Deciding whom to designate as a beneficiary for your IRA might seem like an easy decision—you probably want your money to go to someone near and dear to you. But is the person (or people) you’re thinking of actually named as the beneficiary on the particular IRA you opened all those years ago?

To be certain, it’s wise to review your beneficiary designation form every few years, or whenever you’ve had a change in circumstances, such as a birth of a child or grandchild or change in marital status. Changing your beneficiary is easy—you simply complete a new beneficiary designation form. Keep in mind that a Will or trust does not override this form, or the IRA document itself (which may have “default” beneficiary designations that control even if no beneficiary designation is on file), unless you name your estate or trust as your beneficiary. Because beneficiary designations are important estate-planning documents, you may want to review them with your attorney.

You have the option of naming primary and contingent beneficiaries. The primary beneficiary is your first choice to receive your IRA account and can be more than one person or entity. If you choose more than one primary beneficiary, you may specify a percentage to be paid to each person and indicate whether a beneficiary’s share will be void if he or she predeceases you or if that share will pass to his or her children. You also can name a minor as a direct beneficiary of an IRA, but you should clearly name an individual to act as custodian for any minor beneficiary in order to avoid the need for court appointment of a guardian for the minor.

A contingent beneficiary is someone you designate to receive your IRA only if all primary beneficiaries predecease you, pass away at the same time as you or disclaim their rights to the IRA assets.

It’s important to note that distributions from an IRA may have tax consequences for your beneficiaries. While taxes shouldn’t be the primary determining factor in naming your beneficiaries, ignoring the impact of taxes could have significant consequences for your family. A tax advisor can help you weigh the pros and cons in order to make sure your wishes are executed in a tax-efficient manner.

Remember to look at your IRA assets in context with the rest of your estate before making any decisions. To help ensure that your wishes can be executed as you intended, discuss your beneficiary designations, Wills and other estate matters with your tax and legal advisors and other members of your advisory team.

A Primary Beneficiaries Primer

When naming a primary beneficiary, some designations to be familiar with are all my children, per stirpes and per capita. Terminology and definitions may vary from state to state, however, so you should consult with an attorney before making a final decision.

Per Stirpes: Also known as “rights of representation” in some states, per stirpes means that the children of a beneficiary who predeceases you will share equally in the portion of your IRA originally left to the now-deceased child.

Per Capita: This method divides your IRA assets equally among your beneficiaries and the descendants of any beneficiary who dies before you.

In addition, remember that being precise is better than being vague or general. For example, it’s not uncommon for people to name “All My Children” on a form. However, the better practice is to list the children being designated, and then decide if their share is held “per capita” (meaning if the child dies before you, your IRA assets will be divided among your surviving children, with the remaining children sharing equally) or “per stirpes” (meaning that your deceased child’s children will receive the share).

For today’s income-oriented investor, it’s been a frustrating time. Yields on US Treasury bonds, as well as investment-grade municipal and corporate bonds have hovered near historical lows. Even longer-term issues remain in the doldrums; rates on 30-year Treasuries have not topped 4% since October 2008.¹

But for investors seeking income, there is an alternative: dividend-paying stocks. There are now 395 companies in the S&P 500 that pay dividends, and the average yield on these stocks has been rising since 2000. As of April 30, 2013, the average yield of a dividend-paying stock in the S&P 500 was 2.0%, compared with 1.7% for 10-year US Treasuries.¹

But there’s more to dividend-paying stocks than yield. The long-term benefits of dividends are significant:

• Dividends are a key driver of total return. There are several factors that may contribute to the superior total return of dividend-paying stocks over the long term. One of them is dividend reinvestment. The longer the period in which dividends are reinvested, the greater the spread between price return and dividend reinvested total return.

