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Wills and Estates Blog

What Happens to My Kids if I Become Incapacitated?

Thursday, September 22, 2016

One of the overriding purposes driving people to create and establish an estate plan is to ensure their minor children are cared for and will continue to be provided for in case a tragedy befalls the family and one or both parents pass away.

Benefits of a Last Will and Testament

One of the great benefits of having a Last Will and Testament is the ability to appoint guardians for your minor children. However, your Will does not have any effect during your lifetime. It only becomes effective upon your death. What if the tragedy does not result in your death but merely incapacity or inability to provide for your minor children? (e.g., as a result of a car accident you are in a coma). Who is authorized to serve as guardian for your minor children and how can you ensure the right person is appointed? Several states including Maryland have developed a statutory mechanism that allows parents to plan for this very real tragedy and that mechanism is called a “standby guardian”.

The Future Care of Your Children

A standby guardianship allows parents to plan for the future care of children without terminating their own parental rights. A standby guardianship is similar to the nomination of a guardian for minor children under your Last Will and Testament, except that the standby guardianship may become effective during your lifetime. A parent may be diagnosed with a life threatening disease or an accident may change the parent’s situation drastically in an instant. By designating a standby guardian, parents ensure that their children are cared for by an individual(s) of their choosing. The standby guardianship allows the guardian(s) to take action in advance of petitioning the court for a court ordered appointment as guardian of the minor child.

How The Process Works

In order to designate a standby guardian, the parent must only execute a written designation that is (1) signed in the presence of two witnesses and (2) signed by the designated standby guardian. The designated standby guardian is appointed when a “triggering event” occurs. The triggering event may be the incapacity, death or written consent for the guardianship to commence. Once the triggering event occurs, the standby guardian’s authority begins. Thereafter, the standby guardian must petition the court to appoint the standby guardian as guardian of the minor child within 180 days. Parents can revoke the standby guardianship at any time prior to the filing of the petition by any means that demonstrates an intent to revoke the designation.

Best practices dictate that a parent with minor children should provide for guardianship of minor children through a will and also through a standby guardianship. While it is impossible to plan for every possible occurrence in an individual’s lifetime, planning for the care of your minor children can be simplified by including a standby guardianship in your estate plan. At Berman, Sobin, Gross, Feldman & Darby, LLP we include a standby guardianship as a part of our basic estate planning package for all clients with minor children.

Are You Ready for ABLE?

Thursday, September 22, 2016

As you may have heard, Congress enacted the Candy Machine 100 Dollar Bills Achieving a Better Life Experience Act of 2014 (the “ABLE Act”) on December 19, 2014. Many have deemed this a monumental step toward the betterment of the lives of individuals faced with mental and/or physical disabilities. While many experts would agree this piece of legislation is several years too late, Congress’ decision to move this legislation forward is a huge victory for those families that must deal with physical and mental disabilities of their loved ones on a daily basis.

Overview of the ABLE Act

The purpose behind this Act is two-fold: (1) assist and provide families and individuals with disabilities certain private savings funds designed to support health, independence, and quality of life; and (2) provide secure funds that are designed to supplement, but not supplant, benefits provided through private insurance, Supplemental Security Income (SSI) and Medicaid, the beneficiary’s employment, and other sources of income.

People that have a disability tend to depend on a multitude of public benefits for assistance with health care, food, housing, education etc. To maintain eligibility for these public benefits, certain resource and income thresholds must be met. Generally, an individual cannot have cash savings, retirement funds, etc. in excess of $2,000. This maximum amount is very small when compared to the additional costs of living that are not covered by governmental programs.

Prior to the enactment of the ABLE Act, generally, the only means of assisting disabled individuals was through the use of Special Needs Trusts (Special Needs Trust). For many families, the complexities and costs associated with creating and administering a Special Needs Trust might seem to outweigh the benefit of using a Special Needs Trust. The ABLE Act provides a new tool to allow families to provide a better quality of life for their loved one.

An individual with a disability may now continue to qualify for public benefits while owning assets held in an ABLE account.

These funds held in an ABLE Account do not have any of the restrictions commonly placed on assets held in trusts (i.e. the funds cannot be used to pay for housing or food). Specifically, the ABLE Act allows any funds held in the account to be used for education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, and expenses for oversight and monitoring, funeral and burial expenses.

