Lynn Brenner's Family Finance

Don't Leave Money to a Disabled Child Directly -- Leave it to a Special Needs Trust!

Q: Recently, my father passed away.  He named all six children to inherit his estate.  One of our siblings is a ward of the state due to a disability. How can we handle her portion to ensure that the she receives  income without her misusing the funds, and in a way that will shelter her inheritance from taxation?

What is the government's position regarding wards of the state receiving inheritances? Under the program that my sibling is in, she cannot have more than a certain amount in her bank account without becoming ineligible for the program. -- BC via email



A: This is a very sad situation. Based on what you say, your sister will lose her inheritance. The only silver lining is that, as a result, she'll remain eligible for government assistance.

Income taxes aren't an issue here; with few exceptions, inherited assets aren't subject to income tax. The problem is that the heir is receiving government assistance, probably from Medicaid.

Medicaid is a needs-based government program that helps people who are poor and/or disabled. Medicaid is a joint federal and state program, and its rules differ from one state to another. But in all cases, you're ineligible for assistance if your income and assets exceed a very small amount that is set by state law.

Your story is a cautionary one for other readers. Parents and grandparents who want to leave money to a disabled child should never leave it to the child directly because that can jeopardize his or her government benefits.

Your sister's share of the inheritance should have been left to a Special Needs Trust for her benefit. This type of trust should be prepared by an attorney who specializes in elder law. It's very carefully designed to pay only for things that government programs don't cover. As a result, the trust beneficiary remains eligible for government assistance.

There's little your family can do at this point. You could petition the court that probates your father's will to change its provisions, says Donald Hecht, an elder law attorney in Garden City, N.Y.  But this course isn't worth considering for anything but a very substantial inheritance because it would require costly legal help. And it's a long shot even if you can afford it. "This kind of petition is very very rarely granted," he says. "You'd have to present clear and compelling evidence to the court that the will as written was not Dad's proven intention."

You say that your sister is a 'ward of the state.' That's not a legal term, says Hecht, but it sounds as if she may be a permanent resident of a psychiatric hospital.

Depending on the state, and on the beneficiary's age, Medicaid's rules are sometimes more lenient in other settings. When someone in a nursing home inherits money, for example, the inheritance will disqualify him or her for future assistance until it is spent down, but Medicaid won't always seize the money to recoup its past assistance. By contrast, Hecht says that Medicaid is often extremely aggressive about collecting any money available to its beneficiaries who are in mental health facilities. "But if the state grabs the money in this case," he adds, "at least your sister won't lose her eligibility for the program."

Please send your questions to Lynn@LynnBrennersFamilyFinance.com.  I'm sorry I can't respond personally to every email. Questions are only addressed online.(c) Lynn Brenner, All Rights Reserved

What Happens if I Leave a Bank Account 'In Trust For' a Person Who Isn't Related to Me?

Q: If I have an ITF ('In trust for') bank account, and I name someone who isn't related to me and also my son as the beneficiaries, what would happen with my account when I pass away? -- BN via email


A:  'In trust for' (ITF) accounts are also known as 'Pay on Death' or POD accounts. They automatically go to the named beneficiaries at your death, so this account would be divided between your son and your friend. Each of them could transfer his share into a new account in his own name.

Be sure you've identified both beneficiaries by name on the bank form, and that the account title makes it clear that you want the account to pass to them. You don't have to specify their relationship to you.

If your name is Cindy Jones, for example, the account title should be 'Cindy Jones in trust for Samuel Johnson and Frederick Jones.' 

Assets with named beneficiaries -- retirement accounts, life insurance policies, and 'in trust for' bank accounts -- pass to those beneficiaries 'by operation of law'. That's legal jargon for 'automatically.'  It means that they don't go through probate, unlike the assets you leave in your will.

You can name anyone you wish as the beneficiary of your bank account; it doesn't have to be a blood relative.

The FDIC covers ITF accounts for up to $250,000 per account owner per qualifying named beneficiary. (In other words, you won't get per beneficiary coverage if you leave an account in trust for 'my children'.)

The $250,000 limit is the new FDIC standard, in effect only through December 31, 2013. On January 1,  2014, the standard FDIC limit will return to $100,000 per depositor for all account categories except IRAs and certain other retirement accounts, which will remain at $250,000 per depositor.

Who is a qualifying beneficiary? Under new FDIC rules adopted in September 2008, any person, non-profit organization, or charity qualifies for per beneficiary coverage. (The old rules pretty much restricted qualifying beneficiaries to a small group of your blood relatives.)

What does 'per owner, per qualifying beneficiary' mean? If you're the sole owner of this account, your two beneficiaries each have up to $250,000 of coverage. In other words, the account is covered for a total of $500,000. You don't get an extra $250,000 of coverage on the ITF account for yourself.

I can hear you wondering, 'But what if I leave the account to a non-qualifying beneficiary, like a partnership or a for-profit corporation? Isn't it covered?'

Yes, it is -- along with your other individual accounts at that bank.

The FDIC provides separate insurance for accounts in each of four distinct categories: individual accounts (those in your sole name); jointly-owned accounts; revocable trust (including 'ITF') accounts; and Individual Retirement accounts and certain other self-directed retirement accounts. Each category except trust accounts gets up to $250,000 of coverage for all the accounts in the category. Trust accounts get up to $250,000 per owner per qualifying named beneficiary.

(Please note that the retirement account category doesn't get per beneficiary coverage! All your retirement accounts at one bank are covered for up to $250,000, period -- no matter how many beneficiaries you have on them.)