• Dividends help boost returns in down markets. Since 1926, dividends have accounted for over a third of the returns of the S&P 500. In down years, when price return is negative, dividends help offset the drop. Since 1926, dividends have provided an average return of 3.8% in all 12-month periods where the index declined, which helped offset the average price decline of 14.8%.¹

• Dividend-paying stocks offer potentially stronger returns and lower volatility. Dividend-paying stocks have outperformed the broader market over time. Stocks with a history of increasing their dividend each year have produced higher returns with lower risk than non-dividend-paying stocks. For instance, since 1990, the S&P 500 Dividend Aristocrats--those stocks within the S&P 500 that have increased their dividends each year for the past 25 years--produced annualized returns of 11.78% versus 8.98% for the S&P 500 overall, with less volatility, as measured by standard deviation (13.86% versus 14.97%, respectively).²

• Dividends benefit from continued favorable tax treatment. The extension of many of the Bush-era tax cuts helps to reinforce the current case for dividend stocks. The tax bill passed in early 2013 extended the 15% tax on qualifying dividends and other forms of investment income to those earning under $450,000 (married filing jointly or $400,000 if single) per year in 2013. For those earning above this threshold, a 20% rate applies. Because there are restrictions on the types of dividend income subject to the lower rates, investors should consult a tax advisor to determine how tax laws apply to their situation.

• Dividends are a sign of corporate financial health. Dividend payouts are often indicative of a company's financial health and management’s confidence in future cash flow. They are usually paid by mature businesses, and communicate a positive message to investors who perceive a long-term dividend as a sign of corporate strength.

The Growth of Dividend-Paying Stocks, 1950-2013

Dividend-paying stocks historically have demonstrated a performance edge. As this chart shows, an investor who invested a $1,000 portfolio consisting of the dividend-paying stocks within the S&P 500 in 1950 and reinvested all the dividends would have amassed in excess of $600,000 more than an investor with a portfolio of non-dividend-paying stocks within the index.

Source: Standard & Poor’s. Stocks are represented by the S&P 500, an unmanaged index considered representative of the broad US stock market. For the period January 1, 1950, through April 30, 2013. Past performance is not indicative of future results. Investors cannot invest directly in any index.

Keep in mind that like any stock, dividend-paying stocks can lose money, and there is no guarantee that dividends will be paid in the future. But for investors seeking current income or an income-producing alternative to diversify a portfolio, dividend-paying stocks can be an attractive choice. Morgan Stanley can help you find dividend-paying stocks that suit your portfolio.

Equity Securities’ prices may fluctuate in response to specific situations for each company, industry, market conditions, and general economic environment.

Morgan Stanley, its affiliates and Morgan Stanley Financial Advisors do not provide tax advice. Individuals are urged to consult their tax advisor regarding their own tax or financial situation before implementing any strategies.

¹Sources: Standard & Poor’s; The Federal Reserve, Selected Interest Rates (Daily) – Report H.15, April 30, 2013.
²Source: Standard & Poor’s. The S&P 500 Dividend Aristocrats index measures the performance of all stocks within the S&P 500 that have increased their dividends each year for the past 25 years. Stocks are represented by the S&P 500, an unmanaged index considered representative of the broad US stock market. For the period January 1, 1950, through December 31, 2012. Past performance is not indicative of future results. Investors cannot invest directly in any index.

Did you know that the age at which many workers will qualify for full Social Security benefits has risen to 67 from 65? If that's news to you, you're not alone: The majority of workers are still in the dark about Social Security eligibility requirements and many expect to qualify for benefits payments sooner than they actually will.

Combined with lingering questions about the long-term financial health of the overall Social Security program, these facts reinforce the importance of understanding exactly what you might expect from Social Security during your retirement.

Benefit Basics
The exact amount of your Social Security benefit will depend upon your earnings history. According to the Social Security Administration (SSA), your benefits will be there for you when you retire. However, the SSA also acknowledges that some changes to the present system may be required.

For example, when Social Security was created, the average life span was less than 65 years. But today, many people are living longer, healthier lives. The 2012 Social Security Trustees Report projects that the number of retired workers will grow rapidly, as members of the post–World War II baby boom continue to reach early retirement age, and will double in fewer than 30 years.¹

What's in Store?
Ideally, Social Security takes in more in taxes each year than it pays out in benefits. But according to projections by the SSA in its trustees’ 2012 annual report, the old age and disability trust funds combined will be unable to pay full benefits commencing in 2033. Recognition of these issues is growing, and legislators are now looking at funding and investment options to resolve them.

While your Social Security benefits are an important piece of the retirement income equation, you probably shouldn't plan to rely on Social Security alone for your future income. Your employer-sponsored retirement savings plan, company pension, and personal savings may need to provide the major portion of your income in retirement.

