Preserving Wealth for the Benefit of Others

Daniel YergerFinancial Planning Leave a Comment

In the United States, we have a number of financial safety nets. Social Security, originally known as “old age, survivors, and disability income”, assorted forms of unemployment insurance, and various programs such as SNAP and WIC for supplemental nutritional support. While these can be hotly debated and contested, today we’re going to set aside the politics and talk about the preservation of wealth for those who are unable to provide for themselves. Now, this isn’t a guide on how to reinvest food stamps or something bizarre like that, but on how to provide for family members and individuals who cannot make a living for themselves, and are thus reliant upon the aforementioned safety nets. Before we get into this subject, a disclaimer is required: We’re going to talk about trusts and various social benefit programs that can be extremely complex and require professional guidance, including legal, tax, and financial guidance. You should not read this piece and feel fully equipped to take on the complex world of social benefits programs single-handedly; this is much more to give you a general overview and understanding of various factors, and you should be well aware that there are many federal and state-specific nuances that must be taken into account. I’ll say it again: Consult professionals if you need to step into this area of finance.

The Asset Cap

Fundamentally, and contrary to many talking heads commentary, the government is not a big fan of letting people get rich off of government benefits. In fact, at the present time, someone living underneath a disability program in Colorado is going to be capped at only $2,000 in assets. That’s an all-in figure: you can’t be sitting on a fortune in your grandparent’s jewelry and also be receiving a monthly check for an inability to make a living or care for yourself. The government fundamentally forces a spend-down of practically all assets in an individual’s name before it will provide ongoing financial support. This includes seniors attempting to acquire long-term-care support through Medicaid, children with special needs, and everyday adults who through misfortune are no longer able to provide for themselves. This can be devastating in particular to working couples, as it may fall upon the income of a single-earning spouse to provide all of the support for a household. This issue can be further compounded by a “donut hole” in which benefits are reduced due to household income in a manner that makes earning additional income “pointless” between the point where benefits are reduced and benefits are removed entirely. Further, this can represent a major hazard for those with special needs, as children with special needs who are left behind with inherited or inappropriately gifted assets can see their support cut off until those assets are entirely depleted. Not to be dodged, the government also takes an extremely critical eye towards “giving assets away”; for those parents looking to leave something to their kids, simply gifting assets to qualify for government support isn’t a viable strategy. In fact, there is a five-year look-back that can be used to claw assets back, leaving both parents and children with significant bills if those assets haven’t been retained.

What’s in a Name?

It turns out, one of the most fundamental principles to all of this is simply whose name assets are in. For example, if a minor child with special needs suddenly has a death in the family, the disposition of a potential inheritance can be a major issue. Parents without a will in place or children without a trust established for their benefit can suddenly cause a significant loss of state support for the child with special needs. Importantly then, an estate plan drafted by a competent and estate law specializing attorney is an absolute must for any family with children who have special needs. Even tertiary family members such as siblings who lack estate planning documents can cause significant issues due to intestacy laws: for example, in Colorado, an unmarried adult sibling without a will may end up leaving assets to their parents, other siblings, and children. Inadvertently, this could cause the disruption of another sibling with special needs income, requiring them to spend assets that otherwise might have been better left to other family members. Ultimately, it becomes a critical factor that assets be kept out of the name of those who are under state support, or the state will likely pause support until those assets are depleted.

The First Step to Gifting

It’s not uncommon to see family members want to help other family members whose special needs may extend beyond the lives of their original caretakers. This altruistic motivation can come into conflict with the issues we just highlighted, so it becomes important for family members and well-wishers to be informed of the most appropriate vehicles for gifts. The most immediate and valuable tool came about in the past few years in the form of an account called a 529ABLE (Achieving a Better Life Experience) Account. These accounts are primarily intended for children or young adults with disabilities and require that a diagnosis for a condition expected to last at least twelve months be made before the beneficiary turns 26. If the beneficiary is cognitively capable, they may be able to self-manage the assets in the account, and up to $100,000 of assets can be kept in the ABLE account without impacting state income. If the beneficiary is not capable of managing their financial affairs, then powers of attorney or conservatorships can help appropriate guardians and fiduciaries manage the assets for the beneficiary of the account. This can be an incredibly valuable vehicle for special needs beneficiaries who are not likely to receive significant assets from third parties but who could or would like to maintain assets greater than the bare minimum permitted by the state.

Bigger and More Complex Gifts

The 529ABLE was established to simplify a complex and expensive area of the law: Special Needs Trusts. These trusts still very much exist and serve to hold assets for the benefit of a person with a disability who either could receive significantly greater assets than the $100,000 529ABLE limit or otherwise who may not qualify based on when their disability or condition occurred. There are many forms of special needs trust, and ultimately this is an area where a competent attorney and accountant are critical, not only to ensure the structure appropriately supports the beneficiary as intended, but also that the trust remains compliant with all federal and state guidelines, lest the assets in the trust become subject to the reach of the government and affect the state income for its beneficiary. Special Needs Trusts are complicated vehicles that ultimately provide for the preservation and use of assets for a beneficiary without violating the asset cap we discussed earlier. Importantly, they can provide many positive quality of life experiences and resources for a beneficiary while shouldering less of the burden of day-to-day living than the state does. Special Needs Trusts can be established in a variety of forms, including those managed by third-party trust companies or charities, or by a family guardian or trustee. It cannot be emphasized enough that Special Needs Trusts absolutely require professional guidance to competently manage and that these are not “back of the sheet of paper” estate planning tools, as the potential penalties and problems that can arise with the assets in special needs trusts can be significant.

Preserving Wealth Requires Competency

If it hasn’t been reinforced enough: Competency is key. If someone is asked to act as a guardian, conservator, or trustee for a beneficiary of a special needs trust or an estate for the benefit of a person with a disability, it is critical that they self-evaluate the most practical manner of providing benefits for the beneficiary. Unless the individual handling the assets is a licensed attorney who specializes in estate law, is also a CPA, and is also highly skilled in asset management, it is quite rare that any single individual can handle all the facets of a special needs trust and special needs estate planning. An estate attorney should be engaged on an annual basis to ensure full compliance with all state and federal legal requirements for these vehicles. A CPA should be engaged to perform a limited audit of the financials and a tax return for any trusts and beneficiaries. If the assets in the trust are intended to last longer than a period of a few years, a competent Accredited Investment Fiduciary (AIF®) should be engaged to manage the assets on a going basis to help preserve the benefit for the beneficiaries.

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