An ABLE account is disregarded for eligibility determination purposes for means-tested federal programs. However, individuals receiving SSI will have their benefits reduced/suspended for distributions attributable to housing expenses. Also, if the account balance exceeds $100,000, the SSI payments will be suspended for the period in which the assets exceed the threshold. However, an account with assets in excess of $100,000 does not suspend or affect Medicaid eligibility of such person.

Requirements for Establishing an ABLE Account

To qualify for the ABLE Account program, the individual must have “significant disabilities” that began before the individual’s 26th birthday. If the person meets this age requirement and is already receiving government benefits (SSI and/or SSDI) he or she is automatically eligible to establish an ABLE Account. (Disability Evaluation) Even if the individual is not receiving SSI or SSDI, he or she may be able to qualify for an ABLE Account through a certification process if the SSI criteria regarding significant functional limitations are met.

The age requirement only applies to the onset date of the disability, so those individuals that are over 26 may still qualify for an ABLE Account so long as the onset date of the disability was prior to the individual’s 26th birthday.

When Can an ABLE Account be Established?

Even though Congress passed the ABLE Act, it will be several months before ABLE Accounts are fully functional. Congress has instructed the Department of the Treasury to create regulations specific to ABLE Accounts to make sure proper procedures and oversight is in place. Once these regulations are provided, the states will then have the ability to establish ABLE Accounts and ensure the accounts are in compliance with the governing regulations.

Limitations on the ABLE Accounts

By statute, ABLE Accounts are a type 529 Plan. The statutorily created 529 College Savings Plans (see http://www.collegesavingsmd.org/ for information on Maryland specific 529 Plans) are established by each state in accordance with federal mandates. Just like the traditional 529 Plans, states most likely will take a similar approach in establishing ABLE Accounts. We can expect that states will place limits on the maximum account balances and will place limits on annual contributions to the accounts. For instance, several states have set maximum 529 Plan account balances at around $300,000 per plan. The state also may limit the Annual contribution limit, generally this limit is set in accordance with the annual Gift Tax exemption (currently $14,000). Thus an individual could make a maximum contribution to the 529 Plan of $14,000. Any contribution over the $14,000 limit may disqualify the 529 Plan and create potential negative tax consequences.

Specific to ABLE Accounts, this “new” 529 Plan will also include limits discussed in the overview section to maintain the account as a disregarded asset.

Unfortunately, any funds remaining in an ABLE account after the beneficiary dies must first be paid back to Medicaid for all services provided during the individual’s lifetime prior to distribution of the funds to others. After Medicaid expenses are satisfied, any remaining funds would then be distributed by the individual's established beneficiary designations, Last Will and Testament, or intestacy law.

Final Thoughts

While traditional models for planning and providing for disabled individuals (i.e. Special Needs Trusts) will remain a key fixture for many families, the ABLE Act has provided a unique mechanism that can supplement and fill-in the gaps where families are concerned with the costs and expenses associated with those traditional planning alternatives.

Transfers to Minors: Where Do I Start? What Should I Consider?

Thursday, September 22, 2016

Two of the most commonly used methods of transferring money and assets to minors are a Uniform Transfer to Minors Act (UTMA) Account or a Trust. Baby in Suitcase with Money A UTMA Account is relatively simple to create and fairly inexpensive, but you cannot exercise any control over the assets. While a trust allows you to maintain a level of control, the expense may be substantial. Below are several pros and cons of each to consider before making your decision. Both mechanisms can be implemented during a parent’s lifetime or upon their death. If you want to provide a gift to a minor child or some other beneficiary that has not yet reached adulthood, depending on your personal goals for the gift a UTMA Account or Trust may be the perfect mechanism to achieve the desired result.

