Transcript Section 8 and Special Needs Trusts

Understanding
Special Needs
Planning
(Parts 3 & 4)
Kevin Urbatsch
Editor of Special Needs Trusts: Planning, Drafting, and
Administration, Co-Chair of the 2009 ASNP National Meeting
January 29, 2009
Overview of Special Needs Planning
Section Three:
Estate Planning for a Person
With a Disability Third Party Special Needs Trust
Summary of Estate Planning for
Persons with Disabilities
Why we plan:
• Preserve needs-based public benefits;
• Provide additional financial support beyond public benefits;
• Select an appropriate individual or entity to manage the
inheritance;
• Provide guidelines for asset management;
• Provide guidelines for living arrangements and personal care;
• Provide guidelines for advocacy for the person with the
disability;
• Facilitate employment and social activities;
• Coordinate an entire family's planning; and
• Preserve assets for other heirs at the death of the special
needs beneficiary
Estate planning options available for a
person with a disability
Option include the following, (though not all are
recommended):
• Direct bequest;
• Disinheritance;
• Morally obligated or "precatory" gift;
• Support trust;
• Third party SNT; and
• Third party pooled SNT
Direct Inheritance or Disinheritance
• Leaving an inheritance outright to a person with a severe
disability is almost never a good idea
▫ An outright gift, like no planning at all, will disqualify the
person from needs-based public benefits, including
Supplemental Security Income (SSI), Medicaid, and
Medicaid-related support services
• Disinheritance of a person with a disability is not
recommended.
▫ Disinheritance preserves entitlement to needs-based public
benefits, leaves the child at the mercy of government policy.
Public benefits provide at best a marginal, welfare
existence, and there is no guarantee that the government
will continue to make public benefits available to the
disinherited child.
Leaving Assets to Family
• Parents often express a desire to leave the child with a
disability’s inheritance to a sibling with instructions to use the
funds to care for the child with a disability. Not really a good
idea because:
▫ The informal agreement of a precatory gift cannot be legally
enforced.
▫ The actual donee may lose the money. For example, he or she
may lose a portion through a property division or the donee may
have creditors who take the money.
▫ The donee may not have provided in his or her own estate plan
for continued management of the assets for the person with a
disability.
▫ It can strain relations between siblings
▫ A Third Party SNT can be set up to provide direction on how
expenditures should be made to benefit
Leaving Assets in Trust for Support or
Maintenance
Leaving an inheritance in a trust for the "support
or maintenance" of a beneficiary with a disability
is not a recommended option. A trust that
authorizes or mandates distributions for
"support or maintenance" is counted as a
resource for SSI purposes, and thus will
disqualify the beneficiary from SSI and
categorically linked Medicaid
Protecting Public Benefit Eligibility
• A Third Party Special Needs Trust is usually the
best method for leaving an inheritance to a
person with a disability.
• This type of trust is often called a third party
SNT because it is established with the assets of
someone other than the disabled person.
Third Party SNT Legal Requirements
For SSI purposes, the Social
Security Administration
defines a third party trust as
• A trust established by
someone other than the
beneficiary as grantor
The regulations impose
basically two requirements
for third party SNTs
• (1) The beneficiary cannot
have authority to revoke
the trust; and
• (2) The beneficiary cannot
direct the use of trust
assets for his or her
support and maintenance
under the terms of the
trust.
Not to be Mistaken with First Party
Special Needs Trust
• A common mistake made by many is complying
with the strict legal requirements of a first party
SNT when a third party SNT is all that is
required
• The primary problems:
• Including a Payback to Government
• Making it a Sole Benefit Trust
Third Party Pooled SNT
• A pooled SNT is a preexisting trust
administered by a nonprofit institution
that receives and manages the assets for
the beneficiary.
• It is a useful alternative to a third party
SNT when, for instance, no one is able to
act as trustee of a separate third party SNT
or the settlor wants professional
management of the trust.
Creation of Third Party SNT
Established
Through Will,
Living Trust or
Standalone
Document
Excellent
Management
Professional
Trustee,
Advisory
Committee and
Trust Protector
Preserve Public
Benefits as well
as Future
Advocacy
Memorandum
of Intent
How Much to Fund
• To determine "how much," the practitioner must
ascertain, as fully as possible:
▫
▫
▫
▫
The availability of other private support;
The cost of ongoing care and treatment plans;
The availability of public benefits; and
The best possible integration of the estate plan
with public benefits.
