Thoughts on Transferring Wealth to the Next Generation

Roxanne Alexander

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Senior Financial Advisor

Lately, clients have been asking if we wouldn’t mind having a conversation with their kids about planning for future wealth transfer, as well as helping their children learn how to save and become financially independent. The decision as to whether to talk to your children and when is very personal, so there is no right answer. Every family has their differences, and views on money can be disparate, but having a conversation in advance can prevent future mistakes and confusion within the family. If you have open communication lines with your kids and don’t mind them knowing about the assets you have, bringing up this topic sooner rather than later can be advantageous.

First, decide how much information you want to reveal and what you would like to accomplish or instill in your children. Sometimes it may make sense to involve your financial advisor or estate attorney, who can be a sounding board and an intermediary when explaining types of accounts, estate documents, and other investment questions that may arise. Having a discussion about current beneficiaries, where accounts are located, and the purpose for each type of account is important. For example, if a child inherits an IRA or 401K account, there can be huge tax consequences if the child takes out all the funds at once.

Family Dynamics

If there are several children and grandchildren involved, usually most parents try to be fair. If you pass away and leave more money to one child than the other, since you helped one more while you were alive, communicating this decision in advance may prevent conflict. Also, discussing which assets would be best given to whom may make splitting assets smoother in the future. It may be more efficient in some cases to leave a house to a child that lives in the same location versus to a child who lives in another country. There may be certain tax advantages to leaving an IRA to one child versus another. If one child is struggling and paying for grandkids’ college and also thinking about buying a house, and you really want to pay for this, leaving only IRA assets to that child would cause them to have to take out funds and pay taxes prematurely, in comparison to another child that may be more financially stable and does not need the cash now.

Business Succession

If you are passing on generations of wealth from a family business, you may want to discuss how the money was made and explain the family legacy. If the family business is still active, communicating with your children about how you expect the business to continue may be important. One of our clients had a great idea. He wrote a book about his life for his grandkids and future generations. He added various pictures and life stories such as his first car and first girlfriend, and how he started in his profession.

Charitable Giving

If you are involved in charitable causes, this may be an opportune time to explain the importance of having philanthropy continue into the next generation. If you have a very strong inclination to give back to a specific cause because of a past experience, when your kids understand that decision they may be more inclined to remain involved in that cause once you are gone. One way of doing this could be to set up a charitable fund and have your kids as beneficiaries, but to discuss the purpose of the funds in advance.

Special Needs

If you are dealing with a child with special needs, it is important to have a conversation with other siblings or family members regarding your wishes when you are gone. If the plan was to have another sibling take care of the child with special needs, communicating and planning for this in advance can prevent future surprises. Assuming that a sibling wants to take responsibility as trustee or guardian for another sibling may end up in disaster. If you set up a trust with a sibling as trustee and they resign, you may end up with a corporate trustee making the decisions.

Continuing the Plan

Since your financial plan was put in place to make sure you are secure throughout your lifetime, if significant assets are projected to be left behind, continuity with your financial plan may be another topic for discussion. If your kids are all well off, planning for grandkids and future generations may now be your goal. Having a discussion with your advisor along with the family will help you make better decisions about how to plan for the future. Keep in mind that this should be revisited when there are changes in the tax laws or if there are changes in the family such as a marriage, divorce or new grandchild.

Feel free to reach out to Roxanne Alexander if you have any questions by email: RAlexander@Evensky.com or phone: 305.448.8882 extension #236.

www.Evensky.com

Special Needs Planning: Resources and Issues to Consider

Brian Fischer

Brian Fischer, CFA, CFP® Financial Analyst

Special needs planning is often narrowly thought of as simply creating a special needs trust. However, depending on the individual’s situation and needs, it may require much more. This article will focus on the resources and strategies available to those with special needs and their families who care for them.

Childhood

Federal legislation requires local governments to provide children with disabilities education and other related services that are designed to meet their needs. These resources include Early Intervention (EI) services for children younger than age three and special education that is directed by an Individualized Education Plan (IEP) for children up to age 21 (26 in Michigan). Taking full advantage of what is available to your child not only can help him or her reach full potential, but can also help conserve your resources and identify things to consider while planning for your child’s life after school.

It’s important to note that eligibility for special education benefits is not affected by income and asset ownership. EI services and special education vary by state; more information about each may be found at Autism Speaks1 and the Center for Parent Information & Resources.2

 Government Benefits

Government benefits are subject to strict eligibility rules. Although income and assets do not affect eligibility for special education benefits, they do affect eligibility for Social Security and Medicaid. Consequently, an important aspect of special needs planning involves protecting eligibility to receive government benefits.