¹Source: Social Security Administration, Fast Facts & Figures About Social Security, 2012, p.36.

Contrary to what many people think, trusts are not reserved only for the wealthy. The truth is, people from all walks of life may benefit from a trust.

What Is a Trust?

Generally speaking, a trust is a legal entity that is central to a three-part agreement in which the owner of an asset -- the trust's "grantor" -- transfers the legal title of that asset to a trust for the purpose of benefiting one or more beneficiaries. The trust is then managed by one or more trustees. Trusts may be revocable or irrevocable and may be included in a will to take effect at death.

Revocable trusts can be changed or revoked at any time. For this reason, the IRS considers any trust assets to still be included in the grantor's taxable estate. This means that the grantor must pay income taxes on revenue generated by the trust and possibly estate taxes on those assets remaining after his or her death.

Irrevocable trusts cannot be changed once they are executed. The assets placed into a properly drafted irrevocable trust are permanently removed from a grantor's estate and transferred to the trust. Income and capital gains taxes on assets in the trust are paid by the trust to the extent they are not passed on to beneficiaries. Upon a grantor's death, the assets in the trust are not considered part of the estate and are therefore not subject to estate taxes.

Most revocable trusts become irrevocable at the death or disability of the grantor.

The Role of a Trustee

The trust's grantor names a trustee to handle investments, manage trust assets, and make decisions regarding distributions. The grantor can work with the trustee on major decisions in a revocable trust, or the trustee can be assigned full authority to act on the grantor's behalf.

A trustee may be an individual such as an attorney or accountant, or it may be an entity that offers experience in such areas as taxation, estate tax law, and money management. Trustees have a responsibility -- known as "fiduciary responsibility" -- to act in the beneficiaries' best interests.

Benefits of a Trust

Although trusts can be used in many ways, they are most commonly used to:

• control assets and provide security for the beneficiaries (of whom can be the grantor in a revocable trust).

• provide for beneficiaries who are minors or require expert assistance managing money.

• avoid estate or income taxes.

• provide expert management of estates.

• avoid probate expenses.

• maintain privacy.

• protect real estate holdings or a business.

Generally speaking, most people use trusts to help maintain control of assets while they're alive and medically competent, as well as indirectly maintain control of the disposition of assets if they're medically unable to do so or in the event of death.

Trusts Offer Flexibility to Meet Your Needs

Different kinds of trusts are designed to meet different needs and objectives. For example, if your primary goal is to ensure privacy in the settlement of your estate, to centralize control of assets, or to fully take advantage of estate tax credits provided by the IRS, you might choose a living trust.

The living trust allows you to remain both the trustee and the beneficiary of the trust while you're alive. You maintain control of the assets and receive all income and benefits. Upon your death, a designated successor trustee manages and/or distributes the remaining assets according to the terms set in the trust, avoiding the probate process. In addition, should you become incapacitated during the term of the trust, your successor or co-trustee can take over its management.

An irrevocable life insurance trust (ILIT) is often used as an estate tax funding mechanism. Under this trust, you make gifts to an irrevocable trust, which in turn uses those gifts to purchase a life insurance policy on you. Upon your death, the policy's death benefit proceeds are payable to the trust, which in turn provides tax-free cash to help beneficiaries meet estate tax obligations.

A qualified personal residence trust (QPRT) allows you to remove your residence from your estate at a discount. Under this trust, you get to use the home for a predetermined number of years, after which time ownership is transferred to the trust or beneficiaries. Any gift tax you might incur from giving away the property is discounted because you still have rights to the house during the term of years spelled out in the trust. The potential drawback is that if you die before the term of the trust ends, the home is considered part of your estate.

If you want to leave money to your grandchildren, you might consider a generation-skipping trust. This trust can help you leave bequests to your grandchildren and avoid or reduce your generation-skipping transfer tax exposure, which can be up to 35% on the federal level in 2012

To help benefit your favorite charity while serving your own trust purposes, you might consider a charitable lead trust

Another charitable option, the charitable remainder trust

Trust Definitions

Grantor -- the owner of the assets that are transferred to the trust

Trustee -- the person or entity that oversees management of the trust according to the grantor's specifications

Beneficiary(ies) -- the person(s) or entity(ies) that receive benefits from the trust

Consider the Costs

Different types of trusts and trustees can require a variety of fees for administration and wealth management. As you develop your trust strategies, remember to consider the costs that may be involved and weigh them carefully in relation to the benefits.