Funding the Third Party SNT
• Funding a third party SNT is a wonderful
opportunity to leverage the expertise of several
advisors, attorneys, investment and insurance
advisors, and CPAs
• When working with other advisors, it is
important to find professionals who understand
the unique planning needs of persons with
disabilities.
Other Third Party SNT Issues
If SNT for
Spouse
• Must be
Established
by Will
Multiple
Beneficiaries
Coordination
with Family
• OK
• All family
can use
same SNT
Overview of Special Needs Planning
Section Three (con’t):
Planning for the Person with a
Disability’s Own Assets
First Party Special Needs Trusts
• Used to hold Person with a Disability’s own
assets
• There are various types of First Party SNTs
▫ (d)(4)(A) SNTs or Payback SNTs
▫ Miller Trusts or
▫ Pooled SNTs or (d)(4)(C) SNTs
(d)(4)(A) SNT
• The (d)(4)(A) SNT is authorized by 42 U.S.C.
§1396p(d)(4)(A) and has the following characteristics:
▫ Grantor: Must be established by parent,
grandparent, legal guardian, or court
▫ Beneficiary: The trust must be for the sole benefit of
a disabled person who is under the age of 65.
▫ Payback Provision: The trust must provide that on
the death of the beneficiary, the trustee must repay
Medicaid for all benefits received by the beneficiary
during his or her lifetime to the extent that funds
remain in the trust at the beneficiary's death.
Miller Trust
• A "Miller" Trust is used to qualify a Medicaid
applicant with income in excess of the eligibility
limit (not imposed in all states) for long-term
care assistance from Medicaid
• A Miller Trust solves the problem when a person
applying for Medicaid has too much income
• Requires Payback
• Authorized by 42 U.S.C. §1396p(d)(4)(B)
Pooled SNT
• The Pooled SNT is authorized by 42 U.S.C. §1396p(d)(4)(C) and has
the following characteristics:
▫ Grantor: Must be established and managed by a nonprofit
association
▫ Joinder: May be joined by the beneficiary, the beneficiary's
parent, grandparent, or legal guardian or a court
▫ Beneficiary: The beneficiary may be of any age, but must be
disabled and the trust must maintain a separate account for the
beneficiary
▫ Trustee: The trustee must be the establishing nonprofit
association or supervised by the nonprofit association.
▫ Payback Provision: In most states, after the initial beneficiary's
death, excess funds may remain in the pooled trust for other
beneficiaries with disabilities; excess funds are subject to
repayment only if they do not remain in the pooled trust.
Important Facts to Consider in
Establishing First Party SNT
•
•
•
•
•
Age
Capacity
Amount of Funds Needed to Protect
Whether Conserved or has a Guardian
Money Coming from Litigation or Inheritance
Overview of Special Needs Planning
Section Four: Administering a
Special Needs Trust
Overview of SNT Administration
• All normal trustee duties apply plus
an SNT trustee must assume
additional responsibilities not
normally seen in other trusts
▫ Knowledge of public benefits
▫ Dealing with a Person with a
Disability
SNT Trustee General Duties
• Have a clear understanding of how SNT distributions interact with
public benefits
• Know how to make a disbursement
• Know how to take care of the beneficiary's personal needs
▫ This may require an understanding of the beneficiary's particular
disability, living situation and care situation
▫ It also may require the hiring of a care manager, benefits
counselor, educational specialist, or care advocate for the
beneficiary.
