Why Is My Inherited IRA Subject To Both Pennsylvania Inheritance Tax And Federal Income Tax?

January 29, 2013 by

Pennsylvania levies inheritance tax on the following classes of beneficiaries:

1. Class A – This class includes grandparents, parents, children including natural children, adopted children and step-children, and an un-remarried spouse of a child. This is the only class that receives a $3,500 family exemption from the Pennsylvania inheritance tax which is 4.5% for Class A Beneficiaries.

2. Class A1 – This class includes brothers, half-brothers, sisters, half-sisters, and persons having at least one parent in common with the decedent, either by blood or by adoption. Pennsylvania inheritance tax is 12% for Class A1 Beneficiaries.

3. Class B – This class includes all other beneficiaries. Pennsylvania inheritance tax is 15% for Class B Beneficiaries.

Generally inheritances are not subject to income tax under Section 102 of the Internal Revenue Code. One exception to that rule is traditional Individual Retirement Accounts (IRA’s) because IRA’s contain tax deferred assets that have never been subject to income tax. Therefore, in addition to paying Pennsylvania inheritance tax a beneficiary also has to pay income tax when they inherit a traditional IRA in the year they withdraw money from the IRA. The good news is that the Traditional IRA is not subject to Pennsylvania income tax.

If you inherit an IRA you should consider all the options the Plan Administrator offers you.

One option would be taking a lump-sum distribution. Another option would be taking distributions over five years to lessen the tax bite. A third option may be rolling the inherited IRA over into your existing traditional IRA if the Plan Administrator allows it.

Keep in mind that no matter which option you select you will not have to pay the 10% premature distribution penalty since inherited IRA’s are always exempt from the penalty regardless of the age you decide to take the distribution.

If you have any questions about inherited IRA’s feel free to call Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604.

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What is the Family Exemption on the Pennsylvania REV-1500?

January 21, 2013 by

The Commonwealth of Pennsylvania created the Family Exemption to help the children or surviving spouse who lived with the deceased and relied on that person’s assets or income to take up to $3,500 from the decedent’s bank account until the estate account is opened. At death a person’s assets are frozen until the Executor goes to the Register of Wills with the will and death certificate to open an estate. During this time the surviving spouse or child might find himself or herself without a way to pay for household expenses. In the alternative, if the estate is small, an executor might hesitate to distribute any assets to a dependent child until the Pennsylvania Inheritance Tax was paid in full making the child wait months for a distribution. To guard against this possibility the Pennsylvania legislature created the Family Exemption, which is a right of a person living in the same household with the decedent to retain or to claim real or personal property of a decedent up to $3,500.00 under the theory that this is enough to allow the person to survive until the estate account is opened. Executors can feel comfortable distributing this amount to a dependent child knowing that it will not be subject to the Pennsylvania Inheritance Tax.

Beneficiaries that are members of the decedent’s household are eligible for the Family Exemption. They include grandparents, parents, children including adopted children and step-children, and an un-remarried spouse of a child of the decedent.

Since its inception, the family exemption was legally payable only from the probate estate of the decedent. Furthermore, this exemption can be taken as a deduction on line 3 of Schedule H of the Pennsylvania Inheritance Tax Return Form REV-1500.

If you have any questions about the REV- 1500 or the family exemption you should contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604.

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Why I Should Form a Family Limited Partnership

November 12, 2012 by

Basic Strategy
The estate planning strategy employed by business owners is to gift limited partnership interests to family members at a discount based on their future business succession plan. This works well for succession planning because a business owner that has a successful LLC can gift the nonvoting LLC units to his children and out of his estate over time. The business owner acts as a general partner and his children are limited partners. In addition all the assets transferred to the Family Limited Partnership are protected from business creditors.

