Chapter 1 Special Needs Trusts and Retirement Assets
Melanie Marmion Fitzwater Meyer Hollis & Marmion LLP Portland, Oregon
Contents I. Introduction ...... 1–1 II. Terminology ...... 1–1 III. Types of Retirement Plans 1–1 A. Qualified Retirement Plans (IRC Section 401(a)) ...... 1–1 IV. Required Minimum Distribution Rules ...... 1–2 A. Purpose ...... 1–2 B. RMDs During Lifetime of Owner ...... 1–3 C. Designated Beneficiary ...... 1–4 V. Child Named as Direct Beneficiary ...... 1–5 A. Child Is Named as the Direct Beneficiary of a Retirement Planand Receiving Means-Tested Public Benefits 1–7 B. Solution ...... 1–7 VI. Naming a Trust as Beneficiary ...... 1–9 A. Only See-Through Trusts Qualify as Designated Beneficiaries ...... 1–9 B. Advantage of Designated Beneficiary Status ...... 1–9 C. Five Requirements to Qualify as a See-Through Trust 1–9 D. Two Types of See-Through Trusts ...... 1–10 E. Conduit Trusts ...... 1–10 F. Accumulation Trusts 1–12 VII. Drafting the SNT as an Accumulation Trust ...... 1–16 A. Goal ...... 1–16 B. Examples ...... 1–17 C. Other Drafting Provisions 1–19 VIII. The Beneficiary Designation Form 1–21 A. Beneficiary Designation Form Is an Essential Piece of the Puzzle in See-Through Trust Status ...... 1–21 B. The SNT Must Be a Direct Beneficiary of the Retirement Plan ...... 1–21 C. The “Box” Problem ...... 1–22 D. Memorandum to Clients ...... 1–23 IX. Alternative Estate Planning Ideas ...... 1–23 A. Charitable Remainder Trust ...... 1–23 B. Allocate Nonretirement Assets to SNT ...... 1–24 X. Take-Aways 1–28 Presentation Slides 1–29 Exhibits ...... 1–59 A. Rev. Rul. 200620025 ...... 1–59 Chapter 1—Special Needs Trusts and Retirement Assets
Contents (continued) B. Last Will and Testament of Harry James Potter 1–69 C. Fidelity Investments 403(b) Beneficiary Designation Form ...... 1–81 D. Sample Vanguard IRA Beneficiary Designation Form 1–85 E. Sample Memo Re Beneficiary Designations 1–89 F. Article Excerpt: Charitable Remainder and Special Needs Trust Combo: An Example of a Win-Win-Win Situation for Parent, Child with a Disability, and Charity ...... 1–93 G. Last Will and Testament of Percival Dumbledore ...... 1–95
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I. Introduction
Obviously the subject of retirement plans and all of the rules and regulations associated with them is far too expansive a subject for these materials to cover. Frankly, the subject of distributions from retirement plans is too broad for this presentation. In an effort to narrow the scope of this presentation to focus on working with retirement benefits and special needs trusts, many topics have been brushed over or not mentioned at all. For example, the discussion of naming a spouse as a beneficiary of a retirement plan is only mentioned briefly. You can find a very detailed explanation of anything retirement plan related in Natalie Choate’s excellent diatribe, Life and Death Planning with Retirement Benefits,1 a tome that was heavily relied on by this author in the preparation of these materials.
II. Terminology
A. RMD = required minimum distribution = MRD = minimum required distribution
B. Owner = the individual who contributed to and funded the retirement plan.
C. Beneficiary = the person/entity who receives the benefits of the plan after the owner dies
D. Retirement Plan = a retirement account that is established and managed by an Owner’s employer
E. Retirement Account = a private retirement account that is established by the Owner outside the context of his employment.
III. Types of Retirement Plans
A. Qualified Retirement Plans (IRC Section 401(a))
1. Defined Benefit Plans
a. Employer promises to pay the employee a specific sum of money beginning at retirement for the employee’s life. The payment is usually on a monthly basis and is based on a formula the takes into account the length of employment with the company.
1 Choate, Natalie, Life and Death Planning for Retirement Benefits (7th Edition, 2011).
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b. Defined Benefit Plans are a rare find. Mostly regulated to teachers and government employees.
2. Defined Contribution Plans
a. Employer commits to making certain contributions to the plan. As distinguished from a defined benefit plan, the employer does not guarantee any level of retirement benefit to the employee. Rather, the amount of funds in the employee’s account will depend on: (1) the amount of contributions from the employer; (2) if the plan contains a 401(k) feature, the amount of deferred contributions from the employee; and (3) the investment performance of the funds in the account.
b. 401(k), Profit Sharing Plans and Employer Stock Ownership Plans (ESOPs) are examples of defined contribution plans.
3. 403(b) Plans
4. Individual Retirement Accounts (IRAs)
a. Traditional IRA
b. Roth IRA
IV. Required Minimum Distribution rules
A. Purpose. Remember that retirement plans are tax-favored investment vehicles that allow the owner/beneficiary to invest the funds without paying current income taxes on the profits. The tax is deferred until the funds are withdrawn from the account. The value of this tax-deferral can be dramatic.
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Example: Assume a $500,000 retirement account over a 40 year period2:
Amount held by Action beneficiary at year 40 Immediate distribution from IRA, followed by investment of $2,867,061 funds in taxable investment account
Deferred distribution over 5 year period followed by investment of funds in taxable investment account $2,972,035
Deferred distribution based on 42-yr old life expectancy $4,161,003
Deferred distribution based on 18-yr old life expectancy $5,704,839
However, it was the intent of Congress to install the tax-favored investment opportunities to encourage saving for retirement and NOT for the transfer of wealth to succeeding generations. For this reason, Congress built-in a rigid set of rules, the minimum required distribution rules (“RMDs”) to ensure that funds will be distributed out of the account and subject to income tax, RATHER than remain in the tax-favored investment indefinitely. Despite the intention of the RMDs to force distributions out of the plan (and subject to income tax), the tax-deferred benefits of the plan can exist long past the death of the owner if the owner designates the “right” beneficiary.3
B. RMDs during Lifetime of Owner
1. Because this presentation is focused on the rules regarding the transfer of an account after an Owner’s death, only the broad highlights of the lifetime distribution rules follow.
2 7% assumed rate of growth; 35% tax bracket
3 While many of the code sections and regulations cited in this outline appear to refer to qualified plan section rules, IRC section 408(a)(6) makes those rules applicable to IRAs.
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2. Highlights
a. No distribution prior to age 59 ½ without 10% penalty4
(1) certain exceptions apply; see 26 USC §72(t)(2)
b. Must begin taking annual distributions upon reaching age 70 ½. Actually, the first distribution must be withdrawn by April 1st of the year following the year in which the Owners turns 70 ½ (a.k.a. the “required beginning date” or “RBD”).5
C. RMDs after Death of Owner will depend on whether the Owner died BEFORE or AFTER her required beginning date (RBD).
1. Death before Owner’s RBD
a. Designated Beneficiary–>If the beneficiary of the account qualifies as a “Designated Beneficiary,” the RMDs will be based upon the age of the Designated Beneficiary (see section below for more detailed discussion of Designated Beneficiary).6
b. NO Designated Beneficiary–>If there is no beneficiary for the account OR the named beneficiary does not qualify as a Designated Beneficiary, the RMDs are subject to the 5-year rule.7 That is, the funds in the account must all be withdrawn by the date that is the 5th anniversary of the Owner’s death.8
2. Death after the Owner’s RBD
a. Designated Beneficiary–> same as above. If the beneficiary of the account qualifies as a Designated Beneficiary, the RMDs will be based upon the age of the Designated
4 26 USC §72(t)
5 Pursuant to the Tax Reform Act of 1986, April 1, of calendar year following 70 ½.
6 IRS Publication 590-B.
7 Treas. Reg. § 1.401(a)(9)-3, A-2
8 The 5-year rule only requires that the funds be withdrawn by the 5th year anniversary, but does not require that the distribution take place in 5 equal installments. The beneficiary may wait until the 5th year to take any distributions (although all the funds must be withdrawn) or may stagger the distribution in any way that she wants.
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Beneficiary (see section below for more detailed discussion of Designated Beneficiary).9
b. NO Designated Beneficiary–> If there is no beneficiary for the account or the beneficiary does not qualify as a Designated Beneficiary, the RMDs are calculated based on the Owner’s remaining life expectancy. That is, the funds must be withdrawn over the Owner’s single life expectancy as if he/she were alive. 10
D. Designated Beneficiary
1. As discussed above, the tax-deferred benefits of retirement plans can continue past the lifetime of the Owner if a Designated Beneficiary is named on the account. In that case, the measuring life of the RMD will switch the life expectancy11 of the Designated Beneficiary. This is what’s known as “stretching out” the distribution term to cover two lives, instead of just the life of the Owner.
2. A Designated Beneficiary is either:
a. A living individual.12
b. A See-Through Trust.13
9 26 CFR 1.401(a)(9)-5, A-5(a)(1)
10 The RMD is based on the participant’s life expectancy however the beneficiary is always permitted to withdraw MORE than the RMD.
11 26 CFR 1.401(a)(9)-5, A-5(c)
12 Surviving Spouses have special Designated Beneficiary privileges. Unlike other Designated Beneficiaries who must start taking their re-calculated RMDs the year following the year of the Owner’s death, surviving spouse DBs may choose to roll the funds in the plan to their own IRA and wait until their own RBD to start taking distributions from the plan... AND then name their own Designated Beneficiary and continue the tax deferral into a 3rd life span!
13 Technically speaking, only individuals can be Designated Beneficiaries. So, when I state that a See-Through Trust qualifies as a Designated Beneficiary, I really mean that the trust is ignored and one of the individual beneficiaries of the trust is the Designated Beneficiaries. However, I find it more helpful to understanding these rules to make the distinction between “living individuals” (i.e. those individuals named as the outright beneficiary of the retirement plan) and “see-through trusts” (i.e. those trusts in which RMDs are payable to the trust based on a beneficiaries life expectancy). 26 CFR 1.401(a)(9)-4, A-5
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3. NO entity other than a See-Through Trust can be a Designated Beneficiary, including an estate or a “opaque” trust (i.e. a trust that does not qualify as a See-Through Trust).14
4. Whether or not a Designated Beneficiary exists is determined as of September 30th of the year following the year of the owner’s death.15 Because of this delayed time frame, it is possible to employ post-death “fixes” to get to Designated Beneficiary status.
a. For example, assume that a retirement plan is payable in equal shares to owner’s daughter and his favorite charity. Because of the presence of the charity as a partial beneficiary, there is no Designated Beneficiary as of the owner’s death. The payout period would either be 5 years or the remaining life expectancy of the owner, depending on the age of the owner at death. The charity would not likely care about this result, but the daughter would miss an opportunity to stretch out the deferral of income taxes over her lifetime. To fix this situation, the charity could be paid out its share of the plan by September 30th following the year of death. Once paid, the charity is no longer a beneficiary of the retirement, leaving the daughter as the sole AND DESIGNATED beneficiary.16
5. Separate Account Rule. If a retirement plan is payable to multiple beneficiaries, each beneficiary may establish a separate account with his/her/its share of the plan. IF the separate account is established prior to December 31st following the year of death, the beneficiary of each account will be considered the sole beneficiary of that account. Thus, all of the rules of determining the payout period of the RMD will apply separately to that account. 17
a. Important Caveat! The separate account rule does NOT change the calculation of the RMD if the division into separate accounts occurs via a single funding trust. In that
14 26 CFR 1.401(a)(9)-4, A-3
15 26 CFR 1.401(a)(9)-4, A-4(a)
16 This problem could also be solved by the separate share rule described in Treasury Reg.§1.401(a)(9)-8, A-2(a)(2).
17 26 CFR 1.401(a)(9)-8, A-2(a)(2).
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case, the RMD will still be determined by applying the rules relating to trusts as beneficiaries.
b. Example: Professor Dumbledore leaves his IRA to his revocable living trust. At his death, the RLT will terminate and pay out to Harry Potter, Hermione Granger and Ron Weasley in equal shares. Here, even if Harry, Hermione and Ron each establish separate shares by the end of the year following Professor Dumbledore’s death, the RMDs for each separate account will be based on the age of the oldest of them as required by trust distribution rules (see below for more detailed discussion of RMDs relating to trusts) RATHER than allowing each of them to calculate his/her separate RMD based on their own life expectancy.
V. Child Named as Direct Beneficiary
A. If the child is named as the direct beneficiary of a retirement plan AND the child is receiving means-tested public benefits.18
1. Good News–> DB status accomplished. The child’s age will be used to calculate the RMDs
2. Bad (Terrible) News–> Child is now over-resources and ineligible to continue to receive means-tested public benefits.
B. Solution
1. Transfer child’s portion of the retirement account to first-party (aka “payback”) trust.19
a. Normally, retirement plans cannot be assigned to a trust or another person without triggering an immediate taxation of the value of the retirement account. 20
18 By “means-tested public benefits”, I am referring to those benefits that require the recipient to have a lack of resources/assets and/or income such as Supplemental Security Income (“SSI”) and Medicaid.
19 42 USC §1396p(d)(4)(A).
20 IRC § 691(a)(2).
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b. There is an exception if the transferee is a 100% grantor trust21
c. First-party SNTs are deemed to be grantor trusts with regard to the special needs beneficiary because:
(1) The assets are initially owned by the beneficiary
(a) this is the reason that the first-party needs to be set up in the first place–> the beneficiary owns assets that is putting him over-resources for public benefits purposes.
(2) The beneficiary (or someone on his behalf) must transfer the assets into the SNT.
