Revocable Living Trust

woman-board-meeting-300When selecting an individual to serve as successor trustee of a trust, they often wonder if they are making the right choice. Generally, the individual making the trust serves as trustee for so long as they are capable or alive. Choosing who to serve as trustee in the event the individual becomes disabled or dies can be extremely difficult since the person that you select needs to be responsible and trustworthy.

For the most party anyone can serve as a trustee. In addition to family and friends you can select a professional trust company to administer your trust when you no longer have the ability to do so. Many banks have trust departments that provide trustee services. Attorneys and accountants frequently will agree to serve as trustee of their clients' trusts.

Parents will frequently select their children to serve as trustee by default. For individuals with one child, that decision seems like a no-brainer - "John's going to receive our entire estate so why not name him trustee?" This seems logical and oftentimes it is the right decision.

For parents with multiple children the decision becomes more complicated - "if we choose Suzy will John think that we are playing favorites?" The selection of a trustee becomes more difficult when you have blended families or parents that are divorced. I can't tell you the number of divorced clients that ask me if their ex-spouse will have access to the client's money if they pass away before their children reach 18. Without a properly drafted will or trust, the answer is probably.

The trustee owes the beneficiaries of your trust the fiduciary duty to act impartial and for the benefit of all of the beneficiaries of your trust. Selecting an individual that can fulfill this duty and many other fiduciary duties is difficult. In selecting a trustee, a number of factors should be considered. Below is a short list of the general factors that I ask people to consider in selecting a trustee:

1. Do you trust the person you are naming trustee?

If you answer no, or you hesitate, then the person probably isn't a good choice to serve as trustee. If your son has a gambling problem you may want to avoid naming him trustee. Most trusts name the same person to serve as successor trustee following your death and if you become incapacitated during your lifetime. In addition to squandering away his inheritance he may waste your estate away during your lifetime if you become incapacitated.

2. Do the trustee and beneficiaries get along?

Although death can bring families together, it can tear families apart too. If you have two children that are at each other's throats during your lives, or don't talk to each other at all, it's generally a bad idea to name them as co-trustees. In general, serving as co-trustees will not bring your children together.

Additionally, naming one sibling trustee over the other will further resentment and create conflict between the trustee-sibling and the beneficiary-sibling. Conflict equals attorney fees after your death.

Many parents want to name their children as co-trustees since they get along great and the parents can't imagine their children fighting over money. Although children can serve as co-trustees, you need to realize, and think about, the fact that the great relationship that your kids had during your life can deteriorate quickly when money is involved. For example, your daughter thinks that you should be buried in the family plot - an expensive endeavor. Your son wants you to become a member of the Neptune Society because the expensive burial will eat away his inheritance. These fights over money can destroy any goodwill built up during your lifetime.

3. Do you have children from multiple relationships?

The successor trustee in these situations needs to have a solid relationship with the stepchildren or half brothers and sisters. Will the trustee play favorites or make decisions that tend to impact your children versus your stepchildren? Couples that have children from previous marriages will attempt to resolve this issue by naming a child from each relationship as co-trustees. Essentially, the couple hopes that each child will represent the interest of the child's siblings.

This is not always the case and a couple in this situation should consider naming a professional trustee to eliminate issues of favoritism and bias.

4. Is your estate plan complex?

A complex trust that has many sub-trusts set up for the various beneficiaries can be confusing for a lay person to manage. Each trust may require the trustee to make different decisions concerning asset investment and distribution such that keeping track of those standards can be confusing and overly burdensome.

You may establish a supplemental needs trust for one of your children, a spendthrift trust for another and then minor beneficiary trusts for your grandchildren. The trustee will need to manage the assets in these trusts by applying different investment strategies and distinct distribution schemes.

5. What is the value of your overall estate?

The value of your estate is important since some professional trust companies and banks will only serve as trustee for larger estates ($1.0 million in assets) but there are some that will serve as trustee for smaller estates.

Depending on the family dynamics and the complexities associated with your trust, a smaller estate may need a professional trustee to ensure that the trust assets are properly managed and distributed. If the estate's not large enough for a bank or trust company to serve as trustee, an attorney, CPA or financial planner may be willing to step in and serve as trustee to ensure the trust is managed by a neutral third party.

