The IRS has withdrawn the controversial proposed regulations under Code §2704 that would have significantly affected the use of discounts in US estate planning.

Code §2704 provides that certain “applicable restrictions” on ownership interests in family entities – that is, entities where the transferor and family members control the entity – should be disregarded for valuation purposes.  The proposed regulations created new rules relating to a lapse of a liquidation right.  They also created a class of restrictions known as “Disregarded Restrictions” that included many common types of restrictions in business entities and would be ignored for gift and estate tax valuation purposes.  See our prior blog post on this topic.

The effect of the proposed regulations appeared to be that they would eliminate or greatly restrict minority interest and lack of marketability discounts that are commonly applied in gift and estate tax valuations (resulting in higher valuations).  The regulations were very controversial from the moment they were issued.  Among other things, commentators said the regulations were unclear and unrealistic.

Treasury and the IRS have stated that they now believe that the approach of the proposed regulations to valuation discounts is unworkable.  The IRS issued a notice (Notice 2017-38) that it was reviewing the proposed regulations as unduly complex or overly burdensome, and has now withdrawn the proposed regulations.

Governor Andrew Cuomo recently signed legislation which amends New York law to allow mentally-competent disabled individuals under age 65 to establish a first-party Special Needs Trust without court petition.

In the past, when an individual with special needs had assets in his or her name which precluded his or her eligibility for government benefits, a special needs trust could only be created to achieve eligibility for benefits while preserving the assets for a disabled individual’s care by a parent, a grandparent or a legal guardian, or by the disabled individual by way of a lengthy and costly court proceeding.  Now, a disabled individual with mental capacity can establish his or her own special needs trust for assets in his or her own name without the involvement of these other individuals, or the courts, while preserving his or her eligibility for government benefits (for example, Medicaid and SSI).

New York Social Services Law 366(2)(b)(2)(iii) now conforms to the Federal Special Needs Trust Fairness Act signed into law by President Barack Obama on December 13, 2016, and applies to all first-party Special Needs Trusts established in New York on or after August 21, 2017.

Experts have started to calculate the inflation adjustments to key estate and gift exemption amounts for 2018.  Note that these are not the official figures to be released by the IRS, but should be used as a guide.  The IRS will officially release the numbers later this year.

For an estate of any decedent dying during calendar year 2017, the applicable exclusion was increased from $5.45 million to $5.49 million.  This change increased not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount.  This means a husband and wife with proper planning could transfer $10.98 million estate, gift and GST tax free to their children and grandchildren in 2017.  The projected 2018 adjustment to the applicable exclusion will increase from $5.49 million to $5.6 million which means that a husband and wife with proper planning could potentially transfer $11.2 million estate, gift and GST tax free to their children and grandchildren in 2018.

For 2017, the estate, gift and GST tax rate remains the same at 40% and the gift tax annual exclusion remains at $14,000.  For gifts made in 2018, the projected gift tax annual exclusion will be adjusted to $15,000 (up from $14,000 for gifts made in 2017).

The New Jersey Estate Tax repeal will be effective as of January 1, 2018.  The current $2 million exemption which increased on January 1, 2017 is set to be eliminated as of January 1, 2018.  Keep in mind that the New Jersey Inheritance Tax is still in effect. This is a tax imposed on transfers to beneficiaries who are not spouses, parents, children or grandchildren (i.e., nieces, nephews, siblings, friends, etc.) New Jersey Inheritance Tax rates start at 11% and go as high as 16%.

The New York exclusion amount was changed as of April 1, 2014.  Beginning April 1, 2014, the exclusion has increased as follows:

•           $2.0625 million for decedents dying between April 1, 2014 through March 31, 2015;

•           $3.125 million for decedents dying between April 1, 2015 through March 31, 2016;

•           $4.1875 million for decedents dying between April 1, 2016 through March 31, 2017;

•           $5.25 million for decedents dying between April 1, 2017 through December 31, 2018.  Beginning in 2019, the exclusion would be indexed for inflation, and equal to the Federal exclusion.

In 2017, the gift tax annual exclusion to a non-citizen spouse was increased from $148,000 to $149,000.  This is projected to increase to $152,000 in 2018.  While gifts between spouses are unlimited if the donee spouse is a United States citizen, there are restrictions when the donee spouse is not a United States citizen.

A Third-Party Special Needs Trust (also referred to as a “Supplemental Needs Trust”) allows parents or other relatives of a special needs beneficiary to dedicate assets to the beneficiary by gift or inheritance without affecting his or her eligibility to receive government benefits and without any need for reimbursement of benefits that are provided by government agencies.  Although Supplemental Security Income (SSI) and Medicaid programs require that applicants have limited income and resources in order to be eligible for assistance, assets which are owned by a Special Needs Trust are not counted in determining the child’s eligibility to receive benefits.  Rather, the Special Needs Trust allows the beneficiary to enjoy the use of the assets in the Trust while preserving his or her qualification to receive government benefits.

