Special Needs Estate Planning

Special needs planning involves parents or caregivers who are interested in ensuring quality of life, advocacy and services to a child or individual with special needs. The planning itself is two-fold: First, parents and caregivers will want to be sure that they can use their own assets to provide resources and services and to ensure that such resources are appropriately handled after death. Second, for individuals with special needs, inheritances, like other resources, can have an adverse impact on needs-based or financially-based public benefits. Therefore, special needs planning also incorporates planning for those types of benefits as well.

A properly drafted special needs plan has two primary goals: (1) preservation of resources and (2) ensuring quality of life. The foundation of such planning includes a Will or Revocable Trust, a Special Needs Trust, and in some cases, Guardianship.

If you do not have a Will, Wisconsin Statutes will determine the beneficiaries who receive your property (the Laws of Intestacy). If you have a child with special needs who is receiving public benefits, you may not want that child to receive your property directly. Instead, you can set up a Special Needs Trust in your Will for your child with special needs ensuring that public benefits will remain intact after your death. If you have been court appointed as legal guardian for your adult child, you can also nominate a successor guardian in your Will.

As an alternative to your Will, you can execute a Revocable Trust, which is a trust that provides for distribution of your assets upon death. Unlike a Will, if the Revocable Trust is properly funded, it will allow you to avoid probate procedures. You can also provide for the distribution of assets to a Special Needs Trust within your Revocable Trust.

A Special Needs Trust is a trust arrangement whereby income and assets are preserved and used for the beneficiary without interfering with or jeopardizing the beneficiary’s eligibility for Medicaid, SSI, and other needs-based government benefits. Assets are held and managed by a Trustee, who distributes the assets in accordance with the instructions in the Trust document.

A Special Needs Trust created under a Will or Revocable Trust is called a third-party trust. A third-party trust is one created and funded with assets owned by someone other than the beneficiary. A third-party trust can also be created and funded prior to death and is called a living trust, or inter vivos trust. Under 42 USC 1396p (d)(4)(A), third-party trusts are not subject to a Medicaid lien.

All Special Needs Trusts provide that funds held in the trust are not to be placed under the control of the beneficiary, and most provide specifically that disbursements from the trust are not to be made to the beneficiary but are to be in the form of payments to vendors. The Special Needs Trust must also be irrevocable. The trust also provides what is to be done with any funds remaining after the death of the beneficiary. Unlike Special Needs Trusts established with a disabled individual’s assets (self-settled trusts), a third-party trust contains no requirement to pay back benefits paid to the beneficiary during his or her lifetime. It is important not to commingle the assets of a third-party trust with a self-settled trust because of this distinction.

Special Needs Trusts involve complex estate planning concepts. It is important that you work with someone who is familiar with different types of Special Needs Trusts, the various options for establishing such trusts, and public benefits planning to ensure that your assets are properly managed and that your loved one maintains necessary benefits following your death.

“As Is” Clause in Real Estate Agreement

When using an “as is” clause, the seller and the realtor are still obligated to make disclosures about the property, unless the buyers executed a valid waiver to receive the real estate condition report.

Under Wis. Stat. § 709.01, the law requires that sellers of real estate complete a real estate condition report. There is no exception for property sold “as is.” The only exceptions from the requirement of providing the real estate condition report are for (a) Personal Representatives; (b) Trustees; (c) Conservators; and (d) Fiduciaries who are appointed by, or subject to the supervision of a court. Wis. Stat. § 709.01(2).

Sellers of real property also have a duty to exercise ordinary care — the legal obligation to refrain from any act which would cause foreseeable harm to another or create an unreasonable risk to another. Sellers may be liable if they intentionally conceal defects or prevent buyers from investigating the property to discover the defects. Sellers may also be liable to buyers if they make false affirmative statements about the property. Sellers may further be liable if they do not disclose material conditions which buyers are in a poor position to discover (e.g., fire damage that has been repaired or prior mold or pest issues).

Similarly, pursuant to Wis. Admin. Code REEB 24.07, real estate agents are required to inspect the property to familiarize themselves with the property’s condition and disclose adverse conditions to potential buyers. Wis. Admin. Code REEB 24.07(1)(b) further requires real estate agents to “make inquiries of the seller on the condition of the structure, mechanical systems, and other relevant aspects of the property as applicable.” Simply because the real estate is being sold “as is” does not mean that a real estate agent no longer must comply with such prescribed duties.