Is a Trust Right for You?

Although not quite as popular as wills, trusts are becoming more widely used among Americans, wealthy or not. Increasing numbers of people are discovering the potential benefits of a trust -- how it can help protect their assets, reduce their tax obligations, and define the management of assets according to their wishes in a private, effective way.

Points to Remember

1. A trust is a three-part agreement among the grantor, the trustee, and the beneficiary(ies).

2. Trusts are either revocable or irrevocable.

3. Because you can change or discontinue a revocable trust at any time, the government considers the trust's assets as part of your estate for tax purposes.

4. Irrevocable trusts cannot be altered once they are established.

5. There are some basic types of trusts: living trust, qualified personal residence trust, generation-skipping trust, charitable lead trust, and charitable remainder trust.

6. Different types of trusts involve different costs for administration and management.

7. Your financial advisor can help you determine if a trust will meet your needs.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.

Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor.

The author(s) are not employees of Morgan Stanley Smith Barney LLC ("Morgan Stanley"). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

The FA may only transact business in states where he/she is registered or excluded or exempted from registration, FINRA Broker Check http://brokercheck.finra.org/Search/Search.asp. Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where the FA is not registered or excluded or exempt from registration.

Investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC.

CRC 500833 [07/12]

We all know that money doesn’t grow on trees, but do your children really know how to manage it? Making the connection between saving first and spending later makes possible a lifetime of responsible money management. You can emphasize this connection by following a plan of age-appropriate techniques designed to emphasize the importance of controlling impulsive behavior.

Why Starting Early Is Important

Before teaching children about money, it is important to help youngsters control their impulses, potentially as early as age three. According to a study presented to the National Academy of Sciences in January 2011, a child’s self-control, as evidenced by traits such as conscientiousness and persistence in striving for goals, are strong predictors of success, including wealth, later in life.¹ Children who scored lower on self-control were more likely to experience problems with saving, home ownership, credit and money management.

Depending on the age of your children, consider whether the following suggestions are compatible with your views about children, self-control and money.

Ages 2 to 8

• Buy a piggybank where your children can deposit money that they earn from chores or receive as gifts. A visual chart showing how much they save over time can be a motivator to save more.²

• Provide an incentive to reach a savings goal. For example, when your children save $25, consider adding a few more dollars or letting them buy a treat under your supervision.

• Make children wait until after meals to eat treats or until an occasion such as a birthday to receive a special toy. The practice of delayed gratification can help build self-control at home, according to Mary Alvord, a clinical psychologist and author of Resilience Builder Program for Children and Adolescents.³

Ages 9 to 12

• Consider whether you want to start an allowance. Tying an allowance to chores is a matter of debate, with some parents believing that children should not be paid for helping around the house. An allowance is a family decision that reflects your values about money.

• If you pay an allowance, require your children to put a portion of it into a savings account and use the remainder for personal items, gifts and entertainment.

Ages 13 to 18

• Even if your family has means, consider letting your teenaged child have a part-time or summer job to earn their own money. Require them to set aside a portion of their earnings for personal or college expenses.

• Establish clear rules for curfews and completion of homework before screen time. These practices will help older children control themselves without your intervention, according to Ms. Alvord.

• In a few years, your teenager will be approached by credit card companies looking for college-age customers. Now is the time to review the importance of paying a balance in full every month and reserving credit for items of value.

Ages 19 and Older

• If your family pays tuition and other college costs, require your college student to pay at least a portion of personal expenses.

• If your adult child cannot find work and ends up living with you, resist the temptation to start paying your adult child’s bills or student loan debt.

Let me work with you to identify opportunities to reinforce the connection between saving and responsible spending. Because starting early and presenting a consistent message will enable your children to develop sound habits that last a lifetime.

Whether nurturing the values of children, fulfilling charitable goals, or making investment decisions that affect their own as well as their beneficiaries' financial security, women play a central role in establishing and preserving family wealth. Women need to be involved, informed, and comfortable with their role as guardians of family wealth. Active participation in wealth management can strengthen women's commitment to protect and grow their assets with the goal of leaving a legacy for their children, their community, and beyond.