Gifting to the Limited Partnership
The general partner (business owner) can gift the limited partnership interests up to the annual exclusion of $13,000 in 2012 without filing a form 709 federal gift tax return. If the business owner wants to gift more than $13,000 per person he has to file a Form 709 return and may use part of his $5.12 million exemption in 2012. However, the value of the limited partnership shares or nonvoting LLC units may be discounted up to 30% due to their lack of marketability since there is no ready or available market to sell those shares on.

Tips on Surviving an IRS Challenge
In order for the Family Limited Partnership to survive a challenge by the Internal Revenue Service the general partner (business owner) must resist the temptation to maintain too much control over the partnership assets. The general partner should not pay personal expenses from the partnership bank account or comingle his personal funds with the partnership funds. The partnership should be operated as a separate entity and hold annual meetings to discuss management issues.

The partnership agreement should be drafted to

  1. avoid potential abuses by the general partner;
  2. address when distributions from the partnership bank account should be made;
  3. state at least three nontax reasons indicating why the partnership was formed such as:
    • To make a profit.
    • To increase the family’s wealth
    • To provide a means whereby family members can become more knowledgeable about the management and preservation of the family’s assets.*

If you have any questions about Family limited partnerships please call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park, PA at 610-521-0604.

*Estate of Turner, TC Memo 2011-209

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What Are The Duties Of A Trustee?

November 5, 2012 by

Financial Advisor Talking To Senior Couple
A trustee is a person or entity who administers a trust for the benefit of a beneficiary according to the instructions established by the trust maker in the trust document. A trustee should be patient, organized, detail oriented, honest and have the ability to make unbiased decisions with regard to the trust beneficiaries.

Every trustee has the following duties:

1. Duty to Administer the Trust based on the Trust Documents – the trust is your road map and you must follow its directions, whether about when and how to distribute income and principal or what reports you need to make to beneficiaries.

2. Duty of Loyalty to all the Trust Beneficiaries – you have a fiduciary duty to the trust beneficiaries including the current beneficiaries as well as any future or contingent beneficiaries to safeguard and preserve trust property and keep the beneficiaries informed.

3. Duty to Keep and Render Accounts – to keep track of all income to, distributions from, and expenditures by the trust. Generally, you must give an account of this information to the beneficiaries on an annual basis. In strict trust accounting, you must keep track of and report on principal and income separately.

4. Duty to Exercise Reasonable Care especially regarding investment standards – your investments must be prudent, meaning that you cannot place money in speculative or risky investments. In addition, your investments must take into account the interests of both current and future beneficiaries.

5. Duty to Enforce Claims of the Trust and Defend Actions Against the Trust – you would be responsible for hiring legal counsel.

6. Duty to Keep Trust Property Separate from your own Assets – you should have a separate trust bank account using the trust Employer identification Number (EIN) since the trust is a separate entity from the trustee and beneficiaries.

7. Duty Not to Delegate your Responsibility as a Trustee – however if you feel you can no longer serve as trustee you should resign after an alternate trustee is appointed.

As you can see from all the duties listed above being a trustee is an awesome responsibility. The trustee has full legal responsibility and legal liability for trust administration, filing the trust annual federal and state income tax returns, and making distributions in compliance with the trust documents. Therefore it is very important to select a professional trustee that has the experience and resources to handle all the details and duties listed above. Feel free to contact Gregory J. Spadea at Spadea & Associates, LLC in Ridley Park, PA at 610-521-0604 to see how he can help you fulfill your responsibilities as Trustee or act as a co-trustee with you.

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Information Needed to Prepare Your Will & HCD

October 8, 2012 by

You need the following information to prepare your will, note that you and your spouse both need to provide this information separately:

  1. Your Name and address;
  2. List of beneficiaries and alternate beneficiaries and their relationship to you;
  3. List of specific bequests – list of assets that you want to leave to specific individuals other than your spouse;
  4. List of general bequests if any;
  5. Executor (male) or executrix (female) and their relationship to you;
  6. Alternate executor or executrix and their relationship to you;
  7. Guardian to raise children under 18 years of age and their relationship to you;
  8. Alternate guardian to raise children under 18 years of age;
  9. Custodian to watch over children assets until they are 25 years old or any age you designate and their relationship to you;
  10. Alternate custodian to watch over children assets;
  11. The name of the cemetery you wanted to buried in or if you want to be cremated.
  12. List of all assets including all real estate, stocks, bonds, IRA’s Annuities, etc.

