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When a child has special needs

An overriding concern for the parents of a disabled child is likely to be the child’s care once they are no longer available to offer financial and emotional support. “Care” encompasses a broad spectrum: where the child will live, who will manage his or her financial and personal affairs, as well as who will see to special medical and treatment needs.

Selecting a guardian
Parents are the natural guardians of their children only until they reach majority (generally age 18). The fact that a child is disabled and all decisions regarding the child rest with the parents will not change the fact that upon reaching majority, he or she is presumed to be competent.
Agreements among family members will not give anyone formal authority to act on behalf of a disabled child. Thus, if a child is not self-sufficient, it may be necessary to institute formal guardianship (conservatorship) proceedings.
Parents, of course, are the natural choice to serve as legal guardians. But what about the future? In whose care should the child be left? Sensitivity and the willingness to care for the disabled child should be prime characteristics. But other factors should be considered: the ability of the person chosen to handle financial and legal matters; availability to continue as guardian for the long term; and whether or not the chosen individual can devote the time necessary to care for the child.
There are two kinds of guardians, usually referred to as guardian of the person and guardian of the estate. The former makes decisions as to where the disabled child lives and sees to medical treatment, education, vocational training and other personal matters. The latter is charged with preserving the disabled child’s assets and managing his or her financial matters. Although it is perfectly acceptable to choose one person to act in both capacities, one person may not fit the bill. Naming coguardians is a perfectly acceptable alternative.

Choices: bequests to a disabled child
When drafting their wills, parents have several options in deciding how to provide for the disabled child’s financial future.
Of course, they can choose to make a direct bequest to their child. However, this choice will most likely disqualify the disabled child from receiving government aid. This choice is, for most people, the least desirable—unless they have the wealth available to make certain that there will always be sufficient funds to care for the child without the need to resort to government assistance.
Another choice is to leave the disabled child’s portion to a sibling or other close relative with directions that the portion be used for the child’s care. This approach is viable when there are family members who are close to the disabled child and are capable and willing to use the funds that they receive for the child’s benefit. However, it must be kept in mind that such a bequest in no way obligates the family member to actually use the funds for the child. This kind of bequest establishes, at most, a moral rather than a legal obligation.

Another choice: the special needs trust
Today many parents establish what is commonly referred to as a special needs trust. When properly drafted, a special needs trust may enable parents to establish a trust that can hold an unlimited amount of assets, without these assets being considered for qualification for government programs that are based upon need.
These government programs include Supplemental Security Income (SSI) and Medicaid (sometimes called by other names in certain states). Other government-based benefits include payments for vocational rehabilitation and the provision of subsidized housing. Special needs trusts are intended to supplement, but not to replace, the basic support of the child given by government aid, which is intended to provide, generally, food, shelter and clothing.

Defining “special needs”
A special needs trust can cover a broad array of expenses, most often those that will enhance the child’s life, health and welfare. Here are just a few examples for which distributions may be made from the trust (if not otherwise covered): dental, medical and pharmaceutical expenses; therapy or rehabilitation services; wheelchairs and other special equipment; and psychological services expenses.
The expenses may be made for the disabled child’s pleasure, as well. For instance, the trust may be able to provide funds for travel (including the cost of a companion to accompany the child), summer camp, beach trips, movies and social events, a computer and sports equipment.

Keep these points in mind:
• A disabled child must be “impoverished,” a term of art under federal law. A disabled individual with as little as $2,000 in assets may be disqualified from receiving Medicaid.
• The special needs trust should be established by someone other than the disabled child and managed by a person other than the person with the disability.
• A decision will need to be made whether to establish the trust during the parents’ lifetimes or create it by the parents’ wills, to go into effect after their deaths. A major advantage of the former approach is that it allows other family members (who might not otherwise see the wisdom in making outright gifts or bequests to the disabled child) to make them to the trust.
• Another decision will be whether to make the trust revocable or irrevocable. A revocable trust provides flexibility, allowing parents to add or subtract assets. However, assets in the trust are taxable in the parents’ estates and may be exposed to creditor claims. On the other hand, an irrevocable trust makes it impossible to make changes to any of the provisions in the trust.