Best Practices in Legacy Planning

The following strategies may help assure the smooth transfer of both your measurable wealth and your values surrounding wealth to the next generation.

Education leads to confidence. Attaining financial security for you and your heirs typically requires you to accept responsibility for the management of significant investment assets. Whether you are single, married, or a surviving widow, it is in your best interest to receive as much education as possible about wealth planning, investments, successorship, and related matters. Even if you are not directly responsible for making important financial decisions, it is vital to have knowledge in these areas in order to communicate effectively with professional advisors charged with these duties.

Professionals offer objective, qualified services. Relying on professional advice as opposed to family and friends is extremely important when making decisions affecting the accumulation, preservation, and distribution of wealth. What should you expect from a qualified professional? A good wealth advisor -- or a team with other professionals, such as attorneys and accountants -- should offer guidance and services in most areas of wealth management, including estate planning, retirement planning, insurance needs assessment, and college planning. On a more personal note, a wealth advisor should work closely with you to:

• Identify areas requiring special assistance, such as creating trusts.

• Minimize taxes and planning costs.

• Develop and implement a personalized wealth management plan.

• Review your plan periodically and suggest changes when needed.

Philanthropy is integral to family legacy planning. Wealth holders have a greater opportunity -- if not responsibility -- to make charitable giving an integral part of the legacy planning process. Families that are charitably inclined may have clear goals in mind, but they may not know where to begin. In order to choose the best strategy, you should work with a trusted advisor to evaluate a number of factors, such as tax management objectives, types of assets to be gifted, and your specific strategic intent. Then choose from among a range of charitable giving vehicles, such as donor-advised funds, family foundations, gift annuities, and charitable remainder trusts/charitable lead trusts.

Children should learn about the responsibilities of wealth. Wealth is a gift that opens doors of opportunity not only for you, but also for your children, their children, and generations to come. Yet wealth can be a weighty responsibility that takes time to manage, maintain, and preserve. If you are a parent, you are no doubt concerned about the effects of wealth on your children's values and how the "money" lessons you pass on to them will resonate as they mature to adulthood.

Family values should be held in the same high regard as family wealth. Family values -- those traits, behavioral patterns, beliefs, goals, and morals that are shared by members of a family group -- define a family's character as much as dollar signs measure a family's wealth. By holding shared values in high regard and setting an example of commitment to financial responsibility, philanthropy, and volunteerism for the younger generation, you will enrich your family's legacy for generations to come.

A Woman's Worth

As stewards of the family legacy, women are in a unique and influential position. They are holders of great wealth as well as keepers of the family's moral and philanthropic vision. There are many financial, accounting, legal, and business tools to assist women in implementing a plan of action. Contact your financial advisor for guidance in mapping out a legacy planning strategy unique to your situation.

Have today’s historically low interest rates caused you to consider refinancing your home mortgage? If so, you are certainly not alone. Mortgage refinancing jumped to a three-year high the week ended September 28, 2012, according to data compiled by the Mortgage Bankers Association.¹ Refinancing activity declined as normal over the last few weeks of 2012 mainly due to the holidays.

Not surprising, the financial standards imposed by lenders are considerably more stringent today than they were in the go-go days prior to the housing crisis. And to qualify for a refinancing at today’s historically low interest rates you need to demonstrate a good credit history and a respectable credit score.

A Numbers Game: FICO^® Scores
The FICO^® score (an acronym for its creators, the Fair Isaac Corporation) is a number that summarizes your credit risk. Lenders use it to gauge how likely you may be to repay debts on time and to make credit decisions, such as the interest rate you get when you apply for a loan. How widespread is the use of FICO scores? Ninety of the top 100 largest U.S. financial institutions use the FICO score to make consumer credit decisions.²

A typical credit score will range between 300 points and 850 points. Generally speaking, higher scores are presumed to represent lower risks—the more attractive your score might be to a lender, the better the pricing you may be offered and the more money you may save over time.

