New Considerations for Planning with a Special Needs Trust

Special needs trusts remain a critical planning tool for individuals with disabilities, or parents with children that have disabilities. Moving into 2016, a multitude of changes are occurring within the law that require a practitioner to at least review the potential complications. These changes involve ABLE accounts, state-based entitlement programs, or even potential complications with veterans’ benefits. However, of particular concern is the revamped Social Security Administration special needs trust review process.

In 2014, the Social Security Administration (SSA) started routing all Supplemental Security Income applications that include a trust to the Regional Trust Reviewer Team. This was a response to criticism that the prior system, which simply allowed the local office to review based upon their interpretation of the Program Operations Manual System (POMS) trust guidelines, was inconsistent. As a result of the new system, unintended consequences recently started surfacing. For example, the SSA is now retroactively rejecting previously approved trusts under the redefined policy interpretations. This means special needs trusts must meet the new interpretations of the POMS trust guidelines, otherwise risk having the disabled individual disqualified from government benefits.

For those considering a special needs trust to plan for an individual with a disability or those that currently have a special needs trust, this new review process requires considering whether the redefined trust rules would disqualify the individual from receiving government benefits. If questions arise about amending a special needs trust or the process taken by a regional reviewer, an individual should consult with a trust attorney.

© 2015 Vandenack Williams LLC
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Changes to Social Security Opportunities in Budget Act

by Joshua A. Diveley

On November 2, 2015, President Obama signed the Bipartisan Budget Act of 2015 (the “Act”). Included in the Act were multiple changes that will remove strategies previously utilized to increase social security benefits available to individuals. The changes will affect individuals who will turn 62 in 2016 or later.

First, the Act removes the ability to utilize the “Claim Now, Claim More Later” strategy. Under this strategy, a spouse with lower earning history applies for worker’s benefits, and the spouse with a greater earning history, and who has retained full retirement age, files a restricted application for spousal benefits. This strategy permits the spouse with greater earnings to delay receipt of his or her own worker benefits, which causes delayed retirement credits to accumulate and creates the opportunity for significantly greater benefits at age 70. Upon reaching age 70, the spouse who has delayed benefits can then apply for his or her benefits, which will have increased due to the delayed retirement credits.

Second, the Act removes the ability to utilize the “File and Suspend” strategy. Under File and Suspend, the spouse with greater earnings applies for benefits at full retirement age and then immediately suspends receipt of benefits until age 70. This permits the spouse with lower earnings to receive spousal benefits while the spouse with higher earnings accumulates delayed retirement credits, which creates significantly greater benefits at age 70.

The changes under the Act affect individuals who will turn 62 in 2016 or later. Anybody that is 62 or older prior to December 31, 2015, may still be able to utilize the Claim Now, Claim More Later or File and Suspend strategies.

© 2015 Houghton Vandenack Williams
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To Gift or Not to Gift: A Year End Question

By Mary E. Vandenack

A long time estate planning strategy is to use the annual exclusion ($14,000 for 2015) as a method to transfer assets to heirs during life in an effort to reduce estate size and ultimate estate size. In 2015, donors have a lifetime exemption of $5.43 million. If married, each spouse has a $5.43 million exemption for a total combined exemption of $10.86 million.

For those individuals who still have estate over the lifetime exemption amount, annual exclusion gifting may still be a good idea; however, consideration should also be given to income tax consequences. When a donor transfers a gift to a beneficiary, the donee (recipient of gift) receives a transferred basis.

By way of example, consider that Donor James wants to make an annual exclusion gift to each of his three children equal to $14,000. He transfers cash to Orvis and Ollie but transfers a share of X stock to Orin. The X stock has a fair market value of $14,000 but a basis of only $1,000. As a result, the gift to Orin carries with it a tax burden of approximately $5,000, which means his net gift is really only $9,000.

At Donor James death, the share of X stock will get a step-up in basis to its fair market value of $14,000. Thus, if the stock is transferred to one of James’ children the day after death, there is no tax liability that transfers with the gift. Orin can sell the stock with no gain.

For those who are now under the estate tax exemption amounts, annual exclusion gifting during lifetime may actually result in your beneficiaries receiving less in the long-term than if the estate passes at death. For those with estate tax exposure, annual gifting remains good planning but consideration should be given to the most leveraged and tax effective approach to using annual exclusions.

