Updated: Dec 15, 2021
The Disabled Beneficiary
Someone who is unable to manage their financial affairs or who is eligible for government benefits, such as Medicaid or supplemental security income (“SSI”) benefits would be someone who is a “disabled beneficiary” for purposes of this post. Gifts to disabled beneficiaries demand special attention and focus.
The SSI program has strict limits on the amount of income and assets you can have and be eligible for SSI. If you leave an inheritance to or name a disabled beneficiary on a beneficiary form, the asset transferred to the beneficiary could cause them to be in excess of income or asset limits and disqualify them for SSI. The beneficiary would be required to “spend down” the amount of the gift and then reapply for SSI. This wastes your money and causes a delay in the resumption of the beneficiary’s receipt of SSI benefits. In the event a disabled beneficiary does receive assets that could disqualify them, there are ways to avoid the problems. The beneficiary may be able to disclaim the gift or spend the gift on assets that do not “count” for SSI eligibility and thereby reduce the delay in the resumption of the SSI benefit. These rules are very technical and you should consult an attorney experienced in estate planning, elder law, or guardianship matters for assistance.
If you leave the disabled beneficiary’s bequest to someone else with the understanding that person will “hold” the money for the beneficiary, this can cause many other problems. The person to whom you entrust the money has no legal obligation to spend the money for the intended beneficiary. Additionally, the bequest is also subject to that person’s debts and liabilities. If a creditor sues and gets a judgment against them, your gift could be at risk.
We recommend that special needs or supplemental needs trusts be used to receive and hold any bequest or gift intended for a disabled beneficiary. These trusts have special terms that will not disqualify the disabled beneficiary’s eligibility for SSI or Medicaid. A trustee should be named who has a legal responsibility to spend the money in the trust for only the beneficiary. Administration of the trust is subject to oversight by the local courts in the event of any questions about the trustee’s management of the money. These trusts can be part of a Will or a stand-alone “living” trust that is created and funded before your death.
Naming Your Estate as Beneficiary
It is almost never a good idea to name your estate as a beneficiary of a life insurance policy, investment account, or qualified plan (for example an IRA, 401(k), qualified annuity). There are several reasons to avoid doing this.
Naming your estate as beneficiary will cause those assets to be subject to the Probate process. Your assets that pass through Probate are subject to claims of creditors. You may think that you do not have many creditors but it may not always be that way. Perhaps you pass away with significant unpaid medical bills from a final illness or with debt incurred for something involving a loved one. In addition, many of the costs of Probate are related to the size of your estate. The higher the value of your probate estate, the higher the costs of the administration of your estate. With a little prudence, you can avoid that type of mistake.
Naming your estate as the beneficiary of qualified plans can hasten the imposition of income taxes. If you pass those plans on to a spouse or others by naming them individually (or even through certain trusts), the beneficiary can continue to defer the income tax on those assets for a lengthy period of time. Your spouse can delay taking any withdrawals until reaching age 70 1/2 and can take only minimum required distributions thereafter for the balance of his or her lifetime. Children as beneficiaries can spread withdrawals out (and thus defer income taxes) over their life expectancy — perhaps that will be 30-60 years or more! If you name your estate, the income tax cannot be deferred longer than five years.
The best course of action for married persons is to name your spouse as beneficiary. You should also list contingent beneficiaries because, in the absence of a named beneficiary, the assets will go to your estate. Avoid naming minors as beneficiaries (see below for more explanation). You can also name trusts as beneficiaries (especially for minors) and still retain most or all of the tax advantages above.
Bequests and Gifts to Minors
If you are providing for children or grandchildren under 18 years of age, you should never leave them a gift or bequest in their own name. This rule applies not just to bequests in your will but also to listing minors on beneficiary forms for life insurance, investment accounts, and qualified plans (IRA, 401(k), pensions). One significant problem with leaving a bequest to a minor is that the court will require that a guardian be appointed to hold and manage that minor’s bequest until the age of 18. You will not be in control of who the court appoints as the guardian and the proceeding will likely cost between $2,000 and $5,000.
Another big problem is that you may not want the minor to have complete control of the bequest at age 18. Perhaps the minor is unable to properly manage a large sum of money at that age. In my practice over 23 years, I cannot recall one person who thought it was a good idea to leave money to an 18-year old. Minors who are disabled and receiving assistance such as social security disability and medicare or Medicaid require even more specialized planning. I’ll address the particular issues involving gifts to persons with disabilities in a separate post.
A good way to avoid these problems is to include a trust for minors in your Will. Another is to establish a “living trust” (i.e. a trust that is established and funded during your lifetime). These trusts can receive any bequests to minors from a variety of sources. The trustee can hold and manage the money in accordance with your wishes as expressed in the Will or trust document and distribute the money to the child or grandchild when you deem it appropriate. That might be at age 18, 21, 30, or whenever. The trust can release lump sums of money at different ages. There are lots of possibilities.
If you do include a trust in your Will or have a living trust for bequests to minors, it is very important that beneficiary forms for insurance, investment accounts, and qualified plans make specific reference to the trust and that bequest you are leaving be paid to the trustee in the event the recipient has not reached the age you deem appropriate for that person to have control of the gift.
Failure to Understand How Your Assets Will Pass Upon Your Death
Many people think that their Wills control how and to whom their assets pass upon their death. The reality these days is that many assets pass outside the scope of a Will.
For example, assets titled jointly with another person often pass to the surviving joint asset holder. An example is a deed to a house titled to a mother and son with the right of survivorship. If the mother’s Will divides her estate equally between three children, the Will has no bearing on the transfer of the house upon her death. Her share of the house will pass to the son whose name is on the deed and the son will have no obligation to pay his siblings for the house nor will he be required to reduce his share of the mother’s estate passing to him by virtue of the provisions in her Will.
Many people have bank accounts, investment accounts, annuities, or life insurance policies that have one or more designated beneficiaries. The beneficiary forms for these types of accounts will control to whom and in what amount the assets in the account pass upon the account holder’s death. In our practice, it is quite common that people do not know how they’ve completed beneficiary forms for their accounts or fail to have all of their children listed on the forms. They typically complete the forms when the accounts are opened based upon circumstances that are present at the time and forget to update the forms when things change. The account owner may misunderstand the meaning of the forms and complete them incorrectly. One thing I have seen many times is someone listing a single person on the forms, the intention being that the person will distribute the owner’s assets according to the Will. This can lead to some unintended consequences, unequal distributions of assets, and even adverse tax consequences.
These problems can be avoided by engaging in comprehensive estate planning that takes into consideration all of your assets. The assets should be titled and beneficiary forms completed so that a single plan is effectuated.
The Estate Planning team at Fififk Law Group is prepared to answer any further questions you may have about ensuring a secure estate plan for you and your family. If you’d like to speak to an estate planning attorney, check here.