For instance, at current rates, a borrower with a credit score of between 760 and 850 can expect to pay a rate of 3.072% on a 30-year, $300,000 fixed-rate mortgage, according to myFICO.com’s Loan Savings Calculator. By contrast, an individual with a score of between 620 and 639 can expect a rate of 4.661%, which amounts to an extra $273 in monthly payments and an additional $98,063 in total interest paid over the life of the mortgage.³

Factors That Determine Your Credit Score
Credit reports—and the subsequent credit scores that are generated from them—are compiled by the three major credit reporting agencies—Equifax, Experian and TransUnion—based on information provided by creditors. These agencies generate scores using a proprietary formula that assigns weightings to five main factors:

Payment history. On-time payments are an important component of your credit score. Using your credit responsibly and paying bills on time are great ways to maintain a good credit score.

Credit utilization. Credit utilization is defined as the total debt you have divided by the total available credit that is available to you. High credit utilization can be a warning sign of credit risk.

Note: You do not have to carry a credit card balance from month to month to show credit card utilization. Simply using your card is enough to show activity, even if you pay the balance in full and never accrue interest. Credit card balances are reported by the issuer every 30 days based on the balance on that particular day. There is no distinction between revolving and paid-in-full balances on your credit report.⁴

Length of credit history. Credit history is a significant component of your credit score. Accordingly, the average age of your credit cards can be a strong indication of your credit history. Care should be used in keeping old accounts open and in good standing.

Mix of credit accounts. Both the total number of credit accounts you have and the mix of credit you have will affect your credit score. A healthy mix of revolving credit cards, charge cards, installment loans and mortgages will also impact your credit score.

The amount of new credit on your record. While opening one new credit card might be normal, opening several in a short span of time could be a warning sign to potential creditors that something is amiss in your financial life.

How FICO Scores Break Down
The percentages in the chart below reflect how important each of the five main categories is in determining how your FICO score is calculated. These percentages are based on the importance of the categories for the general population. For particular groups—for example, people who have not been using credit long—the relative importance of these categories may be different.

Sources: myFICO.com; Fair Isaac Corporation; December 2012.

Additional Considerations
While the above are considered standard elements for lenders to scrutinize in the approval process, the following additional types of information may weigh in lenders deliberations:

Credit Inquiries
Credit inquiries are placed on your credit report when an individual or agency has requested to view your credit file. “Hard” inquiries, which appear whenever you apply for a loan or credit card, may have a negative impact on your credit score. “Soft” inquiries, which are unrelated to a new financial obligation (e.g., a credit check by a prospective employer or your own request to review your credit report), have a lesser impact on your credit score.

While inquiries don’t count as much as payment history, credit utilization and other factors that contribute to the calculation of a credit score, a high number of inquiries may indicate that you are struggling financially or are attempting to secure more credit than you can reasonably afford.

Debt-to-Income Ratio
Your debt-to-income (DTI) ratio compares the difference between your gross monthly income and the monthly amount you spend to maintain all types of debt. Banks and other lenders study how much debt their customers can take on before they may start having financial difficulties, and use this knowledge to set lending amounts. The preferred maximum DTI ratio varies from lender to lender, but it is often around 36%.

Because your DTI ratio is not typically included in credit reports, prospective lenders may calculate it using your loan application, your pay stubs and/or your IRS Form W-2. It is also easy to do it yourself. Simply add up all of your monthly debt, such as a home mortgage, car and/or student loan payments as well as any credit card payments, and then divide the total by your gross monthly income. This percentage is your debt-to-income ratio.

First Things First
Since lenders will typically compare your credit scores from the big three credit reporting agencies—Equifax, Experian and TransUnion—your first move should be to obtain current copies of your credit reports and review them for accuracy. All US consumers are entitled to a free credit report each year from all three of these agencies. You can request your reports at www.AnnualCreditReport.com.

Note, however, that unlike credit reports, your credit score is not free. You can purchase your score from one of the above-mentioned agencies or from myFICO.com.

Credit Score Housekeeping
Here are a few takeaways for raising or maintaining a higher credit score.

Pay your accounts on time and keep your balances low. Lenders are looking for a proven track record of making timely payments. Remember, payment history accounts for about 35% of your credit score.

Be conservative in the amount of available credit you use at any given time. About 30% of your credit score is determined by the amount you owe in relation to the amount of credit available to you. If that percentage is more than 50%, your score will be lower.

Hold on to older, unused accounts. The longer an account has been open and managed responsibly, the higher your score will be.

