A qualified disability trust, or QDisT, qualifies for tax exemptions and applies to most trusts created for an individual with special needs. In most cases, explains a recent article from Investopedia, “Qualified Disability Trust: Meaning and Tax Requirements,” the person receiving income from the trust must pay income tax. However, in 2003, the IRS added a section allowing some disability trusts to reduce this tax liability. This is another example of why reviewing estate plans every few years is important.

Trusts need to meet several requirements to be considered qualified disability trusts for tax purposes. However, if a special needs trust meets these criteria, it could save a lot in taxes.

Most special needs trusts already meet the requirement to be treated as qualified disability trusts and can be reported as such at tax time. For 2022 tax year, the tax exemption for a QDisT is $4,400. For tax year 2023, the amount will increase to $4,700. Income from a QDisT is reported on IRS Form 1041, using an EIN, while distributions to the beneficiary will be taxed on their own 1040 form.

The best way to fully understand a QDisT is through an example. Let’s say a child is diagnosed with a disability, and their grandparents contribute $500,000 to an irrevocable special need’s trust the child’s parents have established for the child’s benefit. The trust generates $25,000 in annual income, and $10,000 is used annually for expenses from the child’s care and other needs.

Who pays the income tax bill on the trust’s gains? There are a few options.

The parents could include income from the trust as part of their taxes. This would be “on top” of their earned income, so they will pay their marginal tax on the $25,000 generated from the trust—paying $8,000 or more.

Alternatively, trust income spent for the child’s benefit can be taxed to the child—$10,000, as listed above. This would leave $15,000. However, this must be taxed to the trust. Trust income tax brackets are high and increase steeply. Paying this way could lead to higher taxes than if the parents paid the tax.

The QDisT was designed to alleviate this problem. QDisTs are entitled to the same exemption allowed to all individual taxpayers when filing a tax return. In 2012, for instance, the personal tax exemption was $3,800, so the first $3,800 of income from QDisTs wasn’t taxed.

The deduction for personal exemptions is suspended for tax years 2018 to 2025 by the Tax Cuts and Jobs Act, except the same law said that in any year there isn’t a personal exemption, the exemption will be allowed for a QDisT.

For tax year 2022, $4,400 is the indexed tax exemption amount for these trusts, including most special needs trusts. For tax year 2023, the amount will increase to $4,700.

To be reported as a qualified disability trust, specific requirements must be met:

• The trust must be irrevocable.
• The trust must be established for the sole benefit of the disabled beneficiary.
• The disabled beneficiary must be under age 65 when the trust is established.
• The beneficiary must have a disability included in the definition of disabled under the Social Security Act.
• The trust must be a third-party trust, meaning all funding must come from someone other than the disabled beneficiary.

An experienced estate planning attorney can help set up a special needs trust to meet the criteria for a QDisT and enjoy the tax benefits the statute grants.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Investopedia (March 4, 2023) “Qualified Disability Trust: Meaning and Tax Requirements”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

As the number of people aged 65 plus continues to increase, more seniors realize they must address the cost of long-term health care, which can quickly devour assets intended for retirement or inheritances. Those who can prepare in advance do well to consider asset protection trusts, says the article “Asset protection is major concern of aging population” from The News Enterprise.

Asset protection trusts are irrevocable trusts in which another person manages the trust property and the person who created the trust—the grantor—is not entitled to the principal within the trust. There are several different types of irrevocable trusts used to protect assets. Still, one of the more frequently used irrevocable trusts for the purpose of protecting the grantor’s assets is the Intentionally Defective Grantor Trust, called IDGT for short.

As a side note, Revocable Living Trusts are completely different from Irrevocable Trusts and do not provide asset protection to grantors. Grantors placing their property into Revocable Living Trusts maintain the full right to control the property and use it for their own benefit, meaning any assets in the trust are not protected during the grantor’s lifetime.

IDGTs are irrevocable, and grantors have no right to principal and may not serve as a trustee, further limiting the grantors’ access to the property in the trust. Grantors may, however, receive any income from trust-owned property, such as rental properties or investment accounts.

During the grantor’s lifetime, any trust income is taxed at the grantor’s tax bracket rather than at the much higher trust tax bracket. Upon the grantor’s death, beneficiaries receive appreciated property at a stepped-up tax basis, avoiding a hefty capital gains tax.

