kevin urbatsch editor of special needs trusts: planning, drafting, and administration, co-chair of...
TRANSCRIPT
Kevin Urbatsch
Editor of Special Needs Trusts: Planning, Drafting, and Administration, Co-Chair of the 2009 ASNP National Meeting
January 29, 2009
Understanding Special Needs
Planning(Parts 3 & 4)
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 DisabilitiesWhy 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 MaintenanceLeaving 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
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
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
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 ListAutomobile/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
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 490San Francisco, CA 94105
(415) 710-7886
• • 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/conference2009
•or call (866) 296-5509