Transcript Special Needs Trusts

Special Needs Trusts
Prepared by:
Tina Myers, CPA, MTax
CIRCULAR 230 DISCLOSURE NOTICE:
Any U.S. federal tax advice included in this communication (including any attachments) was not
intended or written to be used, and cannot be used, for the purpose of (i) avoiding U.S. federal taxrelated penalties or (ii) promoting, marketing or recommending to another party any tax-related matter
addressed herein.
Agenda
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Disability & concerns
Public benefit eligibility
Types of SNTs
Grantor/Non-grantor trust status
Qualified Disability trusts
Conditions that Can Cause
Permanent Disability: A Partial list
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Agoraphobia
Alzheimer’s disease
Amputations
Bipolar disorders
Caner (many types)
Cerebral palsy
Congenital heart disease
Cystic fibrosis
Downs syndrome
Emphysema
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Fetal alcohol syndrome
Fragile X syndrome
Hemophilia
HIV
Huntington’s chorea
Kidney malfunction
Lupus
Multiple chemical sensitivity
Muscular dystrophy
Obsessive-compulsive disorder
Conditions that Can Cause
Permanent Disability: A Partial list
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Organic Brain Syndrome
(OBS)
Parkinson’s disease
Phenylketonuria (PKU)
Severe autistic disorder
Sickle cell anemia
Spinal bfidia
Tay-Sachs Syndrome
Thalassemia
Traumatic spine damage
Turner’s syndrome
Disability concerns
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Health care options
Eligibility for Public benefits
Health care options
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Private health care
Medicare
Medicaid
Public benefits available
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Social Security Disability Insurance (SSDI)
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Available to individuals with a disability who
either have sufficient work history prior to
becoming disabled or are entitled to receive
benefits by virtue of being a dependent or
survivor of a disabled, retired, or deceased
worker.
No means testing for eligibility
Public Benefits Available (con’t)
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Supplemental Security Income (SSI)
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Available to low-income individuals who are
disabled, blind, elderly and have limited
income and few assets.
Medicare
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Health care program funded by government
Available to all those age 65 and over
Public Benefits Available (con’t)
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Medicaid
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Health care program funded by government
Available to all those who meet financial
eligibility requirements rather than being
based on age
Covers all necessary medical care.
Purpose of a SNT
The essential purpose of a SNT is to
improve the quality of an individual’s life
without disqualifying him or her from
eligibility for public benefits.
SNT basic characteristics
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Trust document states that the beneficiary
with a disability cannot direct the use of
funds in the trust for his or her support or
maintenance, and
The trust document expressly states that
the beneficiary with a disability cannot
revoke or terminate the trust
Two Types of SNTs
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Self-Settled Trust
Third-party Trust
Pooled trusts
Self-Settled Trusts
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Established with the beneficiary’s own funds
Most commonly funded by proceeds from a lawsuit or
inheritance payable directly to the disabled beneficiary
Trust includes provision directing trustee to pay back
anything the state Medicaid program has paid for the
beneficiary
Rules governing permissible distributions are more
restrictive than for third-party special needs trusts
Often referred to as “d4A” trusts (statutory section 42
U.S.C. §1396p(d)(4)(A))
Also referred to as a first-party trust, payback special
needs trust or litigation special needs trust
Self-Settled Trust
Additional Rules for Grantor trusts
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Trust may be established by parent,
grandparent or the court, even though the
disabled person is the grantor.
Repayment at death of beneficiary.
Sole benefit requirement
Must be irrevocable
Beneficiary cannot be trustee or have
power to remove the trustee
Third-Party SNTs
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Established by someone other than the person
with disabilities with assets never belonging to
the beneficiary.
Does not require a “payback” provision for
Medicaid benefits upon beneficiary’s death
During beneficiaries life, kinds of payments the
trust can make will be more generous and
flexible.
Could be created during lifetime or at death.
Third-Party SNTs (con’t)
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Trust must be discretionary
There must be an independent trustee
Cannot be a general support and
maintenance trust
Beneficiary cannot have control
What public benefits can the
beneficiary receive?