In order to protect the assets which are allocated to a special needs beneficiary and preserve his or her eligibility for government assistance, the terms of a Third-Party Special Needs Trust must direct the trustee to use the trust assets to supplement, but not replace, any government benefits which are available to the beneficiary.  Specifically, the trustee is directed to use trust assets for the beneficiary’s “special needs”, which can include obtaining goods and services to maintain or improve his or her comfort, welfare and care, including luxuries beyond basic needs.  Thus, the beneficiary will not have any access to or control over the trust assets during his or her life.  In addition, because a Third-Party Special Needs Trust does not require that Medicaid/SSI be reimbursed for any benefits that were provided to the beneficiary, the trust may provide for the assets to pass to the beneficiary’s children (or to such other beneficiaries as the grantor designates) at the beneficiary’s death.  In this manner, the Third-Party Special Needs Trust can incorporate estate planning for other family members, such as the beneficiary’s children, grandchildren or siblings.

The following are some important factors that should be considered before creating a Special Needs Trust:

  • Determine the purpose of the Trust. Is the trust being created to receive lifetime gifts from parents or other family members, or will the trust receive assets from the estate of the person creating the trust? (i.e., usually the beneficiary’s parent or parents).  If the Trust is to receive lifetime gifts from parents and/or other family members, the person establishing the trust (called the “grantor”) would create an inter vivos trust, which trust could be either revocable or irrevocable.  If an irrevocable trust is used, the assets in the trust will not be subject to estate tax at the grantor’s death.  On the other hand, if a revocable trust is used, the assets will be included in the grantor’s taxable estate and thus subject to estate tax at his or her death.  Both irrevocable and revocable trusts can also receive bequests to the beneficiary under the grantor’s Will.  If the Trust is only to receive assets at a person’s death, then the trust could be created under the individual’s Will, in which event the assets will be subject to estate tax at his or her death.
  • Select who the trustee of the trust will be. Most often, a parent of the beneficiary will serve as the initial trustee.  The role of trustee is a long term function and involves investing the assets and having sensitivity to the needs of the beneficiary for purposes of making distributions and should be someone with an understanding of how to properly distribute trust assets without affecting the beneficiary’s eligibility for benefits.  These qualifications should be considered when selecting successor trustees as well.
  • Assets to be contributed to the Trust. Whether the trust is being created now to receive gifts of assets during the grantor’s life, or whether the trust will be created under an individual’s Will, it is important to consider and anticipate the amount of assets that will be necessary for the beneficiary’s care during his or her life, taking into account any gifts that might be made for the beneficiary’s benefit from other relatives.
  • If applicable, select individuals to serve as guardians after the death of both parents. Note that the appointment of a guardian for a minor child may be done under the individual’s Will.  However, if the special needs beneficiary is no longer a minor, a guardian would need to be appointed through a legal proceeding.  In that instance, the Will may include language expressing the individual’s hope and desire that the court appoint specific persons, as the court will consider such language as evidence of the testator’s intentions.
  • Prepare written instructions for the trustee, guardians and family members regarding how to care for the special needs beneficiary. This may be done through a letter of intent, which provides detailed instructions regarding the day to-day care and activities of the special needs individual.  There is no required form for a letter of intent, and the letter should be as detailed as is necessary to ensure that guardians and family members have sufficient information to properly care for the beneficiary.
  • Determine any possible changes in circumstances that need to be addressed. If there is a concern that the beneficiary may no longer require government assistance at some point in the future as a result of improved functional ability, the trust can be drafted so that the trustee may make distributions from the trust for any reason in such instance.  This will allow for flexibility in case the beneficiary’s needs should change in the future.

This list is by no means exhaustive and those who have a special needs child, grandchild or other relative should consult with an attorney before embarking on a special needs plan to carefully review available options that can be tailored to fit the individual’s circumstances.  It is also important to note that a Third-Party Special Needs Trust should not be the sole component of an estate plan but should comprise part of a larger overall plan, which is best explored through the advice of an estate planning attorney.

Divorce is an unfortunate reality for many couples and can be especially complicated and heartbreaking when children are involved.  Parents of children with special needs, however, face additional challenges.  While custody and child support issues are typically addressed in divorce proceedings, parents of children with special needs and their divorce attorneys must also consider, among other things: (1) who will be the guardian or guardians after the child’s 18th birthday; (2) the effect of the newly enacted child support termination law; and (3) whether to establish a trust for child support and/or maintenance payments to ensure such payments do not disqualify special needs children from receiving government benefits.

A Guardianship is Necessary for Children With Special Needs 18 or Older

Parenting time and custody over minors are issues adjudicated in a divorce proceeding in the Family Division of the Superior Court.  Family courts in New Jersey, however, will generally not award “custody” over anyone 18 or older because upon the child’s 18th birthday, he/she is legally deemed an adult with the right to make his/her own medical, legal, educational, financial, vocational, and residential decisions.