(3) The terms of the trust allow the income in the trust to be distributed to or for the beneficiary.22
(4) Summary: When an individual transfers assets to a trust and retains the right to receive distributions of income from that trust, the trust is deemed to be a grantor trust.23
2. This technique is blessed by Rev. Rul 200620025.
a. Rev. Rul 200620025 has an excellent discussion of the interplay between first-party SNTs and the minimum distribution rules, so I’ve included a copy in the materials. See Exhibit A.
3. The real “trick” to this technique is getting the IRA provider (the financial institution) on board.
a. For public benefits purposes, the first-party SNT must be the OWNER of the account (not just the beneficiary of the account).
21 Rev. Rul. 85-13 established the principal that transactions between an individual and a trust which is deemed to be deemed owned by the individual under the grantor trust rules of §674 et seq. will be ignored (i.e. will not trigger income tax consequences).
22 IRC 677(a).
23 IRC §677(a).
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b. The transfer of the retirement plan to the first-party SNT DOES NOT change the DB status. The special needs child’s age is STILL the measuring age for RMD purposes; it does not flip to the SNT being treated as the beneficiary of the retirement account.
c. The concept of a trust owning a retirement account is weird24 to financial institutions. Their systems are not set up to handle this transaction.
(1) Be Pro-active!. FIRST, find the financial institution who understands what you are trying to do– i.e. keep the stretch payout of the RMDs in place!!
(2) If you are setting up first-party SNT via Court, ask the financial institution to provide you with the exact language that they want to see in the court order.
VI. Naming a Trust as Beneficiary
A. As described above, only See-Through Trusts qualify as Designated Beneficiaries. Any other trusts that do not meet the requirements of a See-Through Trust will trigger RMDs based either the 5-Year Rule25 or the Life-Expectancy Rule.26
B. Remember that the advantage of Designated Beneficiary status is the ability to stretch out the required payout of the retirement plan over the age of an individual.
C. To qualify as a See-through Trust, the following FIVE requirements must be satisfied27:
REQUIREMENT #1: The trust must be valid under state law– EASY to meet
REQUIREMENT #2: The trust must be irrevocable – EASY to meet
24 “weird” is a technical term used by financial institutions when discussing the interrelationship between special needs trusts and retirement plan distributions.
25 If Owner’s death occurred BEFORE the RBD.
26 If Owner’s death occurred AFTER the RBD.
27 26 CFR 1.401(a)(9)-4, A-5(b)
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REQUIREMENT #3: A copy of the trust agreement must be provided to the retirement plan provider no later than October 30th of the year following the year of the Owner’s death. —should be EASY to meet
REQUIREMENT #4: All of the beneficiaries of the trust must be identifiable- should be EASY to meet
a. Note that the beneficiaries do not have to be identified by name. Identifying them by class is fine. E.g. “All of my children” or “My nieces and nephews who survive me”. An example of a trust beneficiary who is not identifiable would be “to my daughter’s husband”.
REQUIREMENT #5: All of the beneficiaries must be individuals
a. EASY to meet for Conduit Trusts (see below)
b. VERY TRICKY to meet for Accumulation Trusts (see below)
D. There are 2 types of See-Through Trusts
1. Conduit Trusts–> use age of lifetime beneficiary to determine RMD
2. Accumulation Trusts-> use age of oldest beneficiary to determine RMD
E. Conduit Trusts
1. Conduit Trusts specifically provide that any RMDs received by the trust from a retirement plan will be immediately distributed out to the lifetime beneficiary of the trust. In this way, the trust acts as a middle-man that receives the RMD and passes it right back out to the beneficiary. For this reason, the IRS is willing to “see through” the trust and assume that the primary beneficiary is the “true” recipient of the RMD.
2. Conduit Trusts use the primary beneficiaries age to calculate the RMD, as if the primary beneficiary had been named directly as the beneficiary on the retirement account.
3. It is NOT enough that the terms of the trust require that “all income” be paid out to the beneficiary. Without more of an explanation, this terminology would default to fiduciary accounting income and would not necessary capture all of the RMD’s funds.
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4. The advantages of using a Conduit Trust are:
a. If properly drafted, the analysis is easy and clear– the trust qualifies as a Designated Beneficiary and the RMDs are calculated using the life expectancy of the primary beneficiary.
b. It provides the benefits of naming an individual beneficiary with the protection of putting the access to the account in another’s control (the trustee’s). This is especially handy when a parent wants to ensure that the RMDs are taken over time and does not want to tempt the beneficiary into taking more than the RMD.
5. The big disadvantage of a Conduit Trust is that it requires automatic annual distributions to the beneficiary. Obviously problematic in cases with beneficiaries who may be vulnerable to bad influences, but this feature is generally a SHOW-STOPPER for Special Needs Trusts.
6. Trusteed IRAs. There is much confusion regarding trusteed IRAs and how they operate. Essentially, a trusteed IRA is a corporate managed conduit trust. While trusteed IRAs allow the owners to customize distributions from the account that exceed the RMD, they still require that all RMDs be paid out of the account to (or for the benefit of) the beneficiary. Thus, like privately-drafted conduit trusts, trusteed IRA accounts will NOT protect the beneficiary’s eligibility for needs based benefits. 28
7. IMPORTANT: Drafting a Special Needs Trusts to be a conduit trust for retirement plan distribution rules requires VERY CAREFUL consideration because there will be automatic distributions that are not: (1) subject to the trustee’s discretion; (2) nor qualified by special needs language would likely jeopardize the beneficiary’s eligibility for his/her means-tested benefits.29
28 Natalie Choate has a brief explanation of trusteed IRAs in her book, see fn 1 at p. 407.
29 I suppose that given the right facts, drafting a SNT as a conduit trust could work. You would have to a low value IRA and/or a young beneficiary so that the MRD would be an amount that could spend down in the month received; or perhaps timing the MRD distribution to be received in different months to assist with spend-down.
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F. Accumulation Trusts
1. Key Feature: The age of the OLDEST trust beneficiary is used to calculate the RMDs that will be paid to the trust each year from the retirement plan.30
2. An accumulation trust is a trust that does not require the trustee to distribute any RMDs that the trust receives from a retirement plan to the beneficiary. In other words, the RMDs can accumulate inside the trust to be subject to the trust’s distribution rules.
3. Any testamentary trust in which all distributions are within the discretion of the trust will NEVER qualify as a Conduit Trust but MAY qualify as an Accumulation Trust if the 5 see-through trust requirements (outlined above in V. B) are met.
4. A SNT has the potential to be treated as an Accumulation Trust for purposes calculating the RMDs if carefully drafted to meet all 5 see- through trust requirements.31
a. The trust must be valid under state law;
b. The trust must be irrevocable;
c. A copy of the trust agreement must be provided to the retirement plan provider no later than October 30th of the year following the year of the Owner’s death;
d. All of the beneficiaries of the trust must be identifiable; and
e. All of the beneficiaries must be individuals.
5. Requirements #4 & #5 - All beneficiaries must be identifiable individuals.
a. Which Beneficiaries Count???
(1) All potential beneficiaries, including remainder beneficiaries count.
30 26 CFR 1.401(a)(9)-5, A-7
31 26 CFR 1.401(a)(9)-4, A-3, A-5
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(2) Mere Potential successor beneficiaries32 do not count.
b. Using Natalie Choate’s “Chain” test33
(1) Assume current beneficiary counts as first “link” in countable beneficiary chain.
(2) Analyze all future (i.e remainder) beneficiaries of the trust by counting all successive beneficiaries until you come to the beneficiary(ies) who will be entitled to receive the trust property immediate and outright upon the death of the prior beneficiaires. That “immediate and outright” beneficiary(ies) is the last “link” in the countable beneficiary chain.
(a) Powers of Appointment: If a beneficiary has a power of appointment, all of the potential appointees as well as those who take in default of the exercise of the power of apppointment must be analyzed in the chain.34
(b) Embedded successor trusts: If the terms of a trust allow for funds to be held in further trust for a remainder beneficiary, the secondary trust must pass all five requirements of See-Through Trust Status.
(3) Consider all of the links: These are the beneficiaries that count for test requirements #4 & #5.
(a) Are they all identifiable?
(b) Are they all individuals?
i) Yes–? You have Accumulation Trust. The RMD is based on the age of the oldest chain beneficiary.
32 Treas Reg. §1.401(a)(9)-5, A-7(c).
33She actually refers to this test as the “outright-to-now-living-persons” or “O/R-2-NLP” but this author prefers the simpler, albeit less descriptive, terminology. See fn 1 at pgs. 440-443.
34 See fn 1 at pgs. 445-447
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ii) No?– The trust is NOT an Accumulation Trust. The RMD is either the 5-Year Rule (owner died prior to RBD) or the owner’s remaining life expectancy (owner died after RBD).
(4) Chain Test is applied ONCE at the death of the owner based on the identities of the beneficiaries who are surviving at that moment in time and the hypothetical death of each of them until you reach the end of the chain.
6. Example: SIRIUS BLACK
Sirius Black directed his IRA to a trust to benefit his nephew, Harry Potter. The terms of the trust directed the trustee to distribute income and principal to Harry for his health, education, and support while he was under the age of 60. At age 60, the trust would terminate and the trustee would distribute the remaining assets to Harry outright. If Harry died prior to age 60, the trustee would distribute the trust to Harry’s descendants, per stirpes; provided, however, that if any descendant of Harry’s was under the age of 25, that descendant’s share would be held in further trust for the descendant until age 60. The contingent beneficiary of Harry’s and the descendants’ trust is Sirius’ favorite charity, Hogwart’s School of Magic. Sirius dies with $500k remaining in his IRA.
a. Note that at the time the attorney drafts the trust (and hopefully the beneficiary designation) there is no way to confirm that the trust will qualify as a See-Through Trust.
b. The presence of the charity creates the potential to fail Trust Requirement #5 (all “countable” beneficiaries must be individuals).
c. But the facts, as they exist at Sirius’ death, may save the trust from failing.
d. If Harry is older than 60–> DB status exists. The trust is ignored and Harry is deemed to be the direct beneficiary of the IRA. The RMD will be based on his life expectancy.
e. If Harry is younger than 60 but has 1 child who is older than 25, the trust can qualify as a See-Through Trust because all of the “countable” beneficiaries are individuals. That is, under these facts, if Harry died, the trustee would distribute
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the remaining trust property to Harry’s child immediately and outright. Because of this, Harry’s child is the last link in the countable beneficiary chain and we can ignore the charity.
f. If Harry is younger than 60 and either: 1) does not have any children; or 2) has a child younger than age 25, the charity would be a countable beneficiary because there is no individual entitled to an immediate and outright distribution (assuming all preceding beneficiaries died).
7. Example: Druella Black
Druella Black named her revocable living trust as the beneficiary of her IRA. Her RLT stated that at her death, the trust would be split into 2 equal shares. One share would be distributed to her surviving daughter, Narcissa Malfoy, outright and free of trust. The other share would be further divided into 3 separate lifetime trusts for the benefit of three grandchildren (the children of Druella’s predeceased daughter, Bellatrix Lestrange).
At the grandchild’s death, the remainder of the trust would be distributed to such individuals as the grandchild should direct as long as the individuals receiving the directed property were younger than the grandchild. If the grandchild failed to exercise the power of appointment, the remainder of the trust would be distributed to Druella’s descendant’s per stirpes.
Druella Black died with $600,000 in her IRA survived by her daughter, Narcissa Malfoy, and her 3 grandchildren.
a. Assuming all of the See-Through Requirements are met (and they appear to be), then we must determine the age of the OLDEST beneficiary of the RLT.–>
b. It does not matter that the RLT will terminate. Similarly, the result will not chance if the account was divided and separate inherited IRA accounts were established (for Narcissa and each of the grandchildren’s trusts). Separate share/account treatment DOES NOT FIX the problem if the direct beneficiary is a single funding trust, like a RLT.
c. Note that the drafting attempt to limit the Power of Appointment to individuals younger than the grandchild did
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not accomplish what the drafter likely intended– to limit the age to the grandchild or someone younger.
d. These facts were adapted from a real case in my office. Interestingly, the financial institution who managed the IRA reviewed the trust, set up separate accounts for each of Narcissa’s and the grandchildren’s trusts and set the measuring age for each separate account to the primary beneficiary of that account. Narcissa’s account used her age and each grandchild’s trust used the grandchild’s age!
e. Even more interesting is the fact that EVEN IF you were to ignore the RLT (which you cannot35) and test only the grandchildren’s trust, you would still use Narcissa’s age because the testing occurs on date of Druella’s death, and assuming none of the grandchildren had prospectively exercised their power of appointment (how could they when they had never seen a copy of the RLT), Narcissa is still the oldest potential beneficiary of the grandchildren’s trust (in absence of the exercise of the POA, the trust property reverted to Druella’s descendants, the oldest of which was Narcissa).
f. These rules are extremely difficult to analyze and the financial institutions are not immune from reaching an incorrect conclusion.
VII. Drafting the SNT as an Accumulation Trust
A. GOAL: Draft trust so that the primary beneficiary (the beneficiary experiencing disabilities) is the OLDEST potential beneficiary so that the beneficiary experiencing disability’s age is used to calculate the RMD.
1. Because we know that the primary beneficiary’s age must count in the chain test, the goal is for that age is to be the “oldest” age.
2. Drafting focus is on the payout of the trust assets after the death of the primary beneficiary.
35Treas. Reg. § 1.401(a)(9)-4, A-5(c).
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3. What are the client’s goals?
a. Charity?
(1) Charitable beneficiary will cause SNT to fail as Accumulation Trust. Consider alternative estate planning ideas (see below).
b. Siblings or other family members?
(1) Can they receive distributions outright?
