The Case for Living Trusts, Nomination of Guardianship Agreements and Special Needs Trusts: Spend a Little Now, Save Substantial Assets in the Future

Elizabeth McCoy is a California attorney who will be speaking at our upcoming two-day Empowering Autism conference in Orange County, CA on June 27-28, 2014. Some of the information in this article may be specific to California.

by Elizabeth C. McCoy, Esq.

After your death, would you like to save your family substantial amounts of money? This article will explain living trusts, guardianships, special needs trusts, and conservatorships, and how some documents set up now could, after your death, potentially save your minor child with Autism much anguish, and your family substantial amounts of money in federal estate taxes, court fees, and attorney costs.

Most parents agree that one of the most important things we can do after our children are born is to set up a plan for our children in the event of our deaths. A plan for parents’ children and assets is called an “estate plan.” Estate plans for parents who have a child with Autism include consideration of living trusts, guardianships, special needs trusts and conservatorships. While it is important that parents have a basic understanding of these four topics, it is imperative that parents also understand that the four topics are all interrelated, some preclude the need for others, and some can save substantial assets that could be reserved for your child with Autism instead.

First, what happens to the assets we acquire if we die without having set up an estate plan ourselves? At the time of death, if a single person or surviving spouse dies without an estate plan in place and has one hundred thousand dollars or more in countable assets in his or her own name, (assets not counted include, but are not limited to, life insurance proceeds, retirement plans and vehicles,) his or her estate must go to probate court.

Probate court is a time-consuming and expensive process. Probating an average estate takes one to three years, and the costs can be substantial, as probate fees and costs are based on the gross value of a person’s estate rather than the net value. In other words, if you own a home worth $800,000 and have a $350,000 mortgage against it, the court won’t subtract the outstanding mortgage first to find the net value of your asset. Instead, the court will assess probate fees and costs based on the entire $800,000 gross value of the home. In California, the fees are roughly 4.5% of the gross value of the assets. As a result, an $800,000 gross value home alone costs about $38,000 to probate, all money that could have been reserved for your child with Autism instead.

To avoid probate, parents set up a living trust. Most married couples will usually opt for an AB living trust, which in addition to saving the costs of probate, can also effectively double the federal estate tax exemption for the married couple. The cost of setting up a living trust is typically a drop in the bucket compared to the cost of probate, or the federal estate taxes that a married couple can avoid. As a result, a living trust is usually central to a parent’s estate plan.

Can you die without an estate plan? You might be surprised to learn that the answer is ‘no’. If you don’t set up an estate plan during your lifetime, the state has one already written for you. That’s what the Probate Court and state laws of succession provide. The problem, then, is not just that probate is expensive, it also means the state, through a court, rather than you, decides who takes all your assets, and also, who has guardianship over your minor child.

A child is a minor until the child turns 18 years old, at which time the minor child becomes an adult. While a child is still a minor, among other things, parents can make all housing, educational and medical decisions, and enter into contracts on behalf of the minor child. Everyone knows that parents can’t legally sell or contract away the rights they have over their minor child. However, many parents would be surprised to learn that parents have the sole legal right to execute a written Nomination of Guardian Agreement that upon the parents’ incapacity or death, assigns to another person all the legal rights the parents have over their minor child.

Having the sole legal right to do so is important, because without a Nomination of Guardian Agreement in place, multiple persons could have to go to court to establish guardianship over the child during the child’s minority. Grandparents and other family members can’t execute a valid Nomination of Guardian Agreement. They simply aren’t afforded the same legal rights over the child under the law. If a court grants custody over a minor child to the grandparents, and thereafter, the grandparents die or are incapacitated, someone else must go to court to establish a guardianship over the minor child until the child turns 18. Who pays for all of this? Usually the court process is paid out of the minor child’s assets.

The process of going to court to establish a guardianship is expensive, and typically costs thousands of dollars in court and attorney costs and fees. In California, a Guardianship lasts until the child turns 18, meaning the costs of the guardianship continue to accumulate until the child turns 18, with yearly status reports, attorney representation at hearings, blocked accounts and/or costs for bond, accountings and investigations, all as required by the court. On the other hand, if the parents set up a relatively inexpensive Nomination of Guardian Agreement during their lifetimes, the Agreement will negate the need for the entire court process and costs, and potentially, multiple court processes and costs.

Most parents would also be surprised to learn that if the parents do not set up a Nomination of Guardian Agreement, and both parents die or are incapacitated, the state by default becomes the legal guardian over the minor child unless and until a guardian is named by a court of law. While some parents have complete trust in the state, most parents would be wary of the state having complete control over their child. A grandparent or other family member could apply for a temporary guardianship in order to have temporary custody of the child until the court names a guardian, but the state has the legal right to take the child into custody and foster care in the meantime.