In conclusion, if you are selling your property and you want the sale to be an “as is” sale, you may still be required to make disclosures about the condition of the property. To limit your risks, talk to your attorney about proper disclosures when selling real estate.

Health Savings Account Account (HSA)

Have a Health Savings Account? Do you know what happens to your HSA when you die?

An HSA account is a tax-exempt, medical savings account that is available to United States taxpayers who are enrolled in a high-deductible health plan. Over the last few years, HSA accounts have become more common. However, many HSA account owners are unaware of the implications of the rules governing HSA accounts in the event of their death.

Death of an HSA Holder

If you die with an HSA account and you have named your spouse as the designated beneficiary of your HSA, then the HSA will continue to be treated as your spouse’s HSA after your death. Your spouse will then be able to use the money tax-free to pay for qualified medical expenses even if your spouse is not enrolled in a high-deductible health plan. Your spouse will also be able to use the account funds to pay for any qualified medical expenses that you incurred prior to your death if your spouse pays those expenses within a year of your date of death. However, if your spouse is younger than 65, takes a distribution of funds, and uses the funds for something other than medical expenses, then your spouse will be required to pay a 20% penalty tax on the amount withdrawn plus income taxes. (This is the same rule that applies to you while you are alive.)

If you named someone other than your spouse as the HSA account beneficiary, then the HSA account stops being an HSA, and the fair market value of the HSA becomes taxable to the beneficiary in the year in which you die. However, the taxable amount can be reduced by any qualified medical expenses that you incurred prior to your death if those expenses are paid by the beneficiary within a year of your date of death.

If no beneficiary is named or, in other words, if your estate is the beneficiary of the account, then the HSA and the account value shall be included on your final income tax return. The amount reported on your return cannot be reduced for the payment of any qualified medical expenses incurred by you and that your estate paid within a year of the date of your death. This is true even if your spouse is the sole beneficiary to your estate.

In conclusion, naming your spouse as the beneficiary of your HSA account carries numerous tax advantages. If you are not married, naming another person as the beneficiary of your HSA account is a good option, depending on the value of the account and the tax implications you might have if you named no beneficiary and had the value reported on your final income tax return.

LLC Operating Agreement – Do I really need one?

As many people have learned, it is relatively easy to form a new limited liability company (LLC) these days. Often when new clients come in for business advice, they have already filed the Articles of Organization through the Wisconsin Department of Financial Institutions (www.wdfi.org). Sometimes they figured it out on their own, and other times another advisor, such as an accountant, helped them with the filing. All it takes is a credit card and a few minutes of time, and you too can have your very own LLC. These simple state filings are an important and necessary step in the business organization process. However, there is more that should be done to ensure that your business is properly organized!

One of the foundational documents that every LLC should have in place is an operating agreement. An operating agreement provides the basic rules of the road with respect to management and ownership of the company. Without a written operating agreement, the LLC and its members (members are the “owners” of an LLC) will be governed by the default statutory rules. For Wisconsin-based LLCs, those rules are found in Chapter 183 of the Wisconsin Statutes. No offense to our hardworking legislators, but would you really want to rely on the statutes to govern your relationship with your company and business partners?

Operating agreements range from the relatively simple to the extremely complex. The level of complexity depends on the nature of the business and the goals of the members. For example, a husband and wife forming an LLC usually need a straightforward operating agreement that spells out the basics about governance (like who can sign contracts on behalf of the LLC) and liability protections (helping ensure the members are not liable for the debts of the LLC). Typically, extensive rules governing transfers of ownership are not needed when just two spouses are involved. (That is what marital property agreements are for…a topic for another day.)

As soon as ownership of the LLC expands beyond one person and their spouse, it is extremely important to spell out the rules on who can own the LLC and under what terms. For example, if one member wants out of the LLC, will the other members have to buy their interest? At what price? What happens if one member dies or gets divorced? (Would you want to be in business with your partner’s kids or ex?) How will the owners handle a fundamental disagreement about the direction of the business? These are just a few of the questions and issues that an operating agreement should address.

Addressing these types of issues up-front, hopefully before there is a death, disability, divorce, or disagreement, may save both the business and the relationships between the members. While negotiating and drafting these agreements does take time and cost money, it is an investment in peace of mind and, hopefully, a way to avoid future litigation.