(a) Yes? –> easier to draft
(b) No? –> must then analyze remainder trust to test for oldest beneficiary
B. Examples:
Ron and Hermione Weasley have two adult children. Their daughter, Rose (35 yrs), is married with 3 children and their son, Hugo (38 years), has special needs. Ron and Hermione want to split their estate equally between their children and direct Hugo’s share to an SNT. One of the largest assets of their estate is Ron’s IRA account which is $800,000.
1. Under these basic facts, an Accumulation Trust using Ron’s age as the measuring age could be drafted if: The remainder beneficiary of the SNT is Rose, or if Rose is not then living, to Rose’s children, outright.
2. If the clients want to hold any grandchild’s share in trust until they reach a certain age, the drafting becomes trickier and the potential for failure of See-Through Status increase.
a. Consider the following:
“At the death of Hugo, the trustee shall distribute the remaining trust property to our daughter, Rose. If Rose is not then living, the trustee shall distribute the remaining trust property to Rose’s descendants, by right of representation; provided however, if any descendant of Rose is under the age of 35, the trustee shall continue to hold that descendant’s share in a separate trust for such descendant until age 35.”
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Assume that the terms of the separate descendant’s trust direct the trustee to distribute income and principal for the descendant’s health and education until age 35, and if the descendant should die prior to age 35, the trustee should distribute the remainder of the descendant’s trust to such descendant’s descendants, by right of representation.
(1) If, at the death of the survivor of Ron & Hermione, both Hugo and Rose are alive–> see through trust using Hugo’s age as the measuring RMD life expectancy.
(2) But what if Rose has predeceased and all of her children are under the age of 35 and none of them have any children?
(a) You have to test the descendants’ trust but there is no outright beneficiary alive... now what? What does the contingent beneficiary provision say? Heirs at law?
i) Explain risk to clients and move forward?
ii) Switch to outright distribution to Rose’s children?
iii) Switch remainder beneficiary of descendant’s trust to siblings, outright?
3. The beneficiary designation form is critical here. It must direct Hugo’s share of the account directly to the SNT; not to Ron & Hermione’s “estate” or to their revocable trusts.
4. Assume the same basic facts re: Ron and Hermione, except that they want Hugo’s share to be distributed to their favorite charity.
a. See-Through Trust status is not an option.
b. Alternative planning ideas - see below.
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C. Other Drafting Provisions
1. Include Definitions: a. Retirement Benefit means "an interest in one of the following types of assets if payable to this trust as a beneficiary or owned by this trust: a qualified or nonqualified annuity; a benefit under a qualified or nonqualified plan of deferred compensation; any account in or benefit payable under any pension, profit-sharing, stock bonus, or other qualified retirement plan; any individual retirement account or trust; and any and all benefits under any plan or arrangement this established under §408, §408A, §457, §403, §401, or similar provisions of the Internal Revenue Code.
b. Retirement Account means "an account established or held at a financial institution that holds Retirement Benefits"
2. Material Purpose Clause.
a. Why? Remember that Accumulation Trusts are simply drafted to qualify as a See-Through Trust under the rules and regulations pertaining to distributions from retirement accounts. The phrase “Accumulation Trust” or “See-Through Trust” are really just terms of art used by practitioners and those works do not generally appear anywhere in the provisions of the trust itself. So why not consider adding a separate provision in the SNT that clear
Example: “One of the material purposes of this trust is to allow it to qualify as a designated beneficiary of my retirement plan so that the life expectancy of my child, X, is used to calculate the minimum required distribution from the retirement plan under Treas. Reg. Section 1.401(a)(9)-9"
3. Explicitly state that the trust is Irrevocable.
a. Why? The irrevocability of a testamentary trust is assumed because the grantor/settlor of the trust has died, but it probably doesn't hurt to simply state that the trust is irrevocable and make satisfying See-Through Trust Requirement #1 that much more obviously satisfied.
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4. Prohibit the Use of Retirement Benefits to Pay Taxes/Debts/Expenses of Owner’s Estate
a. Why? Most trusts (or state law) permit/require the trust to contribute $ toward the payment of the decedent’s taxes, debts and expenses. However, if the “estate” is deemed to be a potential beneficiary of the trust, this could cause the trust to flunk See-Through Trust Requirement #5 (all trust beneficiaries must be individuals).
Example: "The trustee may not, on or after September 30 of the year following the year of my death, use or apply any retirement benefit payable under any qualified retirement plan, individual retirement account or other retirement arrangement subject to the "minimum distribution rules" of Section 401(a)(9) of the Internal Revenue Code of 1986, as amended, for payment of my debts, taxes, expenses of administration or other claims against my estate, or for payment of estate, inheritance or similar transfer taxes due on account of my death. It being my intent that all such retirement benefits be distributed to or held only for individual beneficiaries. This section shall not apply to any distribution which is specifically directed to be funded with retirement benefits by other provisions of this Agreement".36
5. Exclude Older Adopted People
a. Why? If your document or your state law treats an adopted person as a legal "descendant", in theory, there is the potential that a beneficiary of the trust could adopt someone older than the oldest identifiable beneficiary of the trust. Thus, violating See-Through Trust Requirement #4 (all trust beneficiaries must be identifiable).
Example: "A beneficiary's descendants shall not include any individual who is adopted after my death and is older than the oldest individual who is a beneficiary of this trust at my death."37
6. Limit Powers of Appointment
a. Why? Under most state laws, the power to appoint allows the powerholder to appoint in further trust among the class
36 See Choate, Appendix B, para 4.2 at p. 592.
37 See Choate, Appendix B, para 4.3 at p. 593.
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of allowable appointees. This presents a potential problem since we know that all trusts must pass the 5 See-Through Trust Requirements. The fact that some future trust may come into existence but whose terms are not known at the time of the owner's death could not be tested.
Example: "Notwithstanding any provision to the contrary, no retirement benefits may be appointed, distributed, or transferred to any other trust unless (1) the beneficiaries of the secondary trust are treated as having been designated as the direct beneficiaries of such retirement benefit under Internal Revenue Code § 401(a)(9); and (2) the oldest beneficiary of such other trust was not born in a year earlier than the year of birth of the oldest beneficiary of this trust"38
7. Stand-Alone Trusts. Because of all the quirky drafting provisions suggested above and the ease in which to satisfy See-Through Trust Requirement #3 (provide retirement plan provider with copy of trust by 10/30 of year following year of death), many practitioners opt to have the accumulation trust as a separate stand-alone trust. This is not, however, required.
8. See Appendix ____ for sample Will which includes an SNT drafted as an Accumulation See-Through Trust containing these suggested drafting provisions.
VIII. The Beneficiary Designation Form
A. The beneficiary designation form ("BD Form") is an essential piece of the puzzle in See-Through Trust status. You spend hours of time (and the client's money) carefully crafting a trust that meets all of the requirements of federal/state public benefits rules AND See-Through Trust minimum distribution rules but if the beneficiary designation form is incorrect or sloppily drafted, all of the effort and money will have been wasted.
B. The SNT MUST be a DIRECT beneficiary of the retirement plan.
1. You cannot simply direct to the general estate planning vehicle EVEN if that entity only exists for a short period of time to fund the SNT. Do not use the short-cuts of "my estate" or the revocable living trust and assume that because the assets will flow through
38 See Choate, Appendix B, para. 44 at p. 593.
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the Will or Trust to the SNT, that the SNT is the beneficiary of the retirement plan; it is not.
a. Naming the "estate" will fail any chance of having the SNT deemed as a See-Through Trust. The SNT will be required to withdraw the retirement funds out over the 5-Year Rule or the remaining life expectancy of the owner, depending on the age of the owner at death. b. Naming the governing trust (i.e. the revocable living trust) will force the See-Through Trust Requirements to apply to the RLT, not just the SNT. If the RLT has non-individual beneficiaries (charities, or an argument that the settlor’s estate is a beneficiary (see VI, C, para 4 above), the RLT could cause the SNT to fail.
C. The “Box” Problem
1. One of the most common problems with the BD form is that the forms are standardized and force the owner to translate his beneficiary designation intentions to fix into the boxes on the form.
a. Some BD forms do not even anticipate that there could be a testamentary trust as a beneficiary. They require the boxes for Tax ID and date of trust to be completed and of course, this information is not yet available for a testamentary SNT. (See Appendix C for an example of this).
b. Other forms are more user friendly and either contemplate the use of a testamentary trust and/or allow extra pages to be filed with the form. If this option is available, I recommend taking advantage of it. (See Appendix D for an example with language)
c. Also, this is the time when an actively involved financial planner can be your best friend. I often work directly with the financial planners and explain the clients’ desires to incorporate the SNT as direct beneficiary. The financial planner will then complete the forms and let me review. Further, it has often been the case that the financial advisor can “push through” the form in a situation where the financial institution may otherwise reject because of the box problem.
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D. Memorandum to Clients
1. The completion of the beneficiary designation forms is often left in the client’s hands, either because the client does not want to pay for the attorney to fill out the forms or because it is not part of the attorney’s practice to complete the forms, or perhaps the client is shuffling through financial institutions and the beneficiary designation form is a future project. Whatever the case, I would encourage you to:
a. Think about building the cost of the BD Forms into the estimate of the engagement as if it is all part of the one package, rather than charging later for the completion of the BD Forms as this is when clients are more likely to balk. Remember, for some clients - the BD form can be the most important part of their plan.
b. Provide the clients with a memorandum explaining the potential tax consequences of naming the SNT as a beneficiary and the importance of the BD Form. I’ve attached a sample memo that I often use at Exhibit E which also happens to address life insurance too)
IX. Alternative Estate Planning Ideas
A. Charitable Remainder Trust
1. If the client desires to direct the remainder of an SNT to charity, the trust will fail as a See-Through Trust. This results in an acceleration of the income tax consequences. However, the income taxes could be mitigated by the use of a charitable remainder trust (“CRT”). Here’s how it would work:
a. The CRT is named as the direct beneficiary of the retirement plan. The lifetime beneficiary39 of the CRT is the SNT. The CRT can be established upon the death of the client/owner.
b. The CRT is a trust but the CRT would fail as a See-Through Trust because of Trust Requirement #5 (all trust beneficiaries must be individuals).
39 For ease of the discussion, I am using the terminology of “lifetime beneficiary” to refer to the beneficiary receiving the annuity or unitrust interest of the CRT. Because CRTs can be established for a period of years, the duration of the CRT may not be based on an individual lifetime. However, when used in conjunction with a SNT, the duration is almost always the lifetime of the SNT beneficiary.
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c. The CRT must withdraw the retirement benefits over the 5- Year Period or the Remaining Life Expectancy (depending on age of Owner)40 but there is no immediate income tax consequence because CRTs are tax-exempt entities.41
d. So, the CRT can withdraw all of the funds in the retirement plan without triggering an immediate income taxes.
e. However, CRTs must distribute out a portion of their assets each year to the lifetime beneficiary. These annual distributions carry out some of the income tax consequences each year to the lifetime beneficiary. But the income taxes are spread-out over many years, much in the same way as getting the stretch payout of a See-Through Trust.
f. Usually, CRTs that have a non-individual as the lifetime beneficiary are limited to a 20-year term; however, there is a statutory exception for a trust that is established for the benefit of a person considered disabled under the Social Security rules. The exception allows the unitrust payments to such a trust to continue for the lifetime of the disabled beneficiary.42
B. Allocate Non-Retirement Assets to SNT
1. Sometimes the facts of the client’s situation does not fit into See- Through Trust status and a CRT is not an appealing solution. In those cases, I sometimes play with allocating specific assets to the SNT and other beneficiaries rather than simply dividing each asset proportionally between the beneficiaries.
Example: Petunia Dursley has a house worth $350,000; a bank account worth $150,000 and an IRA worth $500,000. She has 2 children, a younger son, Harry Potter (22 years) who she adopted several years ago and her older son, Dudley (50 years). Dudley has special needs and lives
40 See discussion at IV, C above.
41 See IRC 664 and related Treasury Regulations.
42 Rev. Rul 2002-20. There are a lot more details to naming a SNT as the beneficiary of a CRT and complying with this Rev. Rul. I would recommend that a review of an excellent article from Mass Mutual that I came across online, “Charitable remainder and special needs trust combo: an example of a win-win- win situation for parent, child with a disability and charity.” I’ve attached a copy to these materials. See Appendix F.
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with her. Petunia directs the house and bank account to the SNT for Dudley and the IRA to Harry.
2. This can be slipperly slope if client is truly striving for equality between the children though. Consider the example with Petunia above. While it appears that each child is receiving 50% of the value of Petunia’s estate, realistically it is very unlikely that each child will receive an equal share.
a. Because of the inherent income taxes built in, the IRA is worth substantially less than $500,000 to Harry.
b. Unless Petunia dies tomorrow, all of the values of these assets will fluctuate. Petunia may be subject to withdrawing her RMD from the IRA and as she does, she adds it to her bank account, thereby pulling value from Harry and giving it to Dudley.
3. One solution to this problem is the philosophical client. The client who gives up on trying to control the details of the outcome and decides “close enough” and whose kids hopefully share the same view.
4. Another solution is trying to regain equality via an equalization clause in the Will/Trust.
Example: Using the facts of Petunia above, assume that Petunia’s assets are now: house: $350,000 bank accounts: $150,000 investment account: $100,000 IRA $500,000
Petunia would prefer to avoid naming the SNT as the beneficiary of the IRA because Petunia’s preferred contingent beneficiary is her church. To the extent possible, Petunia wants to ensure that her children share equally in her estate. Petunia’s Will43 could contain an equalization gift to Harry:
“If I am survived by both my children, It is my desire that each of my children share substantially equally in the distribution of my overall estate, including probate and non-probate assets. I intend to direct my non-
43 This would work just as well in a revocable living trust except that you would substitute the term “probate assets” with “trust assets”.