Many parents would be horrified to learn that because they did not execute a simple Nomination of Guardian Agreement, not only would their child lose his parents, their beloved child with Autism could also quickly be living in group foster care without his normal diet, clothing choices, therapy or activities. The good news is that this potential scenario and the costs of a court guardianship process can be avoided with a relatively inexpensive Nomination of Guardian Agreement.

We’ve already learned, then, that a living trust can avoid substantial costs of probate and, in the case of a married couple, can also save substantial federal estate taxes. We’ve also learned that parents can execute a written Nomination of Guardian agreement that could not only save much anguish on the part of their minor child, but also an expensive guardianship court process.

Now the first problem arises: at the time of the parents’ death, either as a minor or as an adult, the child will also inherit the parents’ assets.

If a minor child inherits assets and/or owns $5,000 or more in assets in his or her name, someone must be named Guardian of the Estate for the minor child by a court of law. The process to be named Guardian of the Estate includes expensive attorney costs and court fees, as well as an initial accounting, and thereafter, yearly accountings and status reports to the court, usually with expensive attorney representation. However, as discussed, if the child’s parents named a Guardian of the Estate in a Nomination of Guardian Agreement, and/or had the assets the child inherited held in a living trust or special needs trust for the child, the child won’t inherit assets in her name, and the court process will be avoided. Conversely, if the parents did not set up a living trust or special needs trust for the child during their lifetimes, and their minor child inherits more than $5,000, someone must go to court to be named Guardian of the Estate for the minor child until the child turns 18, at which time the assets will be distributed to the child.

Now we have a second problem: many children with Autism won’t have the capacity to manage their assets at age 18, and should not have the parents’ assets distributed to them directly upon achieving the age of majority.

If the parents die when their child is over the age of 18, the same basic rules apply. A minor child is by definition incapacitated. On the other hand, one day later on the child’s eighteenth birthday, the same child, now an adult, is deemed to have capacity unless and until a court determines otherwise. If the court finds the new adult lacks the capacity to manage his financial resources, someone will have to be named the incapacitated adult’s Conservator of the Estate.

Similar to the court Guardianship process, establishing a Conservatorship of the Estate is an expensive process. Once named, the Conservator of the Estate must file initial and yearly accountings of the assets, and attend yearly hearings, usually with expensive attorney work and representation, for the remainder of the life of the incapacitated adult!

Good news again: Conservatorship of the Estate and Guardianship of the Estate and their potential lifetime of court and attorney costs can be avoided if the parents set up a living trust, a Guardianship Agreement, (if the child is still a minor,) and a special needs trust during their lifetimes.

We’ve already established why parents need a living trust and a Nomination of Guardian Agreement. Parents also need a special needs trust if the parents determine their child won’t or potentially won’t have the capacity to manage his or her own assets once the child is an adult.

A special needs trust works like this: in the parents’ living trust, they name the special needs trust as the beneficiary of their assets rather than the child. (If the parents have less than $100,000 in assets, they can just have a Will instead that names the special needs trust as beneficiary of their assets.)

Thereafter, the assets are all titled in the name of the special needs trust, rather than the child’s name. A Trustee controls the assets, and distributes them for the sole benefit of the child. Because the assets aren’t in the name of, or under the control of the child, the Social Security Administration doesn’t count the assets as owned by the child, meaning the child will still qualify for SSI and Medi-Cal in California, (or Medicare in other states,) thus saving the family substantial amounts of money in housing, food and medical costs.

One of the major reasons parents should set up a special needs trust during their lifetimes, (called a third party special needs trust,) is that the trust won’t have to have pay-back provisions. Pay-back provisions mean that Medi-Cal must be paid back from all remaining assets in the trust after the child dies for all amounts paid by Medi-Cal during the lifetime of the child. Under payback provisions, most of the remaining assets are consumed by the pay-back to Medi-Cal, rather than inherited by other family members, especially siblings.

What happens if the parents own more than $100,000 in countable assets but don’t set up a living trust or third party special needs trust during their lifetimes? The estate will go to probate court, where the court has to establish for the child either a Guardianship or Conservatorship of the Estate, or a first party Special Needs Trust for the child that includes pay-back provisions. A court-supervised first party Special Needs Trust operates somewhat like a Conservatorship of the Estate, with court and attorney costs at initial set up, yearly accountings to the court, court orders required for many expenditures, and expensive attorney work and representation all along the way.

In summary, for parents who have a child with Autism, a living trust, a Nomination of Guardian Agreement, (if the child is a minor,) and a Special Needs Trust can save a family substantial costs in avoiding federal estate taxes, probate fees, attorney costs and fees, as well as Guardianship of the Person and Estate of all the parents’ minor children, Conservatorship of the Estate of the parents’ adult child with Autism, or a court supervised Special Needs Trust, all in all potentially saving a family substantial assets that can be used for the benefit of the child with Autism instead.