Advanced Estate Planning: Special Needs, Second Marriages, and Smart Trust Design

Speaker 1 – 00:00
We’re going to talk about special needs trust.
Speaker 2 – 00:01
My youngest son is autistic. There’s a lot of considerations and there’s a lot of things that just go through your
mind. Is he going to be okay financially? Are the people that are taking care of him going to treat him well? So
there’s that balance of making sure everything is planned for.
Speaker 1 – 00:14
We’re going to talk about qualified terminal interest properties or what’s known as a Q tip.
Speaker 2 – 00:18
I want to protect my second spouse. I want to make sure he or she is okay, but there’s no way I can put her in my
will because my will was designated for my kids.
Speaker 1 – 00:28
It’s a very interesting way to hit multiple goals of making sure your spouse feels loved and protected. And you also
are protecting your wealth for your bloodline, ultimately your kids. We’re going to talk about irrevocable life
insurance trust that avoids the mess when you die, but it does absolutely nothing for you tax wise, while you’re
living.
Speaker 3 – 00:43
Then if you die, you have nine months to pay the estate tax, the benefit of life insurance.
Speaker 1 – 00:54
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You pass 10 million, 100 million, 1 billion. Doesn’t matter the amount of money. Three generations after you pass,
97% of the time, the money’s gone. There’s a reason for this, and the reason is a lack of estate planning. Today
we’re going to talk about strategies that you’re part of the 3% that effectively passes your wealth on and your
children are able to stay financially secure and your children’s children as well. The, the basic type of estate
planning that we believe everyone should need is a revocable trust. And the revocable trust, you know,
accomplishes a couple of things. The first thing is it avoids probate. So I’m sure you guys can share stories, but
probate is a huge deal.
Speaker 1 – 01:32
You know, after losing a loved one, if you don’t have direct beneficiaries or, you know, revocable trust, your assets
have to go through a court system, which can take a lot of lawyer fees and you know, three to six months. And this
is occurring while you’re trying to mourn the loss of a loved one. So absolutely devastating. So revocable trust,
there’s a lot of names for this. If you have a family trust, these are very important to have to receive assets.
Sometimes you can actually have the assets owned by the revocable trust. And what this does is it avoids the
mess when you die, but it does absolutely nothing for you tax wise, while you’re living. It’s the same as you holding
it individually, it’s in your estate, it’s not out of your estate. So this is just table stakes that we recommend.
Speaker 1 – 02:20
And you can make a revocable trust turn into an irrevocable trust when you die. But doing that is really important
maybe for structure and governance of your kids and family after you pass, but again doesn’t accomplish anything
from a estate planning tax perspective while you’re living. So today we’re going to talk through different types of
the complex trust which are known as irrevocable trusts. Irrevocable trust, once you set them up, you most of the
time you’ll have the flexibility to change it. So these are big decisions. A lot of clients kick the can down the road
and then if you never implement it, a lot of money is wasted either from a tax perspective or just from a
governance perspective.
Speaker 1 – 02:59
You know, if your kids aren’t in the know or spouse on the know, if you’re on a second marriage and your spouse
gets remarried, there’s countless examples. So today we’re going to talk about several types of trusts. We’re going
to talk about if you have a special needs child, a special needs trust. We’re going to talk about irrevocable life
insurance trust. We’re going to talk about Q tips which are appropriate if you’re married for the second time. And
today we’re going to focus on not nerding out on like all the specific details. We’re going to give examples, we’re
going to talk about which one’s appropriate given, you know, situations that we’ve seen and you know, share
people, learn from people.
Speaker 1 – 03:32
So we want to share some of the perspective we learned over the last, you know, not to date you, Jimmy, but 30
plus years and for me about 15.
Speaker 2 – 03:38
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I don’t look at that, do I?
Speaker 1 – 03:39
Not at all. Not at all. Well, Jimmy, let’s start with you. So special needs trust, you know, what would be the purpose
of setting one up? And I know you have a lot of personal, this is especially you’ve had for your whole career,
including, you know, your own situation.