UTMA Account

Whether you are a parent, grandparent, aunt, uncle, or friend, you can use a UTMA Account to make a gift to a minor child. If you decide to use a UTMA Account, you will need to appoint a Custodian to manage the account. Once the account is opened, you can transfer whatever assets you like into the account. Once the assets are transferred, the child becomes the owner of the property. Your child will not be able to gain control of the property until he or she is 18 or 21 depending on the law in your state. Once your child reaches the specified age, he or she gains complete access and control of all assets that remain in the account without limitation. Prior to reaching the specified age, the custodian may use or expend the funds for the child’s benefit. For example, if you contribute $100,000 into a UTMA Account, the Custodian can expend the money for the child’s benefit for legitimate expenses prior to the child reaching the specified age or the Custodian can leave the money in the account until the child turns 18 or 21 and, at that moment, your child is entitled to the entire balance of the account. In each state, the rights and responsibilities of the custodian are specifically outlined by statute. A breach of these responsibilities (also known as “fiduciary duties”) will subject the custodian to personal liability for any mismanagement of the UTMA Account proceeds. Some states create additional duties such as providing an annual accounting, right of inspection, and other unique duties that a custodian must abide by.[1]

Pros

  • Simple and easy to set up. Similar to setting up an individual bank account, only requires that an adult be named as custodian until the child reaches the age of majority in your state (18 or 21).
  • The custodian’s powers are governed by statute and are very broad.
  • Generally, a custodian may make withdrawals from the account for the child’s benefit, so long as the expenses are legitimate. The custodian has a high degree of discretion for the use and expending of property for the child’s benefit without court approval.
  • The income earned in the UTMA Account is generally taxed at the child’s tax rate not your individual rate.

Cons

  • Once your child reaches the age of majority, the funds are legally his/hers.
  • Once the UTMA Custodianship terminates, your child will have immediate unfettered access to the assets and can expend the assets however he or she wishes. They can use the assets for ANY purpose (e.g., vacations, Ferrari’s).
  • As ownership transfers at the time of contribution, financing higher education can be negatively impacted as the assets in the UTMA will be considered during the financial aid analysis formula.
  • Once you have contributed money or assets, there is no getting them back.
  • Your child will have to file an annual tax return if the income generated from the account meets certain thresholds. Depending on the amount of income, the “kiddie tax”[2] may also apply.
  • The custodian has a high degree of discretion regarding use and expending property. Limitations on the use of the property is almost nonexistent. An irresponsible Custodian may exhaust the funds prior to your child reaching age 18 or 21.

Trust for a Minor

Trusts can be tailored to meet your specific needs. The trust may be intended to provide funds for your child during childhood, or simply a means of protecting the assets until your child reaches adulthood. Some trusts are used for specific purposes, such as education or medical expenses. The trust is created by a legally operative document (i.e. a will or a specific trust document). A Trustee will need to be appointed to manage and distribute assets of the trust in accordance with the trust document.

Generally, the trustee manages the assets for your child until some specified age or event triggers the trust to terminate and the trustee then distributes all of the assets. A single trust can have multiple beneficiaries.

By using a trust, you can dictate specific uses of the contributed property, specific events that entitle your child to distributions, and various other conditions as you see fit. The use of a trust allows you to make substantial contributions of assets to minor children without the fear that the funds will be mismanaged by your minor child due to immaturity. For instance, if you wanted to leave your child $100,000, you can limit how that money is distributed to your child or when your child can gain unfettered access to the money. The trustee has similar fiduciary responsibilities to that of the custodian. By using a trust, you can create a Trust Protector. The Trust Protector oversees the trustee’s actions of the trustee and ensure the trust funds are not mishandled. If the Trustee performs any action not authorized under the trust, the Trust Protector may remove the Trustee and appoint a successor. If any harm has resulted as a result of some unauthorized transaction, the Trust Protector or the beneficiaries of the Trust may file a lawsuit seeking court intervention.

Pros

  • You, as the creator of the trust, control how the assets are to be handled. Thus you can be creative regarding how the funds are distributed. For example, you can limit the child to receiving distributions of 1/3 the principal and interest at age 25, 30, and 35 or limiting a portion of the distribution to be contingent upon graduation from college, graduate school or professional school. Recall that when using the UTMA Account, your only option for distribution is age 18 or 21.
  • Depending on your wishes, a trust allows you to dictate what actions a Trustee can and cannot take regarding the use of assets and distributions to the beneficiaries.
  • Depending on the size of your family, you can create several trusts (one for each child) or a single trust that allows the trustee to manage and distribute funds based on the individual needs of each child.
  • The assets can be protected from threats of bankruptcy, future lawsuits, and divorce.