How to Select Your Health Care Agent or Surrogate

When you decide to pick someone to speak for you in a medical crisis, in case you are not able to speak for yourself, there are several things to think about. This tool will help you decide who the best person is. Usually it is best to name one person or agent to serve at a time, with at least one successor, or back-up person, in case the first person is not available when needed.

The persons best suited to be your Health Care Agents or Surrogate rate well on these qualifications …

  1. Meets the legal criteria in your state for acting as agent or proxy or representative
  2. Would be willing to speak on your behalf.
  3. Would be able to act on your wishes and separate his/her own feelings from yours.
  4. Lives close by or could travel to be at your side if needed.
  5. Knows you well and understands what’s important to you.
  6. Could handle the responsibility.
  7. Will talk with you now about sensitive issues and will listen to your wishes.
  8. Will likely be available long into the future.
  9. Would be able to handle conflicting opinions between family members, friends, and medical personnel.
  10. Can be a strong advocate in the face of an unresponsive doctor or institution.

The person you choose to make health care decisions for you is known by different names in different states. This person is sometimes called a health care agent, proxy, representative, attorney-in-fact, surrogate, or even patient advocate. State rules for who may be a health care surrogates vary, but the most common groups disqualified are these:

  1. Anyone under age 18.
  2. Your health care provider, including the owner or operator of a health or residential or community care facility serving you — unless this person is your spouse or close relative.
  3. An employee of your health care provider — unless this person is your spouse or close relative.
  4. Talk to your surrogate or agent about the qualifications on the first page of this worksheet.
  5. Ask permission to name him or her as your agent or surrogate.
  6. Discuss your health care wishes and values and fears.
  7. Make sure your agent gets an original copy of your advance directive.
  8. Tell family members and close friends who you picked.
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Why I Can’t Disinherit My Spouse in Pennsylvania

October 1, 2012 by

Although Pennsylvania generally allows deceased spouse ( Testator) to give their property to anyone they wish, this right is limited by a law referred to as an elective share which is designed to protect surviving spouses from being disinherited. Before any property is distributed, the spouse is entitled to a family exemption of $3,500 from the estate. A spouse can then inherit anything left to her in her deceased spouse’s will. However, if the decedent disinherited her (left her out of the will), she is still entitled to inherit and claim her “elective share.” Section 2203 of the Pennsylvania Code sets the elective share at one-third of the decedent’s estate. If the spouse was left out of the will or was left less than one-third of the estate, she has the right to request her elective share from the orphan’s court in the county the estate was probated in. The Elective share will only be paid if the surviving spouse claims it within six months of the Testator‘s death the date of probate whichever is later. The disinherited spouse must notify the Orphans’ Court and the Executor or Administrator of her intention to claim an elective share in writing.

When determining how to pay the elective share the Orphans’ Court will attempt to honor the Testator’s will as much as possible. For instance, if the will makes a specific gift and there are sufficient assets to pay the elective share without using the specific gift, the beneficiary of the specific gift will likely receive that item. If there is not enough probate property to satisfy the full amount of the elective share, all of the remaining probate property is subject to the claim and any gifts or bequests will be reduced proportionately to pay the remaining balance.

The elective share is equal to one-third of the combined value of the following types of property:

1. Property passing by the Testator’s will.

2. Annuity rights transferred by the deceased spouse.

3. Property transferred within one year of the spouse’s death, to the extent that its value exceeds $3,000.

4. Property the deceased spouse transferred during the marriage, but retained the right to:
a. receive income from the property.
b. use the property.
c. take back the transferred property.
d. regain ownership by a right of survivorship.
e. transfer the property by acting alone.