These are just some of the factors that you want to consider in selecting a trustee. Unfortunately you will never know if you made the correct decision until it's too late.

© 1/17/2014 Kevin J. Tillson of Hunt & Associates, P.C. All rights reserved.

Kevin J. Tillson is a Shareholder and Associate Attorney with the law firm Hunt & Associates, PC in Portland, Oregon. He is licensed in Oregon and Washington and maintains a general practice including estate planning, business law, real estate law, family law, misdemeanor criminal defense and personal injury. For additional information, please check out the company's website:

tax-savings-300For US persons, an irrevocable life insurance trust (ILIT) is arguably the most efficient structure for integrating tax-free investment growth, wealth transfer and asset protection. An ILIT comprises two main parts: (1) an irrevocable trust; and (2) a life insurance policy owned by the trust. An international (or offshore) ILIT is a trust governed by the law of a foreign jurisdiction that owns foreign-based life insurance. An offshore ILIT is better than a domestic ILIT because it is more flexible and less expensive. Regarding US tax laws, a properly designed international ILIT is treated virtually the same as a domestic ILIT.

An ILIT becomes a dynasty trust (or GST trust) when the trust's settlor (or grantor, the person who establishes and funds the trust) applies his lifetime exemption for the generation skipping transfer tax (GSTT) to trust contributions. Once a dynasty trust is properly funded by applying the settlor's lifetime exemptions for gift, estate and GST taxes, all distributions to beneficiaries will be free of gift and estate taxes for the duration of the trust, even perpetually. The individual unified gift and estate tax exemption and the GSTT exemption are both $5 million ($10 million for a married couple) during 2011 and 2012, which are the highest amounts in decades.

Under the US tax code, no income or capital gains taxes are due on life insurance investment growth, and no income tax is due when policy proceeds are paid to an insurance beneficiary upon death of the insured. When a dynasty trust purchases and owns the life insurance policy and is named as the insurance beneficiary, no estate tax or generation skipping transfer taxes are due. In other words, assets can grow and be enjoyed by trust beneficiaries completely tax-free forever. Depending on how a trust is designed, a portion of trust assets can be invested in a new life insurance policy each generation to continue the cycle.

Private placement life insurance (PPLI) is privately negotiated between an insurance carrier and the insurance purchaser (e.g., a dynasty ILIT). Private placement life insurance is also known as variable universal life insurance. The policy funds are invested in a separately managed account, separate from the general funds of the insurance company, and may include stocks, hedge funds, and other high-growth and/or tax-inefficient investment vehicles. Offshore (foreign) private placement life insurance has several advantages over domestic life insurance. In-kind premium payments (e.g., stock shares) are allowed, whereas domestic policies require cash. There are few restrictions on policy investments, while state regulations restrict a domestic policy's investments. The minimum premium commitment of foreign policies typically is US$1 million. Domestic carriers demand a minimum commitment of $5 million to $20 million. Also, offshore carriers allow policy investments to be managed by an independent investment advisor suggested by the policy owner. Finally, offshore policy costs are lower than domestic costs. An election under IRC § 953(d) by a foreign insurance carrier avoids imposition of US withholding tax on insurance policy income and gains.

Whether domestic or offshore, PPLI must satisfy the definition of life insurance according to IRC § 7702 to qualify for the tax benefits. Also, key investment control (IRC § 817(g)) and diversification (IRC § 851(b)) rules must be observed. When policy premiums are paid in over four or five years as provided in IRC § 7702A(b), the policy is a non-MEC policy from which policy loans can be made. If policy loans are not important during the term of the policy, then a single up-front premium payment into a MEC policy is preferable because of tax-free compounding.

An offshore ILIT provides much greater protection of trust assets against creditors of both settlor and beneficiaries. Courts in the US have no jurisdiction outside of the US, and enforcement of US court judgments against offshore trust assets is virtually impossible. Although all offshore jurisdictions have laws against fraudulent transfers, they are more limited than in the United States. In any case, an offshore ILIT is necessary to purchase offshore life insurance because foreign life insurance companies are not allowed to market and sell policies directly to US residents. An international trust, however, is a non-resident and is eligible to purchase life insurance from an offshore insurance carrier.