Speaker 2 – 03:52
Yeah. So you know, this is its own because I actually have a special needs trust. My youngest son is autistic. He’s
28. He is not able to live on his own. I also have a healthy, typical 30 year old. So when Lori and I, Laurie, my
spouse, when were thinking about Zach and who’s going to be taking care of him when we’re not able to anymore,
there’s a lot of considerations and there’s a lot of things that just go through your mind. Obviously, the first one is
he going to be okay? Is he going to be okay financially? Are the people that are taking care of him going to treat
him well? But the second consideration is we also don’t want this to be our typical son’s life job either. So there’s
that balance of making sure everything is planned for.
Speaker 2 – 04:45
So the thing that you really want to be careful about with special needs trusts is you can’t have assets in the
disabled child’s name. The limit is $2,000. So anything over $2,000 in the child’s name could potentially disallow
him from government benefits, which is what you want. You want as many government benefits as possible for
your child. So we set up a trust. We funded it with our assets. We named trustees. We are the trustees now. My
oldest son is, you know, the successor trustee. But at least we know that in this document Zach will be able to
receive any government or Social Security disability benefits, which he currently does receive.
Speaker 2 – 05:26
But, you know, when Lori and I are not here, we have the comfort of knowing that there is a corpus of money that
will be able to provide for Zach and that our, you know, our oldest son, Ben, will not have to be financially
responsible for that obligation. And, you know, those are difficult discussions and they’re very emotional, but they
need to be.
Speaker 1 – 05:50
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No question. No question. So. And thanks for that personal example, Jimmy. So I know the funding mechanism, so
obviously if you have. I’m just, I’m thinking of a couple examples. And I, I personally have a sister with special
needs. And, and so there’s examples of, if you set this up, a question is what happens if the, you know, the parents
outlive the special needs beneficiary? So in this case, like my sister had passed a couple years ago, and so there
are ways to, you know, hers was primarily funded with a second that I life insurance policy. Because when you think
about this as a parent, as a couple, you know, probably in your head, okay, if the husband is living, the child is going
to be taken care of, right?
Speaker 1 – 06:35
Because you’ve dedicated a lot of your life is dedicated towards the emotional and financial and just the overall
support and decision making that has to occur for this child’s care. So, you know, if the husband’s alive, it’s going
to be taken care of. If the wife’s alive, it’s going to be taken care of. So I think the first step, regardless of net worth,
is answering the question of one of US passes. Does the surviving spouse have the time and resources alone to
care for the child? And so I think the first step before the special needs trust is you have to make sure that
question is a yes. And that could be a stress test of your net worth. That could be life insurance that goes to each
other if you die.
Speaker 1 – 07:10
And then the second step, and you know, regardless of that first step, you kind of know everything’s gonna be okay
if it’s just one of you gone. Right? It’s gonna be tough, but you know that spouse is gonna take care of them. So the
big question is, what happens if you both pass? Is there gonna be enough money to care for the child? Right. And
so a second a di Life insurance policy generally is the solution to that because you can get pennies on the dollar,
get a large amount. If you say the kid needs 10,000amonth, you know, and just doing some quick back of the
napkin math, like a two and a half million dollar insurance policy is going to, you know, cover that. That’s cheap,
that’s easy. But if, and then there’s the dependent of the flexibility. Well, what if it’s likelihood?
Speaker 1 – 07:57
If you’re in, you know, my parents situation where statistically they’re probably going to outlive, given the condition
of my sister, you know, they had done one that had significantly accumulated cash value. So you know, when she
passed before they did, they were able to ultimately terminate the trust because they were the trustees. And then,
you know, invest that money.
Speaker 2 – 08:16
You can build in a lot of flexibility into a special needs trust to take, you know, to take account for all the scenarios
that you just mentioned. But the biggest takeaway is obviously, you know, what happens when we’re not here and
that is always the driving force behind if you have a special needs child, you know, as long as we’re alive, you know,
for our house, it was if I’m alive or if Lori’s alive, you know, Zach’s going to be fine. The issue is if we’re not here, we
need to make sure he’s fine and we don’t want that to ben’s responsibility.
Speaker 1 – 08:49
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So what advice would you give to a client that doesn’t have, you know, a, a second child that you could name as
trustee? Like if your special needs kid is the only kid, what have you seen? Is it an uncle, is it a family member? Are
there corporations that would set that up?
Speaker 2 – 09:06
It’s probably a combination of the two. Matt, at the end of the day you will need some type of corporate structure in
place if the disabled child is an only child. But the idea of having a family member or a friend working alongside
the corporate trustee will probably give a lot of comfort to the family.