Your ITF account is included in the individual account category. Let's say that in addition to this ITF account, you have checking and savings accounts at the same bank. Together, the three accounts are covered for up to $250,000.

For more information about these rules, go to the FDIC's Web site, here.


Please send your questions to Lynn@LynnBrennersFamilyFinance.com.  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

 

What's the Difference Between My Estate and My Probate Estate?

Q: Is there a difference between my estate and my 'probate estate'? -- AF, via email

A: You bet there is! 

Your estate is everything you own when you die -- and I mean everything. That includes your tax-exempt bonds, your stamp collection, and every asset that you transferred into your revocable trust. You still control all the assets in that trust. If you control it, you own it.

Depending on its total value, your estate may be subject to a state and a federal estate tax. If you die in 2009, federal estate tax applies to any assets you owned above $3.5 million. (If you die in 2010, there's no federal estate tax unless and until Congress passes a new estate tax law; the old one expires at the end of 2009.) 

But your probate estate may be only a fraction of your total estate, because it only includes assets that are going to pass to other people through your will. Probate is the legal process in which a court accepts your will as valid.

Your probate estate doesn't include your financial accounts with named beneficiaries, such as Individual Retirement Accounts, 401(k), 403(b), 457 or Keogh plans, or your life insurance policies, annuities, and ITF bank accounts (accounts that are `in trust for' a named individual).

Those assets are all governed by the appropriate beneficiary designation forms, not by your will.

Nor does your probate estate include any assets that are owned jointly with right of survivorship -- like your house -- because those assets automatically pass to the surviving joint owner when you die.

Let's take that lucky hypothetical couple, Joe and Jane Smith as an example.

Joe and Jane jointly own a $750,000 house. In addition to his half of the house, Joe has $2 million in IRAs and 401(k) accounts, and a $1 million life insurance policy. All of them name Jane as the beneficiary. And he has a $75,000 bank account `in trust' for Jane.

The couple has a $400,000 vacation house, which is solely in Joe's name. And Joe also owns a $55,000 brokerage account solely in his name.

Joe's total estate is worth $3.905 million. (If he dies in 2009, only $405,000 of his estate is subject to federal estate tax, since the federal estate tax exemption is worth $3.5 million in 2009. If they live in New York state, everything above $1 million is subject to state estate tax.)

But Joe's probate estate is worth only $455,000, because it doesn't include the $3 million in retirement accounts and life insurance, or his $375,000 share of their primary residence, or the $75,000 `ITF' bank account.

Many people have virtually no probate estate. If almost everything you own is jointly-held or in accounts with designated beneficiaries, and you live in a state where the probate process is relatively quick and inexpensive there's no reason to spend money on an estate plan that helps you avoid probate.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com.  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

  

I've Inherited My Late Husband's 401(k). Should I Roll It Into an IRA, or into an Inherited IRA?

Q: I am a 43 year old housewife. I have never worked outside the home. My husband passed away recently, and I'm the beneficiary of his 401(k). It's worth approximately $105,000. What should I do with it? It's currently invested at T. Rowe Price. Should I leave it there or transfer it to a bank? Should I roll it over into a new IRA in my name, or transfer it to an inherited IRA?  --CO via email

A: The best choice depends partly on your financial situation. Do you have other sources of money, or are you likely to have to draw on this retirement account for your current needs?

Ideally, you want to leave a retirement account untouched for as long as possible. If you roll it into an IRA in your own name, you won't have to take withdrawals until after you're 70 and a half. But if you're likely to need this account for near term expenses, you should keep at least a portion of it as an inherited IRA.

Here's why:

No matter which option you take, all your withdrawals from the IRA will be taxable income. But if you maintain it as an inherited IRA, you're allowed to take withdrawals without triggering a 10% early withdrawal penalty regardless of your age.

By contrast, if you roll it into an IRA your own name, you become the account's owner instead of its beneficiary. Any withdrawals you take before age 59 and a half will be subject to a 10% early withdrawal penalty as well as to income taxes.

If you have kids, you will be able to name a conduit trust for them as the successor beneficiary to an inherited IRA, says Barry C. Picker, a Brooklyn NY tax accountant and IRA expert.

If you die before December 31 of the year in which your late husband would have turned 70 and a half, the kids will be able to empty the account over their own life expectancies. (Before that time comes, Picker says, you should move the inherited IRA into an IRA in your own name so that they don't lose that advantage.)

It's worth noting that you have some of these options because you're a surviving spouse. When you inherit an IRA from someone who was not your spouse, your successor beneficiary doesn't get to stretch account withdrawals over his or her own life expectancy.

A conduit trust will preserve the inherited IRA's tax advantages for the kids while they're minors. Another advantage of a trust is that you can pick the age at which the children gain control of the account. (You might decide that a 25 year-old is better able to handle a sizable inheritance than an 18 year-old, for example.)

Once the kids are adults, you can name them directly as the IRA beneficiaries.

If you keep the account as an inherited IRA, you won't have to take required IRA distributions until the year your late husband would have been 70 and a half, says Picker -- but any withdrawals you do take will escape the early withdrawal penalty.

As for your investment management question, I think you should keep the money at T. Rowe Price, rather than transfer it to a bank. T. Rowe Price is a major no-load mutual fund company that offers an excellent selection of low-cost investments -- a much broader selection than you'd find at any bank. Besides, this isn't an irrevocable decision. You can decide to move the IRA at a future date if you want.

Note to readers: This post originally contained errors which I've corrected.

(c) Lynn Brenner, All Rights Reserved