An international ILIT may be self-settled, that is, the settlor of the trust may be a beneficiary without exposing trust assets to the settlor's creditors. In contrast, in the United States, the general rule is that self-settled trusts are not honored for asset protection purposes.

In Private Letter Ruling (PLR) 200944002, the IRS ruled that assets in a discretionary asset protection trust were not includable in the grantor's (settlor's) gross estate even though the grantor was a beneficiary of the trust. The trustee of a discretionary trust uses his discretion in making distributions to beneficiaries consistent with trust provisions. Previously, it was questionable whether a settlor could be beneficiary of an ILIT without jeopardizing favorable tax treatment upon his death. The new ruling gives some assurance to a US taxpayer who wants to be a beneficiary of a self-settled, irrevocable, discretionary asset-protection trust that is not subject to estate and GST tax. As a result, the trustee can (at the trustee's discretion) withdraw principal from the PPLI or take a tax-free loan from the policy's cash value and distribute it tax-free to the settlor, as well as to other beneficiaries. In other words, a settlor need not sacrifice all enjoyment of ILIT benefits in order to achieve preferred tax treatment.

An offshore ILIT is designed to qualify under IRS rules as a domestic trust during normal times and as a foreign trust in case of domestic legal threats to its assets. The offshore ILIT is formally governed by the laws of a foreign jurisdiction and has at least one resident foreign trustee there. As a "domestic" trust under IRS rules, the trust also has a domestic trustee who controls the trust during normal times. If a domestic legal threat arises, control of the trust shifts to the foreign trustee, outside the jurisdiction of US courts, and the trust becomes a "foreign" trust for tax purposes. A domestic trust "protector" having negative (or veto) powers may be appointed to provide limited control over trustee decisions. An international ILIT protects trust assets against unforeseen lawsuits, bankruptcy and divorce.

The objective of PPLI is to minimize life insurance costs and to maximize investment growth. The life insurance policy acts as a "wrapper" around investments so that they qualify for favorable tax treatment. Nevertheless, PPLI still provides a valuable life insurance benefit in case of an unexpected early death of the insured.

Initial costs of setting up an ILIT are high, but are recouped after a few years of tax-free investment growth. Initial legal and accounting fees are typically in a range of $25,000 to $50,000. Premium "loading" charges are in a range of about 3% to 5% of premiums paid into offshore PPLI (compared to 8 - 10% in domestic PPLI). Annually recurring charges depend on policy value and vary widely among PPLI carriers, so careful comparison shopping is advised. For example, annual asset charges should be in a range of about 40 to 150 basis points (0.4% to 1.5%) of the policy's cash value. The annual cost of insurance is not substantial and declines over time. Annual costs for maintaining an offshore trust are several thousand dollars. Finally, investment manager fees are paid regularly out of policy funds.

Cash may be contributed to the ILIT, which then purchases PPLI. If asset protection of vulnerable fixed assets in the US is a concern, then equity stripping can be used to generate cash, which is then contributed to the offshore ILIT. Of course, stocks and bonds and other assets may also be contributed to the ILIT and used for investing in PPLI. Various value-freezing and valuation discounting techniques can be used to leverage the GSTT exemption.

An offshore "frozen cash value" policy is a variation of PPLI governed by IRC § 7702(g). The minimum premium commitment is about $250,000. During the life of the insured, the cash surrender value is fixed at the sum of the premiums paid. Withdrawals up to the amount of the paid-in premiums are tax-free, but cash value in excess of the premium amounts is inaccessible until after death of the insured.

Another alternative investment for an ILIT is a deferred variable annuity (DVA). There is no cost of insurance, so investment growth is faster. Tax on appreciation is deferred, but DVA distributions are taxed as income.

