Why Should I Prepay My Funeral by Setting up a Funeral Trust?

There are four reasons why you may want to prepay your funeral:

  1. Avoid inflation by locking in today’s prices.
  2. Guarantee your burial preferences.
  3. Eliminate the financial burden and tough decisions on your loved ones.
  4. Provide peace of mind that everything has been taken care of.

One way to prepay for a funeral is to set up a funeral trust. Funeral trusts allow you to set aside money for your future funeral costs. You can establish a funeral trust by depositing money into an interest bearing trust account at your bank. When you die, the trust funds will be disbursed to the funeral home or other service provider that you have designated as the primary beneficiary in the trust agreement. If you enter into the funeral trust directly with the funeral home it may agree to lock in costs for your future services at an agreed upon price. Generally, after the funeral costs have been paid, any amount remaining in the trust will be distributed to your estate.

The trust can be revocable or irrevocable. If the trust is revocable you can change or revoke the trust at any time. However, it will still be part of your taxable estate and counted as a resource for Medicaid purposes. If the trust is irrevocable, it cannot be revoked and the trust proceeds must be used for your funeral. However, it is not counted as a resource for Medicaid purposes. The five year Medicaid look-back period does not apply to Irrevocable Funeral Trusts so it can be funded right before you enter a nursing home.

Another option is to join a funeral society, which will help you find local mortuaries that will deal honestly with your survivors and charge reasonable prices. If you join a society, you will receive a form that allows you to plan for the goods and services you want to get them for a predetermined cost. To find a funeral society near you, you can search the internet at www.funerals.org.

If you have any questions about setting up a Funeral Trust contact Gregory Spadea of Spadea & Associates, LLC at 610-521-0604.

Determining The Purpose of an SNT and the Appropriate Expenditures

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.

Why I need a IDGT to qualify for VA AID and Attendant Benefits

Estate plan
The intentionally defective grantor trust (IDGT) is a powerful tool that can achieve a wide variety of estate planning and asset protection objectives: transferring interests in a family business, qualifying for need-based programs such as VA benefits or Medicaid, transferring assets outside the probate process, or protecting assets from the claims of the grantor’s creditors.

To learn more about the ways you can achieve your own goals through an IDGT, contact the Law Offices of Spadea & Associates, LLC, in Ridley Park, and discuss your situation with an experienced trusts and estates attorney. Our firm’s understanding of the legal and practical considerations involved in IDGTs can significantly expand your options for future financial security while solving highly specific problems.

What Is an Intentionally Defective Grantor Trust?

Like any other trust, an intentionally defective grantor trust involves dividing the legal title to a given asset from the beneficial interest of owning it. A trustee administers trust assets in the interest of named beneficiaries. In a conventional trust, the tax, gift and probate consequences of trust ownership are substantially the same. In an IDGT, differences between federal tax treatment and the transfer’s status for probate purposes open the door toward significantly expanded flexibility for any number of estate planning objectives.

The central feature of an intentionally defective grantor trust is retention by the grantor of certain rights and interests in the trust assets. As a result, the grantor will need to pay taxes on income generated by trust assets, which is what makes an IDGT “defective” in the eyes of the IRS. A business owner can continue to operate business trust assets, and a homeowner can continue to exercise the powers of residence and ownership of real estate transferred into an IDGT.

When properly established, however, the asset transfers necessary to create an IDGT will be recognized as valid under state probate law. They will also be recognized as valid exercises of an estate reduction strategy for purposes of Veterans Administration programs and Medicaid eligibility. The specific uses of an IDGT for these purposes can include:

  • Taking title to residential property for the sake of qualifying for Medicaid
  • Protecting the proceeds of the sale of a primary residence during the lifetime of an applicant for VA pension benefits
  • Preserving income tax exemptions for the proceeds of sale of a primary residence during the grantor’s life
  • Taking the value of a primary residence out of VA Aid and Attendance benefits eligibility calculations
  • Avoiding tax liability for asset appreciation during the grantor’s lifetime

Integrating an IDGT Into VA Benefits and Medicaid Eligibility Planning

There are many reasons to transfer assets into trust, including a preference to transfer them outside of probate, or to reduce the size of an estate for tax planning purposes. Transferring assets into an IDGT can also protect eligibility for such need-based programs as Medicaid or Veterans Aid and Attendance benefits.

For Medicaid planning, it is essential that assets be transferred out of the applicant’s estate at least five years before the time of need. Otherwise, the transfer will be disregarded for purposes of determining eligibility, and nonqualifying asset transfers can be recovered by the agency upon review after the grantor’s death.

For Veterans Administration programs, transferring assets into an IDGT will normally be effective to preserve or achieve eligibility for pension and other benefit programs, but VA benefits and Medicaid have somewhat differing eligibility rules that can complicate the situation for people who need to protect their ability to qualify under both systems. At Spadea & Associates, LLC, our attorneys work closely with each client in order to make sure that our estate planning solutions are carefully tailored to individual circumstances and goals.

Our familiarity with the legal and practical aspects of VA benefits eligibility planning can help ensure that the estate planning solution we recommend is well matched to the demands of your situation. Depending on your circumstances, the advantages of using an IDGT for protecting VA benefits can include: capital gains exemptions for the sale of the grantor’s home, deferred recognition of asset appreciation during the grantor’s life, disregard of assets for purposes of veteran’s pension qualification. In many cases, the important objective of protecting Medicaid eligibility can be advanced as well.

Not everyone will find it advisable to use an IDGT in connection with VA benefits eligibility planning. Because the grantor will continue to be liable for taxes on trust income, you will need to make sure you can afford tax payments. At the same time, excess income on trust assets could affect VA benefits eligibility.

Estate Planning Solutions in Philadelphia and Southeastern Pennsylvania

If an intentionally defective grantor trust can help you and your family, our lawyers can help you establish an IDGT on terms that take full account of your specific needs and goals across a wide variety of circumstances. For more information about the ways an IDGT can serve important estate planning or asset protection needs in your situation, including the need to protect access to income-tested government programs, contact Spadea & Associates, LLC in Ridley Park.

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