Special Needs Estate Planning for Wealthy Families with Disabled Children

1. Special Needs Estate Planning for wealthy families with disabled childrenGlynis A. Ritchie, Esq. March 4, 2017

2. Wills • Revocable Trusts with Tax-Efficient Marital Trusts (e.g., QTIP) • Stand-alone 3rd party Special Needs Trust • Incapacity Documents: • Living Will • Health Care Proxy • Power of Attorney • Basic Planning Documents

3. Client Example • Mother and Father (52), two daughters (16, 18) and special needs son (22) who requires 24-hour care • Father founder and CEO of privately held business • Bulk of wealth  business interests; primary residence and vacation home ($2 MM Martha’s Vineyard house) • Federal and Massachusetts taxable estate of ~$20MM (could increase significantly if company goes public)

4. Reduce taxable estate; • Support daughters and future grandchildren; • Fund son’s long-term care; and • Achieve significant disability-related charitable objectives • Client Goals

5. Estate, Gift and GST issues • Irrevocable inter vivostrusts for tax planning • Housing Options • Charitable Options & Other • Planning Techniques

6. State and federal lifetime exemption amounts • Unified federal system: • 26 U.S. Code Chapter 11 – Estate tax (Sections 2001-2210). • 26 U.S. Code Chapter 12 – Gift tax (Section 2501-2524) • 26 U.S. Code Chapter 13 – GST  (Sections 2601 – 2664) • Treasury regulations • Tax computed on amount of taxable estate, plus adjusted taxable gifts (gross estate minus deductions) • Tax Liability

7. 2017 Rates • $5.49 Million / per person • Adjusted for inflation • Portability • Deceased spouse’s unused exemption amount (DSUE) • Requires election be made by executor of first spouse’s estate on estate tax return (timely file the Form 706 within9 months after death; or with 6 month extension), even if not otherwise required to file an estate tax return. • Total of $10.98 Million can be transferred estate tax free Federal Exemption Amounts

8. Tax on lifetime transfers in excess of annual exclusion • File gift tax return (Form 709) • Consider need for valuation • Consider gift splitting • Adjusted Taxable Gifts

9. 2017 rate  $14,000/person • “Qualified transfer” exceptions: • Educational expenses & medical care providers • Charitable deduction • Annual Exclusion

10. Imposed on transfers to grandchildren and more remote descendants • Earmarking of transfers made during lifetime or at death that skip a generation • 2 or more generations below (37.5 years younger) • 2017 Rates • $5.49 Million / per person (adjusted for inflation) • GST tax is not portable • Top rate of 40% • In addition to gift and/or estate taxes, not substitute • Generation Skipping Transfer Tax

11. GST elections and allocations should be made at time of gifts or in estate tax return. GST tax is very technical. Many traps for the unwary.  Seek guidance from tax professional for administration of GST trust and other issues.  Many pitfalls and potential for very costly mistakes. • GST, cont.

12. Reduce taxable estate in donor’s lifetime ILIT w/ SNT Beneficiary GRAT QPRT • Inter Vivos Irrevocable Trusts

13. Irrevocable trust that can be used to avoid taxation of the insurance policy proceeds in insured’s estate, if ILIT owns the policy itself • Can provide estate tax liquidity in taxable estate with illiquid assets • ILIT Rules • Insured must avoid retained rights: • Power to change beneficiaries; • Power to cancel / assign the policy; • Being trustee and/or power to remove and replace trustees, etc. • Irrevocable Life Insurance Trust

14. Transfer of policy • ILIT can purchase the original policy outright 2. ILIT can purchase the policy from the insured • Full and valuable consideration • Consider need for a purchase and sales agreement 3. Insured can gift policy to ILIT • If gifting, consider three year rule for gifts under Section 2035 • Gift tax return • Gift of present interest of policy(712 value) • Transfer to ILIT

15. Contributions to ILIT (e.g., annual premium payments) • Can qualify for the gift tax annual exclusion • Beneficiaries must have crummey (withdrawal) powers  notice and right to withdraw • Exclude disabled beneficiary’scrummey powers because present interest can cause problems with means-tested benefits • Outright exclusion or through a contribution instrument • Give rights to other siblings who are beneficiaries of ILIT (and/or vested remainder beneficiaries) • Cristofani rights  crummeypowers to those beneficiaries with more remote interests?  (risks involved)Estate of Cristofaniv. Commissioner • ILIT Withdrawal Rights

16. ILIT can own second-to-die life insurance policy, intended to fund a stand-alone 3rd party irrevocable SNT (and/or other beneficiaries) • Consider executing irrevocable ILIT and irrevocable 3rd party SNT simultaneously • ILIT and SNT Planning

17. Can be funded (i) in Settlor’s lifetime; (ii) as beneficiary of ILIT; (iii) at surviving spouse’s death. Consider: • Might needs of non-disabled siblings exceed the disabled child’s needs? (e.g., very large insurance policy proceeds) • Query: Independent Trustee Discretion  broad discretion to make distributions to other permissible beneficiaries, after taking into consideration the best interests and likely future needs of the Beneficiary? • Remainder beneficiaries  What will happen to property after disabled Beneficiary’s death? (e.g., pour back into existing trusts for siblings / grandchildren?) • Irrevocable 3rd Party SNT

18. Irrevocable trust designed to hold assets for a period of time to remove some earned interest on the underlying assets from the grantor’s estate. Ideal for rapidly growing business interests in low interest rate environment. • Grantor Retained Annuity Trusts

