structuring special needs trusts for the elderly and disabled to...

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Presenting a live 90-minute webinar with interactive Q&A

Structuring Special Needs Trusts for the

Elderly and Disabled to Protect Public Benefits Administering First- and Third-Party Trusts; Addressing the

Interplay Between SNTs, Guardianships and Conservatorships

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, APRIL 18, 2017

Shirley B. Whitenack, Partner, Schenck Price Smith & King, Florham Park, N.J.

Elizabeth L. Gray, Principal, McCandlish Lillard, Fairfax, Va.

Kyla G. Kelim, Esq., Aging in Alabama, Fairhope, Ala.

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-961-9091 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can

address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 35.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

5

Structuring Special Needs Trusts for the Elderly

and Disabled to Protect Public Benefits

Kyla G. Kelim, Esq.

AGING IN ALABAMA

Fairhope, AL

Special Needs Trust Overview

• Special needs trust is established pursuant to 42 U.S.C.

Section 1396p(d)(4)(A) or (C)

• Authorized by Congress to protect the income and

medical benefits of a disabled individual

• The trust must strictly comply with the law to protect the

beneficiary

• There are several types of special needs trusts

• The law controls depending on circumstance and age

6

Types of Special Needs Trusts

• 1st party trust

• 3rd party trust

• Pooled Trust

• Supplemental Trust

• Support Trust

7

First party trust

• Most common type, and also known as “self-settled”, this

trust is funded by the beneficiary’s own funds or funds to

which the beneficiary is entitled

• Must be established by a parent, grandparent, guardian

or Court

• Now, after Special Needs Fairness Act, competent

beneficiary may establish

• If incapacitated and no parent, grandparent, or guardian

available, then you must request the Court to approve

• Medicaid and Social Security must also approve

• Commonly funded with personal injury settlements,

inheritance 8

Third party trust

• Established with assets that do not belong

to beneficiary

• No “payback provision” is required

• Must abide by same rules otherwise

9

Pooled trust

• Each state has one or more company that

provides pooled trust services

• The trust is established through a more

streamlined process and the “trustee” is really a

co-trustee, at best, with the trust administrator

• Must use a pooled trust for those over 64 years

of age

• Must have a payback provision

10

Supplemental vs. Support Trust

• Supplemental Trust “supplements” the

beneficiary’s lifestyle

• Can pay for cable, cell phone, furniture,

electronics, vacation, car, car insurance, funeral

arrangements, etc.

• Does not pay for “support” items like food,

shelter, medical care

11

Interested parties in SNT

• Settlor

• Trustee

• Beneficiary

• Guardian

• Court

• Social Security Administration

• Medicaid Agency

12

PUBLIC BENEFITS

CONSIDERATIONS

• Goal in most is not to lose means tested

benefits

• SSI vs. SSDI

• Medicaid benefits

• Lookback period

• Penalty

• Termination of benefits

• Payback and estate recovery

13

SSI vs. SSDI

• SSDI is not means tested benefits

• Caution! Those on SSDI may qualify for

substantial discounts or Medicaid waiver

or nursing home and will lose it if assets,

income, rise

• SSDI otherwise does not need 1st party

trust, use 3rd party trust

• All SSI must have 1st party trust

• All Medicaid must have 1st party trust

14

Medicaid benefits

• Caution! Those on SSDI may qualify for

substantial discounts or Medicaid waiver

or nursing home and will lose it if assets,

income, rise

• There are many many different types of

Medicaid so important to find out if the

beneficiary receives any of them

• Ex: caregivers at home, QMB, SNP,

Sobra, CHIP

15

Five Year Lookback Period

• Deficit Reduction Act of 2005 imposed a 5 year lookback

period (effective for most states 2/8/2006)

• Restrictions on transfers of assets

• Established penalty period for transfers for less than fair

market value

• Penalty Period is UNLIMITED

• Changed beginning point of penalty period

• This will affect nursing home benefits/Medicaid waiver

• SSI recipients not in need of those services will have 24

month benefit interruption

16

Penalty Period

• Will be imposed for transfers for less than fair market

value after 2/8/2006

• Will not start running until applicant otherwise qualifies

for Medicaid benefits

--in a covered long term care facility

--spent down financially

--income qualified

• UNLIMITED

17

How the penalty is calculated

• Penalty may be imposed for even minimal

transfers

• The amount of the penalty is calculated by

adding up the transferred amounts and dividing

by the average cost of nursing home care in the

area or state as determined by the jurisdiction

• Can vary wildly by state

18

Cost of long term care relating to

Penalty • Can vary by state: may affect placement:

-- Mom transfers her home worth $100,000 to

daughter in July 2011. She falls, hits her head, and enters

a nursing home for long term care in July 2015. She

spends her savings and is under $2000 and eligible in

October, 2015. In Alabama, divisor is $5800, so penalty

period ends March 2017 and in Florida, divisor is $8346 so

penalty period is 12 months, she would be eligible in

October, 2016

• No long term care costs as little as $5800.00 in Alabama

19

Cost of long term care relating to

Penalty • If you said apply in August, 2016, you win!!