While a child may not utilize these benefits prior to the age of 18, planning to preserve eligibility well in advance may be prudent. Even if monetary assistance isn’t needed, remaining eligible may be necessary to obtain services such as life skills training.

Social Security

Social Security Income (SSI) and Social Security Disability Income (SSDI) both provide income to those who meet Social Security’s disability eligibility requirements.3 SSI is a needs-based program available to those with minimal income and resources, while SSDI is an entitlement program for individuals, and possibly their dependents, who have paid into Social Security. Some information about each is outlined below.

 SSI

Assets are limited to $2,000 for an individual or child under the age 18 living at home with one parent, and $3,000 per couple or a child living at home with both parents. Some assets not counted include your primary residence, a vehicle, and household goods.

  • Monthly benefits for 2017 are $735 per individual and $1,103 per couple. These payouts are offset by income. Social Security’s calculation to measure income against these limits is rather complex and can be viewed here.4
  • Also, as an added benefit, some states provide a supplement to SSI.

SSDI

  • Benefits received are based on work history and family size.
  • There is a monthly earned income limit of $1,170. There are no unearned income or asset limits.
  • The 2017 maximum benefit per individual is $2,687 with a total family benefit somewhere in the range of 150-180 percent of that number.

Medicaid

Similar to SSI, Medicaid is a need-based program. However, Medicaid is administered on the state level. As a result, benefits and eligibility vary by state. Typically, if an individual qualifies for Social Security, he or she will qualify for Medicaid as well.

Children’s Health Insurance Program (CHIP)

This program provides health insurance to children under the age of 19 in families that are ineligible for Medicaid because their income is too high. Income eligibility varies by state.

Home and Community-Based Services

Provided through Medicaid, these services help individuals continue living at home or in the community instead of at another residence or in an institution. Services provided vary by state.

Life Insurance

Although a stay-at-home caretaker may not have income, the care he or she provides has value. Replacing the loss of this care can be expensive. As a result, it may be prudent to consider purchasing life insurance on all primary caretakers, regardless of income. The amount and type of life insurance will depend on your family’s needs. Some broad questions to ask that may help in determining what kind (term, permanent, second-to-die), if any, life insurance is to be purchased:

  • How long is the insurance needed?
  • How much can be afforded?

Keep in mind, to preserve eligibility for government benefits, it may make sense to name a trust or someone other than the special needs individual as the beneficiary of life insurance proceeds.

Special Needs Trust

A special needs trust can be an integral part of special needs planning. Generally, it can be used to preserve eligibility for government benefits and provide supplemental resources to the beneficiary. Additionally, it can set clear expectations for the use of funds. For example, giving a special needs individual’s inheritance to a sibling to manage may create confusion and the possibility of the special needs individual not getting the resources he or she needs.

There are many rules regarding the creation and use of special needs trusts, and these rules vary by state. Consider consulting a lawyer if a trust is needed. An attorney familiar with special needs trusts may be found at Special Needs Answers5 or Special Needs Alliance.6

There are two kinds of special needs trusts: first- and third-party. A first-party trust is funded by the individual with special needs or, in other words, the beneficiary. It generally is created when the beneficiary receives an inheritance or a legal settlement. A third-party trust, on the other hand, is funded by anyone other than the beneficiary. Aside from the source of funding, these trusts differ in what happens to the assets after the beneficiary dies. A first-party trust’s remaining assets pay back Medicaid, whereas a third-party trust’s remaining assets may be distributed to named heirs. (First-party trusts are also known as Medicaid payback trusts.)

If costs or limited resources make the use of a trust prohibitive, a pooled trust may be a viable alternative. Pooled trusts maintain assets for the benefit of a group of individuals under the umbrella of a single trust, thus potentially reducing costs. Funds are distributed to the beneficiaries in proportion to what they contributed.

 ABLE Plans

As mentioned earlier, keeping income and assets to a minimum to preserve eligibility for government benefits is an ongoing issue. The enactment of the Achieving a Better Life Experience (ABLE) Act in 2014 created a savings option that may provide some relief in keeping assets to a minimum to preserve eligibility for government benefits.

Features/Benefits

  • Funds in the account may be used for any “…expense related to the designated beneficiary as a result of living a life with disabilities.”7 Expenses may include basic living expenses, housing, transportation, and health care.
  • Investment earnings are not taxed if funds are used for qualifying expenses. If funds are used for unqualified expenses, taxes and a 10% penalty on earnings may apply.
  • Depending on the state, there may be a tax deduction for contributions.
  • They can potentially be a relatively inexpensive and more flexible alternative to a special needs trust.
  • If desired it can be managed/controlled by the beneficiary. This independence can be a source of pride for the beneficiary.
  • You can use any state’s plan.