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probate assets to my son, Harry. To the extent that the value of those non-probate assets does not equal 50% of my net overall estate (after taxes and administration expenses have been paid), I hereby give a pecuniary amount of my probate assets to my son, Harry, so that he receives as close to an equal share of my overall estate as is possible under the circumstances.”44
a. It’s important to note that this equalization gift only works if the value of the probate/RLT assets exceed the value of the non-probate assets.
b. If the value of the retirement benefits exceeded the value of the probate/RLT assets, the equalization gift would need to come from the retirement funds. Retirement funds cannot be controlled by a clause in the Will/Trust, the equalization direction would need to be incorporated into the beneficiary designation form. This author believes that such custom drafting of the form would be universally rejected by the financial institutions.
(1) If equalization in these circumstances were still the goal, Petunia would need to:
(a) Get comfortable with SNT being a beneficiary of the IRA (and the resulting potential of either using Harrys age, or if still incorporating church, the 5-year or Life Expectancy Payout)
(b) Periodically (and often) review her beneficiary designation form allocation with her financial planner to adjust the SNT’s share up/down.
5. Sometimes the client’s desire for equalization is overshadowed by their concern that the SNT for their special needs child receives a minimum amount of funds. This “minimum value” concern is tricky to manage in the context of trying to allocate non-retirement assets to the SNT.
Example: Percival and Kendra Dumbledore have 3 children. Their daughter, Ariana’s share of their estate will be held in an SNT. The value of Percival and Kendra’s estate fluctuates between $850,000 and $950,000 depending on the real estate and investment markets. Their estate
44 I would also recommend defining the terms “overall estate”; “probate assets” and “non-probate assets”. For an example of this see the Will at Appendix G.
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consists of both probate and non–probate (retirement plan and life insurance) assets. They also believe that one or both of them will need long-term care which could further deplete the estate value. Percival and Kendra’s estate planning goals are: 1) to ensure that Ariana’s SNT receives a minimum of $300,000; 2) equalize the distribution of the estate, if possible, among the 3 children; 3) minimize their children’s exposure to the income taxes in the retirement plans; and 4) include their favorite charity, “Art for Azkaban,” as an alternate contingent beneficiary.
a. This type of custom drafting is not for the faint at heart as it requires a combination of equalization gifts, minimum value clauses and periodic review/update of BD forms for non- probate/trust assets.
Example:
IF OVERALL ESTATE EXCEEDS $900,000. If my spouse does not survive me, and if the value of the Overall Estate (as herein defined) is Nine Hundred Thousand Dollars ($900,000.00) or more, the personal representative shall distribute the Probate Assets to and among my sons, Albus Percival Wulfric Brian Dumbledore (“Albus”) and Aberforth Dumbledore (“Aberforth”), and the special needs trust created herein for the benefit of my daughter, Ariana Dumbledore (hereinafter referred to as the “Ariana Dumbledore SNT”), so that each of them receives as close to an equal share of the Overall Estate assets as is possible under the circumstances.
IF OVERALL ESTATE IS LESS THAN $900,000. If the value of the overall estate is less than Nine Hundred Thousand Dollars ($900,000.00), the personal representative shall distribute the Probate Assets as follows:
(1) DISTRIBUTION OF OVER $300,000 TO SPECIAL NEEDS TRUST. If the Ariana Dumbledore SNT will receive Three Hundred Thousand Dollars ($300,000.00) or more of non-Probate Assets (as defined herein), the personal representative shall distribute the Probate Assets in equal shares to Albus and Aberforth.
(2) DISTRIBUTION OF LESS THAN $300,000 TO SPECIAL NEEDS TRUST. If the Ariana Dumbledore SNT will receive less than Three Hundred Thousand Dollars ($300,000.00) of non-Probate Assets, the personal representative shall distribute as much of the Probate Assets as is necessary for the Ariana Dumbledore SNT
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to be funded with Three Hundred Thousand Dollars ($300,000.00) (from both Probate and non-Probate Assets). The balance of the Probate Assets shall be distributed equally between Albus and Aberforth, so that the children receive as close to an equal share of the Overall Estate as is possible under the circumstances.
b. See Appendix G for a more complete same of this Will, including definitions and examples.
X. Take-Aways
A. An SNT must be drafted as See-Through Trust in order to qualify as a Designated Beneficiary
B. Generally, the SNT must be drafted as See-Through Accumulation Trust unless the facts (lower value IRA; young beneficiary) support the ability for See-Through Conduit Trust because the RMD is low enough to allow for spend-down.
C. See-Through Accumulation Trusts use the age of the oldest beneficiary to calculate the payout of the required minimum distributions
D. Accumulation See-Through Trusts require careful drafting and a focus on remainder beneficiaries
E. The beneficiary designation form must show the SNT as the direct beneficiary
F. Client’s estate planning goals may make Accumulation See-Through Trust status impossible. Consider whether any of the alternate estate planning ideas may be helpful
1. Charitable Remainder Trust
2. Allocation of non-retirement assets to SNT
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Chapter 1—Special Needs Trusts and Retirement Assets
What you need to know about minimum distribution rules and special needs trusts.
Melanie Marmion Fitzwater Meyer Hollis & Marmion Portland, OR www.fitzwatermeyer.com
1. This area is expansive!
2. Topics not covered can be explained in Natalie Choate’s Life and Death Planning with Retirement Benefits.
3. What we will cover: Review of webinar A general primer on minimum distribution rules Naming a trust as a beneficiary of a retirement plan Drafting special needs trusts as accumulation trusts Alternative estate planning ideas
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MRD after the death of the Owner will depend on whether the Owner died before or after her RBD. Before: If designated beneficiary (“DB”)Age of DB If no DB 5-year Rule Funds must be withdrawn by 5th anniversary of death After If DB Age of DB If no DB Owner’s remaining life expectancy
Can always withdraw more
Designated Beneficiary Advantage
Tax-deferred benefits can continue past the lifetime of the Owner if a Designated Beneficiary is named on the account.
The “measuring life” of the MRD will switch to the life expectancy of the Designated Beneficiary; thus “stretching out” the distribution term to cover two lives.
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Who is a Designated Beneficiary? A Living Individual Surviving spouses have special DB privileges. Roll-over to spouse’s own IRA and Name their own DB to continue tax deferral into a 3rd lifespan.
A See-Through Trust No other entity (including an estate or a “opaque” trust) can be a DB.
5 requirements for a See-Through Trust: 1st: Trust must be valid under state law
2nd. Trust must be irrevocable
3rd: A copy of the trust agreement must be provided to the retirement plan provider no later than October 30th of the year following Owners death
4th: Beneficiaries of the trust must be identifiable (by class is fine)
5th: All beneficiaries must be individuals
Trust Tested as of September 30th following year of Owner’s death
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Two types of See-Through Trusts:
1. Conduit Trusts Use age of lifetime beneficiary to determine MRD
2. Accumulation Trusts Use age of oldest beneficiary to determine MRD
Conduit Trusts: Trust must be drafted to require any withdrawals from retirement plan/account to be immediately distributed to the lifetime beneficiary IRS assumes that the “true” recipient of the MRD is the primary beneficiary. The primary beneficiary’s age is used to calculate the MRD as he/she had been named as the direct beneficiary of the retirement account. It is NOT enough for the trust to require “all income” to be paid to the beneficiary.
8
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ADVANTAGES A Conduit Trust always qualifies as a DB Tax advantage of naming an individual beneficiary with the protection of a trust Easy to draft DISADVANTAGES: A Conduit Trust requires automatic distributions to the beneficiary. BIG DISADVANTAGE: Because of the automatic distributions to the beneficiary, a Conduit Trust will usually NOT work for special needs trusts.
Trusteed IRAs Corporate-managed conduit trust Allows for customization of distributions that exceed the MRD Will usually NOT work for SNTs
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Accumulation Trusts:
Trust is drafted to allow MRDs to accumulate in the trust no automatic distribution like Conduit Trust
The age of the oldest beneficiary is used to calculate the MRDs
A Special Needs Trust has the potential to be treated as an Accumulation Trust if carefully drafted.
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1st Requirement: The trust must be valid under state law Easy
2nd Requirement: The trust must be irrevocable Easy
3rd Requirement: A copy of the trust document must be submitted to retirement plan provider by 10/30 of year following year of death Easy
4th Requirement: All trust beneficiaries must be identifiable Must be able to identify both current & “countable” remainder beneficiaries to find “oldest” Identifying by class (“my nieces who survive me”) is fine
5th Requirement: All trust beneficiaries must be individuals Which Beneficiaries Count?
Tested as of September 30th following year of Owner’s Death
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Natalie Choate’s Chain Test: Assume current beneficiary counts as first “link” in countable beneficiary chain Analyze all future (i.e., remainder) beneficiaries of the trust by counting all successive beneficiaries until you come to the beneficiary(ies) who will be entitled to receive the trust property immediate and outright upon the death of the prior beneficiaries. That “immediate and outright beneficiary(ies)” is the last beneficiary “link” in the countable chain
Once you know your “links”, then test Are they identifiable? Are they individuals? Yes?Accumulation Trust MRD is age of oldest “link” beneficiary No? No Accumulation Trust No DB MRD based on 5-Year Rule or Life Expectancy Rule Embedded/Successor trusts create more beneficiaries to test Powers of appointment all of the potential appointees as well as those who take in default must be analyzed in the chain
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Example: Sirius Black directed his IRA to a trust to benefit his nephew, Harry Potter: While Harry under 60, the trustee can distribute for HEMS (health, education, support & maintenance) If Harry dies prior to age 60, the trust would be distributed to Harry’s descendants, per stirpes. Any share for a descendant under age 25 would continue in another trust for that descendant until age 25. The contingent beneficiary of Harry’s and the descendant’s trust is Hogwarts School of Magic.
Sirius dies with $500,000 in his IRA Analysis: Note at the time the trust was drafted there is no way to confirm whether or not the trust would qualify as a See-Through Trust The presence of the charity creates potential for failing Requirement #5 The analysis depends on the facts as they exist on September 30th following the year of Sirius’ death
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Analysis Con’t If Harry is older than 60: See-Through Trust status is moot Harry is deemed to be the direct beneficiary DB status; MRD based on Harry’s life expectancy
If Harry is younger than 60 and… All of his children are over age 25 See-Through Trust The countable links are Harry and his children Harry’s age will be used If Harry is younger than 60 and… He does not have any children OR any child is under age 25 The countable links now include Hogwarts No See-Through Trust (Requirement #5 fails)
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Druella Black named her revocable living trust as the beneficiary of her $600,000 IRA. The relevant terms of Druella’s RLT provide: At Druella’s death, RLT splits into 2 shares One share distributed outright to Druella’s surviving daughter, Narcissa Other share split into 3 lifetime trusts for the benefit of Druella’s 3 grandchildren (the children of Laura’s predeceased daughter, Bellatrix). Each GC’s trust allowed for HEMS during lifetime. At death, the remainder would be distributed to individuals appointed by the GC who must be younger than the GC. If the GC failed to exercise power of appointment, default to Druella’s descendants, per stirpes.
Analysis Both the RLT and the GC trust must be tested See-Through Trust Requirements #1- valid under state law yes #2- irrevocable->yes #3 trust doc provided to IRA providerassume yes #4 trust beneficiaries are identifiableyes #5 trust beneficiaries are individualsyes
Oldest beneficiary of RLT is Narcissa
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Analysis cont’d Even if Narcissa and GC trusts established separate accounts with their share of IRA Narcissa is still measuring age Separate Account Rule does not apply when direct beneficiary is RLT (or other funding trust) Note the attempt to draft POA to younger beneficiaries did not help
Analysis cont’d Financial Institution followed result of Separate Account Rule wrong Even if you ignore RLT (which you can’t) and test GC trust, Narcissa is STILL the oldest potential beneficiary of GC trust If fail to exercise POA, the trust defaulted to Druella’s desc, the oldest of which is Narcissa Not uncommon for financial institutions to reach incorrect result
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Goalto draft the SNT so the primary beneficiary (beneficiary with disabilities) is the OLDEST potential beneficiary and his/her age is used to calculate the MRD. Remember: Must be drafted as Accumulation See-Through Trust Drafting focus is on the payout of the trust assets after the death of the primary beneficiary.
What are the client’s intentions after the primary beneficiary passes away? Charity? Charity will cause SNT to fail as See-Through Trust Consider alternative planning ideas’ Family & Friends? Can they receive distribution outright? Yes? easiest to draft; easy to check age of oldest No? harder; must analyze potential remainder trusts
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Example: Ron and Hermoine Weasley have 2 adult children. Their daughter, Rose (35 yrs), is married with 3 children. Their son, Hugo (38 years), has special needs. Ron and Hermoine want to divide their estate equally between their children and direct Hugo’s share to an SNT. The largest asset of their estate is Ron’s $800k IRA account.
Under these basic facts, See-Through Trust using Hugo’s age could be drafted easily if: Rose is the remainder beneficiary of the SNT; AND If Rose is not then living, the GC are the outright remainder beneficiaries
If Clients want to hold any GC share in further trust until the GC reaches a certain age… Trickier drafting Potential for failing See-Through Trust status increases
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Assume Ron and Hermoine want any share for a GC to be held in further trust until the GC reaches age 35; and if a GC dies prior to age 35, to the GC’s descendant’s per stirpes…
Note no guarantees here– See-Through Trust status tested upon “future” unknown facts
If Hugo and Rose survive the Clients See Through TrustDB oldest beneficiary (Hugo)
If Hugo survives but Rose has predeceased leaving children All over 35? Same result as above Any child under age 35? Must test GC trust but no identifiable outright beneficiary of GC trust if GC died prior to age 35. Now What? check contingent beneficiary provision
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Client’s must prioritize… Tax Savings? switch to outright distribution to Rose’s children Or…draft remainder beneficiary of GC’s trust to be to GC’s siblings, outright Control of $ over young descendants Explain risk and move forward Beneficiary Designation Form is critical Must direct to Hugo’s SNT; not to “estate” or client’s RLT “50% to the trustee of the SNT created for my son Hugo under my revocable trust dated xx”
Assume Ron and Hermoine want to direct remainder of Hugo’s SNT Trust to charity See-Through Trust is not option for Hugo’s SNT 5-Year Rule or Life Expectancy Rule Move forward anyway Consider alternative planning ideas
Elder Law 2016: Advanced Concepts 1–44
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Drafting Provisions to Consider Definitions Retirement Benefits? Retirement Accounts? Minimum required distribution?