Also anything the disinherited spouse would receive that was owned jointly with the Testator.

Please call Gregory J. Spadea at Spadea & Associates, LLC in Ridely Park, PA at  610-521-0604 if you need assistance in claiming the elective share or have any other estate administration questions.

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Why I need an IRA Trust

September 17, 2012 by

Jar with label Retirement Plan
The biggest retirement asset for most people other than their primary residence is their retirement plans. One way to ensure that your children do not mishandle your retirement funds after you and your spouse pass away is to set up an IRA trust as your Plan’s contingent beneficiary. This ensures an orderly transfer of wealth from one generation to the next.

The advantages of an IRA trust are as follows:

1. It allows you to control when distributions are made and the circumstances when they should be made. This also allows the beneficiary to stretch out the payments and pay the least amount of income tax over his or her lifetime. This also allows the IRA Assets to continue growing tax free inside the trust over the beneficiary’s lifetime.

2. The IRA trust assets would be protected from creditors so if your beneficiary is sued the assets in the IRA trust would not be subject to any creditor claims. In addition if your beneficiary gets divorced the IRA trust assets would not be part of the marital estate and not subject to claims by the ex-spouse.

3. You can select an investment advisor to ensure the IRA portfolio remains diversified to maximize the investment returns over your beneficiary’s lifetime.

4. If your beneficiary is disabled and receiving government medical benefits the IRA Trust would not disqualify him or her from continuing to receive benefits.

From a procedural perspective you would name the IRA Trust as a beneficiary of your IRA, and upon your passing the IRA trust would distribute the proceeds of your IRA to your beneficiaries over their lifetimes based on the IRS tables for required minimum distributions. If you were married, you may want to have your spouse be the primary beneficiary of your IRA and the IRA trust could be a contingent beneficiary of your IRA.

The reason this is so important is because a nonspouse beneficiary may not receive funds directly from an inherited IRA and roll them over tax free to another inherited IRA within 60 days, as a surviving beneficiary can. Therefore they must use a direct trustee to trustee transfer to avoid income tax on the distribution. Many beneficiaries do not realize once they take the distribution they will be taxed on the entire amount in the year they receive it. This would be disastrous from an income tax perspective because they will lose the power of tax deferred compounding over their lifetime. Therefore setting up the IRA trust as the Beneficiary avoids this problem.

If your IRA assets exceed $250,000 you should consider setting up an IRA trust to ensure your legacy is are protected and your beneficiaries are taken care of after your gone. Contact Gregory J. Spadea at 610-521-0604 if you would like more information.

Filed Under: Estate Planning, Tax Law Tagged With: , , , , , ,

How to Avoid a Will Contest

September 11, 2012 by

Signing Last Will and Testament
With such a large transfer of wealth passing from the current generation than ever before, it is not hard to imagine that litigation can occur at the passing of a loved one if a beneficiary is left out of the will.   A will contest is defined as a formal objection raised against the validity of a will, based on the contention that the will does not reflect the actual intent of the testator (the party who made the will). Will contests generally focus on the assertion that the testator lacked testamentary (mental) capacity, was operating under an insane delusion, or was subject to undue influence, or fraud or duress. A will may be challenged in its entirety, or only in part.

In order to file an objection against a will a person or party must have standing.  Typically, standing to contest the validity of a will is limited to two classes of persons: 1) those who are named on the face of the will (i.e. any beneficiary); 2) those who would inherit from the testator if the will was invalid.

