Retirement Account Trusts

Generally, if you are married, it's often best to name your spouse as a designated beneficiary of your retirement account. This would allow your spouse to "roll-over" your retirement accounts into their own and also avoid probate. 

Issues can arise by naming a revocable living trust as the beneficiary of a retirement account. Tax Code and Treasury Regulations require the trustee of a standard revocable trust to withdraw the entire balance of a retirement account within five (5) years of the owner's death. This would have significant income tax implications.

By naming individual beneficiaries of retirement accounts, the beneficiary can withdraw money from the account over their lifetime according to life expectancy. By spreading out distributions, they can minimize income tax. Dangers arise, however, when a person withdraws a lump sum, either intentionally or inadvertently, resulting in a huge tax bill. The beneficiary could also lose the money to lawsuits, creditors, divorce, addiction, or a "spend down" for government benefits relating to disability. A surviving spouse should carefully assess the financial know-how and credit risks of next of kin.

Retirement account trusts or IRA Trusts allow one to have it both ways. IRA Trusts ensure that clients' beneficiaries stretch out their required minimum IRA distributions, thereby providing maximum benefit and potentially allowing for compounding many years free of income-tax. In addition, an IRA trust allows the option to give a "Trust Protector" the right to elect between minimum required distributions ("MRD") on an annual basis or to have a full discretionary "accumulation trust," where the trustee can hold the MRD inside the trust if the beneficiary has asset protection concerns.

Election by the "Trust Protector" must be made by September 30th of the year following the death of the retirement account owner. The election could also result in a shorter stretch because the age of the oldest possible beneficiary must be used (the "Trust Protector" may be given power to limit such possible beneficiaries to minimize this issue, however). Having the option to elect between minimum required distributions from the IRA Trust and holding the minimum required distributions inside the trust provides flexibility to consider all factors at the time of death (e.g. creditor problems, disability), up to the election deadline.

If done properly, even a modest retirement account can accumulate millions of dollars when stretched out over the lives of next of kin.

Recent SJC Decision Highlights Pitfalls of MassHealth Long-Term Care Planning

On May 30, 2017, the Massachusetts Supreme Judicial Court issued its long-anticipated decision in Daley v. Secretary of the Executive Office of Health and Human Services and Nadeau v. Director of the Office of Medicaid, which were consolidated on appeal. These cases focused on MassHealth’s claim that the right to live in a house owned by an irrevocable trust made it “countable” for the purposes of qualifying for Medicaid in Massachusetts.

To provide some background: without any planning, if an elder requires nursing home level care, they must use substantially all their assets to pay for that care. Once they deplete their resources, they can apply for MassHealth. If a married couple did not plan ahead and own a home, that home is not a “countable” asset so long as its value does not exceed an annually adjusted limit (currently $ 828,000). However, MassHealth will place a lien on the home and force a sale after both spouses have died.

To avoid such a lien, many elders place their homes in irrevocable (Medicaid-qualifying) trusts. MassHealth has recently challenged such trusts.

The good news is that it seems the SJC rejected MassHealth’s argument that specific provisions relating to “use and occupancy” of the house make it a “countable” asset for long-term care eligibility.

However, in the Nadeau case the SJC ruled that the right to use and occupancy of the house was akin to receiving fair market value rental income from the house. This may affect how much an applicant is required to contribute to the payment of long-term care. If the Medicaid applicant is not renting the house, but the fair market value rental income is imputed from the right to use the home, the trustee might have to either sell or rent out the home in order to generate income to contribute for the applicant's care. This could create an entire class of nursing home resident landlords.

The Daley case differs in that the Daley Trust did not own the home in fee simple; the Daleys retained a life estate and deeded only the remainder interest in their home to the trust. Because the trust did not have a property interest in the home during the Daleys lifetime, the court held that the right to use and occupancy could not be deemed akin to fair market value rental income. The court did seem to suggest, though, that the life estate itself has value, and although MassHealth does not currently consider a life estate in an applicant’s name a countable asset, the court left the question open.

