Grandparents play an increasing role in the education of their grandchildren.  With a private college education exceeding $50,000 per year, and grandchildren increasingly attending graduate school, many parents do not have the ability to pay for all of their children’s education. 

What many grandparents do not know is that there is a tax-efficient way they can pay for the higher education of their grandchildren.  It is the 529 Plan.  A 529 plan is a tax-advantaged investment plan designed to encourage saving for the future higher education expenses. The plans are named after Section 529 of the Internal Revenue Code and are administered by state agencies. Grandparents can receive a state income tax deduction for contributing to a 529 Plan.  In Connecticut, we have the Connecticut Higher Education Trust 529 Plan.  Money contributed to the account grows tax free; when the grandchild starts attending college they can use the fund for their higher education without paying any income taxes on the withdrawals. 

There are numerous misconceptions about 529 plans:

          MYTH #1:  A Grandchild Can Only Use a 529 Plan for College.  The reality is that a 529 plan can be used for any eligible post-secondary institution ranging from vocational      school to graduate school.

          MYTH #2:  If the grandchild does not attend college, the fund is lost.  The money in a 529 Plan is never lost. If a grandchild does not go to college and the funds withdrawn, the account owner will pay taxes on the earnings and pay a 10% withdrawal penalty but there will still be funds available for the grandchild to use. Of course, the account owner can always change the beneficiary to someone else who uses the account for higher education.

          MYTH #3:  There is an age limit.  There is no age limit on who can use the money in a 529 plan.  Thus, even if a grandchild does not use the 529 Plan until graduate school, the fund will pay those expenses regardless of the grandchild’s age.

          MYTH #4:  Having a 529 account will disqualify the grandchild for financial aid.   In the financial aid calculation, colleges only take a parent’s and the student’s assets into account.  The treatment of investments in a 529 plan for financial aid purposes varies by school. Assets in a 529 Plan are typically treated as the account owner's and not the student's. Student assets are generally assessed at 20%, whereas, parental assets are generally assessed at 5.6%. Grandparents assets are not included in the financial aid calculation. Thus, if the grandchild will need financial aid, it may be better to have the grandparent remain as the account owner but designate the parent as successor owner.  Even if a school counts the 529 plan for financial aid purposes, the majority of need-based financial aid is in the form of student loans.  So, whatever savings accumulate for your grandchild’s college expenses may help reduce the parent’s or student’s future debt load.

          MYTH #5:  A grandchild can only be enrolled in one 529 plan.  Just because the parent of your grandchild set up a 529 plan, it does not mean you should not set up a 529 plan for your grandchild. There’s no limit on the number of 529 accounts that can be opened for a specific beneficiary.

          MYTH #6:  All 529 Plan are the same.  You can invest in a 529 Plan through a financial institution or through a state agency. The investments available to grow the account can vary greatly depending on where you set up the 529 Plan.  Financial institutions tend to have more investment choices than state agencies.  A 529 Plan provided through a financial institution may not allow you to take a state income tax deduction.  The fees charged for maintenance of the account can vary greatly.  Some plans impose significant annual fees averaging 1% to 1.5%. Some plans also impose significant front-end sales charges on the investments. Fees are generally lower if the investment is made directly with the state plan instead of arranged through a broker.  Thus, it helps to compare 529 Plans.  See www.collegesavings.org to compare plans. 

          MYTH #7:  529 Plans are the only way to provide for your grandchild’s education.  Most financial institutions and every state advertise 529 Plans as the way to provide for a grandchild’s education.  Nevertheless, grandparents have many options besides 529 plans to consider.  Tuition and related expenses paid directly to the college (not reimbursed to the grandchild) are totally exempt from gift or estate taxes.  Sebsequently, a grandparent may wish to simply pay the tuition costs directly instead of creating a 529 plan.  U.S. Savings Bonds may also be a great way to provide for a grandchild’s education if the grandchild is a dependent of the grandparent.  Interest on U.S. savings bonds which are redeemed to provide for the higher education of a dependent is excluded from taxable income. Roth IRAs offer another tax-efficient way to provide for a grandchild’s education.  Roth IRAs grow free of income taxes.    A grandparent can make a withdrawal from a Roth IRA to pay for a grandchild’s education at any level.  Grandparents can also set up a Uniform Trusts for Minors Act account for the grandchild at any financial institution to pay the grandchild’s education expenses.  Finally, a grandparent can set up a Trust for the grandchild with the grandchild’s parent as Trustee.