A few practical suggestions
Seeking the guidance of professionals with experience in financial planning for the disabled is especially important when considering a special needs trust. Matters often can become very complicated because both federal and state law will come into play.
In addition, it is often recommended that parents write a letter of intent, providing instructions concerning the care of the disabled child. The document should be as detailed as possible. Not only major concerns should be addressed, but also anything that the parents might know and others may not—even such relatively minor things such as the child’s favorite friends, foods and forms of entertainment.
Finally, a successor trustee should be named in the event that any individual originally named as trustee may no longer be able to serve. A corporate fiduciary should be considered. Such a fiduciary can provide for professional management for the assets in the trust, establishing a strategy that is best suited to the child’s needs both for the present and the long term.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

 

 

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To avoid intestacy

One tries to anticipate all possibilities when drafting a will, but sometimes that’s just not possible. Roberta Jollimore’s 1992 will named her son, Gregory, as her executor and sole heir. It also provided that if the son “has predeceased me I give all of my estate, both real and personal . . . to the Public Archives of Nova Scotia.”
Roberta live with her son, and suffered from Parkinson’s disease. In 2008, after the son failed to report to work for a week, the police were called. Gregory’s body was found near the door, a plastic bag over his head, with a note: “Please bury my beloved mother next to me. No plots purchased yet. Use funds in my account. G.J.” Roberta’s body was found in the basement, surrounded by stuffed animals with her head on a bible. She had been strangled with a man’s leather belt.
The Supreme Court of Nova Scotia ruled that Gregory had murdered his mother. The law generally prevents a murderer from inheriting from his or her victim, and with Gregory’s death he couldn’t inherit anyway. But who does?
Gregory did not predecease his mother. Arguably, that left the final clause of the will invalid. Because Gregory could not inherit, that would mean that Roberta’s property would pass to more remote relatives, perhaps siblings or cousins. A lawsuit ensued between the Public Archives of Nova Scotia and those relatives.
The Court attempted to divine Roberta’s intentions, given that she could not have anticipated her murder. The will was not ambiguous, said the Court. “If Gregory Jollimore did not receive her estate, it was to go to the Public Archives. No other parties were mentioned.” Holding to the literal language of the will, ruled the Court, “would completely ignore Roberta Jollimore’s wishes.”
The estate was awarded to the Public Archives of Nova Scotia.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

 

 

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Tax-wise land management: Conservation easements

Real property–land and the home or other structures on it–often has special significance to the family that owns it, to the surrounding community or to the ecology of the area. It may: have played a role in a historical event; provide habitat for wildlife; command a magnificent view; or offer access to recreational or educational venues. It is only natural that owners might want to preserve the unique character of their property.
Yet, real estate passing to one’s heirs is valued at its “best and highest use” for federal estate tax purposes. Even if it is open, undeveloped land, it will be taxed at the value that a residential or commercial developer would place upon it. This optimal market value of real property also may affect its assessment for local property taxes.
For these reasons, conservation-minded landowners are choosing voluntarily and permanently to reduce the value of their land. The mechanism that they employ in this process is known as a conservation easement.

Fundamentals of the easement
In legal terms an easement is a right ceded by a property owner to others for limited use of the property, permitting a shared road to pass through one’s land, for example. A conservation easement generally gives to a qualified conservation organization a guarantee that the property in question will not be developed in a way that compromises the interests promoted by the organization.
The unique nature of the property governs the type of organization that may accept the donation of a conservation easement on it. For example: If it has buildings of historical significance, or is part of a battlefield, an organization such as the National Trust for Historic Preservation may wish to enter into an agreement conserving its unique character in perpetuity. Or, an organization such as Ducks Unlimited or the Nature Conservancy may accept an easement protecting a significant wildlife habitat containing special natural attributes.
A conservation easement takes the form of a written agreement between the landowner and the conservation organizations. Easements are quite adaptable to the individual circumstances of the case. Rights that the owner wishes to retain can be written into the agreement–even the right to subdivide, build an additional structure, retain timber, mineral or hunting rights, etc.

Tax issues
An easement is regarded as a charitable donation–the value of the donation being equal to the loss of value of the affected property. This can run from less than 20% to more than 90% of the property’s unencumbered value. Naturally, the more rights retained by the landowner, the lower will be the value of the easement.
The donation is deductible from income taxes up to a limit of 30% of adjusted gross income (AGI). In certain instances, an easement also may reduce the property value in the eyes of local tax assessors, resulting in savings on property tax. Potentially, the biggest advantage of conservation easements involves the estate tax. Easements often are cited as being responsible for keeping in the family valued property that might otherwise have to be sold to pay estate tax.

Additional considerations
In practice, the agreement for an easement must spell out carefully the rights that are being ceded, and those that are being retained, and must be binding on both parties. For this purpose the assistance of an attorney specializing in real estate matters is essential. There must be something special or unusual about the land that you are protecting, although a great variety of properties, large and small, can be found to qualify. The agreement must be with a legitimate charity or government agency. In order to substantiate a tax deduction, the value assigned to the easement must be supported by a qualified appraisal. Often a cash donation accompanies the grant of an easement in order to help the grantee organization maintain the rights ceded to it.
An easement is generally not appropriate when a quick sale is contemplated. The tax benefits notwithstanding, most people who grant conservation easements have a genuine interest in preserving the environment. Although an easement is regarded as reducing the market value of the property on which it is granted, the reverse is sometimes the case. Certain buyers, it seems, actually are willing to pay more for conserved land.
In short, a conservation easement can be a key part of a family’s financial and estate planning. Consult your advisors for more information.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