Both the Nadeau and Daley Trusts allowed the trustees to pay any income tax liability arising from income distributions to the grantors from the principal of the trusts. The SJC asked MassHealth to calculate whether and how much of the trust would be countable based on these provisions.

The Nadeau Trust had another potential pitfall, which allowed the granting of trust property to non-profits. The court pointed out that one quarter of nursing homes are non-profits.
These trusts likely complied with the law at the time, but because this area of law is evolving, older Medicaid qualifying trusts should be reviewed to ensure compliance with current law. Given the financial strain of Medicaid and the increased scrutiny, it’s important for elders and their families to work with advisers who focus in this field of law because these issues can be eliminated or mitigated with proper planning.

Please feel free to contact my office to learn more.

Common Massachusetts Estate Tax Planning Methods

As you may know, if you are a resident of Massachusetts and die with more than $1 million in your “taxable estate,” then you owe a Massachusetts estate tax. Unlike the federal estate tax, which has a current threshold of $5.49 million and taxes at a 40% rate over the threshold, Massachusetts taxes the entire amount above $40,000 if over the $1 million exemption. The Massachusetts tax rate is based on a sliding scale from .8% to 16%.

Considering real estate, life insurance death benefits, and retirement accounts, many people are over the $1 million exemption. Fortunately, there are planning tools that can reduce and often eliminate the Massachusetts estate tax.

For a couple who have, say, $3 million, here is a common planning mechanism:

Living Trust with Marital Trust and Credit Shelter Trust:

The couple splits their assets evenly - each spouse with $1.5 million - and holds them in living revocable trusts with estate tax planning provisions. Spouse 1 dies and leaves $1 million in a credit shelter trust and $500,000 in a marital deduction trust. The marital share of $500,000 passes to the surviving spouse in trust and qualifies for the estate tax marital deduction. The $1 million credit shelter trust is not over the $1 million exemption, meaning no estate tax is due. Both trusts are available for Spouse 2’s benefit. If Spouse 2 then dies, Spouse 2 has $1.5 million in Spouse 2's own trust and the $500,000 in the marital trust. Because Spouse 2's taxable estate is $2 million, Spouse 2 is $1 million over the exemption and owes estate tax of around $100,000.

Without planning, their Massachusetts estate tax would have been about 80% greater.

Another benefit of this approach is that the credit shelter trust protects assets from unsecured creditors. These benefits should be considered alongside the desirable degree of the surviving spouse's control over assets, and whether it would make sense for the couple to hold their assets evenly. 

This approach might not be best for younger families who’d want more control for the surviving spouse, however. In that case, a disclaimer plan might be better, where a back-up trust - with credit shelter trust provisions - is drafted in order to provide flexibility and the appearance of simplicity (this plan puts the burden on the survivor to effect a tax plan and requires careful counseling while settling the first spouse’s estate). A client might also be best advised to plan for the next several years and understand future revisions to the plan will be necessary.

Charitable giving, and/or annual exclusion gifting are also great ways to reduce one's taxable estate.

As you can see, plans vary greatly depending on circumstances and goals. There are also more sophisticated planning mechanisms, but for most of us, the methods above are the ones to discuss with your local estate planning attorney.

Planning for A Special Needs Child

Caring for a child with special needs can bring unique joys but can also require patience, dedication, and understanding. Planning for the future can protect against financial hardships and help the child qualify for public benefits such as MassHealth, Supplemental Security Income, and subsidized housing. "Special needs" trusts, also sometimes referred to as supplemental needs trusts provide management of money for the disabled child and maintain the child's eligibility for government services. 

Take for example a couple with two children, Tom and Frank. Tom has special needs. With no special needs planning, a couple leaves their estate evenly to their children. Frank buys a house and car. Tom uses his inheritance to pay for public services that could have been covered if his parents had planned better.

Supplemental needs trusts allow disabled beneficiaries to receive their inheritance, as well as gifts, lawsuit settlements, and other funds without losing their eligibility for public assistance.

If you have a child with special needs who is unlikely to be able to live and work independently, a supplemental needs trust is a planning tool that should be considered. There's no benefit to waiting either. Parents can be the trustees during their life, and successor trustees will have a history and knowledge of the trust. The trust can receive assets from others, and life insurance may be used to provide funds.

