Most people want to pass their assets to their children or grandchildren, but naming a minor as a beneficiary can have unintended consequences. It is important to make a plan that doesn’t involve leaving assets directly to a minor.
There are two main problems with naming a minor as the beneficiary of your estate plan, life insurance policy, or retirement account. The first is that a large sum of money cannot be left directly to a minor. Instead, a court will likely have to appoint a conservator to hold and manage the money. The court proceedings will cost your estate, and the conservator may not be someone you want to oversee your children’s money. Depending on the state, the conservator may have to file annual accountings with the court, generating more costs and fees.
The other problem with naming a minor as a beneficiary is that the minor will be entitled to the funds from the conservator when he or she reaches age 18 or 21, depending on state law. There are no limitations on what the money can be used for, so while you may have wanted the money to go toward college or a down payment on a house, the child may have other ideas.
The way to get around these problems is to create a trust and name the minor as beneficiary of the trust. A trust ensures that the funds are protected by the trustee until a time when it makes sense to distribute them. Trusts are also flexible in terms of how they are drafted. The trust can state any number of specifics on who receives property and when, including allowing you to distribute the funds at a specific age or based on a specific event, such as graduating from college. You can also spread out distributions over time to children and grandchildren.
If you do create a trust, remember to name the trust as beneficiary of any life insurance or retirement plans. If you forget to take that step, the money will be distributed directly to the minor, negating the work of creating the trust.
To create a trust, consult with your attorney.
Long-term care involves not only a loss of personal autonomy; it also comes at a tremendous financial price. Proper planning can help your family prepare for the financial toll and protect assets for future generations.
Long-term care can be very expensive, especially around-the-clock nursing home care. Most people end up paying for nursing home care out of their savings until they run out, at which point they can qualify for Medicaid to pick up the cost.
Medicaid rules require that recipients have no more than $2,000 in “countable” assets (the figure may be somewhat higher in some states) and limited income. Any excess assets need to be spent down before you can qualify for Medicaid. In addition, in order to be eligible for Medicaid, you cannot have recently transferred assets. If you transfer assets within five years of applying for Medicaid, you may be subject to a penalty period during which you cannot receive benefits. After you die, Medicaid also has the right to recover from your estate, which in the case of a Medicaid recipient usually means only the house.
Careful planning in advance can help protect your estate for your spouse or children. If you make a plan before you need long-term care, you may have the luxury of distributing or protecting your assets in advance. This way, when you do need long-term care, you will quickly qualify for Medicaid benefits. The following are some tools that can be d in an estate plan to prepare for Medicaid:
- Trusts. One of most important estate planning tools you can use is an “irrevocable” trust — a trust that cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the “grantor”) for life, and the principal cannot be applied to benefit you or your spouse. At your death the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses. For Medicaid purposes, the principal in such trusts is not counted as a resource, provided the trustee cannot pay it to you or your spouse for either of your benefits. However, if you do move to a nursing home, the trust income will have to go to the nursing home. And to avoid Medicaid’s “look-back period,” the trust must be funded at least five years before applying for benefits.
- Annuities. Annuities are another tool married couples can use to prepare for Medicaid. An immediate annuity, in its simplest form, is a contract with an insurance company under which the policyholder pays a certain lump sum of money to the insurer and the insurer sends the policyholder a monthly check for the rest of his or her life. In most states the purchase of an annuity is not considered to be a transfer for purposes of eligibility for Medicaid, but is instead the purchase of an investment. It transforms otherwise countable assets into a non-countable income stream. As long as the income is in the name of the spouse who is not in the nursing home, it’s considered non-countable. For single individuals, annuities are less useful, but if you transfer assets, you may be able to use an annuity to pay for long-term care during the Medicaid penalty period that results from the transfer.
- Protecting your home. After a Medicaid recipient dies, the state must attempt to recoup from his or her estate whatever benefits it paid for the recipient’s care. This is called “estate recovery.” For most Medicaid recipients, their house is the only asset available, but there are steps you can take to protect your home. Putting your house in a trust can be a good option, but once a house is placed in an irrevocable trust, you cannot remove it. Another option is a life estate, which is a form of joint ownership of property between two or more people. They each have an ownership interest in the property, but for different periods of time. The person holding the life estate possesses the property currently and for the rest of his or her life. The other owner has a current ownership interest but cannot take possession until the end of the life estate, which occurs at the death of the life estate holder.
Talk to your attorney about whether your estate plan should include preparation for possible Medicaid eligibility.
Beezer the cat can be a member of the family, but what happens to Beezer or [insert your pet’s name] after you are gone? How can you ensure your pet will be cared for? One option is to create a pet trust. While you can give directions in your will to leave your pet to a caretaker, there is no guarantee that the caretaker will continue to care for your pet. A pet trust can provide a little more security for the pet because a third party — the trustee — is obligated to ensure the pet is cared for.
A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.” With a pet trust, the trustee makes payments on a regular basis to your pet’s caregiver and pays for your pet’s needs as they come up.
The federal tax code does not recognize a pet as a beneficiary of a trust. However, all 50 states and the District of Columbia have laws allowing pet trusts. Another option is to set up a traditional trust and place the pet in the trust along with the funds. The pet’s caregiver can be named the beneficiary.
The first step is to contact your attorney. Regardless of what type of trust you use, the following are some elements the trust should include:
- Caretaker. The trust will need to name a caretaker who will be willing and able to care for your pet. The caretaker should be someone who is comfortable with your animal.
- Care Instructions. The trust should include specific instructions on all aspects of the pet’s care, including the brand of food, activities the pet enjoys, and the preferred veterinarian.
- Funds. The amount of money necessary to fund the trust depends on the individual animal. Typically, you can leave the money to the trust in your will. Be warned that under most pet trust laws, the court can reduce the amount of caretaking funds to what it deems is reasonable for the care of the pet.