The cost of higher education has grown 10 times since grandparents put their own children through college.  Through funding their education, grandparents can make a substantial difference in the lives of their grandchildren.  Grandparents should consider 529 Plans as one of the many vehicles to fund a grandchild’s higher education.

In this day and age, it is not uncommon to remarry after a divorce or the death of a spouse.  Often in these remarriages, one or both spouses have children from a prior marriage.  These blended families can pose some challenging estate planning issues for the newlyweds.  If you die before your new spouse, how do you ensure that both your new spouse and your children from your first marriage receive an inheritance?  Who gets the house – your new spouse or your children?  How will your new spouse get by financially if you choose to provide an immediate inheritance for your children?

In a perfect world, you could leave everything outright to your new spouse and trust your new spouse to eventually leave the balance to your children through a Will.  Unfortunately, your spouse may decide for various possible reasons to disinherit the step-children by simply changing his or her Will.  Don’t think it could happen?  How about this scenario?

Bob and Betty are a married couple with three kids.  Betty tragically passes away at a young age.  Eventually, Bob meets and marries Jane.  Bob and Jane set up reciprocal Wills leaving all of their assets to each other otherwise to Bob’s children.  Bob dies shortly after in a car accident, and Jane inherits all of Bob’s property.

A few years later, Jane marries James who has two children of his own.  James moves into the house that Jane inherited from Bob.  Bob’s children do not get along with the James.  James convinces Jane to revise her will to leave everything to James and his two children upon her death.  James outlives Jane and inherits all of the assets Bob left to Jane.

Do you think Bob ever envisioned James inheriting his assets?  While Jane is taken care of in this scenario, Bob’s children were unintentionally disinherited by Bob.

There are several other ways this scenario could play out with similar results.  Jane could exhaust all of the assets or gift the assets outside of Bob’s family.  Jane could have creditor, bankruptcy or divorce problems and lose all the assets.  Jane may have a falling out with Bob’s children and revise her estate plan to leave them nothing.

The point is Bob’s simple reciprocal Will plan with Jane is fraught with risks that could cause Bob to unintentionally disinherit his children.  The good news is there is an easy solution.  Bob could have his assets pass to a revocable trust agreement that is funded either during his life, through his Will, or through beneficiary designations, or a combination of these methods.  Bob can amend or revoke the Trust at any time so he is free to change his mind.  Upon Bob’s death, the trust would become irrevocable and continue for the benefit of Jane and the benefit of Bob’s children.  The Trustee could invest the assets to make them income producing, and pay all of the income to Jane for the rest of her lifetime while preserving the principal for Bob’s children.  Upon Jane’s death, the remaining principal of the trust would go to Bob’s children either outright or in further trust.  If Bob wants Jane to have access to the trust principal, Bob could name an independent trustee who has the power to pay some of the principal to Jane if she needs the principal.

Some benefits of Bob using a trust in this situation include:
• Adding spendthrift protection
• Bob maintaining post-death control over his assets, and
• Bob ensuring he provides for both Jane and his children.

Spendthrift protection refers to trust language that prevents the trustee from paying any creditors of the beneficiaries.  Thus, if Jane or a child have creditor issues or get divorced, the assets will remain protected inside the trust.

Bob maintains control over his assets because his trust becomes irrevocable at his death.  Jane cannot change the plan to disinherit Bob’s children.  If Bob sees no need to provide for Jane if she remarries, the trust could provide that Jane’s interest in the trust ends upon her remarriage.