 Rules/Limitations

  • The beneficiary must have been diagnosed with a disability before age 26.
  • Plan limits vary by state. However, there is a $100,000 account limit to maintain eligibility for government benefits. If the account’s balance exceeds $100,000, the individual will stop receiving Social Security benefits until the account balance is reduced to $100,000. Medicaid eligibility is unaffected.
  • There is a $14k annual contribution limit from all sources.
  • Only one account may be used per individual.

The National Down Syndrome Society has aggregated website links to the various state plans here.8

Letter of Intent (LOI)

A letter of intent is a set of instructions. Although not legally binding, it provides future caregivers the information needed to properly administer care. Information included may vary. It may be limited to medical care and financial information, or may be much more thorough with instructions describing the individual’s daily routine, for example, details describing what works and what doesn’t work for the individual while bathing or preparing for bed.

 Concluding Thoughts

There certainly is a lot to consider while planning for an individual with special needs. A few general observations that may be helpful to keep in mind throughout the planning process are:

  • Don’t wait until a crisis to act. Creating a plan now avoids needing someone to create a plan when you can’t. Without a plan, that someone whom steps into your shoes may be left guessing as to what is needed and most appropriate.
  • It can be challenging to identify and obtain available resources. Having confidence while going through this process along with being persistent and patient can go a long way.
  • Communicate your planning desires and wishes with those who are a part of the special needs individual’s life. Don’t assume the people you select to be a trustee, executor, or guardian are willing and able to perform the responsibilities that come along with those jobs.

 

Feel free to contact Brian Fischer with any questions by phone 305.448.8882 ext. 235 or email: BFischer@EK-FF.com.

 

Advocacy Groups and Other Resources 

There are numerous advocacy and charitable organizations that are focused on providing help to the special needs community. A few that may be of interest are listed below.

Early Intervention Services by State – State websites aggregated by Autism Speaks.

Resources for those with Disabilities by State – State websites aggregated by Center for Parent Information & Resources.

The Arc – The Arc promotes and protects the human rights of people with intellectual and developmental disabilities and actively supports their full inclusion and participation in the community throughout their lifetimes.9

Special Needs Alliance – The Special Needs Alliance (SNA) is a national organization composed of attorneys dedicated to the practice of disability and public benefits law. Individuals with disabilities, their families, and their advisors rely on the SNA to connect them with nearby attorneys who focus their practices in the disability law arena.10

Easterseals – For nearly 100 years, Easterseals has been the indispensable resource for people and families living with disabilities.11

Autism Speaks – Autism Speaks is dedicated to promoting solutions across the spectrum and throughout the life for the needs of individuals with autism and their families through advocacy and support, increasing understanding and acceptance of people with autism spectrum disorder, and advancing research into causes and better interventions for autism spectrum disorder and related conditions.12

Special Needs Answers – The Academy of Special Needs Planners consists of special needs planning professionals such as attorneys, financial planners, and trust officers that assists them in providing the highest quality service and advice to persons with special needs and to their families.13

Other Professionals

Find a Certified Public Accountant (CPA) – The American Institute of CPAs is the world’s largest member association representing the accounting profession, with more than 418,000 members in 143 countries and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education, and consulting.15

  1. https://www.autismspeaks.org/early-access-care/ei-state-info
  2. http://www.parentcenterhub.org/find-your-center/
  3. https://www.ssa.gov/disability/determination.htm
  4. https://www.ssa.gov/ssi/text-income-ussi.htm
  5. http://specialneedsanswers.com/
  6. https://www.specialneedsalliance.org/
  7. http://www.ablenrc.org/about/what-are-able-accounts
  8. http://www.ndss.org/ableprograms
  9. http://www.thearc.org/
  10. https://www.specialneedsalliance.org/
  11. http://www.easterseals.com/
  12. https://www.autismspeaks.org/
  13. http://specialneedsanswers.com/
  14. http://www.letsmakeaplan.org/choose-a-cfp-professional/find-a-cfp-professional?gclid=CjwKEAiA9om3BRDpzvihsdGnhTwSJAAkSewLIgB1GH95lrTy3VJcGVIZSW8HPzAjHhIrZIMoPLldXRoCt3Pw_wcB
  15. https://www.aicpa.org/ForThePublic/FindACPA/Pages/FindACPA.aspx