Speaker 1 – 09:29
Absolutely. But I think you know regardless of net worth if you’re you know high net worth, you know you may be
able to just invest in put investments or you know cash that gets invested inside the special needs trust if you’re
and if you’re in at worth life insurance you may like the structure of that tax free nature being inside where it’s you
know we’re fine if we’re here, if we both are not here that’s that solves that issue. But yeah please reach out. This is
we have you know obviously major firepower here with Jim. It’s been a large part of his practice. I witnessed you
know before Ewa and you know obviously during lots of families they sandals special needs trust for so definitely
especially of now thanks to Jimmy. So okay well Jameson let’s go to you.
Speaker 3 – 10:12
Yeah we’ll talk about irrevocable life insurance trust. So you mentioned the concept but this infrastructure so just
from a high level estate planning overview and people will argue this but our opinion is if the estate tax is going to
come into play for you which right now is $30 million for a couple $50 million person, anything above that is a 40%
federal state tax of debt. So low hanging fruit is let’s not have life insurance owned on your personal balance
sheet. Let’s have life insurance owned by a trust and benefits of it. Once that pays out into the trust it avoids the
40% federal estate tax.
Speaker 3 – 10:58
So in your vocal life insurance trust is in your vocal trust somebody other than yourself has to be the trustee in
general in a standard islet that could be a family member, it could be a corporate trustee, could be anyone you
want. You fund the money into generally with and there’s a million different ways to structure this but just simplest
terms. You have two children, you’re married, you have $19,000 per year person as of 2025. So that’s $76,000 per
year that could be funded into that goes into the trust. The trust then purchases life insurance. Depending on your
age and health maybe that buys you a couple million dollars of insurance at death that pays out inside the trust.
It’s all tax free. So benefits are avoiding tax.
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Speaker 3 – 11:44
You get the same structure and benefits of a normal trust where it’s creditor protected, asset protected, avoids
probate. You can have rules on when they use the money. And one of the big benefits of having life insurance
incorporated your estate plan is think of two primary examples. Number one, if liquidity is a concern. So we see
people that their balance sheets are heavily concentrated in business interest, real estate, different type of private
investments that aren’t liquid. And if you die, you have is it six months to pay the. Nine months, I think to pay the
estate tax. Nine months to pay the estate tax. And instead of doing a fire sale of assets, you have this life
insurance that pays out that can help cover that.
Speaker 3 – 12:24
Second main reason is if your plan is, well, I have enough assets saved that I could just pay for this. That’s great.
But if the market’s down when you die, there could be a correction in the market. Assets could be down. They’re
invested in stocks substantially. You don’t want to have to sell things at a loss to pay for this estate tax. So life
insurance is going to pay out regardless of what the market’s doing. It’s a fixed number that grows and you kind of
can avoid any of the market volatility. And then one example of this is we have a client very young is relative to net
worth, is in his 30s, worth like $50 million. And talking about estate planning is obviously going to be over that
exemption. Talking about lifetime gifting, he’s not going to.
Speaker 3 – 13:10
His kids are all three under the age of five. He’s not going to directly gift money into their name. And so an easy
way to do that is gift it into a trust and use like a 20 pay structure. For example, is what we do for him. He’s using
that gifting exemption, gifting it to the trust. The trust buys life insurance for 20 years. That gets the kids to
mid-20s. At that point you can reevaluate. Okay, I have this trust that’s funded with this life insurance contract. And
because he’s young, he’s getting the very high death benefit. And then at that point, kids are in their 20s, he can
evaluate do I want to give money directly into their name? Do I want to gift it to have them then fund investments?
Speaker 3 – 13:48
And so it can be a good mechanism if kids are under the age of 18 and you have a nice Runway where you can
pump money into it and then the trust is fully funded.
Speaker 1 – 13:56
Yeah. And you’re referring to obviously whole life policies that are dividend participating. So for in that example
was basically like, you know, three times. Whatever the gifting exempt was. I think it was like 17,000. We set up so
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it’s basically 51,000. We did one on him, we did one on the wife. And so we have 100, a little bit over 100,000 going
out of their estate every year. No gift tax return, just crummy letters because it’s under the exemption.