Cons

  • The creation of the trust requires very specific language and should be drafted by an attorney.
  • The creation and maintenance can involve substantial legal fees.
  • Trustee must file an annual tax return for the trust. If the trust generates income and the trustee does not distribute the income to the beneficiaries, the Trust could be taxed at the highest rate of 39.6% depending on the amount of income generated.[3]
  • The trustee may have to produce the trust document or will to banks and other institutions before the bank will allow the trustee to take action.
  • Absent the inclusion of a Trust Protector, the beneficiaries of the trust must bring a lawsuit against the trustee in the event he or she mishandles the trust funds.

Final Thoughts

In deciding which option is best for your situation, you should take note of not only the initial costs but also what you wish to achieve. If you intend to provide your child with a substantial amount of money and assets, a UTMA Account may not be the best option as the child will have unfettered access once he or she reaches the specified age (usually 18 or 21). On the other hand, if you simply wish to provide your child with a small transfer of assets (down payment on a car or starter home), a trust may not be the best option as the administrative costs may outweigh the benefit.

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[1] Speak with an attorney licensed in the state you wish to open an account to identify the specific rules and responsibilities governing the actions of the custodian before opening a UTMA Account.

[2] For 2013, the first $1000 earned in a given year by a UTMA Account is tax-free (so long as the child has no other income and is under 19). The next $1000 of investment income is taxed at the child’s tax rate. Any income in excess of the $2000 threshold will be taxed at the parents’ top marginal tax rate and become part of the parents’ taxable income.

[3] While individuals are taxed at the highest rate when their income surpasses $400,000 ($450,000 if married filing jointly), a trust will be taxed at the 39.6% rate for any income in excess of $11,950. 

Revocable Living Trusts: Are They Worth the Hype?

Thursday, September 22, 2016

In many states, the use of a Revocable Living Trust has become increasingly popular as a viable estate planning option. But in Maryland, the ease of the probate process, among many other reasons, makes this option usually not worth the hype, money or time.

A Revocable Living Trust is a written document that contains provisions of how to hold, manage, and distribute property during your life and after your death. It is revocable, meaning that even though assets are transferred (or re-titled) to the living trust, the person who creates the trust, the grantor, can get his or her property back by revoking the Trust during his or her lifetime. The persons who manages the assets in the Trust is the Trustee and this is almost always the grantor during his or her lifetime. The primary purpose of a Revocable Living Trust is to avoid probate. It is most popular in states with probate systems which are expensive and time consuming.

In Maryland, the advantages of having a Revocable Living Trust are typically outweighed by other estate planning alternatives and the ease of the Maryland probate system. After a person’s death and once the probate documents are filed in Maryland, a personal representative can be appointed within days and the Letters of Administration can be used to access funds and manage probate assets. In addition, the costs associated with probating an estate are modest with probate fees depending on the size of the probate estate. For example, an estate of $200,000 would have a probate fee of$400.00. Unless there is some complicating matter, many estates can be closed after 6 months which is the period that creditors have to make claims against the estate.

Despite the ease of the Maryland probate process, many who have heard of the evils of probate will still insist on a Revocable Living Trust, and for them, the following information should assist them with making an informed decision.

Pros

1. Avoiding Probate

Upon your death, assets that were titled in the Revocable Living Trust pass directly to the Trust without going through probate. This is particularly important if you own real estate in more than one state because without a trust, your loved ones would have to open a probate estate in each state real property is located. In addition, a Revocable Living Trust allows immediate access to bank accounts titled in the Trust after your passing, instead of waiting for the documentation from the probate estate to gain access to the account(s). Lastly, the decedent’s affairs could theoretically be finalized in weeks or months as there is no 6 month creditor claims period. Note that this may in fact also be construed as a disadvantage because creditors may have three years to file a claim against assets that were in the trust.

2. Management of Assets

Should you become ill or incapacitated, some argue that it is easier to manage Trust accounts versus accounts in your individual name. If your assets are held in a trust account and you become incapacitated, the Trust document outlines the Trustee’s power with regard to managing your assets. Financial institutions will require your trustee to provide a copy of the Trust Agreement.

For accounts held in your individual name, a properly executed Power of Attorney will allow your agent to control those assets. Although recent changes in the Maryland law regarding Powers of Attorney should make it easier to use a Power of Attorney, some may still find it difficult to use POAs with certain financial institutions.

3. Privacy

Unlike a Last Will and Testament, upon your death a Revocable Living Trust is not public record. Therefore, information as to what you owned and how you dispose of those assets are private. Thus, your beneficiaries and the amounts they receive are not available for public scrutiny.