Generally, for public policy reasons and because the insurance industry possesses strong political influence, life insurance has long enjoyed favorable tax treatment. Over the past two decades, numerous IRS rulings have clarified the tax treatment of PPLI and irrevocable discretionary trusts. At the same time, strong, new asset protection laws and reliable service providers in numerous foreign jurisdictions have enabled safe, efficient and flexible management of international trusts and insurance products. As a result, an international irrevocable, discretionary trust owning PPLI can provide tax-free growth of a global, variable investment portfolio managed by a trusted financial adviser in full compliance with US tax laws. At the discretion of the trustee, trust assets (including tax-free insurance policy loans and withdrawals) are available to the settlor during his lifetime. Upon death of the insured, policy proceeds are paid tax-free to the trust. Thus, a well-managed life insurance dynasty trust perpetually secures the financial well being of settlor, spouse, children and their descendants.

Warning & Disclaimer: This is not legal advice.

Copyright 2011 - Thomas Swenson

Thomas Swenson practices law in the areas of asset protection, business planning and intellectual property.

Among his specialties are the design and implementation of offshore dynasty trusts holding private placement life insurance (PPLI). In full compliance with U.S. tax laws, an irrevocable, discretionary, offshore PPLI dynasty trust provides a life insurance benefit, tax-free investment growth, asset protection against all creditors, financial security, and perpetual tax-free enjoyment of trust assets by beneficiaries.

He also provides counseling and services to US business owners regarding captive insurance companies, which reduce taxes, build wealth and improve business insurance protection.


dove-of-peaceThe term "QDOT" is an acronym for "Qualified Domestic Trust."  Some people prefer to use the acronym "QDT," but we'll refer to this type of trust as a QDOT.  Qualified Domestic Trusts were created under the Technical & Miscellaneous Revenue Act of 1988 (TAMRA), effective for decedents dying after November 10, 1988.  Prior to TAMRA, the unlimited marital deduction was not allowed when property passed to a surviving spouse who was not a United States citizen.  The creation of QDOTs was designed to provide a mechanism whereby property could pass to a non-U.S. citizen spouse and still qualify for the unlimited marital deduction. 

That's what QDOTs are all about.  Now, let's take a closer look at the requirements for a QDOT  and some of the reasons for these requirements.

Historically, the transfer of property from one spouse to another has not been subject to either a gift tax or an estate tax.  The reason is simply because most married couples depend upon their combined assets for their financial security.  If a gift or estate tax is levied every time one spouse transfers property to the other, their combined assets would be seriously depleted in short order and their financial security may well be placed in jeopardy.  And, that is particularly true when one of the spouses dies.  Remember, the gift and estate tax rates can be as high as 45% of the value of the property transferred.

Think of a married couple as one economic unit.  As long as property remains within that economic unit, the federal government keeps its hands off the property.  Married couples can transfer property from one spouse to the other as often as they'd like, either during lifetime or upon death.  It is only when property is transferred outside the economic unit (i.e., to someone other than the surviving spouse) that the federal government puts its hand out.

That's not to say that the federal government exempts inter-spousal transfers from the gift and estate tax.  On the contrary, it subjects these transfers to the gift and estate tax, but then gives a corresponding deduction equal to the full value of the property transferred.  This deduction is called a marital deduction because it only applies to transfers from one spouse to another.  Furthermore, it is called an "unlimited marital deduction" because there is no limit on the amount of property that qualifies for the marital deduction.  The use of an unlimited marital deduction, rather than an outright exemption, effectively defers the tax until the death of the surviving spouse. 

Keep in mind that the federal government is not as benevolent as you might think.  Although it is willing to defer the estate tax until the death of the surviving spouse, it is not willing to forgive the tax entirely.  In fact, the federal government won't even allow the tax to be deferred upon the first spouse's death unless there is a reasonable certainty that the property will be subject to tax upon the surviving spouse's death. 

How does the federal government determine whether there is a reasonable certainty that the property will be subject to tax upon the surviving spouse's death?  It does so by imposing a three-prong test at the time of the first spouse's death.  If all three-prongs are satisfied, then property passing to the surviving spouse qualifies for the unlimited marital deduction.  The three-prongs of this test are: (1) that the property is being transferred to a bona fide spouse of the decedent; (2) that the spouse of the decedent is a U.S. citizen; and, (3) that the spouse of the decedent is not given a terminable interest in the property.

