Illinois Estate Planning & Elder Law Blog

When parents set up a Third Party Special Needs Trust, it is created by and funded with the assets of the parents. The parents are considered to be the “third party”. The trust is not set up with the assets of the special needs child and the transfer may not be created to make the parents eligible for Medicaid paid nursing home care.

The Trustee has wide discretion in making distributions to or for the benefit of the special needs child. For this reason, the Trustee should be familiar with and responsive to the particular needs of the special needs child, should have knowledge of the government benefit programs and the effect the trust may have on eligibility for these programs, and should be in good health, reliable and financially astute.

If a special needs child has received an inheritance, gift, bequest, lawsuit award or settlement, child support, alimony or divorce property settlement, the receipt of these assets can disqualify a child for means tested benefits such as Medicaid and Supplemental Security Income. In cases like these, a First Party Special Needs Trust should be established to preserve the child’s eligibility for the government benefits.

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Health Savings Accounts are available for individuals who have high-deductible health plans. In 2009, a plan is considered high deductible if it has an annual deductible of at least $1,150 and annual out-of-pocket expenses that the insured must pay for covered benefits cannot exceed $5,800.

Unlike Flexible Savings Accounts, Health Savings Account holders can carry over balances from year to year until the account holder’s death, and if planned properly, until the account holder’s spouse’s death.

All contributions to, distributions from and income earned in the account are free from federal income tax as long as the assets are used to pay for qualified medical expenses. Depending on the amount contributed and distributed from the account and how long the account has been established, Health Savings Account balances have the potential to be substantial.

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Effective November 6, 2009 a new tax credit is available for both repeat and first-time home buyers. The National Association of Home Builders’s website provides specific details.

One can qualify for a tax credit up to 10% of the purchase price of a new home (maximum credit $6500) if one has lived in one residence for five consecutive years of the last eight years.

Income limits apply. For single filers the credits phase out between $125,000 and $145,000 of modified adjusted gross income. For married couples, the phase out is between $225,000 and $245,000.

Other limits apply. The credit cannot be taken if the home is purchased from a spouse or the spouse’s lineal relatives. The person claiming the credit must use the home as a principal residence.

The new law is unclear as to whether one must sell one’s previous home to qualify for the credit.

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Roth IRAs (Individual Retirement Accounts) allow for tax free withdrawals of both contributions and earnings.

The person who opens a Roth and makes periodic contributions can withdraw those original contributions at anytime without penalty and with no tax owed. The rules are spelled out in IRS Publication 590, “Individual Retirement Arrangements”.

As for earnings, a Roth contributor must wait five years (calculated by the IRS as beginning January 1st of the year for which the first Roth contribution was made) before earnings can be withdrawn tax free. And the Roth contributor must be 59 1/2 years old to avoid the 10% penalty for early withdrawal on the earnings and avoid income tax on the earnings.

The Roth contributor who converts to a Roth (as opposed to opening a Roth as in the preceding paragraph) must hold the assets in the Roth for five years or until he turns 59 1/2, whichever comes first, to make penalty-free withdrawals of the converted amount. The earnings on that converted Roth are treated differently. The converter must hold the Roth for five years to withdraw any earnings tax free. The age 59 1/2 category does not come into play. Fortunately, the withdrawal rules for Roth IRAs provide that any distributions come first from contributions, then from conversions, then from earnings so there is no need to keep separate the conversion amounts from the earnings.

Continue reading "Keeping Your Illinois Estate Plan Current" »