These same issues and concerns are present in business corporations, partnerships and even family cottage LLCs. And remember, even when the business owners are all family (or maybe especially when that is the case), addressing these issues up-front is better than losing those relationships or ending up in court

Legal Separation or Divorce?

A physical separation of spouses is not a “legal separation” regardless of how long it has been since the parties have lived together. A “legal separation” occurs through a court proceeding that is almost identical to a divorce proceeding. There are two main differences between a legal separation and a divorce.

1)    Residency requirements: To file an action for legal separation, you only need to be a resident of the state of Wisconsin (and of the county you file in) for 30 days. To bring an action for divorce, you must be a resident of the county you file in for at least 30 days AND a resident of the state of Wisconsin for at least 6 months.

2)    A legal separation does not dissolve or terminate the marriage, and therefore, neither party can remarry if their previous marriage ended only with a Judgment of Legal Separation and not a Judgment of Divorce. However, the parties can agree to convert the legal separation to a divorce after the Judgment of Legal Separation is entered, and either party to the legal separation can bring a Motion to convert the Judgment of Legal Separation to a Judgment of Divorce if more than one year has passed since the Judgment of Legal Separation was entered.

Imperfect Title: A Survey Exception Primer

There is little risk in presuming that the majority of homeowners rate their property as their most important asset. Paradoxically, homeowners likely know more about their car insurance than the insurance purchased for the purpose of protecting legal title to their property. Just like no one would want to purchase a car subject to someone else’s car loan, neither do people want to purchase property subject to the former owner’s mortgage or other liens. A homeowner may avoid such problems by obtaining a title insurance policy.

Familiarity with title insurance is usually nothing more than a nuisance charge on a closing statement. Yet, the essential function of a title insurance policy is to provide coverage ensuring the homeowner has good title to the property. If a covered title defect is found, the policy pays the homeowner for actual loss under the terms of the policy, and no more.

As with any insurance policy, it is paramount to understand what is covered. Basically, title insurance is a two-step transaction: the title commitment and title policy. The commitment consists of three parts: Schedule A, Schedule B, and the Conditions.1 Schedule A lists the name(s) of insured(s), the amount of coverage, a description of the insured property, and the effective date. Schedule B-I provides preliminary requirements to a policy being issued. Schedule B-II lists exceptions to coverage. The commitment also has Conditions found on the commitment cover. Following closing, the policy is issued based upon the commitment if the requirements have been met.

A typical title insurance policy contains certain exceptions concerning title risks that cannot be discovered or evaluated relying solely on public real estate records. The survey exception removes coverage for boundary line disputes. The purpose of the survey exception is to make it clear that the policy does not protect against matters outside a review of real estate records. In other words, matters that would be discovered by a surveyor are not covered by a title insurance policy unless a survey is obtained prior to closing.2 Typical language for this exclusion, found on Schedule B of the policy, states:

This policy does not insure against loss or damage (and the Company will not pay costs, attorneys’ fees or expenses) which arise by reason of: Encroachments, overlaps, boundary line disputes, or other matters which would be disclosed by an accurate survey or inspection of the premises.

Essentially, the title company puts the risk of not surveying the property on the insured. The property owner can limit this risk by either obtaining a survey or arranging for the removal of the survey exception.

Removing the survey exception – which can be accomplished by performing a survey per the policy conditions or paying an additional premium – exponentially expands the protection provided by a title insurance policy. For example, when the survey exception is removed, coverage is expanded to include3:

1.  A survey’s failure to show an encroachment of a policyholder’s fence on a neighbor’s property.

2.  The incorrect placement of lot line which causes a policyholder’s cellar door to open on a neighbor’s property.

3.  The incorrect placement of a power line easement 50 feet from the house as opposed to the true of measurement of 5 feet from the house.

4.  An incorrect statement of the amount of acreage.

5.  The encroachment of an insurance holder’s barn onto the neighbor’s property.

Whether you are working with a realtor or purchasing a for sale by owner property, it is important to understand your title insurance policy and the exceptions to coverage. Review your title insurance terms and exceptions to ensure your property is protected. If you have questions about your title insurance policy and what it covers, make sure you call your attorney.

1.  This form is available at the ALTA website: http://www.alta.org/forms/ (last visited June 5, 2017).

2.  Joyce Palomar, Title Insurance Law, § 7.02.

3.  Title and Escrow Claims Guide, 2nd Ed., § 12.3.16 (2013).

 

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