If all three-prongs of the test are met, then the unlimited marital deduction applies and the estate tax is deferred until the death of the surviving spouse.  It is important to note that there is no requirement that the surviving spouse actually keep the property until he or she dies.  In fact, it's entirely feasible that some or all of the property will be consumed by the surviving spouse during his or her lifetime.  That is the whole idea behind the so-called "economic unit" theory that drives the unlimited marital deduction in the first place.

Now, let's take a closer look at this three-prong test to qualify for the unlimited marital deduction.  The first prong requires that the property be transferred to a bona fide spouse.  Historically, only valid marital relationships between a man and a woman were considered worthy of protection against a potentially devastating gift or estate tax.  Today, those historic beliefs have come under attack and at least six states have now authorized same-sex marriages.  Presumably, same-sex marriages will be tested soon against the "bona fide" spouse requirement for the unlimited marital deduction. That, however, is the subject of another day.

The second prong requires the surviving spouse to receive the entire rights to the property transferred.  In other words, the property given to the surviving spouse must not be terminable.  Generally speaking, a terminable interest is akin to having certain strings attached to the property, which makes it doubtful that the property will be taxed in the surviving spouse's estate.   For example, if the surviving spouse is given a life use of the property and cannot designate who will receive the property upon his or her death, then that property is deemed to be terminable interest property.  As such, it would not be subject to tax in the surviving spouse's estate and, therefore, it does not qualify for the unlimited marital deduction.  There is, however, an exception for terminable interest property placed in a "Qualified Terminable Interest Property Trust," or "QTIP Trust," Again, however, that is the subject of another day. 

The third prong of the test requires that the surviving spouse be a U.S. citizen.  Again, the federal government wants to be reasonably certain that the property will be taxed in the surviving spouse's estate.  If the surviving spouse isn't a U.S. citizen at the time of the first spouse's death, then there is a good possibility that the estate tax will not be collected when the surviving subsequently dies, simply because the federal government doesn't have the power or authority to tax property owned by a non-resident, non-U.S. citizen, unless the property is physically located in the United States.  So, if a U.S. citizen dies and leaves all of his property to his wife who is a not a U.S. citizen, then there is nothing to stop the surviving wife from returning to her native country and taking all the property with her.  In that case, none of the property would be subject to tax by the federal government when she subsequently dies.  To prevent this from happening, the unlimited marital deduction is denied for any property given to a surviving spouse who isn't a U.S. citizen.

While the citizenship requirement is easy to justify, it's application can be very harsh - especially for those who have resided in the United States for years and years without obtaining citizenship, but with no intention of ever returning to their native country.  For this reason, the federal government created an alternative way to qualify for the unlimited marital deduction when property is given to a non-U.S. citizen spouse.  The alternative is to transfer the property to a Qualified Domestic Trust (QDOT) instead of giving it directly to the surviving spouse.

In order to qualify as a Qualified Domestic Trust (QDOT), the federal government imposes the following requirements:

A. At least one trustee must be a U.S. citizen or a U.S. bank.  If the Qualified Domestic Trust (QDOT) holds more than $2 million dollars in cash or property, the trustee must be a U.S. bank.
B. The executor of the decedent's estate must make an irrevocable Qualified Domestic Trust (QDOT) election to qualify for the marital deduction on the federal estate tax return within 9 months from the date of death.
C. If the Qualified Domestic Trust (QDOT) has assets equal to or less than $2,000,000, then no more than 35% of the value can be in real property outside of the United States or else:
  1. The U.S. trustee must be a bank,
  2. The individual U.S. trustee must furnish a bond for 65% of the value of the QDOT assets at the transferor’s demise, or
  3. The individual U.S. trustee must furnish an irrevocable letter of credit to the U.S. government for 65% of the value.
D. If the Qualified Domestic Trust (QDOT) has assets exceeding $2,000,000 either:
  1. The U.S. trustee must be a bank,
  2. The individual U.S. trustee must furnish a bond for 65% of the value of the QDOT assets at the transferor’s demise, or
  3. The individual U.S. trustee must furnish an irrevocable letter of credit to the U.S. government for 65% of the value.