• Know how to keep beneficiary eligible for all public benefits
• SNT established through court order may have additional duties
such as ongoing annual court accountings and obtaining court
permission prior to paying the fees for a trustee, attorney, and trust
advisory committee member
SNT Trustee Duty on Distributions
• The trustee is asked to perform a balancing act
between making distributions that do not violate the
"income" or "resource" rules of the applicable
benefit program (typically SSI and Medicaid) and
providing the beneficiary goods and services so he or
she does not have to live at the poverty level
• The most difficult balancing task an SNT trustee is
required to perform is deciding whether a
distribution that will reduce (or even eliminate) a
beneficiary's government benefits is in the
beneficiary's best interest
Distribution Issues
• If SNT pays for food, shelter or medical care
already being provided by SSI or Medicaid it
may reduce (or eliminate) public benefits
▫ Shelter is defined as:

•
Food, gas, electricity, water, sewer, heating fuel, garbage
removal, real estate taxes, rent or mortgage
Sophisticated planners still authorize such
disbursements if it is in the best interests of person
with a disability (remember your PMV and VTR
from public benefits) and authorized by SNT’s terms
More Distribution Issues
• A SNT cannot give cash directly to Beneficiary
• If first party SNT, distribution must be for “sole
benefit” of beneficiary
▫ No gifts to friends or relatives (not even to the
special needs planning attorney)
▫ Issue with payments for minor children (child
support orders probably ok)
Other Distribution Issues
• The hiring of caregivers, case managers, or
advocates for the SNT beneficiary
▫ Employee/Independent Contractor
• The purchase and sale of real estate using SNT
assets
▫ Is it PMV (check out POMS-Equitable Ownership)
• The purchase of a vehicle using SNT assets
▫ Who should hold title?
The No-Brainer Distribution List
Automobile/van; Accounting services; Acupuncture/acupressure; Appliances (TV, VCR, DVD player, stereo, microwave, stove,
refrigerator, washer/dryer); Bottled water or water service; Bus pass/public transportation costs; Camera, film, recorder and
tapes, development of film; Clothing; Clubs and club dues (record clubs, book clubs, health clubs, service clubs, zoo,
advocacy groups, museums); Computer hardware, software, programs, and Internet service; Conferences; Courses or classes
(academic or recreational), including books and supplies; Curtains, blinds, and drapes; Dental work not covered by
Medicaid, including anesthesia; Down payment on home or security deposit on apartment; Dry cleaning and/or laundry
services; Elective surgery; Fitness equipment; Funeral expenses; Furniture, home furnishings; Gasoline and/or maintenance
for automobile; Haircuts/salon services; Hobby supplies; Holiday decorations, parties, dinner dances, holiday cards; Home
alarm and/or monitoring/response system; Home improvements, repairs, and maintenance (not covered by Medicaid),
including tools to perform home improvements, repairs, and maintenance by homeowner; Home purchase (to the extent
not covered by benefits); House cleaning/maid services; Insurance (automobile, home and/or possessions); Legal
fees/advocacy (may need court approval of legal fees if court-supervised); Linens and towels; Magazine and newspaper
subscriptions; Massage;; Musical instruments (including lessons and music); Nonfood grocery items (laundry soap, bleach,
fabric softener, deodorant, dish soap, hand and body soap, personal hygiene products, paper towels, napkins, Kleenex, toilet
paper, and household cleaning products); Over-the-counter medications (including vitamins and herbs); Personal assistance
services not covered by Medicaid; Pet and pet supplies, veterinary services; Physician specialists if not covered by Medicaid;
Private counseling if not covered by Medicaid; Repair services (e.g., for appliances, automobile, bicycle, household, or
fitness equipment); Snow removal/landscaping/gardening (lawn) services; Sporting goods/equipment/uniforms/team
pictures; Stationery, stamps, and cards; Storage units; Taxicab; Telephone service and equipment, including cell phone,
pager; Therapy (physical, occupational, speech) not covered by Medicaid; Tickets to concerts or sporting events (for
beneficiary and an accompanying companion, if necessary); Transportation (automobile, motorcycle, bicycle, moped, gas,
bus passes, insurance, vehicle license fees, gas, car repairs); Utility bills (satellite TV, cable TV, telephone—but not gas,
water, or electricity); Vacation (including paying for a personal assistant to accompany the beneficiary if necessary).
How to Make a SNT Distribution
• The safest (but least convenient) way is to have the trustee distribute the services or goods
directly to the beneficiary personally. In other words, the trustee could buy a television and
deliver it to the beneficiary
• The most common way is to have the trustee make a payment directly to a third-party
vendor who then provides the goods or services to the beneficiary
▫
For example, the trustee makes a payment to an appliance store and it delivers a television to
the beneficiary. Or, the beneficiary chooses items from an on-line store and the trustee makes
the payment.