Bob can name a trustee or co-trustee to serve with Jane to manage and preserve the assets for the mutual benefit of Jane and for Bob’s children.

There are many options available under a Revocable Trust to suit your individual needs and goals.  The central point is, by proper planning, you can maintain control over your assets to prevent disinheritance of your children while still providing for your second spouse.

On June 12, 2014, in the case of Clark v. Rameker, the U.S. Supreme Court held that inherited IRAs receive no protection from creditors in bankruptcy.  In 2000, Ruth Heffron established a Traditional IRA naming her daugher, Heidi Heffron Clark, as the sole beneficiary of the account.  Ruth died a year later.  At death, the IRA had $450,000 in it.  Heidi didn't cash it in.  Instead, she decided to take monthly distributions from the IRA.  In 2010, Heidi and her husband fell on hard times and filed Chapter 7 bankruptcy in Wisconsin.  The IRA had shrunk in value to $300,000 but Heidi claimed it was an exempt retirement fund under Section 522(b)(3)(C) of the Bankruptcy Code. The bankruptcy trustee claimed that the inherited IRA was not a retirement fund under the Bankruptcy Code and Wisconsin has no exemption for inherited IRAs.

The Supreme Court held that because an inherited IRA does not contain the debtor's retirement funds, an in, an inherited IRA does not qualify for the retirement fund exemption under Section 522(b)(3)(C).  Unlike a traditional IRA, an inherited IRA is not set aside for the day an individual stops working.  The holder of an inherited IRA cannot invest additional funds in the account.  The entire purpose of Traditional and Roth IRAs is to provide tax incentives for workers to contribute regularly to their retirement savings. Holders of inherited IRAs are required to take annual distributions from the accounts no matter how many years the holder may be from retirement.  An inherited IRA naming the estate as beneficiary must be withdrawn within 5 years so it serves no retirement purpose.  Because the tax laws require reduction of the account over time, it is not a retirement fund for the beneficiary.  Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time without the payment of the 10 percent penalty prior to the age of 59½.  Thus, it is fully available to the inherited IRA beneficiary without penalty.

Would this seminal case apply in Connecticut?  Under Connecticut law, any asset or interest of debtor in, or payments received by a debtor from, a plan or arrangement described in the Connecticut statutes is exempt property.  Under Connecticut law, individual retirement accounts are exempt from claims of creditors of not only the participant but also creditors of the beneficiary.  A Connecticut resident who is a beneficiary of an inherited IRA would just need to claim the State exemptions allowed under Section 522(b)(3)(A) of the Bankruptcy Code to exempt the inherited IRA in bankruptcy.

Limits on creditor exemptions for retirement plans in Connecticut do exist, however.  The rights of spouses and children under a Qualified Domestic Relations Order (QDRO) override Connecticut's exemption.  Nothing impairs the rights of the State of Connecticut to recover the costs of incarceration.  Funds in an inherited IRA do not impair the rights of a victim of a crime to proceed against that IRA.

We are only aware of 6 states that exempt IRAs from creditors of beneficiaries --- Alaska, Arizona, Connecticut, Florida, Missouri or Texas.  Can you still protect your IRA for your child if the child does not live in one of those states?  The answer is yes.  You could leave the IRA in a trust for the benefit of your child with a Trustee who is not your child.  Because the child will not own the inherited IRA, it will not be part of his or her bankruptcy estate. 

Do you remember the first time one of your parents let you drive the family car?  Remember the excitement you felt getting behind the steering wheel, followed quickly by that rush of anxiety as you realized you were accelerating down the road, and the trees appeared to jump out toward the car?  Remember the sound of the engine roaring from you pressing too hard on the accelerator, turning quickly into the sound of a neck jolting screech as you attempted to apply the brakes for the first time?  During my first lesson, my Dad's quick corrections on the wheel saved several unsuspecting joggers.  Fortunately for my Dad, he had a strong neck, and a lot of patience, as I gradually improved with each lesson. 

