special needs trusts. overview of public benefit programs
TRANSCRIPT
SPECIAL NEEDS TRUSTS
OVERVIEW OF PUBLIC BENEFIT PROGRAMS
PROGRAMS NOT BASED ON FINANCIAL NEED
Social Security (Survivor’s, Retirement or Disability Benefits)
SSD – Permanently and Totally Disabled
Medicare
PROGRAMS THAT ARE NEEDS BASED Supplemental Security Income
(SSI) 65, Blind or Totally and
Permanently Disabled Assets $2,000 or less
SUPPLEMENTAL SECURITY INCOME Monthly cash payments to aged,
blind or disabled Administered by Social Security
Administration (SSA) Called Title XVI benefits
SSI QUALIFICATION Be aged, medically disabled or
blind US Citizen or meet alien status
criteria
SSI QUALIFICATION Disability – Inability or engage in
“substantial gainful activity” (SGA) Physical or mental impairment that
can be expected to last for continuous period of at least 12 months or result in death
Earnings level
SSI Payments Maximum Benefit rate depends on
Recipient’s living arrangements Marital status Whether recipient is elderly, disabled or
blind Person living alone or with others in own
household Federal SSI benefit $623 (living alone) Federal and NJ State combined $654.25
SSI QUALIFICATION Resources Countable or Non-countable
COUNTABLE RESOURCE INCOME Single - $2,000.00 Married - $3,000.00
COUNTABLE RESOURCES Cash (which is not the current
month’s income) Income producing property,
including real estate Stocks, bonds, investments Life Insurance with c.v. in excess
or $1,500.00 Vehicle
Non-countable Resources Personal Residence Automobiles that are specially
equipped or used for medical appointments
Life Insurance with cash value of less that $1,500.00
INCOME Earned, Unearned or In-kind
UNEARNED INCOME Social Security
benefits Annuities Alimony Child Support Dividends Interest Rents
Royalties Prizes Awards Gifts Inheritance Distributions from
Special Needs Trust
UNEARNED INCOME An SSI recipient may receive up to
$20 per month of unearned income In excess of $20 per month
reduces SSI benefit on dollar for dollar basis
EARNED INCOME Receipt of earned income over $65 per month (or
$85 per month if no unearned income) will reduce SSI benefit dollar for dollar
Formula for determining reduction if there is earned income Deduct the SSI General Exclusion of $20 (if no
unearned income) Deduct $65 per month (earned income exclusion) Deduct one-half of the remaining earned income The balance is total countable earned income Deduct this form maximum SSI benefit Remaining balance is the reduced SSI benefit
IN-KIND INCOME SSI recipient is expected to pay for
food and shelter Recipient of food or shelter from
third party is “in-kind income” May reduce SSI benefits Regulations effective March 9, 2005
Clothing eliminated from definition of income or determination of ISM
TWO WAYS TO CALCULATE IN-KIND SUPPORT AND MAINTENANCE (ISM)
One-third Reduction Rule Used in limited situations SSI recipient lives for full calendar
month in household of another person who provided both food and shelter to him without charge
SSI benefit amount reduced by one-third of federal benefit rate
Presumed Maximum Value Rate Used when SSI recipient has received food or
shelter from outside source and one-third reduction rule doesn’t apply
Example – Recipient lives in own home and received outside help for expenses
SS presumes that maximum value of item is 1/3 of Federal benefit plus $20
SS does not apply both One-third Reduction Rule and PMV Rule in any one month
No reduction if third party pay directly to vendor for items that are not food or shelter
SSI FOR CHILDREN Blind or disabled children may
receive Under age 18, parents’ assets and
income are deemed to the child
SOCIAL SECURITY DISABILITY INSURANCE (SSDI)
Monthly cash benefits to disabled workers (and dependents) Eligibility not based on economic need Eligibility Requirements
Sufficient quarters of covered employment Medically disabled If working, earn less than $900 per month ($1500 if blind) Family benefits available No asset limit No limit on unearned income or in-kind income SNT not necessary unless dual recipient
SOCIAL SECURITY DISABILITY INSURANCE (SSDI)
Amount of benefit depends on PIA (Primary Insurance Amount) If SSDI recipient receives low monthly
benefit, may also receive SSI Dual recipients
PROGRAMS THAT ARE NEEDS BASED Medicaid
Federal/State partnership Based on SSI qualification
Medicaid Qualification Income Test Asset Test
SPECIAL NEEDS TRUSTS
Special Needs Trusts Preservation of Public Benefits Types of available Trusts Failure to consider Medicaid
PRESERVATION OF PUBLIC BENEFITS
Needs based benefits interrupted~Gift~Inheritance~Litigation Proceeds
Supplemental Trust No direct receipt of funds by
beneficiary May receive discretionary
distributions Maintain benefit qualification
TYPES OF TRUSTS
Beneficiary may not have right to revoke
Beneficiary may not direct use of assets for support
Funds not used for food or shelter
TYPES OF TRUSTS
Self-settled Trusts Includes transfers made by
spouse Five year lookback (if not d4A or
d4C) Income only trust
Types of Trusts
Proper Drafting Proper Administration Support vs. discretionary
TYPES OF TRUSTS