If an heir is unhappy with the amount they received or didn’t receive under a will, he may contest the will.  It may be impossible to prevent heirs from fighting over your will entirely, but there are steps you can take to try to minimize squabbles and ensure your intentions are carried out. The following are some steps that may make a will contest less likely to succeed:

  • Make sure your will is properly executed. The best way to do this is to have an experienced estate planning attorney assist you in drafting and executing the will. Wills need to be signed and witnessed by two independent parties and notarized and should include a self-proving affidavit.
  • Explain your decision. If all the heirs understand the reasoning behind the decisions in your will, they may be less likely to contest the will. It is a good idea to talk to heirs at the time you draft the will and explain why someone is getting left out of the will or getting a reduced share. Although you should discuss it in person, always state the reason in the will. You may also want to include a letter with the will.
  • Use no-contest clause. One of the most effective ways of preventing a challenge to your will is to include a no-contest clause in the will. However this will only work, if you are willing to leave something of value to the potentially disgruntled heir. A no-contest clause states that if an heir challenges the will and loses, then he or she will get nothing. Therefore, in order to be effective you must leave the heir enough so that a challenge is not worth the risk of losing the inheritance.
  • Remove the appearance of undue influence. The most common method of challenging a will is to argue someone exerted undue influence over the deceased family member. For example, if you are planning on leaving everything to your son who is also your primary caregiver, your other children may argue your son took advantage of her position to influence you. To avoid the appearance of undue influence, do not involve any family members who are inheriting under your will in drafting your will. Family members should not be present when you discuss the will with your attorney or when you sign it. To be totally safe, family members shouldn’t even drive you to the attorney.
  • Prove competency. One common way of challenging a will is to argue the Testator was not mentally competent at the time he or she signed the will. Pennsylvania requires that you be over 18 years of age and be of sound mind. One type of mental incapacity is insane delusion which Courts have defined as a “fixed false belief without hypothesis, having no foundation in reality.  You can try to avoid this by making sure the attorney drafting the will tests you for competency.  The attorney may ask you a series of questions to ensure the Testator understands (a) the amount and nature of his or her property, (b) the heirs and loved ones who would ordinarily receive such property by his Will, and (c) how his Will disposes of such property.  The attorney will record your answers to show you were competent when you signed your will.  The attorney may also recommend you be tested by a doctor who will write a report indicating you were competent when you signed your will.
  • Remove the appearance of undue influence. The most common method of challenging a will is to argue someone exerted undue influence over the deceased family member. For example, if you are planning on leaving everything to your son who is also your primary caregiver, your other children may argue your son took advantage of his position to influence you. To avoid the appearance of undue influence, do not involve any family members who are inheriting under your will in drafting your will. Family members should not be present when you discuss the will with your attorney or when you sign it. To be totally safe, family members shouldn’t even drive you to the attorney.
  • Remove the appearance of fraud. A less common method of challenging a will is for an heir to argue that the Testator was fraudulently induced into signing his or her will. Fraud can occur if the Testator signed a will without realizing it was a will. It could also happen if someone gave the Testator misinformation that caused him or her to change the distribution in the will. It is very hard to prove but it happens.
  • Remove the appearance of duress. Duress involves some threat of physical harm or coercion on the testator by the perpetrator which caused the signing of the Will not to be voluntary.  To avoid this the Testator should be by themselves when they meet with their attorney to draft and sign the will with no beneficiaries present.

Please contact Gregory Spadea at 610-521-0604 if you would like your will reviewed to ensure the likelihood of it being contested is reduced.

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What are the Duties of PA Executor?

March 8, 2012 by

A frequently asked question for clients preparing Wills is, what are the duties of my PA Executor? The short answer is that the Executor’s duties are to gather the assets, pay the bills, file the necessary tax returns, prepare an accounting and make distribution to the beneficiaries.

The basic outline of the duties of a PA Executor include the following:

1. Notice of Probate. Prepare a Notice of Probate for each beneficiary of the Will and each
heir-at-law and next-of-kin. File within 60 days after probate. Send a Proof of Mailing
to the Register of Wills within 10 days of filing.

2. Charitable Bequests. Determine if there are any charitable bequests. If so, send a
Notice to the Attorney General. The Attorney General must also receive an accounting
and copies of all filed Receipt and Refunding Bonds.