Over time, our anxieties as new drivers ease, and driving becomes second nature, as we enjoy the new found liberation of being able to come and go as we please.

Driving a car becomes an expectation and a “right” as we age.  Losing that freedom can be difficult for a person to accept.

Unfortunately, our ability to drive may decline due to the effects of aging on our vision, hearing, reaction time, and memory.  So, what should you do if Mom or Dad begins to have difficulty driving safely?

Driving Solutions

First, driving is not necessarily an all-or-nothing activity. Some programs exist to help elderly drivers adjust their driving to changes in their physical condition.

AARP (the American Association of Retired Persons) sponsors a Driver Safety Program, designed especially for drivers age 50 and older, which helps people deal with issues such as:

• How to minimize the effects of dangerous blind spots
• How to maintain the proper following distance behind another car
• The safest ways to change lanes and make turns at busy intersections
• Proper use of safety belts, air bags, antilock brakes and new technology found in cars today
• Ways to monitor your own and others' driving skills and capabilities
• The effects of medications on driving
• The importance of eliminating distractions, such as eating, smoking and using a cellphone
• How to compensate for vision problems associated with aging

These Driver Safety Programs are taught at numerous senior centers and other convenient locations throughout the United States, including Connecticut. Visit www.aarpdriversafety.org or call (877) 846-3299 for locations and dates.  Upon completion of the program, participants may be eligible for insurance discounts.

Additionally, the Association for Driver Rehabilitation offers referrals to specialists who teach people with disabilities, including those associated with aging, how to improve their driving.  Visit www.driver-ed.org or call (866) 672-9466 for more information.

There are many ways for elderly drivers to adjust so they are not a danger to themselves or others. Among them are:

• Avoid driving at night, dawn or dusk
• Drive only to familiar locations
• Avoid driving to places far away from home
• Avoid expressways (freeways)
• Avoid rush hour traffic
• Allow plenty of time to get to their destination
• Don’t drive alone

Other forms of transportation

Encourage your loved one to rely more on public transportation. This will reduce their time behind the wheel and help prepare them for the day when they can no longer drive. Many cities offer special discounts for seniors on buses and trains.  Most town senior centers often provide special transportation for seniors.  Community service agencies also provide transportation. For example, the Eastern Connecticut Transportation Consortium (ECTC) www.ectcinc.com  (860-859-5791) provides free rides for seniors 60 years of age or older who reside in Bozrah and Franklin for medical appointments, shopping and other needs.  Their Resources page list links to other websites for both transportation and social service organizations serving Eastern Connecticut .

How to know when it is time to stop driving

The Connecticut DMV (Department of Motor Vehicles) has a Center for Experienced Drivers with a website containing valuable information for older drivers www.ct.gov/experienced.  According to the website, some signs of diminished capacity for driving safely include:

• Having a series of minor accidents or near crashes
• Having wandering thoughts or being unable to concentrate
• Being unable to read ordinary road signs
• Getting lost on familiar roads
• Having other drivers honk at you frequently
• Being spoken to about your driving by police, family, and friends

How to get them to stop

If your loved one is truly an unsafe driver, it is important for their own safety and the safety of others that you get them to stop driving.   If you are lucky, they will agree without an argument. If not, you have several options:

• Stage an intervention.  Family members, health care workers and anyone else respected by the senior, as a group, confront the elderly driver.  Conduct the intervention firmly but with compassion in order to break through the senior’s denial of the issue.
• Contact the Department of Motor Vehicles and report your concerns.  The DMV may do nothing more than send a letter, but this might help convince your parent or loved one to stop.
• Disable the car.  Take the keys or move the car to a location beyond the elderly person’s control. Leave the headlights on all night or disconnect the battery to disable the car. But, if your loved one is likely to call AAA or a mechanic, you have no choice but to eliminate all access to the car.  While this may seem extreme, it might save the life of your loved one, another driver or a pedestrian.