Explicitly state that SNT is irrevocable upon death of [parent] and valid under X state law
Material Purpose Clause Why? Terms “See-Through Trust” or “Accumulation Trust” are terms of art; not generally found in the terminology of the SNT Clarifies any confusion about why you drafted remainder beneficiaries differently than expected
“One of the material purposes of this trust is to allow it to qualify as a designated beneficiary of my retirement plan so that the life expectancy of my child, ___, is used to calculate the minimum required distribution under Treas. Reg. 1.401(a)(9)-9”
Elder Law 2016: Advanced Concepts 1–45
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Prohibit use of retirement funds to pay taxes/debts/expenses Why? Most state laws allow allocation of debts and taxes among the beneficiaries (including the SNT) If retirement funds are paid to the SNT and then used to pay taxes/debts/expenses, the “estate” could be deemed to be a beneficiary of the SNT Flunk See-Through Trust Requirement #5
Exclude older adoptees Why? If document or state law treats adoptees as legal “descendants” and someone’s descendants are the potential beneficiaries of the SNT, the oldest potential beneficiary is now unidentifiable Potential for someone older than ‘oldest’ beneficiary to be adopted later Flunks See-Through Trust Requirement #4
Elder Law 2016: Advanced Concepts 1–46
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Limit Powers of Appointment Why? Most state laws allow POAs to be exercised to appoint “in further trust” All trusts must be tested, but this is a future potential trust that cannot be tested because terms are not yet known
Sample SNT with suggested drafting provisions included in outline materials
Stand- Alone Trust Not required Preferred by some attorneys because: Quirky drafting provisions that you don’t want applied to other trusts Ease to satisfy See-Through Trust Requirement #3
Elder Law 2016: Advanced Concepts 1–47
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The “BD” form is critical to See-Through Trust status Must name the SNT directly Naming the “Will” or “Estate” with understanding that $ will flow from there to the SNT is not a good answer SNT will fail as See-Through Trust No DB status available Five-Year Rule or Life Expectancy Rule will apply Naming the RLT The RLT must pass See-Through Trust requirements Any non-individual (even as contingent) will cause problems
The “Box” problem Standardized forms do not allow for custom drafting Some forms do not even allow for testamentary trust to be considered as beneficiary Some forms are more user-friendly and allow for extra language to be “attached” A good financial planner can be the “hammer” to push through custom drafted form
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Memorandum to Clients Reality is that completion of BD forms are often left for client to fill out Consider building cost of completing the BD form into initial estimate rather than “add-on” cost at end Provide clients with memo explaining potential tax consequences of naming SNT as beneficiary of retirement plan and the importance of the BD form Include sample language for BD Form See written materials for sample Memorandum
1St Alternate Planning Idea: Allocate Non-Retirement Assets to SNT Client’s situation does not fit easily into drafting See-Through Trust
CRT is not appealing solution
Goal Allocate specific non-retirement assets to SNT and direct retirement to other beneficiaries
Elder Law 2016: Advanced Concepts 1–49
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Example: Petunia Dursley has a house worth $350k; a bank account worth $150k and an IRA worth $500k. She has 2 children: a younger son, Harry (who she adopted several years ago) and an older son, Dudley. Dudley has special needs and lives with her.
Petunia’s Will directs her estate to Dudley’s SNT.
Petunia names Harry as the 100% beneficiary of her IRA.
Not truly equal IRA is worth substantially less than $500k to Harry because of the income taxes Values will continue to fluctuate As Petunia pulls out her MRDs, she’ll add them to bank account, thereby reducing Harry’s share and adding to Dudley’s share Solutions Philosophical Client- “that’s life” Another solution may be including an Equalization Clause
Elder Law 2016: Advanced Concepts 1–50
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Similar facts as above, except Petunia has: House: $350k Bank account: $150k stock account: $100k IRA: $500k Petunia’s goals: Avoid naming Dudley’s SNT as beneficiary of her IRA because she wants to name her Church as contingent beneficiary
Ensure that her children receive equal shares of her estate
Petunia names Harry as the 100% beneficiary of her IRA
Petunia’s Will directs the residue of her Estate to Dudley’s SNT
In her Will, Petunia gives Harry a specific pecuniary gift to equalize his share of her overall estate
Elder Law 2016: Advanced Concepts 1–51
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“If I am survived by both of my children, it is my desire that each of children share equally in the distribution of my overall estate, including both my probate and non-probate assets. I intend to direct my non-probate assets to my son, Harry. To the extent that the overall value of those non-probate assets does not equal 50% of my net overall estate (after the payment of taxes and administration expenses), I herby give a pecuniary amount of my probate assets to my son, Harry, so that he receives as close to an equal share of my overall estate as is possible under the circumstances”
House: $350k Bank account: $150k stock account: $100k IRA: $500k Petunia’s overall estate = $1,100,000 Harry would receive: $500,000 IRA $50,000 under the Will Dudley’s SNT would receive: $550 under the Will
Elder Law 2016: Advanced Concepts 1–52
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Equalization gift only works when value of probate/RLT assets exceed value of retirement assets If retirement account value is higher, than equalization amount would need to come from IRA How to incorporate equalization clause in BD form? Petunia would have to name SNT as beneficiary of “excess” portion of IRA Get comfortable with 5-year/Life Expectancy rule applying Periodically and often review her IRA account value and adjust BD form accordingly
2nd Alternate Estate Planning Idea Drafting for Minimum Value to SNT Sometimes clients’ desire for equalization is overshadowed by their concern that the SNT receive a minimum amount of funds
This “minimum value” goal is tricky to manage when retirement accounts make up large part of estate
Not for the faint of heart: Combines equalization gifts with minimum value clauses and periodic review of estate values and update of BD Form
Elder Law 2016: Advanced Concepts 1–53
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Example: Percival and Kendra Dumbledore have 3 children. Their daughter, Ariana’s share of the estate will be directed to an SNT. The value of their estate fluctuates between $850k- $950k consisting of probate assets and non-probate assets (life insurance and retirement plans). They also believe that one or both of them will need long-term care which will further deplete the estate value.
Percival and Kendra’s estate planning goals are: To ensure that Ariana’s SNT receives a minimum of $300,000 Equalize the distribution of the estate, if possible, among the 3 children Minimize the exposure of income taxes in the retirement plans Include their favorite charity “Art for Azkaban” as a contingent beneficiary
Elder Law 2016: Advanced Concepts 1–54
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Overall drafting of Will/Trust requires: Minimization Clause If overall estate equals less than $X, SNT receives first $300,000 Equalization Clause If overall estate exceeds $X, than all 3 children get equal shares with SNT being funded first from probate assets Periodic Review/Update of BD Forms If SNT needs to be funded with retirement assets (because probate asset values have been reduced), clients must add SNT as beneficiary to retirement account
Appendix in written materials has sample Will for Percival Dumbledore showing: Minimum Value Clause Equalization language Provides specific examples
Elder Law 2016: Advanced Concepts 1–55
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3rd Alternate Planning Idea: Charitable Remainder Trust “CRT” Charity as remainder beneficiary will cause SNT to fail as See-Through Trust
Income taxes accelerated via the 5-Year Rule or Life Expectancy Rule
CRT provides ability to stretch-out income tax consequences to SNT
Charitable Remainder Trusts The CRT is named as the direct beneficiary of the retirement account The lifetime beneficiary of the CRT is the SNT Must be structured as an annuity or unitrust interest Must satisfy requirements of IRC 664 and related Treasury Regs Because the CRT is a tax-exempt entity, the initial withdrawal of the retirement $ by the CRT does not trigger any immediate income tax consequences.
Elder Law 2016: Advanced Concepts 1–56
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The annual distributions to the SNT will carry out a portion of the income taxes each year
Generally, a CRT is limited to a 20-year term when the primary beneficiary is a trust Statutory exception for trust where beneficiary is disabled under Social Security rules CRT can be structured to make distributions to SNT for SNT beneficiary’s lifetime
Summary: Must be familiar with CRT rules and draft carefully Good fit for clients who have charitable inclinations and are willing to pay for complex drafting Drafting can be easier than administering Does not work well with young beneficiares because 10% charitable remainder test fails
Elder Law 2016: Advanced Concepts 1–57
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SNTs must be drafted as Accumulation See- Through Trust to get DB status Always uses age of “oldest” potential beneficiary Requires careful drafting and focus on remainder beneficiaries Pay particular attention to BD Form
Client’s estate planning intentions may make Accumulation See-Through Trust impossible Consider Alternate estate planning techniques Charitable remainder trust Allocation of non-retirement to SNT Charge accordingly!
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LAST WILL AND TESTAMENT
OF
HARRY JAMES POTTER
I, HARRY JAMES POTTER, of Portland, Oregon, declare that this is my Will and revoke all prior Wills and Codicils.
ARTICLE 1
1. FAMILY
1.1 SPOUSE. I am married to GINEVRA (“GINNY”) POTTER and all references to "my spouse" are to him.
1.2 DESCENDANTS. My children are JAMES POTTER, ALBUS POTTER, and LILY POTTER. References in this Will to "my children" include any child later born to or adopted by me.
ARTICLE 2
2. LEGAL REPRESENTATIVES
2.1 PERSONAL REPRESENTATIVE. I name my spouse as my personal representative. If my spouse fails to qualify or ceases to act as my personal representative, I name HERMIONE GRANGER WEASLEY as my personal representative.
2.2 GUARDIAN. If a guardian is necessary for any child of mine, I name RONALD WEASLEY and HERMIONE GRANGER WEASLEY as guardian.
2.3 TRUSTEE. I name HERMIONE GRANGER WEASLEY as trustee of any trust created by this Will for the benefit of a descendant of mine. If HERMIONE GRANGER WEASLEY fails to qualify or ceases to act as trustee, I name NEVILLE LONGBOTTOM as trustee. If a conservator is necessary for the estate of any child of mine, I name the trustee as conservator.
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ARTICLE 3
3. SPECIFIC GIFTS AND SPECIAL DIRECTIONS
3.1 SPECIFIC GIFT. I give the sum of One Hundred Thousand Dollars ($100,000.00) to HOGWART’S SCHOOL OF MAGIC, a non-profit organization located near the Village of Hogsmeade. If HOGWART’S SCHOOL OF MAGIC is no longer in existence at the time of my death, this gift shall lapse.
3.2 TANGIBLE PERSONAL PROPERTY. If my spouse survives me, I give to my spouse any interest I have in household goods and furnishings, personal vehicles, recreational equipment, clothing, jewelry, personal effects, and other tangible personal property for personal or household use, together with any insurance on this property. If my spouse does not survive me, I give this property in substantially equal shares to my surviving children to be divided among them as they agree or, if they do not agree, as my personal representative determines.
ARTICLE 4
4. RESIDUE
4.1 IF MY SPOUSE SURVIVES. If my spouse survives me, I give the residue of my estate to my spouse.
4.2 IF MY SPOUSE DOES NOT SURVIVE. If my spouse does not survive me, I give the residue of my estate in equal shares to my children, one share for any child who survives me and one share by right of representation for the then surviving descendants of each child who does not survive me; provided, however that if my son, JAMES POTTER, survives me, his share shall be held in a special needs trust as provided in Article 5.
4.3 CONTINGENT BENEFICIARIES. If neither my spouse nor any of my descendants survive me, I give the residue of my estate to HOGWART’S SCHOOL OF MAGIC, a non-profit organization located near the Village of Hogsmeade.
4.4 DESCENDANT’S TRUST. If any surviving descendant of a deceased child of mine who is under the age of twenty-five (25) is entitled to a share of my estate or trust estate, the trustee shall retain that beneficiary's share in a separate trust. The trustee shall distribute to or for the benefit of the beneficiary those amounts of income or principal which the trustee considers advisable for the
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beneficiary's health, education, support, and maintenance. When the beneficiary reaches the age of twenty-five (25), the separate trust shall terminate and the trustee shall distribute the remainder of the trust to the beneficiary. If the beneficiary dies before receiving full distribution of the share, the trustee shall distribute the remainder of the trust to the beneficiary's estate.
ARTICLE 5
5. SPECIAL NEEDS TRUST
5.1 NAME OF TRUST. This is a third party special needs trust. This trust may be called the James Potter Third Party Special Needs Trust. JAMES POTTER may be referred to as “James” throughout this Article.
5.2 DISABILITY OF BENEFICIARY. James is disabled. As a result of this disability, James requires financial assistance to meet his needs.
5.3 INTENT. My primary intentions for creating this trust for James’s benefit are as follows:
5.3(a) SUPPLEMENT PUBLIC RESOURCES. To provide a fully discretionary spendthrift trust to supplement public resources and benefits when such resources are unavailable or insufficient to provide for the special and supplemental needs of the beneficiary. It is my purpose to create a fund for James’ benefit; and
5.3(b) ENHANCE QUALITY OF LIFE. To enhance James’ health, comfort, happiness and dignity during his lifetime, subject to the sole and absolute discretion of the trustee.