Income-Assignment Trusts Miller Trusts
Not available any longer
TYPES OF TRUSTS
Third Party Testamentary Self Settled Pooled
TYPES OF TRUSTS Third Party Trusts
Funded with monies belonging to other individuals
No payback provisions Trustee must be given discretion Beneficiary may not have control
over funds May name residual beneficiary
TYPES OF TRUSTS
Third Party Trusts Grandparents establish trust for
disabled grandchild and funds with stock
Grandparent is trustee. Children’s mother is successor trustee
Funds used to purchase computer, computer training, vacation with paid companion
TYPES OF TRUSTS
Testamentary Trust created under Last Will and Testament
Creation of testamentary trust is not transfer for less than FMV
Residual beneficiary permitted
POOLED TRUST (d)(4)(C)
Pooled Trusts are authorized under OBRA-93
These trusts are funded with the assets of a disabled person
The definition of “disability” is used
POOLED TRUST (d)(4)(C) Pooled Trust Requirements
Pooled Trusts must be established and managed by a non-profit organization
There must be a separate account for each beneficiary
Funds are pooled for investment and management
The account is solely for the benefit of the disabled individual
The Trust must be established by a parent, grandparent, legal guardian, or court
POOLED TRUSTS (d)(4)(C)
Advantages Corpus is not counted as an asset A person can be over 65 at the time of
establishment of a Trust A disabled person can establish his
own Trust The Community Trust already exists
and does not have to be created The Community Trust requires only a
joinder agreement
POOLED TRUSTS (d)(4)(C)
Taxation The Grantor Trust rules apply to
income tax The Trustee must track each sub-
account Gift tax issues must be explored If there is a pooled income fund,
the remainder interest may be tax deductible
POOLED TRUSTS (d)(4)(C)
May pool assets for investing and management
After Beneficiary’s death, amounts not retained by trust paid to state to reimburse Medicaid
Most Trusts will retain funds
SUPPLEMENTAL NEEDS TRUSTS (d)(4)(A)
Allows individual to retain funds while maintaining eligibility for public benefits programs
Tort proceeds Divorce Settlement Workers Compensation
SUPPLEMENTAL NEEDS TRUST (d)(4)(A)
Funds may be used to pay for items not provided by governmental programs
Restrictions apply Inter Vivos Irrevocable
SUPPLEMENTAL NEEDS TRUST (d)(4)(A)
Authorized under OBRA-93 For the benefit of disabled
persons Person must be under 65 at the
inception of the Trust Transfers to and from the Trust
are not subject to the transfer of assets rules or the income and resource rules of Medicaid
SUPPLEMENTAL NEEDS TRUST (d)(4)(A)
Trusts Established by: Parent Grandparent Legal guardian Court
SUPPLEMENTAL NEEDS TRUST (d)(4)(A)
Distribution on Death The Trust must provide that on
death the funds remaining in the Trust go first to reimburse Medicaid and then for the benefit of other beneficiaries
SUPPLEMENTAL NEEDS TRUST (d)(4)(A)
Types of Payments OBRA-93 contains no express
limitation on the amount or types of payments.
Wise to limit payments to “in-kind” payments
Does not reduce public assistance
SUPPLEMENTAL NEEDS TRUST (d)(4)(A)
In-Kind Support In-kind support consists of goods
or services from third parties Cannot include food or shelter Or anything that could be used to
obtain food or shelter. If in-kind support includes food or shelter, there may be a reduction of up to 1/3 of the SSI benefit
CHOOSING A TRUSTEE
Family members may be best qualified to determine special needs of the child
May lack expertise regarding administration
CHOOSING A TRUSTEE
Responsibility for proper investment of trust assets
Accurate record keeping Ensuring that distributions will
not disqualify from governmental benefits
CHOOSING A TRUSTEE
Choose someone familiar with Prudent Investor Act Principal and Income Act Rules of SSI, Medicaid and other
governmental programs
CHOOSING A TRUSTEE
Unsophisticated trustee runs risk of exposure of liability
Goals of trust may not be satisfied
CHOOSING A TRUSTEE
Consider choosing a professional Bank Disability Organization Private Fiduciary Attorney
CHOOSING A TRUSTEE
Consider choosing a professional Trust Advisory Committee (TAC)
could be used to advise trustee as to needs
TAC could be made up of family member, social worker, CPA, Attorney
CHOOSING A TRUSTEE
Appoint co-trustees Family member and professional
trustee
FUNDING THE TRUST
Proper titling What to put in the trust
ADMINISTRATION OF TRUST
Personally distributes goods or services directly to beneficiary
Pay the provider directly and provider delivers goods or services
Give beneficiary non-transferable and non-refundable right to obtain goods and services (voucher)
No credit cards
TRUST DISTRIBUTION STANDARDS
Discretionary Trust Not support Trust Trustee needs to understand
the law before administration of trust
SUMMARY OF DISTRIBUTION RULES
Determine benefit program No cash distributions (treated as
income) Pay for services and exempt
resources In-Kind maintenance and
support (food and shelter) if trust allows it
Don’t reduce SSI to $0