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SSDI/Medicare
SSI/Medicaid
Veterans benefits
Subsidized Housing
Temporary Assistance for Needy Families
(TANF)
Other means-tested benefit programs
Questions to consider when
establishing a SNT
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Are assets of the SNT includible in the
beneficiary’s countable assets?
When assets are transferred to a SNT, is there a
penalty period?
What distributions from the trust are considered
countable income to the beneficiary or the
beneficiary’s family?
Can non-disabled, ineligible parents income and
assets be deemed countable for the beneficiary’s
eligibility?
How do trust distributions affect
the beneficiary’s public benefit?
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A distribution of cash reduced dollar for
dollar the beneficiary’s SSI payment.
A distribution that is “in-kind support and
maintenance” (ISM) reduces the benefit
by a lesser amount.
Things that a SNT can Pay for
Without Worry
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Home upkeep & utilities
Phone, cable & internet service
Vehicle, insurance, maintenance & gas
Pre-paid Burial/funeral arrangements
Tuition, books, tutoring
Travel & Entertainment
Household furnishing & furniture
Television, computers & electronics
Durable medical equipment
Care management
Therapy, medications, alternative treatments
Taxes
Legal, guardianship and trustee fees
Personal hygiene (haircuts, manicures)
Clothing
What tax rules to SNTS follow?
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SNTs follow the same basic tax rules that
all trusts follow
SNT Trustee duties
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No self-dealing
Impartiality
Delegation
Investment
Bond
Titling of Assets
Accounting requirements
Reporting to Social Security
Reporting to Medicaid
Reporting to the Court
Wrapping up the trust
Income taxation of SNTs
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Grantor trusts
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Generally, a SNT will be a grantor trust if a
family member is the trustee. If there is an
independent trustee, it may still be a grantor
trust.
May obtain a new EIN for the trust, or use
SSN of grantor
Files an “informational” return
Income taxation of SNTs (con’t)
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Non-Grantor trusts
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Virtually all third-party, and some self-settled trust will
be non-grantor trusts.
Subject to the compressed tax rates of trusts
Will need its own EIN
Most likely will be classified as “complex”
Files a Form 1041 with a K-1 to the beneficiary for
distributions
Can take deductions that would have otherwise been
subject to 2% floor.
Income taxation of SNTs (con’t)
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Qualified Disability Trusts (QDisT)
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Optional treatment as a QDisT
Cannot be a grantor trust
Since 2002, trusts qualifying under IRC Sec
642(b)(2)(C) are permitted to claim a
personal exemption
Trust must be funded before beneficiary turns
age 65
Beneficiaries must be receiving SSI or SSDI
Employment of a Caregiver
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May be provided through an outside
agency
Or a caregiver not associated with an
agency.
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Will be treated as an employee
Must withhold income and unemployment
taxes
Rules applicable to all SNTs
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There is a difference between “income” for
tax purposes and “income” for purposes of
SSI.
If a taxpayer is under age 24, “kiddie ax”
applies.
Ohio Pooled Trusts
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Charities Pooled Trust
Community Fund Management Foundation
Pooled Trusts
The Disability Foundation Pooled Trusts
McGivney Pooled Special Needs Trust
Secured Futures Pooled Trust
Securet Trust
Trust Sample Language
The primary purpose of this trust shall be to provide for _______’s
special needs resulting from his/her disabilities. In the event such
beneficiary is receiving government benefits based upon need or
disability, from any local, state, or federal government program, the
trustee shall have the discretion to supplement those government
benefits. No disbursement shall be made for _____’s benefit that
would permanently jeopardize eligibility for, or inappropriately limit
the type of assistance available to him/her, if he/she is receiving or
intends to apply for local, state or federal benefit programs. If
_____ is not receiving government benefits based upon need or
disability, the Trustee shall have the absolute discretion to determine
what disbursements shall be made from the trust for _____’s
benefit.