19. Owner transfersinterest to trust in exchange for fixed annuity payments for a specific term (usually 2-10 years). In “zeroed-out” GRAT, annuity payments will equal initial value of assets plus required interest (7520 rate) • Filezeroed-out gift tax return showing initial value of assets • Throughout term, initial assets and required interest distributed back to grantor • At end of term, assets remaining (“winnings”) pass to named beneficiaries free of estate / gift tax • GRAT Process

20. *Winnings are not GST exempt unless GST allocation made at end of GRAT (“ETIP”) period * • Winnings could be used to fund an inter vivos irrevocable 3rd party SNT intended to be non-GST • Desirable if disabled beneficiary is unlikely to have children and likely to use the GRAT winnings in his lifetime • GRAT and SNT Planning

21. Irrevocable trust designed to hold and own a primary or secondary residence and remove the value of the residence from the grantor’s taxable estate. • Qualified Personal Residence Trust

22. Transfer real estate into trust; retain right to live for a term of years • Report the value of the property on a gift tax return, using up some lifetime exemption  QPRT allows client to leverage gift tax exemption by discounting the value of the property • Donor must outlive term • At the end of the term, residence can be transferred to a different trust (or beneficiaries) for the benefit of the ultimate beneficiaries • QPRT Process

23. Donor may continue to live in or use the residence after term ends, provided payment of fair market rent to the new owner • Act of paying rent is tax advantageous  provides cash flow to the trust to pay the taxes and insurance on the real estate • If property is sold, donor must receive annuity payment each year for the remainder of the term • Cost basis issues involved; trust receives donor’s basis in property (rather than step-up in basis at donor’s death) • QPRT Process, Cont.

24. Consideruse of QPRT to transfer ownership of renovated home to stand-alone 3rd party irrevocable SNT for the benefit of a disabled beneficiary -- assuming parents intend for the disabled beneficiary to remain in the home long-term. • QPRT and SNT Planning

25. Threshold Considerations: • Who will develop and operate the residential arrangement?  • Family (ies) • Outside professional agency   • Availability of funding -- public and private? • Structure of staffing and scheduling? • Number of desired residents andtheir level of independence? • Housing Options

26. Many families seek an outside professional agencyspecializing in operating such services so they can continue to provide loving support, yet not have primary responsibility for staffing and management. • Agency handles staffing • May involve initial buy-in and ongoing expenses • Potential perks (nutritionist, yoga, etc.) • Often can use some form of public benefits for housing expenses, if child is eligible (consistency w/ HHS policy?) • Agency Model

27. Private residence arrangements owned by multiple families • Group purchases desired houseand hires chosen staff • Shared communal expenses, staffing responsibilities • Potential for individual families to supplement child’s care • Consider state regulations to limit size of home (e.g., maximum number of residents) • May be more difficult to get state buy-in • Zoning, fire safety concerns • Conflict resolution issues and management problems • LLC Model

28. Family purchases desired home for child. Gives family the greatest control, but also greatest level of responsibility and required involvement. • Consider: • Charity gift agreements • QPRT • Liability issues • Private Family Model

29. Book: Moving Out by Barbara Jackins and DafnaKrouk-Gordon Boston Area • Jewish Family & Children’s Services of Boston -- http://www.jfcsboston.org/Our-Services/People-with-Disabilities/Supported-Housing • Specialized Housing -- http://specializedhousing.org/ • Toward Independent Living and Learning, Inc. (TILL) -- http://www.tillinc.org/residential.html • New England Village -- http://www.newenglandvillage.org/residential-services.php • CampHillAssociation -- http://www.camphill.org/life-in-camphill/ Other • Hannah and Friends Neighborhood in Indiana -- https://www.hannahandfriends.org/ • Fraser throughout Minisota-- http://www.fraser.org/Our-Services/Housing/Supervised-Living • Marbridge in Manchaca, TX -- http://www.marbridge.org/ • Casa de Amma in San Juan Capistrano -- http://casadeamma.org/ • Medina Creative Housing -- http://medinacreativehousing.com/about/ • Suggested Resources

30. Attorney should have intimate knowledge of client’s values and goals • Variety of gifting options to minimize taxes: • Charitable Gift / Devisee • Beneficiary Designation (e.g., retirement accounts) • CLAT, CLUT, CRUT, CRAT • Donor Advised Fund vs. Private Foundation • Charitable / Philanthropic Goals

31. Premarital Agreements • For a disabled beneficiary w/ capacity who plans to marry but is unlikely to support him/herself • For siblings • Disclaimers • Disclaimer by parents trying to reduce size of estate (watch for assets passing outright to a disabled descendant) • Other

32. Dear Client: You should inform any persons who are naming you and/or your descendants in their estate planning documents to include the following language in their wills and/or trust instruments. The language may need to be modified slightly, but each individual’s attorney should be able to handle those revisions; he or she is also welcome to reach out to me at any time. Notwithstanding the foregoing, to the extent that any property is distributable under [the terms of my will / the terms of this trust Agreement] to [disabled beneficiary], such property shall be distributed to the then Trustee of The 2017 Discretionary Supplemental Needs Trust for _________________, made and entered into on ______________, 2017, by and between_______________, as Settlors and original Trustees, as that agreement may be amended, to be added to the corpus of the trust created thereby and held, administered and distributed as part thereof. • Letters to Extended Family

33. Glynis A. Ritchie, Esq. Gritchie@DayPitney.Com (617) 345-4785 Day Pitney, LLP One International Place Boston, Massachusetts 02110 www.daypitney.com • Questions?