Maintain a diversified credit mix. If you hold an auto loan, a home mortgage and credit cards that are well managed, you will generally have a higher credit score than someone whose credit consists mainly of credit card debt.

Understanding your credit score and how it affects your overall financial well-being is vital to sound financial management. Please contact me for more information about managing credit and debt.

Callout: Know Your Rights
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, you have a right to see your credit score for free if you have been denied a credit card or received a poor mortgage interest rate. The company or lender who denied you credit has to disclose your score at no cost to you.

¹Source: The New York Times, “Refinancing Spikes as Mortgage Rates Fall,” October 3, 2012.
²Source: myFICO.com, January 22, 2013.
³Source: my FICO.com, Loan Savings Calculator, January 16, 2013. The rates shown are averages based on thousands of financial lenders, conducted daily by Informa Research Services, Inc. The 30-year fixed home mortgage APRs are estimated based on the following assumptions. FICO scores between 620 and 850 (500 and 619) assume a Loan Amount of $150,000, 1.0 (0.0) Points, a Single Family Owner Occupied Property Type, and an 80% (60-80%) Loan-to-Value Ratio.
⁴Source: CreditKarma.com, January 22, 2013.

Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor.

The author(s) are not employees of Morgan Stanley Smith Barney LLC ("Morgan Stanley"). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

The FA may only transact business in states where he/she is registered or excluded or exempted from registration, FINRA Broker Check http://brokercheck.finra.org/Search/Search.asp. Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where the FA is not registered or excluded or exempt from registration.

Investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC.

CRC 603130 [01/13]

Special needs pose complex challenges for any parent. One of the hardest and most complex tasks is building a financial support system that can provide for a child’s special needs for the child’s lifetime. There are a number of specialized trust structures that can help.

Trust, but verify. You can actually do both simultaneously to help meet the future financial needs of your special needs dependent.

How? By setting up a special needs trust. Properly structured and funded, a special needs trust can help assure financial security and stability for a dependent who may not be able to manage his or her own affairs effectively. It can also help ensure efficient use of resources for serving that person’s needs in the future.

Many people are familiar with the uses of trusts in estate planning. They are common vehicles for tax management, meeting philanthropic objectives and maintaining the long-term integrity of property holdings and investment portfolios. Trusts can serve many of these same objectives when you draw up a financial plan for a family member with special needs. But they can do much more.

Special Needs Trusts Have a Prime Directive

The overarching concept that distinguishes most special needs trusts from other trust applications is that they are intended to provide financial support that is, above all, “supplementary.” That is, in order to protect the trust beneficiary’s access to important resources such as Medicaid, a special needs trust must be structured to provide only supplemental and extra care to that beneficiary. This means that special needs trust proceeds should be used only for things that programs such as Medicaid would not ordinarily provide to a person with special needs. For example, a special needs trust could finance many educational and cultural undertakings that enrich the life of the beneficiary but do not provide essential lifeline support. A special needs trust could also finance advanced adaptive equipment and property modifications that might go well beyond baseline standards of accessibility, and it could finance a broad range of recreational activities.

Keep in mind that a typical special needs trust also has to be managed so that it funds only permissible benefits for the designated beneficiary, that it does so directly and that it does not give the beneficiary any direct access to or control over cash payments. Otherwise, the trust proceeds and its assets could be counted as resources for determining benefit eligibility.

The trustee must be someone other than the beneficiary. He or she must consistently act to ensure that correct protocols are observed and that only compliant expenses are funded from the trust. Meeting these requirements calls for carefully drawn trust language and an especially attentive trustee.

The legal principles underlying special needs trusts are spelled out in seasoned statutes that have changed little over the decades. But standards of care and administrative policies affecting individuals with special needs are more fluid, and in some cases, can change frequently. People charged with overseeing special needs trusts should be well versed in the legal fundamentals and well informed about current trends and developments. After all, the consequences of administrative transgressions are most likely to be borne by the special needs beneficiary himself or herself—publicly financed benefits can be curtailed or eliminated and trust assets can be redirected away from their originally intended purposes if the trust were to make impermissible disbursements.

The Basics of Special Needs Trusts at a Glance

Primary strategic objectives of special needs trusts include:

• Assuring that adequate financial resources will be available for the beneficiary’s special needs.
  
  
• Conserving the beneficiary’s assets in an efficient manner.
  
