PRESERVING ASSETS FOR MINORS AND INCAPACITATED INDIVIDUALS
October 23rd, 2018 | Joseph E. Kluger
Trusts are effective estate-planning and property management tools if drafted in the appropriate manner to meet the needs of the person wishing to establish the trust.
If a person wishes during lifetime or at time of death to transfer assets to children or incapacitated individuals, there are trust instruments that can be utilized to protect the beneficiary from himself/herself, from creditors, from divorcing spouses and from government attachment.
Generally speaking, a property owner (called the "grantor”, "trustor", or "settlor") transfers legal ownership (either immediately or at some later date, including at time of death) to a person or institution (called the “trustee") to manage that property for the benefit of another person (the “beneficiary"). Trusts can serve a number of purposes, including transferring wealth, reducing taxes, avoiding probate and controlling distribution of assets. HKQ Law Attorney Joseph Kluger points out another important function: “Trusts can be indispensable in preserving assets for those unable to manage financial affairs. Minors’ trusts and special needs trusts are but two examples of such trusts.”
UTMA and Minors Trusts
If a minor child inherits property from someone who passed away without a will, a court may require the appointment of a property guardian to manage that property until the child turns eighteen. While this is the age of majority in Pennsylvania, there may be a concern about whether an 18-year old is mature enough to manage his or her own financial affairs. For example, will the child be prudent enough to wisely invest the inheritance, or rather will the child spend the money on cars, partying, etc.? Fortunately, there are options that may alleviate these concerns.
If a trust had not been set up for the minor child, the child could inherit assets via the Uniform Transfers to Minors Act (UTMA). Each state has a version of UTMA, which allows a "custodian" to manage assets for children. The custodian has the right to collect, hold, manage, invest and reinvest a minor’s property – without a court's approval. When the custodianship ends (when the child turns 21 years old under Pennsylvania law), the money belongs to the beneficiary, outright.
There are occasions when a transfer under Pennsylvania’s UTMA may be appropriate, but we often see parents wishing to further restrict withdrawal rights of a beneficiary to a time beyond the age of 21, while still ensuring that money can be used for the "health, education, maintenance and support” of a child as needed over time.
A minor’s trust with spendthrift provisions allows such restrictions. For example, issues such as a beneficiary’s history of drug/alcohol abuse can be addressed in a minor’s trust, as could concerns that a beneficiary would be financially irresponsible even after the age of 21.
Indeed, the lawyers at HKQ Law often incorporate these concepts into a parent’s last will and testament.
Documented properly, a parent can have the comfort of knowing that his/her child/children will be financially better off without having the fear that the child will take the inheritance and immediately spend it on foolish items, make bad investment decisions or have someone else gain access to the money.
Special Needs Trusts
Also known as supplemental needs trusts, special needs trusts are specifically designed for the benefit of physically or mentally disabled individuals who may lack the capacity to manage financial affairs. These trusts protect the assets of disabled adults while maintaining their eligibility for government benefits such as Supplemental Security Income (SSI), Medicaid, vocational rehabilitation and subsidized housing.
If a close relative of a disabled individual passes away without a will, that individual may inherit assets under state law. Assets in excess $2,000 could jeopardize government benefits.
A special needs trust can serve a disabled individual for the rest of his or her life, ensuring that they are well cared for even after parents or guardians are gone. The trust provides safeguards that the individual's assets will remain under the control of the designated trustee. The trustee has a duty to protect the assets of the trust and to act in the best interest of the disabled individual. An individual or an institution (such as a bank) can serve as trustee.
While most special needs trusts are created when the disabled individual is young, special needs trusts must be created before the disabled individual's 65th birthday as there can be no additions to the trust after the trust beneficiary turns age 65. When drafting a special needs trust one must be mindful not only of Pennsylvania laws and regulations, but also applicable federal laws and state case law. As with a minor’s trust, a special needs trust can be part of a parent’s (or grandparent’s) last will and testament, or a separate document.
Money from a special needs trust can pay for things not covered by public benefits. For example, trust expenditures may cover medical and dental expenses, physical therapy, personal items, furniture, home improvements, technology, transportation, education and even vacations or entertainment. The trustee should pay money directly to a merchant or service provider rather than putting trust money directly into the hands of the beneficiary.
Transferring assets to a minor or an incapacitated individual, and preserving those assets, can be a complex process. HQK Law can provide guidance throughout the process – from drafting the required documents to administration of the trust. To speak with one of our estate planning attorneys, call (800) 760-1529.