5.3(c) QUALIFY AS SEE-THROUGH TRUST. To allow this trust to qualify as a designated beneficiary (i.e. a “See-Through Trust”) of my retirement plan so that the life expectancy of James is used to calculate the minimum required distribution under Treas. Reg. 1.401(a)(9)-9.
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5.4 DISTRIBUTIONS.
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5.4(a) NO RIGHT TO COMPEL. All distributions shall be within the sole discretion of the trustee. James does not have any authority to compel a distribution from this trust.
5.4(b) SPECIAL NEEDS. During James’ lifetime, the trustee shall have sole discretion to distribute for his benefit those amounts of income or principal that the trustee considers advisable to meet James’ special needs that are not met by government assistance programs. "Special needs" shall include, but not be limited to, the following types of special needs, to the extent other funds from public sources are not available: clothing; personal attendant and personal care services, respite care, advocacy, rehabilitation and therapy, social development services, private case management; medical and dental care; health insurance premiums; durable medical equipment; guardian and conservator fees; education and training; transportation expenses; computer equipment and services; entertainment; telephone; and housekeeping.
5.4(c) CONSIDERATION OF OTHER RESOURCES. Despite any other provision of this instrument, the trustee shall consider any income, support, or property available to James from any source, including government assistance programs, before making any discretionary distributions under this trust. The trustee shall further consider the applicable resource and income limitations under any government assistance programs for which James may be eligible.
5.5 ELIGIBILITY FOR GOVERNMENT ASSISTANCE. If it is in James’ best interest, the trustee shall take any steps required to qualify James for government assistance programs and to ensure that James’ support needs are met through such programs.
5.6 DEFENSE OF TRUST. For purposes of determining James’ eligibility for such benefits, no part of the principal or income of the trust estate shall be considered available to him. In the event the trustee is requested by any department or agency to release principal or income of the trust to or on behalf of James to pay for equipment, medication, or services which other organizations or agencies are authorized to provide, or in the event the trustee is requested by any department or agency administering such benefits to petition the court or any other administrative agency for the release of trust principal or income for this purpose, the trustee shall deny such request and may defend, at the expense of the trust estate, any contest or other attack which defeats the purpose of this trust.
5.7 PREFERENTIAL RIGHTS OF BENEFICIARY. James’ rights and interests are preferred over the rights of any remainder beneficiary who receives the trust property
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after James’ death. The trustee is authorized to exercise discretion to spend all income and/or principal of the trust in order to accomplish the trust purposes.
5.8 SPENDTHRIFT. No interest in the principal or income of this trust shall be anticipated, assigned or encumbered, or shall be subject to any creditor’s claim or to legal process, prior to its actual receipt by the beneficiary. Furthermore, I declare that it is my intent as expressed herein, that because this trust is to be conserved and maintained primarily for James, that no part of the corpus thereof, nor principal nor undistributed income, shall be subject to the claims of voluntary or involuntary creditors for the provision of care and services, including residential and institutional care, by any public entity, office, department or agency of the State of Oregon, or any other state, or of the United States, or any other governmental agency.
5.9 RETIREMENT PLANS.
5.9(a) DISTRIBUTION OF RETIREMENT BENEFITS. Notwithstanding anything to the contrary, any Retirement Benefits (as herein defined) directed to a trust created for a child of mine shall be subject to the following provisions:
5.9(b) DEFINITIONS.
5.9(b)(1) RETIREMENT BENEFIT(S). ‘Retirement Benefit’ or ‘Retirement Benefits’ and other similar references mean any benefit or amount that is owned by or payable to this trust under: an individual retirement account (‘IRA’) as defined in §408; a Roth IRA as defined in §408A; a ‘deemed’ IRA or Roth IRA under §408(q); an annuity or mutual fund custodial account under §403(b); a pension, profit sharing, stock bonus or other retirement plan that is qualified under §401(a); any other retirement plan or arrangement that is subject to the ‘minimum distribution rules’ of §401(a)(9), or equivalent rules under any other Code section; any annuity (specifically including any non-qualified annuity, regardless of whether it is part of a retirement plan); or any plan or arrangement of deferred compensation for services. The plan, trust, account or arrangement under which any Retirement Benefit is held for or payable to this trust is referred to as a ‘Retirement Plan'.
/// 5.9(b)(2) ANY OTHER TERMS. Any other terms in this Article shall be determined in accordance with section 401(a)(9) of the Internal Revenue Code of 1986, as amended, and Treasury regulations thereunder.
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5.9(c) EXCLUSION OF OLDER ADOPTED DESCENDANTS. Notwithstanding any other provision herein or of state law, the class of ‘lineal descendants’ shall not include an individual who is a ‘lineal descendant’ by virtue of legal adoption if such individual (i) was so adopted after my death and (ii) is older than the oldest other beneficiary of this trust who was a living member of said class at my death.
5.9(d) PROHIBITION TO PAY TAXES AND EXPENSES. Notwithstanding any other provision herein, the trustee may not, on or after September 30 of the calendar year following the calendar year in which my death occurs, use or apply Retirement Benefits to pay debts, taxes, expenses of administration or other claims due on account of my death.
5.9(e) POWERS OF APPOINTMENT. Notwithstanding any provision to the contrary, no retirement benefits may be appointed, distributed, or transferred to any other trust unless (1) the beneficiaries of the secondary trust are treated as having been designated as the direct beneficiaries of such retirement benefit under Internal Revenue Code §401(a)(9); and (2) the oldest beneficiary of such other trust was not born in a year earlier than the year of birth of the oldest beneficiary of this trust.
5.10 POWER TO AMEND. The trustee of this trust may amend this trust so that it conforms with any laws or interpretations of law by any governing body or agency relating to government assistance received by James, and/or to better effectuate the purposes of the trust.
5.11 OBTAIN PROFESSIONAL ADVICE. I strongly encourage the trustee to consult with a knowledgeable attorney for professional advice regarding (1) the fiduciary duties of a trustee, (2) how to handle trust distributions in a manner that will not jeopardize James’ eligibility for government assistance programs. The trustee is to be reimbursed for the cost of this professional advice.
5.12 DEATH OF BENEFICIARY. Upon James’ death, the trustee may pay the expenses of his funeral, and all administrative expenses relating to this trust, including reasonable attorney and accountant's fees, if, in the trustee's sole discretion, other satisfactory provisions have not been made for the payment of such expenses.
5.13 TERMINATION OF SPECIAL NEEDS TRUST. This trust shall cease and terminate on James’ death and thereupon the trustee shall distribute the remaining trust property to my daughter, LILY POTTER, or if LILY POTTER is not then living, to her
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descendants, by right of representation, subject to the provisions of section 4.4 of this Will.
ARTICLE 6
6. TRUST ADMINISTRATION
6.1 NONASSIGNMENT. The interest of any beneficiary in income or principal may not be voluntarily or involuntarily anticipated, alienated, or encumbered and shall not be subject to claims of creditors or others or to legal process.
6.2 PRINCIPAL PLACE OF ADMINISTRATION. The principal place of administration of any trust established under this instrument is the State of Oregon. The trustee may transfer the principal place of administration to another jurisdiction that is appropriate to the trust’s purposes, the trust’s administration, and the interests of the beneficiaries.
6.3 NOTICE, INFORMATION, AND REPORTS. The trustee shall have a duty to furnish notice, information, and reports in accordance with Oregon law with respect to this Trust and any trust established under this instrument. Any notice, information and reports for any person who is a minor or is financially incapable, shall be given instead to his or her court-appointed conservator or guardian of the estate.
ARTICLE 7
7. TRUSTEE POWERS
Except as may be otherwise provided in this instrument, as to each trust created herein, the trustee shall have all powers that are conferred on a trustee by Oregon law as now existing or later amended. In addition, the trustee shall have the power:
7.1 MANAGE AND DISPOSE OF ASSETS. To manage, maintain, improve, lease, grant options on, encumber, sell, exchange, or otherwise dispose of part or all of the trust estate in any manner and on any terms the trustee considers beneficial to the trust estate.
7.2 RETAIN ASSETS. To retain any property for so long as the trustee considers retention of probable benefit to the trust estate and the trust beneficiaries.
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7.3 MAKE INVESTMENTS. To invest and reinvest the trust estate in common or preferred stocks, bonds, mutual funds, common trust funds, secured and unsecured obligations, mortgages, and other property, real or personal, which the trustee considers advisable and in the best interest of the trust estate, whether or not authorized by law for the investment of trust funds.
7.4 RECEIVE COMPENSATION. To receive reasonable compensation for the trustee's own services and reimbursement for expenses incurred in administering the trust estate.
7.5 ADVANCE FUNDS OR BORROW. To advance the trustee's own funds to the trust for any trust purposes at prevailing rates of interest (with any advance to be a lien on the trust estate) and to borrow money for those purposes and upon those terms and conditions which the trustee considers to be in the best interest of the trust estate.
7.6 PURCHASE ASSETS AND MAKE LOANS. To purchase assets at their fair market value (as determined by the trustee) from my probate estate or my spouse's probate or trust estate, and to make secured or unsecured loans to my probate estate or my spouse's probate or trust estate, for any reason the trustee believes will benefit my probate estate or my spouse's probate or trust estate.
7.7 COMBINE MANAGEMENT OF SEPARATE TRUSTS. To hold the trust estate as an undivided whole without separation into any separate trusts for as long as the trustee considers suitable and to allot undivided interests in any asset to any separate trusts, but no undivided holding shall defer vesting or distribution under the trusts.
7.8 DO OTHER ACTS. Except as otherwise provided in this instrument, to do all acts that might legally be done by an individual in absolute ownership and control of property and which in the trustee's judgment are necessary or desirable for the proper and advantageous management of the trust estate.
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ARTICLE 8
8. TRUSTEE
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8.1 RESIGNATION OF TRUSTEE. The trustee may resign the trusteeship at any time. Any resignation shall be in writing and shall become effective only upon written acceptance of the trust by a successor trustee.
8.2 TRANSFER TO SUCCESSOR TRUSTEE. Upon acceptance, a successor trustee shall succeed to all rights, powers, and duties of the trustee. All right, title, and interest in the trust property shall vest in the successor. The prior trustee shall, without warranty, transfer the existing trust property to the successor trustee. A successor trustee shall not have any duty to examine the records or actions of any former trustee and shall not be liable for the consequences of any act or failure to act of any former trustee.
8.3 NO BOND REQUIRED. No bond or other undertaking shall be required of any individual trustee of any trust.
ARTICLE 9
9. PERSONAL REPRESENTATIVE
9.1 NO BOND REQUIRED. No bond shall be required of any individual named in this Will as my personal representative.
9.2 POWERS. I give my personal representative all powers conferred on a personal representative by Oregon law as now existing or later amended, whether or not those powers are exercised in Oregon.
9.3 TRANSFER TO CUSTODIAN. Except as otherwise provided herein, if any interest passes under this Will to a person under the age of twenty-five (25), I authorize my personal representative to transfer that interest to a custodian for that person under the Oregon Transfers to Minors Act. The custodian shall be chosen by my personal representative.
9.4 VIRTUAL ASSETS. I direct my personal representative to take such actions reasonably necessary and prudent to locate and gain control of all virtual assets including, but not limited to, online financial accounts, email, social media accounts, access to vendors whose bills are paid electronically, online subscriptions and online storage accounts; electronic information existing on the hard drive of any computer or laptop or other storage device such as flash drives, CDs and DVDs. This power shall include the power to: hire and reasonably compensate computer or other technical experts to assist my personal representative with respect to any virtual asset; change
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passwords or other means to access and/or control any virtual assets; take actions necessary to protect the security and continued accessibility of any virtual asset and communicate with any software licensor, internet service provider or other third party in connection with the location, administration, transfer, or distribution of any virtual asset. A virtual asset shall mean any intangible personal property which is stored and/or accessed by any electronic means whatsoever.
ARTICLE 10
10. GENERAL ADMINISTRATIVE PROVISIONS
10.1 SURVIVORSHIP. I shall be considered to survive my spouse if the order of our deaths cannot be proven or if I survive my spouse for any period, no matter how short. In addition, any beneficiary under my Will (including my spouse) shall be considered to survive me only if the beneficiary is living on the sixtieth (60th) day after the date of my death.
10.2 DEBTS AND EXPENSES. My personal representative shall pay any debts as they come due, expenses of last illness and funeral, and expenses incurred in administering or distributing my probate or trust estate.
10.3 TAXES. Except as provided below, I direct my personal representative to pay out of the residue of my estate, without apportionment, all estate, inheritance, and other death taxes (including interest and penalties) payable by reason of my death on property passing under this Will or otherwise. If the residue is insufficient to pay all such death taxes, the excess shall be apportioned according to Oregon law.
10.4 SIMILAR WILLS. My spouse and I are executing substantially similar Wills. Our Wills are not joint and mutual nor made pursuant to a contract to make a Will or devise. I have not made this Will in consideration of the execution of a similar Will by my spouse. Any property received by my spouse under this Will should be my spouse's absolutely.
10.5 GOVERNING LAW. The validity and construction of my Will shall be determined under Oregon law in effect on the date my Will is signed.
10.6 CAPTIONS. The captions are inserted for convenience only. They are not a part of this instrument and do not limit the scope of the section to which each refers.
I have signed this Will on the _____ day of ______, 2016.
PAGE 10 - LAST WILL AND TESTAMENT OF HARRY JAMES POTTER
Elder Law 2016: Advanced Concepts 1–78 Chapter 1—Special Needs Trusts and Retirement Assets
______HARRY JAMES POTTER
On the date of the foregoing Will of HARRY JAMES POTTER, I saw him sign it. Upon his declaration that it was his Will, I signed my name below as a witness.