• Remember the 5 year lookback, if you wait to apply until

August 2016, then the 5 years has run…

• NO PENALTY

• If you apply in July of 2016, call your insurance carrier

• THE PROBLEM: Most nursing homes have your client

sign a Medicaid application on admission and routinely

file them

20

Payback provision and estate

recovery

• A first party or pooled trust must have payback

provision to reimburse Medicaid at death

• The moment of death, the payback kicks in (if

you are going to pay for funeral…pay for it now!)

• After death, if Medicaid is owed anything, they

will come after estate assets

21

Kyla G. Kelim, Esq.

AGING IN ALABAMA

68 N. Bancroft Street

P.O. Box 109

Fairhope, AL 36533

(855) ELD-RLAW

http://www.elderconsults.com

[email protected]

22

http://www.elderconsults.com/

Special Needs Trusts: Drafting Considerations and Pitfalls to Avoid

Presented by: Shirley B. Whitenack, Esq.

Schenck, Price, Smith & King, LLP

Florham Park, Paramus & Sparta, NJ

[email protected]


GENERAL TRUST REQUIREMENTS

• Supplement, not supplant, government benefits

24


Self-Settled Special Needs Trust

• 42 U.S.C. §1396p(d)(4)(A) • Established with assets of individual with

disabilities • Individual must be under 65 at time of the

establishment and funding BUT – SSA says payments from structured settlement

beginning before age 65 and continuing thereafter are ok

• Individual must be disabled as defined in Social Security Act

25


SOCIAL SECURITY ACT DEFINITION OF “DISABLED”

“unable to engage in any substantial, gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months”

26


DEFINITION OF DISABLED FOR CHILD UNDER 18

Child “suffers from any medically determinable physical or mental impairment of comparable severity” to adult

27


ADDITIONAL REQUIREMENTS OF PAYBACK TRUSTS

• Trust may be established by

– Parent or

– Grandparent or

– Legal guardian or

– Court or

– Competent individual with disabilities

28



• Certain regions require the trust of a competent beneficiary to be “seeded.”

• The parent or grandparent nominally funds the trust and then the assets of the beneficiary with disabilities are transferred to the trust.

29


PAYBACK REQUIREMENTS

• Medicaid agency entitled to reimbursement from any assets remaining in trust upon death of beneficiary or trust termination for other reasons

• Reimbursement “dollar for dollar” up to amount paid by Medicaid on behalf of individual

• Irrevocable

30


Court-created Special Needs Trusts

• If trust is created or authorized by court it may retain oversight in following areas:

– Accountings

– Trustee’s commissions

– Investments

– Limitations on Purchases of Major Assets

31

Trust Protector

Ensures that trustee is acting properly

May have power:

to receive account statements

to remove and replace trustee

May include additional powers of trust protector

Consider: Is trust protector a fiduciary? Compensation?

32 Schenck, Price, Smith & King, LLP


• Check state requirements for additional drafting provisions



THIRD PARTY SPECIAL NEEDS TRUST

• Living trust or

• Testamentary trust created by will

• Revocable or

• Irrevocable

34

THIRD PARTY SPECIAL NEEDS TRUST

• Trust provisions need not be as restrictive as those in self-settled special needs trusts


Drafting Considerations for All SNTs

• Beneficiary cannot compel or control distributions

• Trustee has unfettered discretion

– Authorize trustee to make distributions that may reduce or eliminate public benefits

– Authorize trustee to amend trust to comply with current public benefits laws


Drafting Considerations for All SNTs

• Grantor or Non-Grantor Trust?

• Trustee compensation

• Accountings

• Successor and Substitute Trustees

• Trustee Powers

• Ultimate Beneficiaries


Special Needs Trusts

Elizabeth Gray

McCandlish Lillard

[email protected]

Grantor Trusts

All items of income, deductions and credit are

not taxed at the trust level, but are reported on

the personal income tax return of the individual

who is considered the "grantor" of the trust for

income tax purposes.

Trust Taxation Basics

39

Non-Grantor Trusts

Distributions to or for the benefit of a non-grantor trust beneficiary carry

out income in that beneficiary.

Trust income that is not distributed to or expended on behalf of the

beneficiary (retained income) in a given year (or by March 5th of the

following year) is taxed to the trust.

Trust Taxation Basics, cont.

40

Trust Tax Brackets 2016

The highest federal tax bracket of 39.6% is reached at taxable income on

trusts in excess of $12,400.

For a single taxpayer, the tax rate on taxable income of $12,400 is only

25%.

The highest federal tax bracket of 39.6% does not apply to a single

individual taxpayer until taxable income reaches over $415,050.


41


Exemption on non-Grantor Trusts

$100 [unless the trust requires all income be distributed annually in which

case the exemption amount is $300, but SNTs should not have such a

requirement].

Individual Exemption for 2016 is $4,050.

The Trustee should file a Form 56 (“Notice Concerning Fiduciary

Relationship”) with or before the first SNT tax return is filed.