While the term “irrevocable” makes some people nervous, most IDGTs have built-in flexibility and protections for grantors. One provision commonly included is a Testamentary Power of Appointment, which allows the grantor to change beneficiary designations.

IDGTs also include clauses providing for the grantors’ exclusive right to reside in the primary residence. However, if the grantor needs to change residences, the trustee may buy and sell property within the trust as needed.

IDGTs provide for two different types of beneficiaries: lifetime and after-death beneficiaries. Lifetime beneficiaries are those who will receive shares of the total estate upon the death of the grantor. Lifetime beneficiary provisions are important because they allow the grantor to make gifts from the trust principal. Hence, there is always at least one person who can receive the trust principal if need be.

Asset protection trusts are complicated and require the help of an experienced estate planning attorney. However, when used properly, they can offer protection from unanticipated creditors, long-term care costs and even unintended tax liabilities.

Reference: The News Enterprise (March 4, 2023) “Asset protection is major concern of aging population”

When a person dies, others are called upon to manage their estate. The executor, named in their will, oversees the distribution of assets. If they didn’t have a will, the court names an executor, sometimes referred to as an administrator. Beneficiaries are those designated to inherit the decedent’s assets, as explained in a recent article, “Executor vs. Beneficiary Rights: Estate Planning Guide” from Nasdaq.

The terms beneficiaries and heirs are used interchangeably. Beneficiaries are typically persons named in a legal document, such as a will or a trust. Life insurance policies, retirement accounts and bank accounts also have named beneficiaries to inherit the assets or proceeds. In the case of life insurance, it is on the death of the original owner. In most cases, the person making beneficiary designations has the right to change them.

State inheritance laws legally identify the heir as having the right to receive assets from a deceased person’s estate, usually their spouse, children, or other relatives.

The executor is appointed by the will or the court to oversee probate. This is where assets are inventoried, outstanding debts are paid and any remaining assets are distributed to heirs.

When having a will prepared by an experienced estate planning attorney, it’s possible to name a beneficiary as an executor. However, there are some pros and cons to doing this.

An executor who will benefit from the will could simplify things, if the estate is relatively straightforward. However, if the estate is large, or if other beneficiaries might challenge the will, it could get messy.

Executor tasks may include:

• Consulting with estate planning attorneys, accountants, financial advisors, and others whose services are needed in the probate process;
• Collect and inventory assets of the decedent;
• Give notice to creditors of the person’s death, so they may bring claims against the estate for any outstanding debts;
• Receive reimbursement for expenses paid to manage the estate, including professional fees;
• Collect a fee for their time and services provided as the executor, which could be a percentage of the estate or a flat fee, depending on what is permitted by state law and local custom.

Beneficiaries have certain rights:

• Receive assets from the estate they’re entitled to according to the terms of the will or state law in a timely manner;
• Request and receive information about the administration of the estate, including financial details;
• Request the removal of the executor.

Beneficiaries also have the right to sue the executor of an estate, if they believe a breach of fiduciary duty has occurred. The executor is a fiduciary, meaning they must act in the best interest of the beneficiaries or other persons represented in financial matters.

Executors can be sued only if there are grounds for doing so. For example, a beneficiary might have grounds to sue the executor if the executor:

• Fails to provide financial statements upon request.
• Delays distribution of assets for no reason.
• Favors one beneficiary over others when distributing assets.
• Mismanages or misuses estate assets for their benefit.
• Uses estate assets to make risky investments.
• Has an obvious conflict of interest because they are also beneficiaries of the estate.

Understanding the difference between executor vs. beneficiary rights is essential if you’ve been assigned either role. If you’re preparing a will with an experienced estate planning attorney, they will clarify these roles and help you determine the best candidate for executor.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Nasdaq (March 10, 2023) “Executor vs. Beneficiary Rights: Estate Planning Guide”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Because of the extreme rate of inflation, which hit 6.5% in 2022, more of us are worried about estate planning than ever before, according to the annual Wills and Estate Planning Survey from Caring.com.

SI Live’s recent article entitled, “More young adults are creating wills because of COVID-19, inflation, survey says,” reports that roughly 20% of survey respondents said they believe an estate plan is now more important because they worry about how inflation will affect their heirs’ financial future. More than one in 10 said inflation changed their view on estate planning because they see their assets, such as real estate, as more valuable than in the past.