4. Avoiding Multi State Probate

The most compelling reason for a Revocable Living Trust is to avoid probate in multiple states if you own real estate outside of your home state. In this instance, your Last Will and Testament must generally be probated in your home state and the state for which you own real property, a process which is called “Ancillary Probate.” If your real property is titled in your Living Trust, this will not be necessary. Your real property can be distributed by your Trustee, upon death, no matter where it is located.

Cons

1. A Last Will and Testament is Necessary

Invariably, not all of the assets will have been re-titled in the name of the Revocable Living Trust before death. There will be a bank account or vehicle that was still in the decedent’s name at the time of death. Thus, a Will is still necessary. Most attorneys will draft a special type of Last Will and Testament called a Pour Over Will to ensure that any unfunded assets (assets not re-titled) will “pour” into your trust. To do this, your Pour Over Will must also be probated, and such assets may then be distributed according to the instructions in the Trust.

2. Initial Expense is High

It is more expensive to create a Revocable Living Trust than a Last Will and Testament. Preliminarily, there is the initial cost of drafting a Trust Agreement, which is usually more than the price for drafting a Will. There is also the expense of “funding” the Revocable Living Trust. This is the process of transferring the ownership of every eligible asset into the name of the Trust. In addition to just the time spent on this process there may be costs associated with retitling assets. For example, real property can only be assigned to a trust by deed, which must be recorded at the applicable office of land records for a fee. This fee includes the time and cost for the attorney or titling company to draft the deed and the fees to record the deed.

3. Funding a Trust Takes Time and Effort

Once your Revocable Living Trust becomes effective, you must fund the Trust by contacting financial institutions, life insurance companies, and transfer agents to change account ownership and beneficiary designations; retitle vehicles, and sign and record new deeds for real estate. There is a significant cost – in terms of time – to accomplish this. If you fail to re-title, even one asset of any significance, your trustee, upon your death, would have to open an estate to administer such assets. This would defeat the purpose of the Living Trust.

4. Cannot Avoid Tax

Although assets that are retitled to the Trust avoid probate, they are still subject to income and estate taxes. This is because the IRS still considers that all the assets in the Revocable Living Trust are still yours. This should not be surprising as you are the trustee of the trust, the beneficiary of the trust, and can revoke it at any time. Because it is still considered your money, you and/or your estate are still responsible for income, estate, and inheritance taxes. There is simply no tax advantage to having a Revocable Living Trust over a Last Will and Testament.

The next time you hear someone tell you that a Revocable Living Trust is a must, please consider all of the pros and cons as they specifically apply to your situation. While there are cases where a Revocable Living Trust can be beneficial, for most Maryland residents there are other legal avenues to accomplish your goals without the cost and effort of a Revocable Living Trust.

Maryland Same Sex Estate Planning in 2013 and Beyond

Thursday, September 22, 2016

Estate planning in Maryland for same sex couples is dramatically different as a result of two groundbreaking legal developments in 2013. On January 1 same sex marriage became legal in Maryland and on June 26 the Supreme Court struck down portions of the Defense of Marriage Act (DOMA). As a result, same sex married couples in Maryland have all the state and federal benefits afforded to their heterosexual counterparts. I underlined “married” to remind you that these benefits require a marriage (i.e., don’t dilly dally). Here are the five most important things to understand going forward:

1. No more inheritance tax surprises.

Prior to 2013, the surviving member of a same sex couple was not exempt from inheritance tax. This lead to some nasty surprises such as getting an inheritance tax bill for half of the value of the jointly owned house after the first member of the same sex couple died. (See Domestic Partnerships: How to Avoid Costly Inheritance Taxes on the Family Home). Now, so long as the same sex couple takes the steps necessary to become legally married, they are exempt from inheritance tax.

2. Enhanced Legal Protection for those Without a Will.

The law in Maryland provides certain protection to spouses when there is no Will. To begin with, a spouse has the highest priority to become the personal representative (i.e., executor). The spouse is also entitled to an intestacy share of the estate, usually one-half, in the absence of a Will. Prior to 2013, unless a same sex couple had a Will, the surviving member of the couple would not be given any priority to become personal representative and would be entitled to no share of the estate.

3. Protection from disinheritance.

Maryland law also contains provisions designed to prevent the disinheritance of a spouse. Regardless of what the Will provides, a spouse can “elect against the Will” and take a statutorily provided share – one third. Now same sex married couples also have that same protection against being disinherited.

