All parents have a never ending list of concerns for their children. When a child has a physical or mental challenge, the concerns are multiplied. My role, as an estate planning attorney, is to help my clients figure out how to continue to protect their child should they themselves become incapacitated or pass away. I can offer a variety of choices as to how to protect assets and provide for the entire family.
The obvious questions to address are who will care for the child and what funds will be available for that child’s care. For these parents, an attorney can provide a tutorial on how to make the right choices and upon whom they could rely. Successful planning requires us to know the nature of the assets – what you own and how you own it.
The first step is for the client to take an inventory of their assets. Make a list of all of your assets – your cash accounts, stocks, bonds, home, car and other valuable items. Next to each item, consider who owns that asset. Whose name appears on the bank account, brokerage statement, and title to the car or deed to the house? If it is more than one name, then often the asset will be deemed to be owned with a right of survivorship. That means that the person who lives longest will own the entire asset. The other way to own an asset jointly is to own assets as tenants in common. In those cases the asset is deemed to be owned by percentages. If no percentage is stated then the owners will each be deemed to own a 50% interest in the asset. Each tenant in a tenancy in common can transfer their ownership interest by gift, by sale, or upon death. If two co-tenants purchase a home together and the deed says that A owns 60% and B owns 40%, then B can give away, sell or bequeath his 40% interest at any time, to anyone he chooses. Husbands and wives in first marriages tend to own assets jointly with a right of survivorship. When one spouse dies, the survivor owns the entire asset. In the traditional family scenario, that may work out well. If you are not in a traditional marriage, you may require some more clever and considered planning to achieve all of your goals.
The other factor to consider is whether or not the asset has a beneficiary designation. Many of our assets already have documents that direct their disposition in the future. Life insurance policies designate beneficiaries. IRA’s, 401k’s and other qualified plans designate beneficiaries. Beneficiary designations can be added to most bank and brokerage accounts depending upon the state law and the rules of the financial institution.
Now that you have an understanding that how you own an asset can affect what happens upon your death, you should consider what will happen to your assets if you pass away and have done no planning. Once you can identify not only the assets you own and how they are owned you can begin to consider the best way to apply them for the protection of your family.
Assets owned in your sole name, with no beneficiary designation and no co-owner, pass according to your will and through the probate process. A will is a list of instructions for the probate process. The probate process is how the Courts supervise the payment of debts and taxes from an estate and guarantee passing assets to the appropriate persons. The probate process can add to the expense and delays in providing your estate assets to the family members who have relied upon you. Therefore, it may be best to direct some assets pass directly upon death in a trust or into a trust which avoids probate.
When planning for persons with disabilities, we often use special needs trusts. A third party special needs trust is often created by a parent or grandparent for the benefit of a child. It may be the best receptacle for your assets to be held, administered and applied for the child with a disability. A special needs trust is a discretionary trust. The trustee of the trust has the discretion to apply the assets for the use of the child in the trustee’s sole and absolute discretion. This puts a lot of power in the hands of the trustee. However, the use of a trust will better guarantee the proper use of your estate for the benefit of your child.
If assets pass directly to a person who is incapacitated, a Guardian will need to be appointed by a Court. The drawbacks of a guardianship are that a judge may select the Guardian who might not be a family member, the guardianship proceeding is costly as lawyers will get paid fees, and the guardian may have to post a bond annually, which is an expensive form of insurance to guarantee the return of any funds squandered or stolen by the guardian.
Another alternative chosen in estate planning is to leave funds to siblings or other family members directly in the hope that they will apply those funds for the benefit of the child with disabilities. However, this method is seriously flawed. Will your assets actually be used for that child’s benefit? What if the person who receives the assets themselves goes bankrupt, gets sued or abuses the funds. And what will happen if the person who would appear to receive assets from your estate does not survive you or then becomes incapacitated or dies?
Knowledge and organization regarding assets are the key factors to successful estate planning for parents of children with challenges. Lawyers providing these services should have the skills and background to assist you in making appropriate choices and executing the best estate plan possible.
Evan J. Krame © 2010, Rockville, Maryland.