ElderLaw Answers Blog

                Our new clients are a young couple with two young children, both with limited disabilities.  The boy, who is eight years old, has severe attention deficit disorder.  His younger sister, who is six, suffers from hearing loss.  At this time, both are in regular public school classes and their parents hope will be able to develop and function normally.  They’ll know better in another decade.

                The precipitating circumstance that brought them to our office was the death of the father’s aunt, who named the eight-year-old boy as the sole beneficiary of her $1.1 million IRA.  At the time she named him as beneficiary, the girl had not yet been born.  This act of generosity by the great-aunt raises many issues, including the following:

• Within a year, the boy must begin taking minimum distributions based on his age.
• At age 18, the boy will have control over these funds, whether or not he has a disability due to his ADHD or simply due to teenage hormones.  Misuse of the funds can lead drug abuse, extreme tax consequences, or simply waste resulting from bad decisions.
• Not only will the boy be much wealthier than his younger sister, he’s already wealthier than his parents.
• Since the funds are all tax-deferred, they could be put into trust only after paying taxes on them.  If this were done immediately, much of the taxes would be paid at the top income tax bracket.

While this is an object lesson on why the aunt should have sought legal advice – everyone would be better off if the IRA had been payable to a trust for the boy’s benefit (as well as the girl, if the aunt was so inclined – the question now is what should the parents do.

Our recommendation is to create a trust for the boy’s benefit and to transfer funds from the IRA to the trust every year for the next 10 years.  The amount withdrawn from the IRA will be taxable, but at a lower rate than if it were all withdrawn all at once.  Further, most tax professionals expect tax rates to increase due to the nation’s large budget deficit, so paying taxes today may in fact save money.

The trust would protect the boy from his own potentially poor decisions while he is young.  It could also be drafted as a special needs trust to permit him to qualify for public benefits.

One question is whether the parents actually have the legal power to transfer their son’s funds into a trust, since doing so prevents his access at age 18.  In fact, the son could challenge this action.  But our feeling is that it’s better to put up this wall of defense, which may be attacked by the son when he reaches the age of majority, rather than leave the funds totally exposed.

What would you suggest?

New Jersey elder law attorney Donald D. Vanarelli in his blog describes a recently decided case that highlights the need for special needs trusts.  Public benefits programs, unfortunately, are limited in what they provide and can force beneficiaries to attempt to jump countless hurdles if they need anything out of the ordinary.

In Pichardo v. N.J. Department of Human Services, Julia Pichardo appealed the state’s decision not to repair or replace her computer which it had previously provided through New Jersey’s Traumatic Brain Injury Fund.  The fund has a one computer per lifetime policy.

In this case, the court upholds the state’s policy, meaning that Ms. Pichardo must somehow come up with the funds to repair or replace her computer herself.  As Attorney Vanarelli points out, a special needs trust could be a source of such funds — without adminisistrative and court appeals — if Ms. Pichardo had such a trust.