3. Specific Bequests. Pay any specific bequests within 1 year.

4. Social Security. Notify Social Security of the decedent’s death and return any Social
Security checks that should not have been received. In the case of direct deposit, Social
Security will automatically make the withdrawal upon receipt of the notification.

5. VA. Determine if the decedent is a Veteran and apply for the appropriate Veteran’s
benefits by calling 800-827-1000. The VA Pension direct deposit phone number is 877-
838-2778. The VA Life Insurance phone number is 800-669-8477.

6. Postal Service. Contact the postal service and arrange for the decedent’s mail to be
forwarded to the executor.

7. Valuation. Value all assets of the estate as of the date of death, including:

  • Tangible personal property (by appraisal, if necessary)
  • Real estate (by appraisal). Deal with all tenants, landlords and lenders.
  • Bank accounts
  • Securities
  • Employee benefits
  • Retirement accounts
  • Motor vehicles
  • Business assets
  • Government bonds
  • Annuities
  • Tax or Insurance Refunds

8. Debts. Obtain balances for any indebtedness owed by the decedent

9. Retitle to Estate. Retitle assets from the decedent to the estate

10. Claims. File claims with life insurance companies, annuities and retirement plans

11. Safeguard Assets. Safeguard any real and personal property, check that all insurance is current, that real estate is secured, and that utilities are dealt with appropriately

12. Taxes

  • Income Tax. File the decedent’s final federal and state income tax returns.
  • Federal Estate Tax. Prepare and file a Federal Estate Tax Return (Form 706), if required.
  • PA Inheritance Tax. Prepare and file a PA Inheritance Tax Return, if required. Remember that Wrongful death claims are not subject to PA Inheritance Tax
  • Income Tax for Estate. Prepare and file a Form 1041, if the estate income exceeds $600.
  • Income Tax for Trust. Prepare and file a 1041 Income Tax Return for any trust, if required.
  • Out-of-State Taxes. Prepare and file any out-of-state tax returns, if required.

13. Executor’s Commission. Determine the amount and appropriateness of executor’s commissions based on the Johnson estate.

14. Accounting. Prepare an informal accounting of all of the financial activity of the estate. List the assets of the estate, income generated by those assets, expenses paid by the estate, what is left and how the remaining assets are proposed to be distributed.

  • Determine whether the beneficiaries want distribution in cash or in-kind.
  • Obtain beneficiaries’ signatures on the accounting.

15. Release and Refunding Bonds. Obtain a signed Release from each beneficiary indicating that they accept the distribution and agree to refund to the estate any amounts that may be due if obligations of the estate are later discovered. The Release only needs to be filed with the Register of Wills if a formal accounting is requested by one of the beneficiaries or by the Orphans Court.

16. Retitle Assets. Make distribution to the beneficiaries, including any trusts that may be beneficiaries and retitle assets to the name of the beneficiaries.

17. If the decedent got divorced after the will was written you also need the divorce decree.

Contact a Ridley Park, PA Estate Planning Attorney

Contact Gregory J. Spadea in Ridley Park, PA at 610-521-0604 if you need help probating an estate or have any questions about your duty as an executor.

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Determining The Purpose of an SNT and the Appropriate Expenditures

November 18, 2011 by

Arriving to Hospital via Ambulance
A Special Needs Trust might have been created to handle proceeds from a personal injury settlement or an inheritance left directly to an individual with a disability. It might be designed to protect eligibility for Supplemental Security Income (SSI), Medicaid or other public benefits programs — or for a number of programs (usually including those two) at the same time. Common questions about use of trust money revolve often revolve around what expenses should be paid from the trust such as travel and entertainment, transportation and housing and other expenditures.

The first place the trustee should look is at the trust document itself. It may be fine that state and federal law permit a particular expenditure, but if the trust does not then the trustee cannot take advantage of the government’s flexibility. Sometimes there is nothing to prohibit a proposed expenditure in public benefits law or the trust document, but that still might not mean that the purchase is appropriate — it might be imprudent considering the circumstances, or a violation of general trust administration principles.