Our parents led us into the world of driving.  We owe it to them to guide them through their driving challenges as they age.

On June 17, 2014, the Connecticut Supreme Court decided the case of Palomba-Bourke v. Commissioner of Social Services. Our local newspaper, The Day, wrote the decision allows Connecticut officials to reject Medicaid coverage for nursing home patients if their spouses have trusts funds, no matter if those funds predated the marriage or were never intended to benefit the patients. The Day was not alone in reporting the decision in that manner.  But I think that the press is seriously misleading the public in the way it reported the case.   

Mary Palomba-Bourke is the beneficiary of a trust under the 1968 Will of her first husband, Edward Palomba. The Will required the Trustee to pay to, or expend for the benefit of, Edward’s wife and children so much of the annual net income and principal as the Trustee deems advisable for their comfortable care, maintenance and support, and the education of the children. Edward died in 1976 and Mary became the beneficiary of the trust. Mary remarried in 2000. Her new husband, Daniel Bourke, filed a Title 19 Medicaid application in 2009.  The trust had $514,977 in it at the time of the 2009 application. Their combined assets were $655,624, if the trust assets were counted. The Connecticut Dept. of Social Services denied the Medicaid application stating that the trust assets were countable and Mary and Daniel had too much in assets to qualify for Medicaid. The applicant can only have $1,600, and the spouse of the applicant can only have the Community Spouse Protected Amount  ($109,540 in 2009; $117,240 today).  Mary asked for a fair hearing.  DSS denied the appeal.  Mary appealed the case to the Superior Court.  The Superior Court ruled against Mary and denied Daniel his Title 19 benefits.  Mary appealed the case to the Connecticut Supreme Court.  In the Supreme Court, Mary conceded that the trust under Edward’s 1968 Will was an available asset, but argued the trust was created and became irrevocable before the Medicaid Catastrophic Coverage Act of 1988 (MCCA) so the trust rules in 1968 or 1976 apply.  Back then, trust assets did not count if the Medicaid applicant was not a beneficiary.  Daniel Bourke was not the beneficiary of Edward Palomba’s Will.  In 1988, MCCA changed the Medicaid rules so assets of one spouse are deemed assets of both spouses.  The Connecticut Supreme Court upheld the ruling in the Superior Court concluding that the Medicaid rules that exist at the time of application is filed apply, not the rules when the trust was created in 1968 or when Mary became a beneficiary in 1976.   

Even under today’s Medicaid rules, if the trust had been a discretionary trust that allowed the Trustee to make distributions as it deemed advisable in its sole, absolute, and uncontrolled discretion, it would not be a counted asset. The trust, under Edward’s Will, required distributions for “comfortable care, maintenance, support and education,” so it was available for beneficiary’s support. The press is wrong to give the impression that all trust funds are available assets under the Medicaid rules.  The language of the trust matters.  

There are many unanswered questions about this case that puzzle me:

1.  Knowing that the trust under Edward's Will was a support trust, why didn't Mary spend the trust principal on exempt assets and keep the Community Spouse Protected Amount  ($109,540 in 2009; $117,240 today) before Daniel applied for Title 19 so there were no countable assets left in the trust?

2.  Why didn’t the Trustee distribute the funds to the children who were also beneficiaries under the Trust before Daniel applied for Title 19?

3.  Why didn’t the Trustee refuse to pay the principal for Mary or Daniel’s benefit? Edward would certainly have wanted the trust principal to go to his children instead of going to the care of Mary’s new husband.  If the Trustee refused to pay or all the assets had been distributed pursuant to the trust provisions, the assets would not be available and could not be counted in Daniel’s Medicaid application.

Trust law protects the rights of all beneficiaries of a Trust to receive distributions contemplated by the trust.

The sky is not falling as the press might have us believe.  This case did not change the available strategies to preserve family assets.  It simply closed the door on an improbable theory of asset exemption.