© 2015 Houghton Vandenack Williams
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Priority for the Right of Distribution of Remains and Funeral Arrangements

Provisions have been adopted to the Nebraska Probate Code that clarify who has authority to make decisions regarding a decedent’s funeral or disposition of remains. Section 30-2223 provides that by affidavit or will, any person who is eighteen years of age or older may direct the location, manner, and conditions of disposition of his or her remains, as well as the arrangements for funeral goods and services to be provided upon his or her death.

In carrying out the decedent’s directions for disposition of remains or funeral services, the power is vested in any person who is designated by the decedent. If no one is designated or the person designated fails to act, the Legislature has provided a priority list for the exercise of the power. First priority is the surviving spouse, followed by the decedent’s children. If there are no children or surviving spouse, the priority goes to related parties (parents, siblings, grandparents, or the next closest relative). If none of the above are available, the guardian of the decedent, the personal representative, or other representatives will have the power.

Any person entitled to the right of disposition shall forfeit the right if it is not exercised within the earlier of three days after notification of death or four days after the decedent’s death. The right of disposition is also forfeited if the person was estranged from the decedent, as determined by a county court. There are also provisions allowing a court to handle disputes over the right of disposition and notwithstanding the priority listed above or the designation by the decedent, the court has the power to award the right to a person who the court determines to be most fit and appropriate.

For additional information see, Neb. Rev. Stat. 30-2223, available at http://nebraskalegislature.gov/laws/statutes.php?statute=30-2223.

© 2015 Houghton Vandenack Williams
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Alimony Award Greater than Monthly Income

The Nebraska Supreme Court has upheld a district court’s determination that a 95 year old man should pay $3,302.60 a month in alimony; an amount greater than his monthly income. Of note is that the wife required special nursing home care, costing substantially more than the income she received from social security and various other sources. The monthly deficient from the wife’s nursing care matched the amount her former husband was order to pay as alimony.

A trial court has substantial discretion to determine the amount of alimony due in a specific situation. The court will evaluate the duration of the marriage, the history and contributions to the marriage, and the ability of the person receiving funds to be gainfully employed. Once a trial court makes a decision, it will be difficult to have it changed by an appellate court unless the award is truly egregious or in violation of a law.

In this case, the husband sought the divorce once the wife had expensive medical needs. Although the alimony payment is greater than the husband’s monthly income, the court cited substantial agricultural property acquired by the husband prior to marriage which could be sold to pay the monthly alimony. This ruling suggests that in specific instances, a court will evaluate the total assets of the divorcing couple, including non-marital assets, when determining alimony payments. The Court’s decision could have substantial impact on couples divorcing due to irreconcilable differences and also those obtaining a divorce in an attempt to protect the assets of one spouse from being depleted for the care of the other.

© 2015 Houghton Vandenack Williams

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Supreme Court Finds Constitutional Right for Same Sex Marriage

The United States Supreme Court ruled, in a 5-4 decision, that a state does not have the right to ban gay marriage. This, in essence, means that Nebraska’s ban on gay marriage, passed in 2000, no longer is the law. The holding of the case, Obergefell et al. v. Hodges, Director, Ohio Department of Health, Et Al., 576 U. S. ____ (2015) “requires a state to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out of state.”

Central to the decision, the Supreme Court focused on the Fourteenth Amendment  due process clause and equal protection clause of the United States Constitution. Citing a long history of precedent protecting the right to marry, the Court proceeded to elaborate with four reasons on why the protection extends to same sex couples. First, the Court noted the right of personal choice is central and inherent to marriage. Second, the right to marry supports the union between two people and is therefore of the utmost importance. Third, marriage provides protection and safety for families, including children. Fourth, marriage is so set in the nations’ traditions that it must be recognized.  The Court found that the states supporting the gay marriage bans were unable to put forth a compelling reason to withhold a same sex couple’s right to marry.

In Nebraska, exactly when and how this will impact the ability for same sex individuals to marry remains unclear. County clerks have stated they will be seeking guidance from the Nebraska attorney general, as the specific case that will change the Nebraska law is still pending in the 8th Circuit Court of Appeals. However, in the short term, this may not necessarily stop county clerks from issuing marriage licenses to same sex individuals in Nebraska. Regardless of whether issuance of same sex marriage licenses begin within hours or weeks, it is now clear that banning same sex marriage is unconstitutional as determined by the Court.