______at ______, Oregon
______at ______, Oregon
PAGE 11 - LAST WILL AND TESTAMENT OF HARRY JAMES POTTER
Elder Law 2016: Advanced Concepts 1–79 Chapter 1—Special Needs Trusts and Retirement Assets
Elder Law 2016: Advanced Concepts 1–80 Chapter 1—Special Needs Trusts and Retirement Assets
Fidelity Investments 403(b) Beneficiary Designation
1. general instructions Please complete this form and sign it on the back. In the future, you may revoke the beneficiary designation and designate a different beneficiary by submitting a new Beneficiary Designation form to Fidelity. Mailing instructions: Return this form in the enclosed postage-paid envelope or to Fidelity Investments, P.O. Box 770002, Cincinnati, OH 45277-0090 Questions? Call Fidelity Investments at 1-800-343-0860 Monday through Friday from 8 a.m. to midnight Eastern time, or visit us at www.netbenefits.com/atwork. 2. designating your beneficiary(ies) You are not limited to three primary and three contingent beneficiaries. To assign additional beneficiaries, or to designate a more complex beneficiary designation, please attach, sign, and date a separate piece of paper. When designating primary and contingent beneficiaries, please use whole percentages and be sure that the percentages for each group of beneficiaries total 100%. Your primary beneficiary cannot be your contingent beneficiary. If you designate a trust as a beneficiary, please include the date the trust was created, and the trustee’s name. Unless otherwise specified by your plan, if more than one person is named and no percentages are indicated, payment will be made in equal shares to your primary beneficiary(ies) who survives you. If a percentage is indicated and a primary beneficiary(ies) does not survive you, the percentage of that beneficiary’s designated share shall be divided among the surviving primary beneficiary(ies) in proportion to the percentage selected for them. Naming an estate: Letters of appointment issued by the court naming the executor or administrator of the estate must be provided when a claim is filed. Please consult your attorney for advice on the effect of this designation. No additional legal documentation is required at this time. Naming a trust: Provide the name, date, and tax identification number of the trust (if available). If there has not been a tax identification number assigned to the trust, provide your Social Security number. The trust must be established prior to the date this form is submitted. Do not send a copy of the trust agreement. If available, provide the name and address of one trustee. Naming a charity: Please list name, address, and tax identification number. Please select “Estate/Charity” as the beneficiary type. What happens if you designate a minor, a person who is not legally competent, or an estate as beneficiary? If you should choose a minor, a person who is not legally competent, or an estate as beneficiary, it may be necessary to have a guardian or administrator appointed before any proceeds can be paid. This may mean delay of payment and additional expense for your beneficiary. What effect does divorce have on beneficiary designations? If a Beneficiary Designation form was completed leaving benefits to a spouse prior to divorce, this designation is not automatically revoked by your divorce from the former spouse. Unless otherwise required by applicable federal or state law, or the terms of your retirement plan document, your former spouse will remain your ben- eficiary until you designate a new one. This is the case even if you remarry, unless the terms of the retirement plan document require a different beneficiary. If you remarry, your new spouse will automatically be your beneficiary for at least 50% of your account unless (1) you designate another beneficiary (which could be your former spouse) and your new spouse consents to the designation, or (2) the death benefit has been assigned to your former spouse under a qualified domestic relations order (QDRO). 3. spousal consent Spousal Consent: If you are married, your plan requires that you designate your spouse as primary beneficiary for 100% of your vested account balance. If you are married and you do not designate your spouse as your primary beneficiary for your account balances as described above, your spouse must sign the Spousal Consent portion of this form in the presence of a notary public or a representative of the plan. Age 35 Requirement: Your spouse must be the primary beneficiary of your account as described above unless your spouse con- sents to a different primary beneficiary. If this designation occurs prior to the first day of the plan year in which you attain age 35, this designation is void on the earlier of (a) the first day of the plan year in which you attain age 35, or (b) the date of separation from service. When this designation is voided, your spouse will become the beneficiary for the amount described above. If you wish to designate a different primary beneficiary at that time you will need to complete a new Beneficiary Designation form. 4. authorization Please provide your signature. Fidelity Investments Institutional Operations Company, Inc.
5VFITSAAB001T
Elder Law 2016: Advanced Concepts 1–81 Chapter 1—Special Needs Trusts and Retirement Assets
Fidelity Investments 403(b) Beneficiary Designation
1. your information Please use a black pen and print clearly in CAPITAL LETTERS.
Social Security #: Date of Birth:
First Name:
Last Name:
Mailing Address:
Address Line 2:
City: State:
Zip: I am: Single OR Married
Daytime Phone: Evening Phone:
Plan Number Name of Employer: (if known):
Name of Site/Division: City & State of Employer:
2. designating your beneficiary(ies) Please check here if you have more than three primary or contingent beneficiaries. Primary Beneficiary(ies) I hereby designate the person(s) named below as primary beneficiary(ies) to receive payment of the value of my account(s) under the plan upon my death. 1. Individual: OR Trust Name:
Social Security Number: OR Tax ID Number: Percentage:
%
Date of Birth or Trust Date: Relationship to Applicant:
Spouse OR Trust OR Other
2. Individual: OR Trust Name:
Social Security Number: OR Tax ID Number: Percentage:
%
Date of Birth or Trust Date: Relationship to Applicant:
Spouse OR Trust OR Other
Elder Law 2016: Advanced Concepts 1–82 Chapter 1—Special Needs Trusts and Retirement Assets
2. designating your beneficiary(ies) (continued) Primary Beneficiary(ies) continued I hereby designate the person(s) named below as primary beneficiary(ies) to receive payment of the value of my account(s) under the plan upon my death.
3. Individual: OR Trust Name:
Social Security Number: OR Tax ID Number: Percentage:
%
Date of Birth or Trust Date: Relationship to Applicant:
Spouse OR Trust OR Other Total = 100%
Contingent Beneficiary(ies) If there is no primary beneficiary(ies) living at the time of my death, I hereby specify that the value of my account is to be distributed to my contingent beneficiary(ies) listed below.Please note: Your primary beneficiary cannot be your contingent beneficiary.
1. Individual: OR Trust Name:
Social Security Number: OR Tax ID Number: Percentage:
%
Date of Birth or Trust Date: Relationship to Applicant:
Spouse OR Trust OR Other
2. Individual: OR Trust Name:
Social Security Number: OR Tax ID Number: Percentage:
%
Date of Birth or Trust Date: Relationship to Applicant:
Spouse OR Trust OR Other
3. Individual: OR Trust Name:
Social Security Number: OR Tax ID Number: Percentage:
%
Date of Birth or Trust Date: Relationship to Applicant:
Spouse OR Trust OR Other Total = 100%
Payment to contingent beneficiary(ies) will be made according to the rules of succession described in the instructions.
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Elder Law 2016: Advanced Concepts 1–83 Chapter 1—Special Needs Trusts and Retirement Assets
3. spousal consent By signing below, I hereby acknowledge that I understand: (1) that the effect of my consent may result in the forfeiture of benefits I would otherwise be entitled to receive upon my spouse’s death; (2) that my spouse’s waiver is not valid unless I consent to it; (3) that my consent is voluntary; (4) that my consent is irrevocable unless my spouse completes a new Beneficiary Designation; and (5) that my consent (signature) must be witnessed by a notary public or plan representative. I understand that if this beneficiary designation is executed prior to the first day of the plan year in which the participant attains age 35, then my rights to receive the death benefit as determined by the retirement plan provisions will be restored to me on the earlier of (1) the first day of the plan year in which the participant attains age 35, or (b) the date the participant separates from service with the employer sponsoring the retirement plan. Signature of Participant’s Spouse: Date:
X To be completed by a notary public or representative of the plan:
Sworn before me this day
In the State of , County of
Notary Public Signature: X
My Commission Expires: Notary stamp must be in the above box
Witnessed by Plan Representative: Date: X
4. authorization and signature To help the government fight money laundering and the funding of terrorism, federal law requires Fidelity to obtain your name, date of birth, address, and a government-issued ID number before opening your account. In certain circumstances, Fidelity may obtain and verify comparable information for you and any person authorized to make transactions in an account or beneficial owners of certain entities. Further documentation is required for certain entities, such as trusts, estates, corporations, partnerships, and other organiza- tions. Your account may be restricted or closed if Fidelity cannot obtain and verify this information. Fidelity will not be responsible for any losses or damages (including but not limited to lost opportunities) that may result if your account is restricted or closed. Individual Authorization: By executing this form • I certify under penalties of perjury that my Social Security number in Section 1 on this form is correct. • I understand that I may designate a beneficiary for my assets accumulated under the Plan and that if I choose not to designate a beneficiary, distributions will be made according to the plan document. • I am aware that the beneficiary information included in this form becomes effective when delivered to Fidelity and will remain in effect until I deliver another completed and signed Beneficiary Designation Form to Fidelity with a later date. • I am aware that the beneficiary information provided herein shall apply to all my Fidelity Accounts under the plan listed in Section 1 for which FMTC (or its affiliates and/or any successor appointed pursuant to the terms of such Accounts or trust agreement in effect between FMTC and my Employer, as applicable) acts as trustee or custodian, and shall replace all previous designation(s) I have made on any of my Accounts.
Your Signature: X Date:
427490.11.0 Fidelity Investments Institutional Operations Company, Inc. 1.721882.108
Elder Law 2016: Advanced Concepts 1–84 Chapter 1—Special Needs Trusts and Retirement Assets
Form R350
IRA Beneficiary Designation Form
Use this form to designate one or more beneficiaries who will inherit your IRA assets upon your death. In accordance Do this online with your designation, your assets will pass directly to your Log on to your account at chosen beneficiaries. vanguard.com. When you submit this form, it will completely replace any Questions? Call 800-662-2739. prior designations for the IRA types you specify in Section 2. Therefore, it’s important that you list all the primary and secondary beneficiaries you want to designate, even if you’re only updating information for one beneficiary. Provide the full, legal name for each person you designate. Print in capital letters and use black ink.
1. Your information
Name first, middle initial, last Provide the full, legal name. > David Smith Birth date mm/dd/yyyy 01/01/1945 Daytime phone area code, number, extension Evening phone area code, number, extension
If you’ve applied for an SSN or a TIN but Last four digits of Social Security (SSN) number or taxpayer ID number (TIN) Zip code haven’t received it, > enter the date on XXXX which you applied.
2. Types of IRAs for which you want to designate beneficiaries
Your beneficiary designations on this form will apply to all of the holdings in the IRA types checked below that are registered under the SSN or TIN listed in Section 1.
Change all my IRA beneficiaries
If you check this box, ✔ skip to Section 3. > All IRA types I currently hold at Vanguard New designations won’t apply to annuities held in IRAs.
Change beneficiaries only in these IRA types Check all that apply. Your designations will apply to ALL Vanguard mutual Traditional IRA Rollover IRA Roth IRA fund and brokerage > accounts held within SIMPLE IRA SEP–IRA Inherited traditional IRA* Inherited Roth IRA* the selected plan type(s). *Estates, trusts, or charities that inherit IRAs can’t designate beneficiaries.
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Form R350
3. Beneficiaries you want to designate
Primary beneficiaries Check all that apply. Those you designate as your primary beneficiaries will be first to inherit your IRA assets upon your death. Indicate the percentages of your assets to be distributed to the designated primary beneficiaries upon your death. The minimum percentage you can leave to a beneficiary is 1%, and the total to all beneficiaries must equal 100%.
My spouse If completing this section, check only one of these options. To the person named here Name first, middle initial, last Birth date mm/dd/yyyy Check only Laura Smith 12/12/1945 100 % one option; don’t > OR check both boxes. To the person I’m married to at the time of my death If you select this option, your assets will be distributed to whoever is your spouse at that time. You don’t need to provide a name. %
Descendants or individuals
To my descendants who survive me, per stirpes If you select one of Your assets will be divided equally among your surviving children. If a child is deceased, these designations, the entire portion due to that child will be divided equally among his or her children (if don’t list the names > any). This designation excludes stepchildren and stepgrandchildren. of your descendants/ % grandchildren below. Equally to my grandchildren who survive me %
To the following named individual(s):
Name of individual first, middle initial, last Birth date mm/dd/yyyy Provide the full, % legal name for each Name of individual first, middle initial, last Birth date mm/dd/yyyy person. Attach a > separate sheet if you % want to list more individuals. Trusts To the trustee of an existing trust created under an agreement Name of trust Date of trust mm/dd/yyyy This applies to % existing trusts only; you can’t create a > trust with this form. To the trustee of a trust created under my last will Name of trust or section of will %
Provide the proper Other name for each entity Organization or charity you designate. > Provide name. Attach a separate % sheet if you want to list more names. My estate %
If the percentages Total don’t total 100%, we’ll allocate equal percentages > 100% totaling 100%. Return ALL pages of this form, even if some sections are left blank.
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Form R350
Secondary beneficiaries Check all that apply. Those you designate as your secondary beneficiaries will inherit your assets only if there are no surviving primary beneficiaries upon your death. Indicate the percentages of your assets to be distributed to the designated secondary beneficiaries upon your death. The minimum percentage you can leave to a beneficiary is 1%, and the total to all beneficiaries must equal 100%.