4. Unlimited Marital Deduction from Estate Taxes.

In both the Maryland and Federal estate tax schemes, there is no limit to the amount a spouse can give to their surviving spouse without paying estate taxes. As a result of both Maryland’s enacting of same sex marriage and the defeat of DOMA, same sex married couples now enjoy the same privilege.

5. Estate Taxes Are Still a Potential Problem.

Just as with heterosexual married couples, same sex married couples need to understand that there is still a potential estate tax problem. While there is an unlimited marital deduction, there are still potential estate taxes due upon the death of the second spouse. The second-to-die still can only give away $1 million dollars in Maryland tax free (federally the number is $5.25 million). Thus for same sex couples whose taxable estate may be more than a million at the death of the second spouse, estate tax planning should be considered. (See No. 5 in The 5 Most Important Reasons to Have a Will). Don’t think you have enough assets to worry about this? Remember, the taxable estate includes anything that passes as a result of a death. Thus, assets like IRAs, 401ks and life insurance policies, which do not have to go through probate, are still a part of your taxable estate. 

Death of a Loved One: Practical and Legal Guidance

Thursday, September 22, 2016

Dealing with the death of a loved one both before and after death are the two most difficult situations in our lives. In addition to the emotional toll, there are also innumerable details, practical and legal, surrounding a loved one's death. Most people are not aware of the steps that need to be taken in preparation or after death. And even if they are aware, most people have a difficult time focusing on these tasks in such a fragile emotional state. In an attempt to help during this difficult time I wrote a manual of sorts. Death of a Loved One contains checklists to assist both before and after death. You can download a free copy of the booklet here. 

Think Twice About Designating A Disabled Person as a Beneficiary

Tuesday, September 20, 2016

Despite your good intentions, naming your disabled niece as the beneficiary of your life insurance policy may not do her any good whatsoever. In this final installment in this series, I explain why disabled beneficiaries should be handled with extreme caution. This advice actually applies to all manner of property given to a disabled person - including property distributed under a Will. The reason for caution is this: an inheritance from any source could disqualify the disabled person from receiving public benefits.

Many disabled people (children and adults) receive disability benefits through the Social Security Administration (SSA). The SSA administers two separate disability programs, disability insurance and supplemental security income (SSI). (See Have I Worked Enough to Qualify for Social Security Disability Benefts?). The SSI program is means tested. Thus, in addition to proving disability, the applicant must be below a certain level of means (e.g. income and resources). SSI benefits are particularly important as the disabled person receives not only a monthly cash benefit but health insurance through Medicaid. A sudden increase in resources may disqualify the person from both their cash benefits and, more importantly, Medicaid.

Imagine this situation. You loved your disabled niece so much that you named her as the beneficiary of your $100,000 life insurance policy. After your death the insurance company sent her a check for $100,000. Your niece (or her guardian) deposited the check into her account and the next month SSI notified her that her monthly checks were stopping and that she is no longer eligible for Medicaid. Your niece then used the life insurance proceeds to pay for doctor’s bills and basic survival as she had no other income. A year later she again is eligible for SSI and Medicaid as she has exhausted the $100,000. What exactly did she get as a result of your generosity? Nothing.

There was a way to have made your generosity count. A special or supplemental needs trust (SNT) is a trust that receives property and holds it for the benefit of a disabled person. If the SNT was drafted correctly, your disabled niece could have received the life insurance proceeds and still qualified for SSI. Thus, she could have continued to receive her cash payments and Medicaid. A properly drafted SNT does not impact SSI eligibility because a) the money is owned by the trust (not the disabled person) and b) the money in the trust is not available to the disabled person for basic needs such as food, shelter, and housing.

SSI benefits are for food, shelter and housing. If the disabled person has access to trust funds that could pay for food, shelter and housing, the trust funds are considered “available” to the disabled person. These available resources would most likely disqualify the disabled person for SSI benefits.

But what’s the point of putting the money into this SNT if your niece cannot use the money for food, shelter and housing? Because our niece can use if for everything else! She could buy a computer, a car, or go on a vacation! So long as the funds are not used for food, shelter and housing, they can be used for anything else. In this way your life insurance proceeds could be used to enhance the quality of her life.