All that said, the very purpose of Special Needs Trusts is usually to provide extra, or supplemental, items to the beneficiary the things that the system, family and other sources cannot or will not provide. One of the very few court cases addressing this concept is a 2004 Minnesota Court of Appeals case, In re: The Irrevocable Supplemental Needs Trust of Collins. The Court of Appeals ruled that the proper approach was not to second-guess the trustee as to each expenditure, but to determine whether the trustee was properly exercising his discretion. Since the whole point of a Special Needs Trust is to provide for extra benefits that are not otherwise available, the trial judge here should have presumed that a trustee/father knows best whether his daughter is mature enough to ride a snowmobile or attend a Britney Spears concert.

The Collins case was an unreported case and therefore sets no precedent for other courts.
Nonetheless, the Collins case can give us some assistance in determining whether a given expenditure should be approved from a Special Needs Trust. Among the items to consider in a given case:

1. Is the expenditure permitted by the trust terms? Is it prohibited by Medicaid or Social Security regulations?

2. Does the expenditure clearly benefit the trust’s beneficiary? Does it also benefit others, such as family members? If it benefits the trustee (as, for instance, a home improvement that clearly aids the beneficiary but also increases the value of the home owned by a parent/trustee), it should be scrutinized much more closely, and may not be permissible in all circumstances.

3. Is there enough money in the trust to make the proposed payment without seriously affecting the ability to provide other benefits in coming years? Not every expenditure that reduces future benefits is forbidden, but the larger the expenditure (in relation to the trust’s size), the harder it is to justify.

4. Is the proposed expenditure related to the purpose for which the trust was established? In other words, if the trust came from a personal injury settlement it will ordinarily be easier to approve expenditures for therapy or adaptive equipment related to the injury for which the settlement was obtained.

5. Are there other sources of funds? If public benefits are available to provide the same items, the money ordinarily should not come from the trust. But if the public benefits are so limited that the quality of the items will suffer, or if it takes an extremely long time for equipment or services to get to the beneficiary, the trust might still be available to make the purchase more quickly or to purchase better supplies or equipment. Where family resources are available, it might be better to save trust funds — especially if the beneficiary is a minor, and parents have a general obligation of support.

There will, of course, be other considerations in each case. We do not mean to give an encyclopedic list here, so much as to suggest that decisions about expenditures can be very difficult. It is not enough for the trustee to really, really want to make the expenditure, or to be completely convinced it is appropriate — it is important to consider the proposal from all sides, admitting that there may be good reasons not to proceed, as well. The key is that the trustee must act reasonably, remain free from self-interest or bias, and above all, be prudent.

How Does a Trustee Act Prudently? The best way to assure that proper decisions are made, and to minimize the possibility of later difficulties, is to seek independent advice from a qualified legal expert.

Payment by the trust for housing and food directly to the organization providing the services (income distributions) will not usually eliminate SSI and Medicaid benefits. Income distributions of food and shelter invoke special rules, known as In Kind Support and Maintenance, or “ISM,” which may reduce but not necessarily eliminate benefits.

What kind of expenses are considered “shelter” or “household” expenses according to the Social Security Administration? Social Security’s rules list these and only these:

1. Mortgage, including property insurance
2. Property taxes
3. Rent
4. Gas
5. Electricity
6. Heating fuel
7. Sewer/Garbage removal
8. Water
9. Food

In general, the benefit is not reduced by more than one third of the maximum Supplemental Security Income plus $20.00.

Sometimes it may be appropriate to consider the options and risks, to make an expenditure and report it to the appropriate government agency and wait for a response. Sometimes it may be better to seek the blessing of the court system, giving notice to government agencies as appropriate and asking for a determination of the validity of the proposed expenditure in advance.

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