer not connected to the PI lawyer’s firm?

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b. If the PI lawyer prepares the SNT, can he charge a fee? Can the PI lawyer’s firm charge a fee to prepare the SNT if a different lawyer in the firm prepares the SNT?

5. Is there any obligation to notify government agencies about the settlement?

C. An adult suffers a traumatic brain injury and enters a nursing home. Meanwhile her daughter initiates a Medicaid application and files for guardianship. The court appointed attorney has heard that an individual with more than nominal amounts can’t qualify for Medicaid but placing excess amounts into a special needs trusts can protect assets and accelerate Medicaid eligibility. However, the court appointed attorney has no experience with Medicaid or special needs trusts. What issues are raised? 1. Is court approval required to use a special needs trust here?

2. Can the court appointed attorney draft the special needs trust?

3. Should the court appointed attorney draft the special needs trust?

4. Can the court appointed attorney counsel the guardian and/or the trustee regarding Medicaid qualification and the special needs trust?

D. In the course of doing estate planning you learn that your clients’ 18 year old son has severe developmental disabilities, but he was rejected for SSI because about $200,000 is in a Uniform Transfer to Minors Act account for the son. The clients want to spend some of the UTMA to put an addition on their house. 1. Can you help the parents spend the UTMA to put an addition on their house?

2. If the parents decide to put the UTMA into a 42 U.S.C.

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1396p(d)(4)(A) special needs trust for the child can you draft the trust for the parents to sign and fund on the child’s behalf?

3. Is court involvement required?

4. Would an ABLE account be a better alternative?

FriedmanLaw / 12 Cushing Drive, Bridgewater, New Jersey 08807 / 908-704-1900 / SpecialNeedsNJ.com

About the Panelists…

Lawrence A. Friedman, Certified as an Elder Law Attorney by the ABA-accredited National Elder Law Foundation, is in private practice in Bridgewater, New Jersey. He concentrates his practice in elder and special needs law; government aid; Wills, trusts, estates and tax law, including the preparation of estate and tax planning documents such as Wills, trusts, powers of attorney and health care directives; nursing home and long-term care planning; guardianships; Medicaid, Medicare and other government programs; special needs trusts to protect disability aid in gift and estate planning; personal injury; divorce settlements; Medicare set-aside arrangements; Division of Developmental Disabilities concerns and other legal matters.

Mr. Friedman is admitted to practice in New Jersey and New York, and before the United States Tax Court. Past Chair of the New Jersey State Bar Association's Elder and Disability Law Section and a member of the Association’s Real Property, Trusts & Estates Law Section, he has served as a Director of Somerset ARC (formerly the Association for Retarded Citizens) and has been a member of the New Jersey Chapter of the National Academy of Elder Law Attorneys (NAELA), the Planned Lifetime Assistance Network of New Jersey and the Malaria Foundation.

The author of scores of articles in his areas of expertise, Mr. Friedman is a frequent lecturer for ICLE, the New Jersey State Bar Association and Foundation, NAELA, several elder and disability groups, and other public and private sponsors. He is a recipient of the NJSBA’s Distinguished Legislative Service Award for drafting legislation that facilitates the use of special needs trusts and the PLAN/NJ Life Planning Partner Award. Copies of his many legal articles and further information on his credentials appear at SpecialNeedsNJ.com, and he also administers the website’s frequently-updated blog.

Mr. Friedman received his B.A. from the State University of New York-Binghamton (Harpur College), where he was elected to Phi Beta Kappa and served on the University Assembly. He received his J.D. and LL.M. in Taxation from New York University School of Law, where he was Editor of the N.Y.U. Journal of International Law & Politics and a Student Fellow of the Center for International Studies. He also received awards from the Association of Trial Lawyers of America Environmental Law Essay Contest and the American Society of International Law Essay Contest.

Mark R. Friedman practices estate planning, elder law and special needs law with FriedmanLaw in Bridgewater, New Jersey. His work includes creating special needs trusts for disabled clients so litigation proceedings, child support and other payments will not disrupt public benefits; helping seniors plan to prevent long-term care costs from wiping out their savings; and estate planning in first marriages, second marriages and for unmarried clients.

Admitted to practice in New Jersey and New York, Mr. Friedman is a member of the New Jersey State Bar Association Elder and Disability Law Section and Young Lawyers Division, and serves on the leadership committee. Prior to joining the firm he was a Contributing Editor for The FCPA Blog in Singapore, ROS, where he provided analysis on compliance, corruption and the Foreign Corrupt Practices Act (FCPA). He is the author of “Modern Estate Planning for Same-Sex Couples,” New Jersey Law Journal, October 14, 2013.

Mr. Friedman received his B.A. from Binghamton University, State University of New York, and his J.D. from New York University Law School, where he was selected as an inaugural Fellow with Fellowships at Auschwitz for the Study of Professional Ethics, which sends law and medical students to Germany and Poland to study their profession’s role in the Nazi genocide. He also created the Darfur Victims Project at NYU, leading a team of law students in support of litigation before the International Criminal Court.

Richard H. Greenberg is Senior Partner in Greenberg & Schulman in Woodbridge, New Jersey, where he focuses on tax matters, business and corporate matters, estate planning and estate administration.

Admitted to practice in New Jersey, New York and Georgia, and before the United States Tax Court, Mr. Greenberg is a Fellow of the American College of Trust and Estate Counsel (ACTEC); Past Chair of the New Jersey State Bar Association’s Taxation Law and Real Property, Trust and Estate Law Sections; Past Chair of the Association’s Corporate Tax Committee; and a member of the Estate and Inheritance Tax and Partnership Tax Committees. Mr. Greenberg is a member and former President of the Tri-County Estate Planning Council, Past Chair of the Essex County Bar Association Tax Committee and a member of the New York State Bar Association Tax, Trusts and Probate Committees and the Middlesex County Bar Association Tax Committee. He is a frequent lecturer and author on numerous estate planning and estate administration topics as well as the 2011 recipient of the Alfred C. Clapp Award bestowed by ICLE.

Mr. Greenberg received his B.B.A. from Case Western Reserve University, his J.D. from St. John’s University and his LL.M. in Taxation from New York University.