Speaker 1 – 14:21
And when you fund, you know, 100 a year that age into life insurance and have it complete in 20 years, you know, I
think we did it’s projected if just at current dividend scale, which are historically we’re at a lower rate because
interest rates are just recently been high, is that, you know, there’s like 15 to 20 million dollars at their life
expectancy age that’s already going to be out of their estate. And most people would just say I’m not going to do
trust planning in my 30s, I’m going to just wait till my kids are grown up because like I don’t want to give them
money when they’re 1, 3 and 5.
Speaker 1 – 14:51
But this allows them to, you know, use those freebies, kind of like a 401k limit tax rate to get it in and then you
know, essentially they will be over the limit. So that strategy, they haven’t wasted any of their exemption. It’s 40 of
20. They just saved 8 million bucks in taxes by doing.
Speaker 2 – 15:07
It’s a real opportunity to create generational wealth. It’s a powerful tool.
Speaker 3 – 15:10
Another tax efficiency point is if you gift investments and you gift cash by investments into a trust. Trusts are
subject to a compressed tax rate. Anything over like 20 ish thousand a year is hit at 37%. And so there’s ways with
tax loss harvesting. And if the trust, a grantor trust or not that you can help offset some of that, but you can’t
always eliminate. You can be as tax efficient as possible. There’s going to be dividends that pay out. Like this is a
really high number in this trust. The benefit of life insurance is all of the growth on the cash value you don’t pay
taxes on. It’s tax deferred. So it’s a much more tax efficient asset to hold inside of the trust, especially relative to
bonds or cash, versus something that you’re going to be paying taxes on every single year.
Speaker 1 – 15:57
No question. Yeah. So the next one that we’re gonna, we see absolutely a lot is, you know, we have a high net worth
spouse that gets, you know, under on their second marriage and they have kids, maybe both spouses in the second
marriage have kids from prior marriages. And so the concern when you’re on your second marriage there’s lots of
concerns, right? You don’t want to get divorced a second time. And part of that is the financial, you know, we’ll call
it the emotional, the power, the financial dynamics that all come into play when you’re high net worth on your
second marriage.
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Speaker 1 – 16:33
So some of the, the things that we need to address is if one of them passes first, they’re both worried, both
spouses may be worried about if all the money goes to my second spouse, are my kids going to see any of it? Is
that person get remarried again? And then, you know, the will gets changed, the trust gets changed and my kids
don’t see any of it. So because of that, you know, concern, and then there’s other concern is, well, if I favor my kids
too much, is my spouse like, let’s say from a male perspective, my spouse is going to leave me. I need someone to
take care of me when I’m older. So this is, you know what a qualified terminal interest properties, what’s known as
a Q tip trust comes into play, also known as a marital trust.
Speaker 1 – 17:17
So just really simple example, you have two spouses, let’s say a net worth of 20 million. And let’s say we split it. So
you’re married, you’ve got three kids. We say 10 million goes right to an irrevocable trust that’s immediately
directed to three kids. So they each get 3.33 million. A third, a third. Once you die, that goes into thirds. The other
10 million, which is still half your property, you’re like, I want my example, my wife to be taken care of. So that 10
million, it could go directly to her or you could go into a Q tip. So the way the Q tip would work, just to nerd out here
for a second, is that 10 million she would get interest from. So let’s just say she’d be able to take a half a million
dollars a year.
Speaker 1 – 17:59
Now principal distributions would have to be approved by a trustee, which could be her and a co trustee could be
kids. Right. So that could create some conflict. But it’s the purpose of this is the principle of that’s protected. So
the kids ultimately when she dies gets the 10 million. If she gets remarried, her and her new spouse only get the
interest. The principal has to be approved typically for a HEM standard. So health, education, maintenance and
support. So the goal of this is to make sure that present principal, it won’t be adjusted for inflation because 10
million, if she lives another 20 years wouldn’t be 10 million, it would be worth 5 million. But that a portion of that
really goes to the kids as well.
Speaker 1 – 18:35
So one decision could be, if you’re married, is, does all 20 million go to the Q tip, or does half of my money go to
the kids directly, half the money go to the spouse, or does half that money go to a Q tip? So it’s a really unique
strategy. So, you know, your spouse, especially if there’s an income or net worth difference between the spouses,
let’s say you have a prenup or a postnup or whatever it is, it’s a very interesting way to hit multiple goals of making
sure your spouse feels, you know, loved and protected. And you also are protecting your wealth for your bloodline,
you know, which is your new spouse, and then also ultimately your kids. So, yeah, no question.