If you are interested in creating a supplemental needs trust for a loved one contact me at

MassHealth Seeking to Limit Disability Trusts for Folks 65 and Over

MassHealth has proposed regulations that would limit the ability of folks 65 and over to fund pooled disability trusts. These so-called (d)(4)(C) trusts permit assets to be used and protected for the benefit of someone receiving Supplemental Security Income (SSI) or MassHealth benefits. A significant difference between special needs trusts, also known as (d)(4)(A), and the (d)(4)(C) pooled disability trusts is that beneficiaries of special needs (d)(4)(A) trusts must be under 65 years old when they are created and funded. This is not the case with (d)(4)(C) pooled disability trusts. (d)(4)(C) pooled disability trusts allow folks 65 and over to fund trusts. These trusts have been helpful to many people for long-term care planning.

According to information supplied for this Boston Globe articlethe average trust account balance administered by the Plan of Massachusetts and Rhode Island Inc., a nonprofit that administers trusts, is $60,000. These trusts are a way to provide small comforts to elderly people living in the community or long-term care facilities, such as nursing homes. The funds are often used to pay for special medical care, geriatric care managers, a weekly lunch with a companion, or health aides. The funds can also be used to help an elderly resident stay in their home instead of moving to a nursing home funded by taxpayers.

Any funds remaining after the beneficiary's death goes to MassHealth, except for final trust administration fees. The cost to the Commonwealth for these pooled disability trusts is not great and helps many of our elderly neighbors live in the community and pay for support.

This proposed change has not been finalized, and I encourage those who disagree with MassHealth's proposal to limit these trusts for people 65 and over, to call your legislators. Community members picking up their phones and voicing their opinions can have a big impact.

Planning with Trusts

What is a Trust?

A trust is a flexible, efficient instrument that can be used for a wide variety of purposes. It is a tool for holding property, and there are certain types of trusts more commonly used in estate planning. 

A settlor (or donor or grantor) transfers assets with the intent that the recipient (trustee) hold the property for the benefit of someone else (a beneficiary). The trust instrument will provide instructions for the trustee about how to manage and disburse the trust property. 

What are the benefits of trusts?

Depending on the situation, there can be a number of advantages to creating a trust.

1. Probate avoidance -- Upon the death of the donor, the trust will either continue for beneficiaries or terminate, depending on the terms of the trust. Either way, this avoids the time and expense of probate.

2. Privacy -- Unlike a will, a trust is a private document.

3. Tax savings -- Certain trusts can create estate tax advantages, such as "life insurance" or "credit shelter" trusts.

4. Asset management -- Trusts provide continuity of management in the event the donor becomes incapacitated, or dies with minor children, allowing trusted family members or professionals to step in and help.

5. Special needs planning -- Provides for financial management and protects assets, in addition to preserving public benefits for people with special needs.

There are 2 basic categories of trusts: Revocable and Irrevocable

A revocable living trust gives the donor control over the trust. He or she may alter, amend, or revoke (terminate) the trust at any time. As noted above, the continuity of management with revocable living trusts is useful if a donor becomes incapacitated or dies with minor children. These revocable trusts often become irrevocable at the death of the donor.

An irrevocable trust cannot be changed or amended by the donor. Irrevocable trusts are often used in MassHealth planning or with life insurance policies as an estate tax planning tool. Irrevocable trusts must obtain their own tax id number and file an annual tax return, where most revocable trusts use the social security number of the donor.

Trusts are often part of a comprehensive estate plan that would also include a will, durable power of attorney, health care proxy, HIPAA releases, and advance medical directives. 

"Do I Really Need a Will?"

Yes! The short answer is yes. Even if an estate is designed for probate avoidance, there is always a risk that probate property may exist at death. Even more importantly, for a parent of a minor child, a will may appoint a guardian for the child. Section 5-209 of the Massachusetts Uniform Probate Court (MUPC) provides in part that a guardian of a minor (or ward) "has the powers and responsibilities of a parent regarding the ward's support, care, education, health and welfare" and "shall act at all times in the ward's best interest and exercise reasonable care, diligence and prudence."

