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SUCCESS STORY OF THE MONTH

Husband and wife (“clients”) have 2 adult children.  Once child is disabled and the other is a spendthrift (money is spent as soon as it is received).  The disabled child is on Medicaid and lives in a facility where the drug costs and the great majority of the care costs are paid by the government as a result of means-tested Medicaid eligibility (since the disabled child is single, he can only have $2000 in addition to an income limitations).   One-half (1/2) of the assets of clients are retirement accounts owned by the husband.

Goals of the client:

  1. Disabled child does not lose Medicaid 
  2. Protect the spendthrift child from creditors and spending habits
  3. Stretch the retirement account distributions for as long as possible

As noted in prior issues of the Texas Elder Law E-Letter, the Secure Act became effective this year whereby there are only 5 exceptions to the rule that permit a lifetime “stretch” of retirement funds (although laws could always change).  Those who did not fit within an exception are required to take distributions from the retirement account inherited within 10 years following the year of death.  In other words, the government wants you to save for retirement, but it does not want to make your kids wealthy by deferring income taxation.  Two (2) exceptions permitting the stretch that are applicable in this fact situation are a surviving spouse and a disabled beneficiary. 

An additional long-term care Medicaid ruling in August 2020 that treated an inherited IRA as a countable resource (contrary to the state’s announcement in 2019) effected the planning strategy.

The Plan by their Wills:

  1. Although the married couple want everything to go to each other first, the husband’s retirement account would first designate a spousal trust (inside the will) just for his retirement accounts.  The spousal trust could limit the IRA distribution to the minimum required amount as required by law.  Since a surviving spouse is one of the exceptions for the stretch, then with appropriate language (normally a trust as a beneficiary could result in immediate taxation) , there could be continued tax deferred growth if wife survives the husband.  The trust could also provide protection if there was a possibility of remarriage.  If the spouse did not want that protection, the spouse would be named individually as the secondary beneficiary of the retirement account.  The trustee of the spousal retirement trust could then disclaim so that the retirement account could go to spouse individually as there would be a spousal rollover.
  2. Since a disabled child is another exception permitting a stretch of retirement account funds over life expectancy of the disabled child, it was decided all retirement account assets would go for the benefit of the disabled child in a special needs trust after the wife dies.  Additionally, since the disabled child cannot individually handle funds plus the recent long-term care Medicaid determination that an inherited IRA counts as a resource,  it became paramount that retirement account name the trustee of the special needs trust for the benefit of the disabled child  as the next contingent beneficiary. The retirement account held by the special needs trust would not count as a resource (assuming properly drafted) and distributions could be stretched over the disabled child’s  lifetime likely resulting in a much larger asset assuming the disabled child lived longer than the required distributions if the child was not disabled  -presently  10 years following the death of the parent who would be the owner of the retirement account.   That left one more issue so that Medicaid would not be lost.  If the annual or monthly distributions from the retirement account held in the trust were too great, it could result in a loss of Medicaid eligibility for the disabled child.  As a result, language in the special needs trust would say the distributions are to be accumulated rather than being a mere conduit.  Thus, the distribution from the retirement account in the special needs trust would simply stay in the trust (and the trust would pay the income tax).  After the disabled child dies, the 3rd contingent beneficiary (after spouse and the trustee of the disabled child’s special needs trust) would be the trustee of the spendthrift trust (described below)  for the remaining child (disabled child has no children).  If the disabled child lives more than 11 years after the second parent dies, then there should be substantial growth which would then benefit the spendthrift child (or that child’s descendants).
  3. Besides the spousal retirement account trust (for the benefit of the wife) and special needs trust (for the benefit of the disabled child), the will would also include a spendthrift trust to protect the  non-disabled child from creditors, bad marriages and protect the balance of the funds held in the spendthrift trust for the  grandchildren upon the death of the non-disabled child.  There is an independent trustee to protect the spendthrift child from blowing through the funds.  An underaged trust is also part of the will if a grandchild is too young to handle funds.  Generation-skipping transfer tax language is also included to reduce the possibility of that tax event.

The following goals were accomplished by the plan:

  1. Disabled child will not lose public benefits due to inheritance (possibly too high amount of countable resources otherwise if recent long-term care Medicaid determination stands)  and trust including an accumulation provision (so income is not distributed resulting in potential loss of benefits due to Medicaid income limit) with the contingent special needs trust
  2. Retirement accounts could be stretched and grow since a surviving spouse and the disabled child (or in this case, the trusts for their benefit) are eligible designated beneficiaries under the Secure Act (whereas the non-disabled child would have had to take distributions 10 years following the death of the surviving spouse. 
  3. Children could be protected if their mom (the surviving spouse) remarried if retirement funds stay in spousal retirement account trust
  4. Spendthrift child protected from self (spending habits) in addition to protection from creditors or a bad marriage
  5. Grandchildren are protected if they are too young or immature to handle funds (although funds could be used for health, education, maintenance and support of the grandchildren)
  6. Estate tax and generation-skipping transfer tax issues were also considered

Everybody’s planning is different.  This case is an illustration of the variety of issues a planner should consider when drafting.

If you would like to know more, attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102.  We make it simple to attend and it is without obligation.

We would like to invite you to join our Alzheimer’s walk team, Michael’s Marchers, on October 23, 2020, to raise funds for the benefit of the Alzheimer’s Association to help find a cure for this terrible disease. Unlike prior years of a mass gathering, the Walk will be virtual where you will be a part of small group or you can walk individually from any location. This will be a unique experience! Please join our team (whether you contribute or not)  by clicking here

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