Lifetime Giving, Minors and Incapacitated Beneficiaries Amy F. Altman, Esq. Meltzer, Lippe, Goldstein & Breitstone, LLP 190 Willis Avenue Mineola, New York 11501 Outline A. Inter Vivos Gifts B. Trusts for Young Beneficiaries and Uniform Gifts to Minors Act C. Guardians of the Person and/or Property D. Trusts for Spendthrifts E. Testamentary Supplemental Needs Trusts F. Funding Testamentary Trusts by Beneficiary Designation Inter Vivos Gifts I. Purpose of Gifting II. Greater tax benefit a. lifetime gifts are tax exclusive. b. removal of property gifted, gift tax, paid, appreciation and income generated. 1
State Gift Tax Only Connecticut has a gift tax New York State repealed gift tax in 2000 Gifts made within 3 years of death are includable --If made by a NY resident between April 1, 2014 and January 1, 2019. Federal Gift Tax and Annual Exclusion Federal Gift Tax exemption is $5,450,000 Identifying which assets to gift Techniques to maximize gifting The Annual Exclusion US citizens or residents are permitted to transfer, tax free, up to $14,000 to an unlimited number of donees. IRC 2503(b) May be made to any person Trust Corporation 2
Gift-Splitting A married couple can together can gift $28,000 to anyone If only one spouse made gift, the other spouse not required to file, but should! Filing of US Gift Tax Return, Form 709 No Carry forward to the next year No reciprocal giving Educational and Medical Expense Gifts What s better than a gift? No tax consequences, monetary limit or reduction to annual exclusion! Payment of Tuition at an educational institution Payment to a provider for medical care 529 Plans Prepaid Tuition Plan (not in NY) College Savings Plan, IRC 529 $ grows tax free, no investment control NYS annual state tax deduction if $10,000 Not taxed if used for educational expenses Broadly defined: tuition, board, fees, books and supplies. Can front load account $70,000 (5yrs) Penalty of 10% and Federal Income Tax for non-qualified withdrawals www.nysaves.org 3
Trusts for Young Beneficiaries and Uniform Gifts to Minors Act Drawbacks to outright gifts Benefits to placing gifts in trust for minors Uniform Gifts to Minors Act (UGMA) Uniform Transfers to Minors Act (UTMA) UTMA Statutory trust for minors Funds are irrevocably placed into an account and belong to the minor Only one person can be the custodian. Should not be the parent! If you die before child is of age it will be includable in your estate! Trusts for minors 2503(c) Trust Age 21 Trusts Income and principal available for distribution 2503(b) Trust Unqualified income interest No age requirement for termination of trust 4
Guardians of the Person and/or Property When creating an estate plan where minors are beneficiaries: The most important question is who do the parents want to appoint as guardian? The duties can be bifurcated into Guardian of the Person person who make daily decisions for the minor Guardian of the Property person who is financially savvy Always choose successors! Sample Language DESIGNATION OF GUARDIANS AND CUSTODIANS. I designate my [husband/wife], as Guardian of the person and property or estate of each of our minor children and as successor Custodian of any property held by me for a child of ours under the gifts or transfers to minors act of any jurisdiction. If [he/she] fails to qualify or ceases to act for any reason, I designate [ ] in [his/her] place and stead. No such Guardian or Custodian shall be required to post a bond or other security in any jurisdiction. Trusts for Spendthrifts What is a Spendthrift Trust? Asset protection language from creditors/spouses Makes clear that the beneficiary has no control over distributions 5
Sample Spendthrift Provisions The interest of a beneficiary in the income or principal of any Trust hereunder shall be free from the control or interference of any creditor of a beneficiary or of any spouse of a beneficiary and shall not be subject to attachment or execution or susceptible of anticipation or alienation. To the extent permitted by law, no interest of any beneficiary in the income or principal of any trust hereby created shall be subject to pledge, assignment, sale, or transfer in any manner, nor shall any beneficiary have power in any manner to anticipate, charge or encumber his or her said interest, nor shall said interest of any beneficiary be liable or subject in any manner while in the possession of my Trustees for the debts, contracts, liabilities, engagements or torts of such beneficiary. Testamentary Supplemental Needs Trusts Will should not give anything outright to beneficiary with special needs who may be on governmental benefits now, or in the future. Tell clients to discuss these issues with relatives What is a Supplemental Needs Trust? A Supplemental Needs Trust enables a person with a disability to maintain eligibility for governmental benefits, primarily Medicaid and SSI. The purpose is to enhance the quality of life for the disable person by permitting the trust to pay for expenses not paid for by public benefits. 6
New York s Legal SNT History Matter of Escher, 94 Misc. 2d 952, 407 N.Y.S.2d 106 (Surr. Ct. Bronx Cty., 1978) established the right of a parent to create a discretionary trust or Escher Trust for a disabled adult child without jeopardizing the child s eligibility for government benefits. This was later codified in EPTL 7-1.12. Types of SNT There are a few different types of SNTs but all have some of the same defining characteristics: They are all irrevocable; The beneficiary must not have the right to direct the use of the corpus or to sell her beneficial interest; and The beneficiary must be disabled. What are the different types? Third party supplemental needs trust Payback Trust (also known as first party, self-settled trust, exception trust) Individual payback trust Pooled trust 7
A Third Party SNT An SNT established with funds from someone other than the disabled beneficiary (example: parents placing their own funds in trust for disabled child). Funds placed into the SNT are not considered available for purposes of Medicaid or Supplemental Security Income. Ways to structure & fund a SNT Inter-vivos v. testamentary trusts. If inter-vivos must wait until there is no longer a legal duty to support. Non-probate assets remember to change beneficiary designations to name of SNT. Life insurance Second to die life insurance policies. Cheaper because its payout is on the second to die. How is an SNT managed? The Grantor appoints a trustee who can make distributions in their sole discretion. All distributions are generally paid directly to third parties that provide goods and services. The State will not have the right to place a lien or recovery against SNT. Parents can direct how to distribute the remainder at the disabled child s death. 8
Updates Qualified Disability Trust IRC 642(b)(2)(C)(ii)(I) An SNT can qualify as a qualified disability trust and the trust can qualify for a deduction As long as Trust is funded before beneficiary turns 65 Deduction of $4,000 Able Act (529A Accounts) Similar to a 529, for disabled beneficiaries Qualifications: To qualify, you must have been disabled before age 26. Annual contribution limit equal to the annual gift tax exclusion currently $14,000. The account can grow to $100,000 without jeopardizing federal benefits balances over that amount may prompt a suspension. Payback provision. Funding Testamentary Trusts by Beneficiary Designation What does this mean? Funding trusts created under will using nonprobate assets What are some non-probate assets: Life insurance Totten Trust Accounts Check the beneficiary designations to make sure they are in the name of 9
THANK YOU!! Email: aaltman@meltzerlippe.com 10