Articles Tagged with Trusts

In the past, creditor protection was afforded to your IRA and to the beneficiaries that would inherit your IRA, such as your children.  However, in June of 2014, the United States Supreme Court ruled that an “Inherited IRA” is not protected from creditors of the beneficiaries.

This major change in the exempt status of the Inherited IRA, motivated estate planners  to examine new ways to protect these retirement assets from creditors.

The need to restore creditor protection while maintaining the favorable tax treatment of IRAs has led many clients to consider adding a stand alone Retirement Trust to their estate plan.  If drafted properly, this type of trust can protect Inherited IRA accounts from creditors, including a beneficiary’s divorcing spouse.

A Special Needs Trust (“SNT”) or Supplemental Needs Trust is a certain type of trust which can be used for goods and services that governmental programs will not cover.  The SNT must have special language within the trust such as: “This trust shall be used to supplement and not supplant governmental programs”.  Having such necessary language, the assets in the trust are not counted against the special needs beneficiary as an asset in determining eligibility for governmental programs such as Medicaid and Supplemental Security Income (SSI).

There are two types of SNTs.  The First Party SNT is funded with the special needs person’s own funds.  For instance, if a person with a disability is awarded monies from a settlement from an auto -mobile accident, those funds can be placed in a First Party SNT to preserve the eligibility for SSI and/or Medicaid.  The same process can be used for when a special needs person inherits a sum of money outright.

There is one disadvantage with the First Party SNT.  When the beneficiary dies, Medicaid will send a bill to the Trust for the monies spent by that program during her life.  The trust must pay back Medicaid the amount of the bill. However, if the trust assets are less than the Medicaid charge, Medicaid will absorb the balance of its bill.  If there is a balance after paying the Medicaid bill, the proceeds may be distributed to family or anyone who is a distributee of the Trust.

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