However, 9% of survey respondents said they feel inflation reduced the value of their assets, creating less of a need for estate planning; and 7% said they had to sell many of their valuable assets to keep up with the cost of inflation in their day-to-day lives.

Although 64% of Americans think having a will and an estate plan is important, only about a third (34%) of Americans have a will or an estate plan. Caring.com found younger Americans are 63% more likely to have an estate plan in 2023 than compared to 2020 – and more than a third said inflation made them realize the need for an estate plan.

Sixty-three more young adults aged 18- to 34-year-olds have estate planning documents than the same age group did in 2020, because of inflation, according to the results. This makes young adults almost as likely as middle-aged adults to have an estate plan. According to the survey, the coronavirus (COVID-19) pandemic had a significant impact on young adults wanting to create an estate plan, with the number increasing by 69% between 2020 and 2021.

Just 32% of Americans age 55+ said inflation changed their mind about estate planning. However, older adults have an overall higher rate of already having a will. The 2023 Wills and Estate Planning Survey found 3% more Americans have a will in 2023 than last year – from 33% to 34% — and 6% more Americans have a will than in 2020.

A total of 42% of Americans said they haven’t created a will because of procrastination. One in three people said they don’t have an estate plan because they don’t think they have enough wealth to leave behind when they die.

Everyone should consider estate planning. Ask an experienced estate planning attorney for assistance.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: SI Live (March 3, 2023) “More young adults are creating wills because of COVID-19, inflation, survey says”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Mindful estate planning can create tax and investment efficiencies and help ensure that your wishes are fulfilled, says a recent article titled “Estate planning basics: Tips for strategic preparation” from Atlanta Business Chronicle. Before creating a plan, it may be helpful to understand the components of a comprehensive plan, how assets can be transferred and how to get started.

Thoughtful estate planning starts with key documents. Your last will and testament provide details on wishes about property distribution and assets after death. The will creator names an executor, who oversees and manages the estate until its final distribution, including payment of any outstanding debts or taxes.

The will has no impact on insurance proceeds, retirement assets, or transfer-on-death investment accounts. A will can be amended during the creator’s lifetime and should be reviewed every three years or so to ensure that it still aligns with the testator’s wishes.

Trusts are legal entities allowing a third party—the trustee—to manage assets on behalf of beneficiaries. There are many different kinds of trusts, depending on the family’s needs. The grantor, who is the person creating the trust,  can define how and when assets pass to beneficiaries.  They can be revocable, meaning the grantor can amend the trust as long as they are living, or irrevocable, meaning the grantor cannot amend the trust after its creation.

A letter of intent can accompany a will and is published to the executor, trustees and beneficiaries. This provides detail from the decedent on their wishes but is not legally enforceable.

Power of Attorney is used when the person creating it is physically or mentally disabled due to illness or injury. It allows an agent to manage financial and legal affairs, can be temporary or permanent and is revoked upon the death of the principal.

Advance directives for health care provide detailed guidance to caretakers and medical professionals regarding wishes for healthcare when the person is unable to communicate their own wishes.

Transferring assets to beneficiaries occurs in several different ways, including designations, jointly held accounts and property, probate, or trusts. Beneficiary designations are typically used with life insurance policies, annuity contracts, retirement accounts and investment accounts.

Some assets are owned through Joint Tenancy With Rights Of Survivorship (JTWROS). They pass by title or registration to a surviving co-owner. This type of ownership is usually used with bank and investment accounts, real estate property, vehicles, or boats. The asset automatically transfers to the surviving owner. Be sure to avoid conflicting instructions in wills or trusts when assets are owned with JTWROS.

Probate is the method through which the estate is approved by the court and assets are distributed using the will as guidance. The court also authorizes the executor to manage the estate.

Assets held in trust are maintained by trustees who hold the assets on behalf of beneficiaries. They are passed on based on the trust agreement and don’t go through probate.

Once you have created an inventory of all assets and properties, meet with an experienced estate planning attorney to draft the documents needed to carry out the plan. The attorney will help refine goals and clarify key issues. Assets may need to be retitled and trusts may need to be funded. Executors, trustees and beneficiaries should be notified, so they understand their role in your estate plan.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Atlanta Business Chronicle (March 1, 2023) “Estate planning basics: Tips for strategic preparation”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys