Estate Planning and Divorce

It’s important to update your estate planning documents after divorce; and if you have not done your estate planning post-divorce is an excellent time to complete them.

Usually married individuals designate each other as beneficiaries and fiduciaries for their estate plans. When a divorce is finalized all of this planning becomes mute. There are state laws that impact the beneficiary designations and of course most divorced spouses no longer want their ex serving as their fiduciaries or inheriting their assets. Here are some estate planning issues to consider.

Update you Last Will and any Trusts – Fiduciaries and Beneficiaries

A will is a legal instrument which predetermines the distribution of a person’s assets after death. A trust is a legal instrument which is established for the purpose of holding or using assets on behalf of a predetermined beneficiary. As a default matter, whenever a divorce occurs in Colorado, the law automatically removes ex-spouses from wills and trusts as beneficiaries. Also by default, once an ex-spouse is removed, he or she will be replaced by a “contingent beneficiary.” In many cases, this contingent beneficiary may not be who you want your entire estate to flow to. Thus, it’s very important to update your will and either dissolve or revise any trusts in order to ensure that assets are going in the desired direction. There may be a chance, for whatever reason, that spouses wish to include their ex-spouse in a will. This means they will need to take the proper steps and ensure that the ex-spouse isn’t automatically removed by operation of Colorado law.

You may also need to select a new trustee. Trusts have grantors, trustees, and beneficiaries – the grantor is the trust originator or creator, the trustee is the manager, and the beneficiary is the recipient of the assets of the trust. If your selection of a trustee is no longer appropriate, given the divorce, then you need to update the documents to reflect your current wishes regarding the care and management of your trust property.

If you have minor children it is important to name guardians and trustees for them in your documents. This might be the ex-spouse or a close and trusted friend or relative. Either way as a newly single parent it is super important that you update your wishes in regards to your children. This might include creating a trust for them should something happen to them, providing resources for their well being, etc.

Update your Agent for your Powers Of Attorney

Powers of attorney are used during disability with a named agent stepping in to manage the financial and/or medical concerns of the party.  In many cases, people designate their spouse as the agent for the POAs for the purpose of managing their affairs, and this designation should be revisited upon any divorce.

Reach out for a quick consultation

These are just a few of the estate planning considerations that you will need to think about following divorce. Whether you need to update your estate plan or create one – post divorce is an excellent time to get your affairs in order. The clarity provided to your loved ones should something happen to you is priceless.  Schedule now.

Special Needs Trusts In Colorado

What Is A Special Needs Trust?

A special needs trust (also known as a supplemental care trust or supplemental needs trust) is a discretionary trust designed to provide for a disabled individual’s supplemental care (i.e., those things that are not provided under public benefit programs) while maintaining their eligibility for public benefits.

Its primary purpose is to preserve inheritances, personal injury settlements and awards, and other assets for use by an individual with special needs without disqualifying them from eligibility for public benefits.

Who Should Consider A Special Needs Trust?

Special needs trusts are very appropriate for parents of adults or minor children with disabilities who wish to leave their children more than $2,000 in countable assets. These parents are concerned about who will care for their child and how that child will be provided for once their parents pass away. If a parent leaves all their assets directly to the disabled child, that child will not be financially eligible for public benefits until the inheritance is spent down. Once spent down, public benefit programs may then provide for the basic needs of the child with a disability. There will not, however, be any funds available to supplement the child’s basic needs.

In essence, a special needs trust allows the disabled individual to keep both the inheritance as well as the public benefits. A special needs trust is a mechanism that provides for those extras that can make the difference between subsisting and thriving.

How Does A Special Needs Trust Preserve Eligibility For Public Benefits?

A trust is a separate legal entity. Funds are transferred into the trust to a person, called the trustee, who is responsible for managing, investing and distributing the assets or property of the trust. The trustee holds the funds for the benefit of the beneficiary of the trust. The person who establishes the trust and who initially transfers the property or causes the property to be transferred to the trust is called the grantor or settlor. This is often the parent.

In order to understand how the special needs trust can shelter inheritances and personal injury funds, it is necessary to understand the concept of availability. Availability is the standard used by governmental agencies to determine whether assets (including trust funds) will be counted for purposes of determining asset or resource eligibility for public benefits. As indicated above, an individual cannot have more than $2,000 in nonexempt assets to qualify for Supplemental Security Income (SSI) and most Medicaid programs. In general, if an applicant or recipient can gain access to an asset or resource, it will be deemed available to that individual for purposes of resource eligibility and, therefore, will be countable against the $2,000 maximum. If, however, access to such funds is restricted so that only the trustee, a court or a third person (and not the disabled child beneficiary) has authority to make distributions from the trust, then such funds are deemed legally unavailable to the beneficiary and are not counted for public benefit eligibility purposes. Simply put, special needs trusts are drafted so as to make the trust funds unavailable for purposes of Medicaid eligibility.

What Types Of Distributions May Be Made From Special Needs Trusts?

Special needs trusts are designed to supplement – rather than to supplant or replace – goods and services already provided under a public benefit program such as Medicaid. A properly drafted special needs trust should therefore make it clear that:

• Trust funds are not legally available to the beneficiary in the sense that the individual cannot compel or require a distribution.

• Trust funds should not be used for food or shelter-related items or for services already provided by a public or private benefit program. For third party-funded trusts (see discussion below), there may be more flexibility.

Examples of acceptable special or supplemental needs that can be paid for by the trustee of the special needs trust include but are not limited to the following:

• Support services, dental care, physical therapy, massage and other medical costs to the extent not covered by some other public benefit program

• Payments for tuition, books and supplies

• Transportation to and from school

• Health and life insurance premiums

• Books, magazines and video games

• Season tickets for plays, museums and sporting events

• Televisions, VCRs, CDs, sound systems and computers

• Hobbies

• Vacations

• Costs for travel companions

• Automobiles

• Automobile maintenance expenses, car insurance and gasoline

• Cleaning supplies and paper products

• Bus passes

• Telephone, cable television and internet

• A prepaid burial/cremation and funeral plan: If it’s $1,500 or less, it can be revocable; if it’s more than $1,500, it should be irrevocable

• Cost differentials between private and semi-private rooms in institutional settings

• Clothing

Examples of distributions from a special needs trust that can adversely affect public benefits include the following:

• Payment of rent, mortgage or real property taxes

• Heating and cooling bills

• Electricity, water, sewage and garbage collection

• Payments for groceries or meals

• Cash distributions directly to the beneficiary (with the exception of the $20 unearned income disregard under the SSI program).

Such items should usually be purchased by the beneficiary using their SSI payments or other public benefits such as food stamps.
Trustees of special needs trusts should be granted full discretion, meaning that they have the absolute right to decide whether to distribute funds. If the trustee is required to distribute income or principal rather than being granted the choice to do so, the amounts subject to mandatory distribution will be deemed countable regardless of whether they were actually distributed.

Types Of Supplemental Care Trusts

A third party-funded special needs trust is a trust that contains assets belonging to someone other than the beneficiary, such as a parent or other relative. This type of trust is typically established under the last will and testament of the parent.

The will provides that upon the parent’s death, any assets that are to go to the disabled child are to be held in a special needs trust, the terms of which are contained either within the will or in a separate trust document that is cross-referenced in the will. Third party-funded special needs trusts can be very flexible and, unlike the self-settled disability trusts (discussed below), they can contain provisions allowing funds remaining in the disabled child’s trust to pass to the parent’s other children or grandchildren upon the disabled child’s death. This is in contrast to the disability trust, which must provide that remaining funds first be used to repay Medicaid expenses incurred by the state.

A self-settled special needs trust is a trust that contains assets that the disabled child already owns or is legally entitled to. These assets include the disabled individuals’ own savings, personal injury settlement and, more commonly, inheritances that the disabled child is entitled to receive outright – for example, when the parent fails to set up a third party-funded special needs trust in their will and the inheritance goes directly to the disabled child.

In order to shelter assets that already belong to the disabled child or to which they are already legally entitled, there are only two types of trusts that can be used to maintain Medicaid eligibility: a disability trust, and a pooled trust, both of which are described in more detail below.

In order to be a qualified disability trust:

• The beneficiary must be disabled as that term is defined by Social Security law.

• The beneficiary must be under age 65.

• The state must be designated as the remainderman, thereby entitling it to any funds remaining in the trust at the beneficiary’s death.

• The trust must be established by the beneficiary, a parent, grandparent, legal guardian or court;

• The trust must be reviewed and approved by the Colorado Department of Health Care Policy and Financing (unless already approved by the federal Social Security Administration).

• The trust must be drafted as a special needs trust (i.e., funds must be legally unavailable to the beneficiary).

The second type of permissible self-settled trust is a pooled trust. This form of trust is very similar to the disability trust except that it is run by a nonprofit agency. In order to be a qualified pooled trust, the following requirements must be met:

• The beneficiary must be disabled as defined under the Social Security Act and, unless waived by the state, under the age of 65.

• The trust must maintain a separate subaccount for each beneficiary.

• The trust must be established and managed by a nonprofit association (e.g., Colorado Fund for People With Disabilities).

• The trust must be established by a parent, a grandparent, the court, a guardian or the individual.

• The state must be designated as the remainderman except to the extent that the pooled trust retains the funds (the trust will almost invariably retain.

• The trust must be reviewed and approved by the Colorado Department of Health Care Policy and Financing.

• The trust must be drafted as a special needs trust (i.e., funds must be legally unavailable to the beneficiary).

When Should You Set Up A Special Needs Trust?

If you are contemplating leaving anything to your loved one with special needs, then you need to set it up now. As discussed above, if you fail to do so, then the only choices left to your disabled child is to immediately spend down the inheritance or place it in a disability trust or pooled trust, which are less flexible and contain provisions that require any funds remaining in the trust at death to either be paid to the state or remain with the pooled trust, instead of passing it on to other heirs.

Demystifying Trusts

Planning our estate with Wills and Trusts.

I can’t tell you how many times I get calls from people who want to create a trust of some kind as a part of their estate plan. There are many types of trusts and they all serve different purposes. I have created a summary of the most common types of trusts and what they are used for as a basic guideline to help dispel some of the myths around “trusts” and how they are used. There are many different asset protection tools available, including LLCs and family partnerships and so trusts are an important vehicle but not the only way to protect assets. As an estate planning tool, trusts are an important planning technique but not always either necessary or advisable. If you are curious about trusts and how they are used, I hope the summary below gives you some helpful information.

First, there are revocable trusts and irrevocable trust. Revocable living trusts are generally used as part of an overall estate plan and are important planning tools in Colorado when a client has assets in multiple states or a very complex asset structure, has an imminent disability that would require a successor trustee to be able to step in seamlessly, or has a need for privacy. While probate avoidance is important in some jurisdictions, Colorado has an informal and relatively simple probate process that can make the expense of trust set up contraindicative for simple estates. Revocable living trusts do not shelter assets from the creditors of the settlor and become irrevocable upon the death of the settlor.

An irrevocable trust cannot be modified or revoked after it is created. Examples of these are Irrevocable Life Insurance Trusts (ILIT) or Asset Protection Trusts, which can be set up in jurisdictions such as Nevada or the Cook Islands that have trust protection laws. ILITs are generally used as an estate planning technique for those who find themselves in the position of having taxable estates ($5.43 million in 2015) and Asset Protection Trusts are used to make sure that future creditors can never access the Trust to satisfy a judgment against the settlor.

Charitable Remainder Trusts are set up to benefit a nonprofit organization.   These are used as an estate planning technique and can help avoid the estate being taxed and gift tax implications. The settlor receives benefits during his or her life and also receives the intangible benefit of being recognized by the charity beneficiary during his or her life.

Special Needs Trusts are set up for people who are disabled and receiving government benefits. The disabled beneficiary cannot control the amount or frequency of the trust distributions and cannot revoke the trust. Parents of a disabled child can establish a special needs trust as part of their estate plan and not worry that their child will be prevented form receiving necessary benefits when they are not their to care for their child.

There are many other types of trusts, including Spend Thrift Trusts which are created to protect a beneficiaries’ interests from creditors, Tax By-Pass Trusts, Totten Trusts, etc. If you are curious about whether a trust might be an important tool to manage your assets, I would be happy to discuss the various types and how they might or might not be applicable to your situation.

Estate Planning For Single People

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Single people without children often avoid estate planning and the challenges associated with it, because of feeling overwhelmed or unsure.  This is unfortunate because its even more critical for single people to plan ahead and name their fiduciaries and beneficiaries as there is no clear cut answer for their loved ones should something happen.

The following questions should be addressed:

To whom should I leave my assets?

Do I need to consider creating a trust to manage my assets now or for my chosen beneficiaries in the future?

Who should be my personal representatives and/or trustees?

Who should be my agents for my medical and financial powers of attorney?

If you are a single person without young children, you can leave your assets to whomever you choose, including but not limited to your partners, relatives, friends or charitable organizations. In Colorado, you can also create Pet Trusts and name trustees to care for your animals. If you do not have an estate plan in place, the state will dictate who will inherit your assets.  A recent case in point, the author of the Girl With the Dragon Tattoo series, Stieg Larrsen did not have an estate plan and as a result, his estranged father and brother, whom he had not spoken to for over 20 years before his death inherited his entire estate and all royalties thereof while his long-time love and assistant, whom he had lived with for 20 years was cut off, receiving nothing.

Selection of the right personal representatives and trustees is also essential to successful estate and trust administration. Who do you trust to administer your estate, especially if your relatives live far away or are unfamiliar with your affairs?  In addition, health care and financial powers of attorney are very important documents to have in place since you may need these agents to make crucial medical decisions on your behalf as well as control your financial matters if you are ever unable to do so on your own because of disability.

Estate planning for a single person often demands more attention to detail than estate planning for married persons or single persons with children or grandchildren - because there is no obvious answer.  A Will is usually sufficient for unmarried persons with smaller estates, but a Living Trust may be a better option for persons with larger estates (click here to read about Living Trusts). Your estate planning documents should be reviewed regularly, particularly when there have been changes in the law or in your personal situation. As a single person, it is very important that you understand how your assets are currently held and how they will pass after your death.