Additionally, without permission from the adult child, no one is authorized to access that child’s medical, legal, financial, or educational records. Often times, cognitive limitations prevent adult children from not only making competent decisions, but also from providing the authorization necessary to ensure their parents have access to essential records.  Given that the Family Court will not award “custody” over an adult child, parents of children with special needs in the process of obtaining a divorce must consider what type of proceeding should be filed to ensure there is authorization to make decisions for their adult disabled children and which parent, if not both, will be authorized to make those decisions.

In order to obtain authorization to make decisions for a special needs child that is 18 or older, a petition for guardianship must be filed with the Chancery Division of the Superior Court.  If a divorce is commenced and the couple’s special needs child will turn 18 shortly thereafter, or the child is already over 18, the Family Court judge in the divorce proceeding will likely direct the parents to file a guardianship petition prior to determining issues of child support or maintenance payments.  In that guardianship action, the parent (or parents) applying for guardianship must demonstrate that their child is incapacitated based on that child’s inability to govern himself and manage his affairs. This is done by filing, among other documents, a Verified Complaint, a certification of assets and certifications from two physicians or a physician and a licensed practicing psychologist supporting the petition for guardianship. If the child is receiving services from the New Jersey Department of Children and Families – Children’s System of Care/PerformCare or the Division of Developmental Disabilities, the documents to be submitted in the guardianship action will vary slightly.

Once appointed, a guardian (or guardians) will have the authority to make, medical, legal, educational, financial, vocational, and residential decisions for that adult child. The guardian (or guardians) will also be considered the child’s personal representative under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and will have full and complete access to all of the adult child’s records.

Divorce and guardianship proceedings can be tumultuous for the children involved. As such, the ultimate goal should be to create an environment during and after the litigation where parents can work together to continue to act in their child’s best interests and maintain a civil, if not amicable relationship.  This is especially important when children with special needs are involved because it is likely that the parents will remain in contact for the remainder of the children’s lives.  A potential way to avoid future disagreements is to address areas where decisions will have to be made for the special needs child during the guardianship. Some of these areas include: residence, schooling, vocation, medical care/treatment, enrollment in a “21 Plus” program, enrollment in extra-curricular activities, travel out of state, activities of daily living, a protocol for transfer of the child for parenting time from one parent to another, and a protocol for emergency situations.  In an effort to avoid returning to Court each time there is a disagreement, guardians should also consider determining what mechanism to employ should they come to an impasse regarding their child.  One option, for example, could be to engage a neutral decision maker.  If practicable, these decisions and protocols should be memorialized in a final judgment appointing the guardian or guardians. Additionally, if only one parent is awarded guardianship, the non-guardian parent can still petition the Court for certain rights to be included in the final judgment appointing the guardian.

Extending Child Support and Financial Maintenance Payments

Once the guardianship proceeding is completed and a guardian or guardians are appointed, the parents will return to the Family Division to resolve issues regarding child support and/or financial maintenance payments.  A child’s special needs may affect whether child support can be extended and eventually converted to financial maintenance.  Pursuant to the Child Support Termination Law which went into effect on February 1, 2017, child support automatically terminates when a child:

  • marries;
  • dies;
  • enters the military; or
  • reaches the age of 19, unless an exception applies.

Child support may continue past the age of 19 if:

  • a Court Order directs support to terminate at a different age or date;
  • the child is still enrolled in high school or other secondary educational program;
  • the child is enrolled full-time in college or other post-secondary education program;
  • the child is in the custody of the Division of Child Protection and Permanency in the Department of Children and Families; or
  • the child has a physical or mental disability, as determined by a federal or State government agency, that existed prior to the child reaching the age of 19 and requires continued child support.

Even if an exception applies, however, including that the child’s disability requires continued support, child support will automatically terminate once the child turns 23.  When a child reaches age 23, that child or his parent can apply to convert the child support to another form of “financial maintenance,” but only if exceptional circumstances such as a mental or physical disability are demonstrated.

Establishing a Special Needs Trust for Child Support or Financial Maintenance Payments

Parents of children with special needs must also consider the effect of child support and/or maintenance payments on a child’s potential to qualify for and receive government benefits.  Children and adults with special needs may be entitled to government benefits such as Medicaid and Supplemental Security Income (“SSI”).  These means-based benefits may be compromised if a child receives support or maintenance payments from his or her parents because in New Jersey, child support payments are considered an asset of the child.  As such, parents of children with special needs and their family law attorneys should consider having child support or financial maintenance paid into a properly established special needs trust to ensure that those children remain qualified for government benefits after turning 18.  Without a special needs trust, those with special needs could be disqualified from means-based benefits.  Such a trust should be established either during the divorce proceeding or during the guardianship proceeding, and a Court Order must direct the child support funds be deposited directly into that trust.

Given the complexities of this area of the law, it is strongly advised that parents and their family law attorneys seek assistance from competent counsel experienced in guardianship litigation and special needs planning.