In addition to the above requirements, any distributions of principal to the surviving spouse will be subject to estate taxes, and the trustee is required to withhold funds equal to the tax. However, exceptions are made for principal distributions for the health, education or support of the surviving spouse or a child or other person whom the spouse is legally obligated to support, as long as substantial financial need exists. 

Any property that the deceased spouse transfers to the surviving spouse outside of the Qualified Domestic Trust (QDOT) (i.e., directly as a result of jointly-owned property, or through a will or some other means) may be transferred to the QDOT without being subject to the estate tax if the property is transferred prior to the estate tax return's due date.

If the deceased spouse's will does not provide for a QDOT, the executor or the surviving spouse may elect to establish a QDOT and transfer the assets to the trust before the date on which the tax return is due.

It should be noted, however, that the best way to insure the availability of the marital deduction is to have the non-U.S. citizen spouse establish citizenship beforehand.  If that is not possible, then the U.S. citizen spouse should take the necessary steps to insure that a Qualified Domestic Trust (QDOT) is established in his or her will and/or living trust so that the QDOT is established automatically upon his or her death.




numbers-financial-325The unified, lifetime federal gift and estate tax exemption in calendar year 2012 is set at $5.12 million. The federal lifetime exemption for the generation-skipping transfer tax (GSTT) is also $5.12 million in 2012. These are the highest exemption amounts in decades. In 2013, these exemptions are scheduled to go back down to $1 million, and the maximum estate and GST tax rates will increase from 35 percent to 55 percent.

Calendar year 2012 might be the last opportunity for individual United States taxpayers to move millions of dollars into an irrevocable dynasty trust without incurring punitive gift taxes, and to ensure that future generations of trust beneficiaries receive benefits free of GST taxes. Given current and projected political and fiscal conditions, exemptions for the gift tax and GSTT will probably not be this favorable again for a long time.

An irrevocable trust can be funded with cash, real estate, stocks, bonds, hedge fund interests and virtually any other type of valuable asset. An irrevocable trust can own (and manage) any type of property, including a family business, life insurance and variable annuity policies, and other investment vehicles. When an individual trust grantor (settlor) donates particular property to an irrevocable trust, he gives up formal control over the property. In return, the grantor is able to dictate to a large extent how the trust assets are managed and used, now and in the future, to accomplish his immediate and long-term goals. In other words, the grantor surrenders some degree of control during his lifetime in return for a large degree of future control. Further, assets in the trust are protected against personal creditors of both grantor and beneficiaries.

Finally, an irrevocable trust funded with assets to which gift tax and GST tax exemptions have been allocated allows an individual to build a legacy that passes to his children and future generations to enjoy, maintain and enhance. The unfortunate but inevitable alternative for assets outside of a trust is to be eviscerated by punitive and predatory estate taxes, which force descendents to cannibalize the family business or other legacy at each generation and to pay taxes over and over again.

Not all assets are well-suited for donating to an irrevocable trust. For example, a personal residence owned by a trust but inhabited by the grantor might be viewed by tax authorities as an incompleted gift and, therefore, still within the grantor's estate. On the other hand, home equity could be turned into cash, which could then be gifted to an irrevocable trust.

Of course, estate and GST taxes can be avoided using other useful techniques. For example, interests in a family limited partnership (FLP) or family limited liability company (FLLC) can be transferred to succeeding generations by simply gifting the assets to family members. Valuation discounting of family business interests can lower exposure to gift taxes. Under circumstances, a personal residence can be efficiently transferred using a qualified personal residence trust (QPRT). These other techniques, however, do not offer the asset protection and long-term wealth preservation and management possible with an irrevocable dynasty trust.

In view of the uncertainty in tax laws and of the erratic nature of lawmakers in the United States, any individual having assets totaling more than $1 million should fund an irrevocable dynasty trust in 2012 to take advantage of the current $5 million gift and GST tax exemptions. Even individuals having $1 million or less should consider placing high-growth assets in a dynasty trust, where they can grow insulated against creditors and against future estate taxes.

Warning & Disclaimer: This is not legal advice.