My spouse If completing this section, check only one of these options. To the person named here Name first, middle initial, last Birth date mm/dd/yyyy % Check only OR one option; don’t > check both boxes. To the person I’m married to at the time of my death If you select this option, your assets will be distributed to whoever is your spouse at that time. You don’t need to provide a name. %
Descendants or individuals
To my descendants who survive me, per stirpes If you select one of Your assets will be divided equally among your surviving children. If a child is deceased, these designations, the entire portion due to that child will be divided equally among his or her children (if don’t list the names > any). This designation excludes stepchildren and stepgrandchildren. of your descendants/ % grandchildren below. Equally to my grandchildren who survive me %
✔ To the following named individual(s):
Name of individual first, middle initial, last Birth date mm/dd/yyyy Provide the full, Joan Smith 50 % legal name for each Name of individual first, middle initial, last Birth date mm/dd/yyyy person. Attach a > separate sheet if you % want to list more individuals. Trusts ✔ To the trustee of an existing trust created under an agreement Name of trust Date of trust mm/dd/yyyy This applies to existing trusts only; % you can’t create a > trust with this form. To the trustee of a trust created under my last will Name of trust or section of will See attached 50 %
Provide the proper Other name for each entity you designate. > Organization or charity Provide name. Attach a separate % sheet if you want to list more names. My estate %
If the percentages Total don’t total 100%, we’ll allocate equal percentages > 100% totaling 100%.
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Form R350
4. Signature of account owner Read carefully before signing.
I agree to be bound by the terms and conditions established by Vanguard Fiduciary Trust Company (VFTC), the custodian of my IRA, for an IRA beneficiary designation. I understand that this designation will supersede any previous designation I have made and will become effective upon receipt in good order as determined by VFTC. If, for any reason, I do not have a beneficiary at the time of my death, my beneficiary will be what is stated as the default under the applicable Vanguard IRA Custodial Account Agreement in effect at the time of my death. I acknowledge that VFTC may require additional information upon my death to determine the identity or interest of the beneficiary or beneficiaries. In such event, I acknowledge that VFTC shall have no independent duty to obtain or verify such information but may instead rely upon the representations of an authorized party such as the executor or administrator of my estate or, if a trust beneficiary, the trustee of that trust (my fiduciary). I agree that VFTC shall have no liability for, and shall be fully indemnified against, any cost or damage it incurs in connection with its good-faith reliance on such representations. If no such fiduciary is appointed or if my fiduciary is unable to provide the required information, VFTC reserves the right to request whatever documentation it deems appropriate before making distributions or transferring ownership to a beneficiary.
If the IRA owner Signature of account owner Date mm/dd/yyyy is a minor, a legal guardian or custodian > X must sign.
Mailing information
Make a copy of your completed form for your records. Mail your completed form and any attached information in the enclosed postage-paid envelope.
If you don’t have Vanguard a postage-paid > P.O. Box 1110 envelope, mail to: Valley Forge, PA 19482-1110
Vanguard For overnight delivery, mail to: > 455 Devon Park Drive Wayne, PA 19087-1815
Vanguard Brokerage Services is a division of Vanguard Marketing Corporation, member FINRA and SIPC.
Return ALL pages of this form, even if some sections are left blank.
© 2016 The Vanguard Group, Inc. All rights reserved.
R350 062016
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MEMORANDUM
To: Harry and Ginny Potter
From: Melanie Marmion
Re: Beneficiary Designations
Date: ______, 2016
Your Wills establish a special needs trust for the benefit of your son, James. However, life insurance and/or retirement plans are controlled by a beneficiary designation form on file with the financial institution. For those assets to be directed to the special needs trust for James, you need to ensure that beneficiary designation form on file with the financial institution reflects your intentions. I have enclosed sample form letters (one for life insurance and one for retirement plans) that you may use to complete your beneficiary designation forms.
For Life Insurance: Because life insurance does not carry the same income tax implications as retirement plans, the beneficiary designation forms can be much more straight forward. I recommend that you name your spouse as the primary beneficiary and your “Estate” as the secondary (contingent) beneficiary. By designating your Estate as the contingent beneficiary, the funds will flow through your Wills to the special needs trust.
For Retirement Plans: For income tax reasons, the language must be more specific for retirement plans. When you name a trust rather than an individual, the trust may be required to withdraw the funds from the retirement plan (and pay the resulting income taxes) in a shorter period of time (maybe as soon as five years) than an individual beneficiary. However, for parents of a special needs child, the trust is still the best option to control the funds and protect James’ eligibility for his public benefits. I have drafted the trust so that there’s a strong possibility that the retirement funds can be withdrawn over James’ life expectancy (rather than the five years). However, because the determination of the withdrawal period does not occur at the death of the survivor of you, it is possible that the beneficiaries of the trust have changed and shifted the withdrawal period. For example, the remainder beneficiaries of James’ special needs trust are his younger siblings, Albus and Lily. But it’s possible that both Albus and Lily may have predeceased James without having children, in which case James’ trust would
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Elder Law 2016: Advanced Concepts 1–89 Chapter 1—Special Needs Trusts and Retirement Assets
be distributed to Hogwart’s School of Magic. This change in beneficiaries would also cause the withdrawal period to switch to a shorter period.
Beneficiary designation forms are different depending on the financial institution. However, I recommend that you first try to simply attach the sample letter to the form and see if the company will accept it. You would write “see attached” in the section for contingent beneficiary and then sign and attach the sample letter.
If a company does not accept this or proposes language different from the specific language I have used in the sample form letter, please give me a call, and I will see if I can work out some alternate language that is acceptable to the company. Let me know if you have any questions or encounter any difficulty.
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Elder Law 2016: Advanced Concepts 1–90 Chapter 1—Special Needs Trusts and Retirement Assets
[LIFE INSURANCE]
Insured: Harry James Potter
Policy No.: ______
Primary Beneficiary: My spouse, Ginevra (“Ginny”) Weasley Potter.
Contingent Beneficiary: My “Estate.”
______Date HARRY JAMES POTTER
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Elder Law 2016: Advanced Concepts 1–91 Chapter 1—Special Needs Trusts and Retirement Assets
[RETIREMENT ACCOUNT]
Owner: ______
Account No.: ______
Primary Beneficiary: My spouse, ______.
Contingent Beneficiary: In equal shares to my children or their surviving descendants by right of representation; however, if JAMES POTTER survives me, pay his share to the trustee of the special needs trust established for his benefit under my Last Will and Testament dated March 12, 2016.
______Date Name
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Elder Law 2016: Advanced Concepts 1–92 Chapter 1—Special Needs Trusts and Retirement Assets
Article Excerpt: Charitable Remainder and Special Needs Trust Combo: An Example of a Win-Win-Win Situation for Parent, Child with a Disability, and Charity Say you're getting on in years and, anticipating the time when you're no longer able to do so, want to provide a lifetime of care for your adult child who has a serious disability. You'd also like to make a substantial financial gift to the charity that's been so helpful in providing advice and care for the child over the years. Is there any way you can achieve both goals, and do so in a tax-effective way? One example, a Charitable Remainder Trust (CRT), when combined with a Special Needs Trust (SNT), creates a powerful combination that can result in a win-win-win situation for the child with special needs, the parent or other trust settlor, and the charity. If structured correctly, the CRT and SNT combo provides (1) the parent with a charitable contribution tax deduction and a reduced income and/or estate tax bill, (2) a steady funding stream to the SNT established for the child's benefit, and (3) a monetary donation to the charity or charities of the parent's choice. Before you're able to enjoy the benefits gained by combining a CRT with a SNT, however, specific conditions imposed by the Internal Revenue Code and by the IRS must be satisfied. . . . . Conclusion If the Charitable Remainder and Special Needs Trusts are designed as indicated in this article, and the adult child with a disability is financially disabled as required by the IRS, the CRT will be able to provide a steady stream of income to the Special Needs Trust for the child's life. The payments from the SNT to the child will supplement and not replace his or her SSI and Medicare benefits, and so will not jeopardize the child's eligibility for such benefits. And you, as the child's parents, will receive not only an immediate income tax deduction for the initial contribution to the CRT but, because appreciable assets are removed from your estate, you may enjoy a lower estate tax bill and will avoid capital gains tax on the sale of the assets. Finally, your favorite charity-often-times the charity that's helped your child-will receive a gift of the remainder interest in the CRT and perhaps in the SNT. All in all, a win-win-win situation.
The article is available here: https://www.thefreelibrary.com/Charitable+remainder+and+ special+needs+trust%3A+combo%3A+an+example+of+a...-a0172829903
Elder Law 2016: Advanced Concepts 1–93 Chapter 1—Special Needs Trusts and Retirement Assets
Elder Law 2016: Advanced Concepts 1–94 Chapter 1—Special Needs Trusts and Retirement Assets
LAST WILL AND TESTAMENT OF PERCIVAL DUMBLEDORE
ARTICLE 4
1. RESIDUE
a. IF MY SPOUSE SURVIVES. If my spouse survives me, I give the residue of my estate to my spouse.
b. IF MY SPOUSE DOES NOT SURVIVE. If my spouse does not survive me, the Probate Assets (as herein defined) shall be distributed as follows:
i. GENERAL INTENT. It is my general intent that the special needs trust created for my daughter, Ariana, receive a minimum of Three Hundred Thousand Dollars ($300,000.00), and, if possible, each of my children receive an equal share of my overall estate.
ii. IF OVERALL ESTATE EXCEEDS $900,000. If the value of the Overall Estate (as herein defined) is Nine Hundred Thousand Dollars ($900,000.00) or more, the personal representative shall distribute the Probate Assets to and among my sons, ALBUS PERCIVAL WULFRIC BRIAN DUMBLEDORE (“Albus”) and ABERFORTH DUMBLEDORE (“Aberforth”), and the special needs trust created herein for the benefit of my daughter, ARIANA DUMBLEDORE (hereinafter referred to as the “Ariana Dumbledore SNT”), so that each of them receives as close to an equal share of the Overall Estate assets as is possible under the circumstances. See examples below.
iii. IF OVERALL ESTATE IS LESS THAN $900,000. If the value of the overall estate is less than Nine Hundred Thousand Dollars ($900,000.00), the personal representative shall distribute the Probate Assets as follows:
(1) DISTRIBUTION OF OVER $300,000 TO SPECIAL NEEDS TRUST. If the Ariana Dumbledore SNT will receive Three Hundred Thousand Dollars ($300,000.00) or more of non- Probate Assets (as defined herein), the personal representative shall distribute the Probate Assets in equal shares to Albus and Aberforth.
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(2) DISTRIBUTION OF LESS THAN $300,000 TO SPECIAL NEEDS TRUST. If the Ariana Dumbledore SNT will receive less than Three Hundred Thousand Dollars ($300,000.00) of non- Probate Assets, the personal representative shall distribute as much of the Probate Assets as is necessary for the Ariana Dumbledore SNT to be funded with Three Hundred Thousand Dollars ($300,000.00) (from both Probate and non-Probate Assets). The balance of the Probate Assets shall be distributed equally between Albus and Aberforth, so that the children receive as close to an equal share of the Overall Estate as is possible under the circumstances.
iv. DEFINITIONS. For purposes of this Article 4, the following definitions shall apply:
(1) PROBATE ASSETS. “Probate Assets” shall mean any assets that are distributed pursuant to the terms of this Will (and not by virtue of a beneficiary designation or joint ownership), and shall specifically include any assets remaining in any Disclaimer Trust that was established at the death of my spouse.
(2) NON-PROBATE ASSETS. “Non-Probate Assets” shall mean any assets that are distributed to my children by virtue of a beneficiary designation or joint ownership.
(3) OVERALL ESTATE. “Overall Estate” shall mean all the Probate Assets and non-Probate Assets passing to my children as the result of my death.
v. IF A CHILD DOES NOT SURVIVE. If either of my sons, Albus or Aberforth, does not survive me, that son’s share of the Probate Assets shall pass to his descendants by right of representation. If my daughter, Ariana Dumbledore, does not survive me, his share of the Probate Assets shall be distributed to HOGWART'S SCHOOL OF MAGIC.
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vi. EXAMPLES. In order to illustrate my intentions as expressed above, the following assets will be distributed at my death as a part of the Overall Estate:
Life Insurance Policy $300,000.00 Retirement Account $600,000.00 Probate Assets $400,000.00
(1) EXAMPLE 1. If the life insurance policy was directed to the Ariana Dumbledore SNT and the retirement plan was divided equally between Albus, Aberforth and the Ariana Dumbledore SNT, the personal representative would distribute the Probate Assets to Albus and Aberforth. In this case, the distribution of the Probate Assets would not achieve full equalization, but this would be as close as could be achieved under these circumstances.
(2) EXAMPLE 2. If the life insurance policy were directed to the Ariana Dumbledore SNT, and the retirement account was distributed to Albus and Aberforth, the personal representative would distribute the Probate Assets in equal shares among Albus, Aberforth and the Ariana Dumbledore SNT.
(3) EXAMPLE 3. If the life insurance policy had lapsed and the retirement account was directed to Albus and Aberforth, the personal representative would distribute Three Hundred Thousand Dollars ($300,000.00) of the Probate Assets to the Ariana Dumbledore SNT. The balance of the Probate Assets would be distributed in equal shares to Albus, Aberforth and the Ariana Dumbledore SNT.
b. CONTINGENT BENEFICIARIES. If neither my spouse nor any of the beneficiaries described above survive me, I give the residue of my estate to HOGWART'S SCHOOL OF MAGIC, a non-profit organization located near the Village of Hogsmeade.
c. DESCENDANT'S SHARE. If any surviving descendant of a deceased
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child of mine who is under the age of twenty-five (25) is entitled to a share of my estate or trust estate, the trustee shall retain that beneficiary's share in a separate trust. The trustee shall distribute to or for the benefit of the beneficiary those amounts of income or principal which the trustee considers advisable for the beneficiary's health, education, support, and maintenance. When the beneficiary reaches the age of twenty-five (25), the separate trust shall terminate and the trustee shall distribute the remainder of the trust to the beneficiary. If the beneficiary dies before receiving full distribution of the share, the trustee shall distribute the remainder of the trust to the beneficiary's estate.
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Elder Law 2016: Advanced Concepts 1–99 Chapter 1—Special Needs Trusts and Retirement Assets
Elder Law 2016: Advanced Concepts 1–100