Speaker 2 – 19:06
Madden, you know, fortunately or unfortunately, we see this a lot. And, you know, I have one client in particular who
I’m thinking about where, you know, at the end of the day, what we always hear is I want to protect, you know, my
second spouse. I want to make sure he or she is okay, but there’s no way I can put her in my will because my will is
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designated for my kids. So there’s that balance that needs to be created. And I think the nice thing about the
marital trust is you really are addressing both concerns. There is the income that’s going to go out to the second
spouse.
Speaker 2 – 19:42
So, you know, from a day to day, month to month, year to year perspective, she’s going to be taken care of or he
and my kids get the corpus of the value of the trust. So, you know, we all know, you know, and I’ll speak to this
particular client. Men do not like to be alone as they get older. So this is always a, a discussion. So you definitely
want to make sure that we are protecting the interests of the second spouse without really alienating the children
and making sure that they are still the primary beneficiaries of the estate or the trust or whatever we’re talking
about. So it’s a very helpful tool in what can be a very difficult situation and conversation.
Speaker 1 – 20:25
Yeah, so I, I’m going through a totally different example. I just want to share. So this client was, I’m sitting around, it
was like 30. We’re just going to say $30 million. And the husband had three kids from a prior marriage. The wife
had no kids. And so what we did, we decided to do is basically divide this plan by three. So the wife got some
money directly upon a death and actually in her name. Now the second part of this plan was this Q tip where if the
husband died, the Q tip was funded with about $10 million. And so that was, you know, interest only. And now their
lifestyle required more than her just getting 10 in her individual name like she would used to, you know, higher
lifestyle. The other 10 million is going directly to the kids.
Speaker 1 – 21:15
So ideally, if this plan works out, she’ll be fine with the lifestyle she’s accustomed to. She’ll have 10 in her name, 10
in the Q tip and then the kids have the 10 directly if he dies. And then also the, you know, the principal of that Q Tip
10 when she dies. So that just as a pure example, that was a third, a third. And what we saw after that, there was
lots of conflict about finances. She felt like the husband was prioritizing the kids. You know, the kids were worried
because there was a little bit of an age gap. You know, what if it happens? Our dad dies? What, you know, what.
Speaker 1 – 21:48
And they all have good relationship like the second, the second wife and the kids had a good relationship, but it
causes all kinds of conflicts when these things aren’t discussed and all kinds of resentment and who’s more
important. And so after laying this plan, having trans, you know, some private discussions obviously, and then
some, you know, transparency of what people needed to know, kids, wife, extra, etc, the year following that, we just
saw a lot of peace and not saying that there was some disagreements that still occur, but you know, ultimately that
the wife, second wife feels very comfortable and secure, that the husband feels very secure, he’s taking care of
everybody, you know, and the kids are also, you know, very grateful that there’s wealth guarantee there as well.
Speaker 3 – 22:32
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So, and I’ve seen an example similar situation. One spouse literally said I hate the kids of the, from the past
marriage.
Speaker 1 – 22:43
And so, which is very common by the way.
Speaker 3 – 22:45
Very. So what if you don’t do all this planning? One of the things that happened is one spouse that wants money to
go to spouse and kids gets concerned that well, if this money passes to my spouse, they’re just going to spend it
all and my kids aren’t going to get anything. So this is a way to protect it. They get the income need they get and
then it doesn’t matter what the relationship is because the trust outlines what the money’s used for and how it
passes.
Speaker 1 – 23:10
It’s really important to ultimately the success of this is going to be based upon the documents but more
importantly is who the trustee is because you know, if you choose the wrong trustee like Uncle Joe or whoever and
he’s gets worn out in the first six months of dealing with this conflict and he, you know, it could be a full time job,
he’s just going to, you know, let whatever give up and the money is going to be gone pretty quickly so that the
documents have to be secure and the trustee, you know, typically having a, you know, some kind of corporate
trustee alongside a family member but making your second spouse and your kids co trustees probably not.
Speaker 2 – 23:47
Yeah, there ultimately there’s going to have to be a bad cop example sometimes and sometimes that’s difficult for
families to do.
Speaker 1 – 23:54
So that’s why we got Timmy.
Speaker 2 – 23:55
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That’s why we have that’s why we offer trustee services at dwa.
Speaker 1 – 24:00
No doubt, no doubt.