© 2015 Houghton Vandenack Williams
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Probate Code Amended To Re-Allocate Costs Associated With Being Appointed To Care For a Minor

In May, the Nebraska Legislature amended the probate code to allow a court to provide reasonable fees and costs associated with being appointed to care for a minor. Legislative Bill 422 covers the fees and costs of an attorney, guardian ad litem, physician, or visitor as appointed by the court. Importantly, the payments will come from the estate of the minor or the county itself and awarded at the discretion of the court.

This law came forward as part of a Nebraska Bar Association effort and was a recommendation by the Supreme Court’s Guardianship and Conservatorship Commission. A similar provision had previously been enacted for situations when a person is incapacitated and when a person is to be protected, both situations requiring a court appointment.

The law and legislative notes may be found at the following link: http://www.nebraskalegislature.gov/bills/view_bill.php?DocumentID=24813

© 2015 Houghton Vandenack Williams

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Coordinating Beneficiary Designations with Your Estate Plan Can Help Avoid Unintended Tax Consequences

By Michael J. Weaver. A recent Tax Court case illustrates the importance of making sure beneficiary designations are consistent with your estate plan. (E. Morris, 109 TCM 1411, TC Memo. 2015-82) In this particular case, a father had listed his son as the sole beneficiary of his IRA. After his father passed away, the son was named the administrator of his father’s estate. In his capacity as administrator, the son requested a lump sum distribution of the IRA and then split the IRA among himself and two of his siblings, believing that this is how his father wanted the account handled. Son consulted with a local law firm and was advised that splitting the IRA in this manner would not subject the distributions to tax.

Unfortunately, the Tax Court held otherwise. Because the son was listed as the sole beneficiary on the IRA, requesting a lump sum distribution and then splitting the account among himself and his two siblings resulted in a taxable distribution of the entire account to the son that was includible in his gross income. The Tax Court noted that the son was not required to transmit the IRA distributions to his siblings as a trustee or a mere conduit. Despite the son’s honorable intentions in following what he believed to be his father’s wishes, his good intentions did not change the fact that the distribution was included in his gross income.

Had the beneficiary designation on the IRA been changed by their father during his life to be consistent with his wishes, i.e., if the three children were listed as equal beneficiaries of the IRA, this result could have been avoided. As such, making sure beneficiary designations are consistent with your estate plan is an important part of any planning process. Failure to do so can result in unintended tax consequences.

2015 Houghton Vandenack Williams

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Tax Basis is Important in Modern Estate Planning

By Mary E. Vandenack.  In 2012, the federal estate tax exemption increased to $5.12M adjusted for inflation ($5.43M in 2015). Such exemption applies to life gifts or death transfers. Skilled practitioners can drive a mack truck through the lifetime exemption. Thus, for most individuals, the federal estate tax can be avoided.

For estates of $5,430,000 or less ($10,860,000 for married couples), income tax planning has become significant in tax reduction. (For estates in excess of one exemption, especially if the estate is likely to grow, federal estate tax planning does remain important.)  One income tax consideration is the step-up in basis received at the date of death of the decedent.  By way of example, assume Jim Shelton purchased 1 share of Y Co. stock in 1995 for $10, that is his tax basis in the stock. If that share of Y Co. stock is now worth $5,000 and Jim sells the stock while he is alive, Jim will have capital gain of $4,990.  If instead, Jim dies, his heirs get a step up in basis to the fair market value as of the date of death. If the share of Y Co. stock is worth $5,000 on the day Jim dies, then his heirs can sell the stock the next day and have no gain.

Step-up in basis, along with many other income tax planning tools, should be considered in the modern estate plan.

© 2015 Houghton Vandenack Williams

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Report on Retirement Savings by Americans

Earlier in March, the National Institute on Retirement Security issued a report on retirement planning by Americans. Although the savings in 401(k) plans and Individual Retirement Accounts (IRA) hit $11.3 trillion dollars at the end of 2013, an all-time high, the overall news regarding retirement savings remains negative.

The report notes that nearly 45% of households with working age adults have no retirement savings in a recognized retirement vehicle, such as a 401(k) plan. For all households, even those without traditional retirement vehicles, the average retirement savings is $2,500; the number jumps to $14,500 for those near retirement. The report also finds that 62% of households with working individuals between the age of 55 and 64 have total savings of less than one year of their income.

The National Institute on Retirement Security continues to highlight the worsening condition for retirement and the need for developing retirement vehicles. In fact, the Institute stated that for all working adults between 25-64 in 2014, the retirement shortfall will be approximately $4.13 trillion dollars. The report may be found at the following link: http://www.nirsonline.org/storage/nirs/documents/RSC%202015/final_rsc_2015.pdf

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