Choosing a guardian can be a difficult decision. A primary concern, especially for young children, is that the children and potential guardian have a close and loving relationship. It's also important to consider the age of the potential guardian given the physical and emotional energy needed to raise children. The chances of a grandparent dying before a minor reaches the age of majority is also something to consider.

An estate plan should also address management of a child's property. "Guardians" generally do not manage property for a minor. Under the MUPC, a person charged with managing a minor's property is known as a conservator. The comments to Section 5-409 of the Code provide that "a person nominated in a writing, will or otherwise, should be appointed unless not qualified." 

There are significant drawbacks to the use of conservatorship, however, including court supervision, filing annual accounts, and petitioning the court for permission before entering certain types of transactions. Court involvement makes this arrangement cumbersome and expensive. It's also not often ideal to have the minor's property turned over to him or her at the age of majority. 

The best way to address potential problems with conservatorship are for parents to create a trust to manage property for the benefit of their children. The trustee would manage the trust property, and the trust can be drafted in accordance with the wishes of the parent. Trusts are an efficient, flexible way of holding property for a minor.

While a will is an essential part of every estate plan, a comprehensive estate plan often includes one or more trusts, a durable power of attorney, health care proxy, HIPAA authorizations, and a living will in addition to a will.

ABLE Accounts Up and Running

On December 19, 2014, President Obama signed into law the Achieving a Better Life Experience (ABLE) Act. ABLE accounts allow people with disabilities and their families to open tax-advantaged savings accounts to cover qualified disability-related expenses, including, but not limited to education, transportation, and housing.

Each person may have one ABLE account, and $14,000 per year can be deposited for each beneficiary. The account value, up to $100,000, will be disregarded in determining eligibility for government programs such as Supplemental Security Income ("SSI") and MassHealth. 

The ABLE Act amended the Internal Revenue Code to provide a mechanism whereby a disabled person can have access to cash in an account that will not count against the $2000 resource limit for SSI and MassHealth.

This is an important and welcome development for parents who wish to save for a special needs child and for adults to have access to cash without interfering with their SSI benefits. Although the ABLE account program in Massachusetts is currently in the development stage, states such as Ohio, Nebraska, and Tennessee accept nationwide enrollment. 

For many families, an ABLE account will complement a Special Needs Trust (SNT) or Pooled Income Trust. 

For more information, contact Timothy F. Robertson, Esq.

What is a Durable Power of Attorney?

The durable power of attorney (DPOA) is often the most important estate planning document a person could execute. My office drafts them as part of a "core" estate plan. It allows you to appoint another person, referred to as your "agent" or "attorney-in-fact" to manage your financial affairs in the event you become disabled or incapacitated. The powers that are given can be limited or quite broad. A power of attorney that is not durable is no longer effective once you become disabled or incapacitated, whereas a "durable" power of attorney continues to be effective after disability or incapacity. 

Without a durable power of attorney, a family may have to go court to petition for a guardian or conservator to be appointed to manage the affairs of the incapacitated person. This process takes time, costs money, and could lead to further court involvement if there is disagreement among family members. 

Certain provisions of the Massachusetts Uniform Probate Code pertaining to guardians and conservators came into effect on July 1, 2009. Although a durable power of attorney does not become ineffective due to a lapse of time, durable powers of attorney executed under previous Massachusetts law may be invalid. 

In addition, attorneys report that clients sometimes have difficulty getting banks and other financial institutions to recognize the authority of an agent under a durable power of attorney. There is no guarantee that a third party, such as a bank or insurance company, will honor a durable power of attorney. A durable power of attorney may also be rejected by a financial institution if it lacks sufficient detail. Many banks and other financial institutions have their own standard power of attorney forms. To avoid problems, my office often recommends contacting the financial institutions with which you have accounts to execute their forms as well as a general durable power of attorney. 

Financial institutions may also be more comfortable with revocable living trusts, which I'll write about in another blog post.