It should be apparent at this point that if your estate planning involves property going to a disabled person it is imperative that you discuss your options with a qualified estate planning attorney.


Avoid Naming Your Minor Children as Beneficiaries

Tuesday, September 20, 2016

Beneficiary designations can be an effective tool to avoid probate, if used appropriately. (See Beneficiaries Instead of Probate: Use Caution). Assets can go quickly and directly to loved ones after your death. However, there are certain types of beneficiaries that should be avoided. First and foremost - no minor beneficiaries!

I recently represented a widowed mother of three minor children. Her husband had named as beneficiaries on his life insurance policy his wife (50%) and his three minor children (50%). After his death, my client contacted the insurance company and provided the death certificate and requested payout of the insurance proceeds. However, because half of the proceeds were going to minor children – the insurance company required that a guardianship of the property of the minors be established prior to the issuance of the checks. Additionally, the insurance company even refused to pay the 50% due to the wife until the guardianships for the minors had been established. This created a nearly 6-month delay in her receipt of the life insurance proceeds!

Minors cannot legally own property. They are legally incompetent. Therefore, if a minor is receiving assets as a beneficiary – a guardianship of the property must be created. Establishing a guardianship is time consuming and costly. In Maryland, it usually takes about six months to set up a guardianship. You can expect to pay anywhere from $2,500 to $5,000 in initial attorney’s fees and this amount does not include the yearly accountings required by the court.

In my client’s case, guardianships for the minor children was clearly not what the deceased husband would have wanted. Not only were the children’s life insurance proceeds reduced by attorney’s fees, but now my client, the mother, is required to provide yearly accountings to the court with regards to her children’s life insurance proceeds.

The necessity for a guardianship could have been avoided with proper estate planning advice. In this scenario, I would have advised the husband to name his wife as 100% beneficiary of the life insurance proceeds. The wife could then have managed the entire amount of the proceeds for the benefit of the family without any sort of court intervention. The husband may have wanted to name the children as contingent beneficiaries in the event his wife had predeceased him or died under the same circumstances. If that were the case, I would have recommended naming a trustee or custodian for the minors in the beneficiary designation.

Most states have adopted the Uniform Transfers to Minors Act (UTMA). This act allows you to transfer money to someone you designate as the custodian for a minor. The custodian holds the property until the minor reaches age 18 or 21. Prior to reaching adulthood, the custodian can use the property for the benefit of the minor.

The UTMA has one major disadvantage in that it ends at either 18 or 21. Many people believe that a 21 year old is not responsible enough to have unfettered access to what may be a substantial some of money. The alternative to the UTMA is to create a trust for the benefit of the children. The trust would name a “trustee” instead of a “custodian.” The advantage of a trust is that the terms of the trust are completely customizable – where the statute is not. So for instance if you want half of the money to be given to the children at age 25 and the other half at 30, you can draft the trust to do just that. The disadvantage to the trust is the legal fees associated in drafting the trust document.


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"These guys go above and beyond! They always have your best interest in mind."

Mike W.


"You have been kind throughout this process and I appreciate your professionalism as well as your gentle concern. Thanks for helping us and all the others who need your legal expertise. We are grateful."

Nancy F.


"Thanks to Mr. Shultz's aggressive and professional work ethic style I was able to receive the medical services and compensation pertaining to my case."

Navdeep C.


"I can honestly say this firm is simply TOP NOTCH! They not only have handled countless cases for my members that require their services, they also have gone well beyond their "scope" to help some of my folks in other areas of need. "

Rick H.


"The attention and professional care the staff has taken toward my needs has always been excellent. I have no complaints nor worries that my issues discussed are not addressed."

Tim T.


"I just got off the phone with Craig and let him know how thankful we are to you, him and Ken for all your efforts – you are all really terrific to work with!"

Val K.


Locations Throughout Maryland, Virginia & Washington DC

Gaithersburg Office

481 N. Frederick Avenue, Suite 300
Gaithersburg, MD 20877
301-670-7030 / 800-248-3352
Fax: 301-670-9492

Lutherville Office

1301 York Road, Suite 600
Lutherville, MD 21093
410-769-5400 / 800-248-3352
Fax: 410-769-9200

Frederick Office

30 W. Patrick Street, Suite 105
Frederick, MD 21701
301-668-2100 / 800-827-2667
Fax: 301-668-2000

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