• Another acceptable way is to have the trustee give the beneficiary the right to obtain a good
or service, e.g., through a gift card, voucher, or gift certificate to an appliance store where
the beneficiary pays for the television with the gift card
▫
To avoid problems, the beneficiary should not be given a gift card, voucher, or gift certificate
that may be converted to cash or result in a cash refund. A safe way to ensure that this does
not happen is to buy the gift card, gift certificate or voucher with a credit card in the name of
the trustee. Then, any refund would be credited to the SNT instead of to the beneficiary.
• The trustee may pay the beneficiary’s credit card bill
▫
The trustee must review each and every credit card statement entry and exercise discretion as
to each item purchased by the beneficiary. For example, if the beneficiary purchased $50 of
groceries, and paid $200 for an IPod, and $50 for downloadable music, the trustee should
only pay $250 of the credit card bill for the IPod and the music but not for the groceries.
Taxation of Third Party SNT
• A third party SNT is often a nongrantor trust.
The SNT can be treated both as a conduit and as
a true taxpayer for income tax purposes
▫ To the extent the SNT distributes its income to
beneficiaries it functions as a conduit
▫ The income is then taxed to the beneficiaries and
the trust is allowed a deduction for the portion of
the gross income that is currently distributable to
the beneficiaries or properly paid or credited to
them
Taxation of Third Party SNTs
• If the third party SNT does not distribute a
income, the trust itself becomes liable for the
payment of income tax.
▫ The trust reports its income on its own income tax
return and pays, from trust income or principal,
the taxes on its income
▫ The third party SNT is subject to the compressed
tax rates for trusts, so it will generally pay a
greater tax on accumulated income than would a
beneficiary under a grantor trust
Taxation of First Party SNTs
• First party SNTs are generally characterized as grantor
trusts for income tax purposes
• The income from a first party SNT treated as a grantor
trust is taxed not to the trust, but to the beneficiary with
a disability
• The beneficiary is often the preferred taxpayer because
▫ His or her income tax brackets will be much lower than the
trust's tax brackets, and
▫ The beneficiary may have large medical expenses that will
qualify as deductions on his or her individual income tax
return. In order to minimize or eliminate the financial
burden on the beneficiary, the trust can pay for the
preparation of the tax returns and even pay any tax that is
due on the beneficiary's behalf.
Termination of First Party SNT
• In general, the trustee's legal obligations on termination of a
first party (d)(4)(A) SNT are:
▫ Notifying public agencies that provided or may have provided
medical assistance to the beneficiary and requesting a detailed
report of medical expenditures;
▫ Paying expenses as allowed under federal and state guidelines;
▫ Filing tax returns and paying taxes;
▫ Reimbursing the state (or states) for any Medicaid payments
made on behalf of the beneficiary;
▫ Paying other creditors and claims against the SNT;
▫ Accounting to the court (if a court-supervised SNT is involved) or
to the remainder beneficiaries, if any;
▫ Making any final distributions of remaining assets as authorized
by the SNT document; and
▫ Closing the SNT checking account and the SNT file.
First Party SNT Termination –
Priority of Payment
Only the following administrative
expenses may be paid before
reimbursement of Medicaid
• State and federal taxes due from the
trust because of the death of the
beneficiary or termination of the
trust and transfer of trust assets to
the remainder beneficiaries;
• Reasonable fees for administration
of the trust estate, such as an
accounting of the trust to a court,
completion and filing of documents,
or other required actions associated
with termination and wrapping up
of the trust.
The following are expressly
prohibited from being paid before
reimbursement of Medicaid
payments
• Payment of debts owed to third
parties;
• Funeral expenses; and
• Payments to residual beneficiaries.
Conclusion
• Special needs planning attorneys and
trustees find working on behalf of
persons with disabilities very
satisfying
• They make a real difference in the
person's quality of life.
The Urbatsch Law Firm
Special Needs Planning Attorney
101 Howard Street, Suite 490
San Francisco, CA 94105
(415) 710-7886
[email protected]
www.UrbLaw.com
•
• Special Needs Planning in the Era of Change:
New Opportunities for You
and Your Clients
• March 6-7, 2009
• Rancho Bernardo, CA
• www.specialneedsplanners.com/c
onference2009
• or call (866) 296-5509