42


Exemptions for Qualified Disability Trusts (QDT):

A qualified disability trust is a non-Grantor trust and entitled to a Personal

Exemption:

• (For 2016 = $4,050)

43


Personal Exemption Update for Qualified Disability

Trusts Subject to Phaseout for 2016.

All qualified disability trusts with modified AGI in excess of $250,000 are subject

to a phase-out of the personal exemption deduction.

A qualified disability trust allows the exemption if the trust’s modified AGI is less

than or equal to $259,400.

44

Income Taxation

3.8% Net Investment Income Tax

Tax on certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.

Filing Status Threshold Amount

Married filing jointly $250,000

Married filing separately $125,000

Single $200,000

Head of household (with qualifying person) $200,000

Qualifying widow(er) with dependent child $250,000

45

Income Taxation

• Will be imposed at a 3.8% rate and is designated as a

Medicare contribution tax (the Medicare surtax).

• The Medicare surtax also applies to estates and trusts once the taxable income reaches the top marginal tax rate.

• Some SNTs will end up with income subject to this new tax.


46

Income Taxation


Individuals are subject to the new tax only if they receive passive income during a year in which their modified adjusted gross income (MAGI) exceeds a certain threshold.

Modified Adjusted Gross Income for purposes of the Net Investment Income Tax: is adjusted gross income and tax-exempt interest income.

47

Income Taxation

Self-Settled SNTs

Grantor Trust Status

Self-settled SNTs are considered grantor trusts under the Internal Revenue Code (IRC sections 671-679).

The beneficiary will pay the tax even if the income is accumulated.

In self-settled SNTs, the grantor is the source of trust assets (even if the

grantor named in the actual trust is the parent, grandparent, legal guardian

or court).

48

Income Taxation

Self-Settled SNTs


As a grantor trust, the self-settled SNT is ignored for income tax purposes

and the grantor is treated as having received the income directly even

though the trust receives the income.

All income from the self-settled SNT will be taxed directly to the

beneficiary.

49

Income Taxation

Self-Settled SNTs


Grantor trusts only need to file an information fiduciary income tax return

indicating that all items are reported on the grantor's personal income tax

return.

50

Income Taxation

Third-Party SNTs

Grantor Trust – revocable SNT will be treated as a Grantor Trust. Non-Grantor Trust - pays income tax at the trust level on any taxable income retained by the trust. If the trust makes a distribution to a beneficiary, such distribution will pass the taxable ordinary income (but generally not capital gains) to the beneficiary, to be taxed on the beneficiary's personal income tax return. The trustee must complete Form 1041 and issue a Schedule K-1 to the beneficiary, showing the amount and type of income from the trust to be included on his/her individual tax return.

51

Income Taxation

Third-Party SNTs Qualified Disability Trusts – Third-Party SNTS

The qualified disability trust must satisfy certain statutory requirements under IRC section 1396p©(2)(B)(iv): The trust must be irrevocable. The trust must be for the sole benefit of the beneficiary who is disabled. The trust itself cannot be a grantor trust (i.e., it must be a taxpaying entity). The beneficiary must be under the age of 65 at the time the trust is established and must have a disability determination from the Social Security Administration.

52

Income Taxation

Third-Party SNTs Qualified Disability Trusts – Third-Party SNTS

A qualified disability trust is eligible for a deduction equal to the personal

exemption in lieu of the $100 complex trust exemption.

The personal exemption is $4,050 for the 2016 tax year.

If the third-party SNT cannot meet the requirements of a qualified

disability trust, then it will be taxed as a complex trust and receive a

significantly lower exemption.

53

Gift Tax Issues

Self-Settled SNTs A self-settled SNT that provides the beneficiary with a testamentary power of appointment over the property remaining in the SNT at the Beneficiary's death and after the pay-back is satisfied, does not result in a completed gift upon the funding of an irrevocable SNT with the Beneficiary's assets. This is true even if the beneficiary is not capable of exercising the power of appointment. The mere possession of the power is insufficient to preclude a completed gift upon funding.

54

Estate Tax Issues

Self-Settled SNTs “Present value" of remaining future guaranteed annuity payments to a self-settled SNT is fully includable in the beneficiary's gross estate. Estate tax deduction for payback amount. “Stepped-up" basis.

55

Estate Tax Issues

Third Party SNTs 2016 federal estate tax on >$5,450,000 Irrevocable life insurance trust removes the value of the policy from the taxable estate of the insured person. Irrevocable life insurance trusts can be coordinated with SNTs. Drafters of irrevocable life insurance trusts often make a common error when the trust is intended to serve special needs beneficiaries:

inclusion of so-called “Crummey” powers in the trust instrument!!

56

Recognize

“Income” for tax purposes is defined

differently

than “Income” for Social Security purposes.

Different Terms

57

Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the Tax relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The author, or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.

Circular 230

58

Elizabeth L. Gray, Esq.

11350 Random Hills Road, Suite 500

Fairfax, Virginia 22030

(703) 934-1104

[email protected]

59

structuring special needs trusts for the elderly and disabled to...

Documents