SPECIAL SITUATIONS Providing housing Providing Transportation General Distribution Rules Distributions that benefit
others Paying members of
beneficiary’s family
HOUSING
Home owned by d4A Trust must be paid over to Government after Beneficiary’s death
Trust can pay all expenses or charge rent Trustee must decide how to treat other
family members living in home (d4A Trust must be for sole benefit of Beneficiary)
Beneficiary received equitable interest in month of purchase – reduction in SSI in that month
If Trust pays other shelter or household expenses – reduction in SSI benefits
HOUSING “Countable” Housing expenses
Mortgage (principal and interest) Rent Real Estate Taxes Electricity, Water, Sewer Homeowner’s Insurance Condominium Charges
HOUSING “Noncountable” Housing Expenses
Telephone Cable Television Premiums for personal property
insurance Paper products Laundry and cleaning supplies Staff salaries Repairs to recipient’s home Capital improvements
HOUSING Trust buys home and titles in
Beneficiary’s name Trust renovates home purchased by
Beneficiary Countable income in month
received by Beneficiary Excluded resource unless law
changes Trustee loses control (Beneficiary
can sell, gift or mortgage house)
HOUSING
Renovating home owned by another
Usually for handicap accessibility
Doctor’s prescription to help justify expense
HOUSING
Can pay rent to third person Countable Income (ISM) Pay for non-countable
expenses
PROVIDING TRANSPORTATION
Not food or shelter Biggest issues is how to title vehicle Should not be owned by trust
(exposes trust assets to liability claim)
Can purchase and title in name of beneficiary or reliable care provider
Can pay operating expenses (gas, maintenance, repairs, insurance)
PROVIDING TRANSPORTATION
One automobile is excluded If used for transportation for
the individual or member of household
Under new regs, no limit on value
GENERAL DISTRIBUTION RULES
Do not distribute cash Do not distribute food or
shelter or anything convertible
GENERAL DISTRIBUTION RULES
Personal property (stereo, computer, furniture)
Memberships to library, swimming pool
Subscriptions Bus Pass Medical Insurance Premiums
GENERAL DISTRIBUTION RULES
Services of care providers Vacations (not food or shelter) Travel expenses for person to
accompany and assist the beneficiary on a trip
Entertainment Medical services Social services Personal services (like house keeper)
DISTRIBUTIONS THAT BENEFIT NON-BENEFICIARIES
Example: Family of Beneficiary lives rent free in home owned or paid for by the Trust
Trustee must analyze expenditure
No bright line test
PAYMENTS TO FAMILY MEMBERS
Family care provider may quit job or reduce work hours to provide care
Would have to pay outside party or institutional placement
PAYMENTS TO FAMILY MEMBERS
Suggest hourly basis Survey home health agencies
for appropriate rate Payments are taxable income May provide health insurance,
retirement plan and employee benefits
TERMINATION OF TRUST Death of lifetime beneficiary
terminates trust Could continue to remainder
beneficiaries Trustee remains in office for
reasonable period
TERMINATION OF TRUST Pay final expenses of trust Final accounting to remainder
beneficiaries Distribute remaining assets
TERMINATION OF TRUST
Payment of expenses tricky if insufficient funds
Pay debts Administrative costs Income taxes Estate taxes Beneficiary’s personal debts Funeral expenses Medicaid reimbursement Remainder Beneficiaries
TAX ISSUES
Estate Tax Assets sometimes included in
estate of beneficiary Self-settled trust usually included Third party trust
Depends on how much control beneficiary has
Normally not included
TAX ISSUES Income Tax
Apply for employer identification number
Use SS-4 Grantor
third party trust self-settled trust
Don’t use Beneficiary social security number
TAX ISSUES
Income Tax Any income not distributed from
non-grantor trust is taxed at trust rate
Tax rate is 35% imposes at $9,750 Individuals top tax rate imposes at
$326,450
TAX ISSUES
Income Tax Income earned by grantor trust
taxed at beneficiary’s tax rate Grantor trust treated as pass
through entity
TAX ISSUES SSA crosschecks with IRS Trust earnings reported to IRS Income reported for tax
purposes may not constitute income for SSI purposes
Proactive approach suggested
TAX ISSUES
Income Tax Reduction strategies Purchase tax-free investments Distribute income to beneficiary
FIVE PLANNING POINTERS FOR PARENTS WITH DISABLED CHILDREN
PLANNING POINTERS
Buy enough life insurance Parent can’t be replaced Services will be necessary
PLANNING POINTERS
Set up a trust Public Benefits will be
jeopardized Management of Funds Disinheritance can pose
problems Sibling can be sued, divorced,
shirk responsibility, tax issues
PLANNING POINTERS
Create a will and appoint a guardian
Might make sense to put guardian in place while parent is living
PLANNING POINTERS
Write down the care plan Parent’s wishes for care Group home, live on own, live
with family member Disclose estate planning
arrangements to family
FAILURE TO CONSIDER MEDICAID
Beneficiary loses benefits Attorney exposure to
malpractice claim Make sure all Medicaid and
Medicare liens on settlement are satisfied before funding trust