Copyright 2011 - Thomas Swenson

Thomas Swenson practices law in the areas of asset protection, business planning and intellectual property.

Among his specialties are the design and implementation of offshore dynasty trusts holding private placement life insurance (PPLI). In full compliance with U.S. tax laws, an irrevocable, discretionary, offshore PPLI dynasty trust provides a life insurance benefit, tax-free investment growth, asset protection against all creditors, financial security, and perpetual tax-free enjoyment of trust assets by beneficiaries.


mother-with-disabled-son-325Many people in the United States are currently considered disabled as defined by Social Security. Their disability may entitle them to receive various benefits that are provided by the federal and state government. Some of these benefits, such as supplemental security income, Food Stamps, housing or fuel assistance, may only be available to the disabled person if he or she meets eligibility requirements that require the disabled person to have income or assets less than a certain amount. Should a disabled person receive an inheritance outright, the inheritance almost always causes the asset limit to be exceeded and benefits to be lost. Fortunately, with proper planning it is possible to leave an inheritance to a disabled person and not disrupt their benefits in any way.

Often, a parent or family member of a disabled person will choose to leave the disabled person’s inheritance to another family member, who is then expected to provide for the disabled individual. This plan may work if the family member carries out their obligation as anticipated, but this plan in no way guarantees that the disabled person will receive the benefit of the assets left with the other family member. As such, the best plan includes a Special Needs Trust, which is designed to benefit the disabled person and simultaneously prevent the disabled person from losing any available governmental benefits.

A Special Needs Trust should become the primary vehicle for providing for the needs of the disabled person to the extent that those needs are not otherwise provided for by public benefits or any other source. Thus, the funds held in a Special Needs Trust are typically used to provide for additional quality of life. For example, the trustee of a Special Needs Trust may make distributions to provide household furnishings and repairs, educational opportunities, travel (with a companion, if needed), professional services, non-food grocery items, pet supplies, recreational activities, a modest automobile and operating expenses for the automobile, holiday decorations and events, and the like. In addition, in the event that governmental benefits are ever diminished, trust assets would still be available for the benefit of the disabled person. Upon the death of the disabled individual, any assets remaining in the Special Needs Trust would be distributed in accordance with your wishes as stated in the trust.

Should you choose to leave an inheritance outright to a disabled person, the disabled person may also have the ability to create a Special Needs Trust or to have one created for their benefit. 

Nonetheless, the disabled person may lose benefits while the Special Needs Trust is being created. In addition, upon the death of the disabled person, any Medicaid benefits paid on behalf of the disabled person will first need to be repaid to the Commonwealth before any distribution can be made to any other family member. As such, it is clear that the best plan includes a Special Needs Trust created by you as opposed to a Special Needs Trust created by, or for the benefit of, your intended beneficiary.

In addition to establishing a Special Needs Trust, if the disabled person is your child, it may be important to establish a Care Plan. Such a plan provides the guardian and trustee with knowledge of the child’s needs. This plan should be updated every year, and a copy should be kept with the Special Needs Trust. A Care Plan typically sets forth educational, social, financial and other information relative to the daily needs and abilities of the child. This information should be helpful to the trustee and guardian when determining the best interests of your child. Also, a Care Plan may detail your wishes for the future as your disabled child continues to age. © 2010 Gina M. Barry, Bacon Wilson, P.C. 2 Planning to ensure that a disabled family member does not lose governmental benefits as a result of your generosity has never been easier. If you intend to leave an inheritance to a disabled beneficiary, you should ensure that your plan includes a Special Needs Trust for their benefit. Otherwise, the benefit that you intend to leave may come with an unintended burden because special needs require special planning.

Gina M. Barry is a Partner with the law firm of Bacon Wilson, P.C., Attorneys at Law. She is a member of the National Association of Elder Law Attorneys, the Estate Planning Council, and the Western Massachusetts Elder Care Professionals Association. She concentrates her practice in the areas of Estate and Asset Protection Planning, Probate Administration and Litigation, Guardianships, Conservator-ships and Residential Real Estate. Gina may be reached at (413) 781-0560 or This email address is being protected from spambots. You need JavaScript enabled to view it..