  
• Protecting assets intended for meeting special needs from potential misapplication or misuse.
  
  
• Establishing enforceable preferences for the ultimate disposition of any assets that remain after the trust is no longer needed.
  
  
• Complying with applicable rules and regulations for special needs assistance programs.
  
  

Important funding sources for special needs trusts include:

• Securities and income-producing assets you own.
  
  
• Assets or property belonging to the individual with special needs.
  
  
• Life insurance and annuities.
  
  
• Cash bequests or gifts.
  
  
• Child support payments.
  
  
• Proceeds from legal settlements.
  
  

Principal Types of Special Needs Trusts

While trust law may be complex and some of its terminology arcane, the most common forms of special needs trusts can be assigned to one of two general categories: self-funded trusts and third-party trusts. The type of trust you use should generally be governed by the sources of trust funding and your ultimate objectives for the trust. Keep in mind that each type of trust may have different implications for control, inheritance, Medicaid eligibility and other important factors. Also note that there are niche trust types for certain applications that fall outside these primary categories.

An Overview of Self-Funded Trusts

The term “self-funded” is used when the source of the funding is the special needs person himself or herself. Actual financing for these trusts typically comes from gifts, insurance proceeds and tort settlements credited directly to the beneficiary.

However, since individuals cannot generally create trusts for which they are the primary beneficiaries, the actual creator of a self-funded special needs trust is a third party who has explicit legal authorization to act on behalf of the beneficiary—generally, a parent, grandparent, guardian or other court-authorized agent.

Self-funded special needs trusts can be set up so that they are generally not counted immediately as resources for benefit determination. Assets in these trusts may remain excluded from future benefit determinations as long as the trust continues to meet the standards for providing only supplemental and extra care and the special needs beneficiary is the sole beneficiary of the trust. But when the beneficiary of a self-settled trust has received publicly funded support from programs such as Medicaid, the funding agency generally has the right to reclaim funds it paid out from trust assets when the beneficiary dies. Only after all such claims are satisfied could any remaining trust assets generally pass into the beneficiary’s estate.

An Overview of Third-Party Trusts

The key feature of third-party trusts is that they are financed by assets that do not belong to the beneficiary and the beneficiary has no control over either asset management or trust disbursement. Assets within properly constructed third-party special needs trusts play no role in benefit determination and cannot be reclaimed for Medicaid or Supplemental Security Income (SSI) reimbursement. However, the special needs beneficiary must still be the sole trust beneficiary and disbursements from the trust must still meet the supplemental needs tests. Otherwise, the trust’s payments will be considered as resources, potentially leading to benefit exclusion.

Third-party trusts can typically be terminated when predetermined conditions are satisfied. Remaining assets could be distributed at that time according to whatever termination plan was specified in the trust documents. For example, assets remaining when the special needs beneficiary no longer requires trust support can be distributed to siblings, charities or other trusts as designated in the trust creation documents. Keep in mind that the tax consequences of various third-party special needs trust scenarios for you, your estate and your heirs are complex. They call for careful planning and expert guidance.

Niche Trust Applications

The trust arrangements outlined so far are those used by and for individuals and families. They are typically used to finance the general spectrum of special needs. You may also wish to consider trusts designed solely for extended care and those which may benefit a designated philanthropy in addition to your intended special needs beneficiary.

The trust created to finance extended care is commonly known as a “Miller” trust, named for the court case that established the trust’s ground rules. The Miller trust is intended to finance the difference between Medicaid-financed long-term nursing home care and any desired level of more specialized care. It is used in those states that impose income limits on Medicaid long-term care eligibility. Assets in the trust are not counted in the eligibility calculation, and disbursements are allowed to enhance the care opportunities. However, as with the self-settled trusts discussed earlier, assets in Miller trusts are subject to claims for eventual reimbursement to Medicaid when the beneficiary dies.

The special needs trust format that can also benefit a designated philanthropy is known as a Nonprofit Pooled Income Special Needs Trust. In these arrangements, any assets that might remain after benefits are paid and Medicaid reimbursement requests are satisfied would pass to the sponsoring agency.

As you can see, trusts can address many special needs financing and legacy needs, but they must be constructed and operated according to strict rules. Let me help you identify the trust opportunities most suited to your needs and resources.