 

 

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Succession planning for art and collectibles

Most people are collectors of some kind. Some own art that has been passed down through generations, and their collections may be worth millions of dollars. Others start collections based upon their special interests—as common as coins and stamps or as unusual as musical wind-up toys and fishing lures.
What all collections have in common is value, either in dollars or in the simple pleasure that having the objects brings. In either case, developing what is sometimes referred to as an art succession plan is an important element of a collector’s overall estate planning.
The goal of an art succession plan is to preserve and distribute the collection to heirs with the least possible turmoil and expense. Here are a few suggestions offered by collectors and art succession professionals.

Keep a comprehensive list of the items in the collection
A collector always should maintain a complete and up-to-date inventory of the items in his or her collection.
Along with the inventory, a collector should record all purchase and sale transactions. If available, authentication documents and the provenances (origins or sources of the collectibles and histories of subsequent owners) should be included. If the collection is small, a simple computer spreadsheet might suffice. Specially designed software is available for larger, more complex collections.

Know the collection’s value
The general rule for federal estate, gift and income taxes is that property is transferred at its “fair market value.” When dealing with publicly traded securities, that’s easy enough to determine. For collectibles of any significant worth, an appraisal or valuation of each item in the collection from a qualified professional, one who will meet the standards set by the IRS, may be needed.
When a collector or his or her estate seeks a tax deduction for the transfer to charity of items in the collection, the IRS requires a “qualified appraisal” for property valued at over $5,000, and when the value claimed is over $20,000, the appraisal must be submitted to IRS along with the proper tax form. An IRS Art Advisory Panel reviews appraisals reported on income, gift and estate tax returns to determine their accuracy when the collection or work of art is valued at over $50,000.
When looking for an appraiser, most professionals suggest choosing a member of either the American Society of Appraisers, the Appraisers Association of America or the International Society of Appraisers.

Plan now, not later
Michael Mendelsohn, a principal at Briddge Art Strategies, Ltd., an art succession planning firm, is the author of Life Is Short, Art Is Long—Maximizing Estate Planning Strategies for Collectors of Art, Antiques and Collectibles and recognized by Arts and Antiques magazine as one of the top 100 collectors in the U.S. He has seen at firsthand what can happen when a collector fails to plan adequately for a valuable collection. The following is a short summary of a situation that he related to Registered Rep., a publication for investment professionals:
Collector had amassed a substantial collection of sports cars. Although he had done some general estate planning, it did not include the collection. Succession planning did begin when Collector decided that the cars should be put on display. He met with Mendelsohn and his financial advisors. A plan was put in place hastily. A private museum would be set up to house and preserve the cars. Collector would purchase a life insurance policy on his and his wife’s lives. After they died, part of the proceeds would be used to fund the museum; museum profits would go to a charity for terminally ill children; and the balance would provide income for Collector’s children.
Unfortunately, a few months before the plan was completed, Collector died.
The collection passed to his wife and children. With no completed succession plan and a limited time to pay a hefty federal estate tax on the value of the cars, the wife and children began auctioning off the cars and arguing over who would get what. The unfortunate and unnecessary result was that a cherished collection was dismantled; a charity lost a significant gift; and Collector’s heirs were hit with a large tax bill.

Consider charitable gifts
When philanthropy is one of the goals of an art succession plan, a collector can reap a number of tax rewards. For one, the 28% long-term capital gain tax rate on the appreciation in value of a collectible is avoided when it is donated to charity rather than sold. The collector is entitled to an income tax deduction for the gift as well (subject to certain caps). And, because the collection is no longer part of the collector’s estate, there’s no tax bill looming in the future.
When a collector wants to make a charitable gift and still provide for his or her family, a charitable remainder trust may be a good solution. The collectibles transferred to the trust can be sold free of capital gains tax, and the income from the reinvested proceeds can be paid to the collector or designated beneficiaries for life. The collector receives a partial income tax deduction for the donation (the amount that represents the value of the gift to the charity).
If the collector still is concerned about smaller bequests to his or her heirs as a result of the charitable gift, another trust can be established. This trust purchases a life insurance policy on the collector’s life, often equal to the value of the collectibles that were transferred to the charitable remainder trust. After the collector’s death, heirs can receive the proceeds from the insurance free of both income tax and estate tax (as long as the collector lives at least three years after the trust was created). Of course, this approach comes at a price: the cost of insurance premiums on the policy.

Communicate
Finally, experts recommend strongly that a collector take into consideration what family members have to say. Are they interested in keeping the collection intact? Do any of them want specific pieces in the collection for themselves, or do they prefer to receive the proceeds from sale of the collection? The answers may have a major bearing on the ultimate shape that a succession plan takes.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.