structuring special needs trusts for the elderly and...

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

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THURSDAY, APRIL 16, 2015

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

Elizabeth L. Gray, Partner, Matsen Miller Cossa & Gray, Fairfax, Va.

Howard S. Krooks, Esq., CELA, CAP, Partner, Elder Law Associates, Boca Raton, Fla.

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7284 W. Palmetto Park Road, Suite 101 Boca Raton, Florida 33433

(561) 750-3850 www.ElderLawAssociates.com

Boca Raton – Aventura

Weston – West Palm Beach

Howard S. Krooks, JD, CELA, CAP

[email protected]

Special Needs Trusts for the Elderly & Disabled to Protect

Government Benefits

April 16, 2015

Strafford Webinar

6

Outline

SNT Overview

Public Benefits Considerations

Tax Issues

Relationship Between Guardianship and SNTs

Drafting Considerations

Pitfalls

7

The Problem

What should be done with assets of a person

who is disabled?

Assets Existing Assets Prior to Onset of Disability

Personal Injury

Inheritance

Matrimonial Settlement

Retroactive Government Benefits Payment

8

Estate Planning Options

Accept the Money

Transfer Penalty Period Issues

Spend Down

No gov’t. benefits

Exception Trust

9

Exception Trusts Generally

Required to be disregarded as available income and resources for Medicaid eligibility purposes

Trust assets are not owned by persons with disabilities

No penalty period upon funding trust

Two Kinds

1st Party Special Needs Trust

Pooled Supplemental Trust

10

Terminology

Self-Settled Trust

1396p(d)(4)(A) Trust

Payback Trust

First-party Trust

Pooled SNT or (d)(4)(C) Trust

(d)(4)(B) or Miller Trust

11


A mechanism for protecting resources for

individuals with disabilities without sacrificing

their government benefits

Must be in writing

Irrevocable Trust

Inter-Vivos

12


Trust created for the sole benefit of an individual with disabilities when such an individual is under age 65

Established with the assets of the under-65 individual

13

Special Needs Trust

Trust established by the individual’s

parent, grandparent, legal guardian or court

Special Needs Trust Fairness Act (S. 1672)

Assets not available

Distributions not = income

No SSI or Medicaid penalty period

Contributions after age 65 are subject to

transfer penalty provisions

14

Special Needs Trust Gifts to trust should not be made by third parties

Sole Benefit Rule

Individual with disabilities must be sole

beneficiary of trust during his/her lifetime

Payback provision

Funeral expenses cannot be paid after death

Multiple states - pro rata

15

Why Create a d(4)(A) Trust?

Reimbursement is only for Medicaid, not all

public benefits

Reimbursement is based on actual Medicaid

expenditures, not prevailing market costs

No interest

Some services not covered by Medicaid

16

Pooled Trust

Created and managed by non-profit org.

May be established by the individual directly

Separate accounts maintained for the sole benefit of the individual

Assets pooled for investment/management

Modified payback provision

To the extent funds not retained in the trust

Payback to state required before residuary beneficiaries

17

Pooled Trust

Must be irrevocable

Beneficiary may be any age, but

Medicaid asset transfer issue in some states

NAELA working on resolution with CMS

18

Medicaid Lien Medical services related to injury only

Negotiation of Medicaid lien Lien generally must be paid prior to funding of SNT

Ahlborn case (547 US 268 (2006))

Wos v. E.M.A., 133 S. Ct. 1391, 185 . Ed. 2d 471 (2013)

Lien limited to medical expenses

12.26.13 – federal budget legislation overturns Ahlborn effective October 1, 2016

SGR Bill (HR 4302 – 4.1.14) delays by 2 years Payback required on death for all Medicaid charges

19

Medicare Lien

Medicare coverage received prior to

settlement of claim

Contact CMS to determine amount of lien

Consider Medicare Set-Aside Arrangement,

if appropriate

20

Estate Planning Options - 3rd Party SNTs

What happens with assets of a third party

and a person who is disabled?

Disinherit

Gift to child with disabilities

Distribute to sibling

Supplemental Needs Trust

21

3rd Party Supplemental Needs Trust

Improve quality of life of beneficiary with disabilities

Should not contain support or maintenance distribution standard

Medicaid has no right of recovery

Inter-vivos trust

Testamentary trust

22

3rd Party Supplemental Needs Trust

Created for the benefit of an individual of

any age with disabilities

Designed to supplement, rather than

supplant, government benefits for which

the individual is otherwise eligible

No payback requirement

23


Can direct corpus at death of beneficiary to

any individual

Not described in any federal statute

Some states have third-party SNT statutes

Can be created by revocable inter vivos trust,

irrevocable inter-vivos trust, or a will.

(d)(4)(A)/(C) - must be irrevocable inter-vivos trust

24


Attorney Obligation?

Grillo v. Petiete et al., 96-145090-92 (96th Dist. Ct.

Tarrant Cty., Texas) and Grillo v. Cause, 96-

167943-96 (96th Dist. Ct., Tarrant Cty., Texas)

Lawsuit alleged failure to preserve government

benefits through SNT – case settled

Dept. of Social Services v. Saunders, 724 A.2d

1093 (Conn. 1999)

25


Attorney Obligation? Dept. of Social Services v. Saunders, 724 A.2d 1093 (Conn. 1999)

“By contrast, with the creation of the trust, Jamie will retain his

Medicaid eligibility and Saunders (the conservatrix) can provide

for his supplemental needs from the trust assets, while Medicaid

provides for basic medical care. Therefore, not only is the latter

course of action clearly the better one for Jamie, it may be fairly

stated that by failing to follow it, the Probate Court, and Saunders

potentially could have been deemed to be in dereliction of their

duties to Jamie (italics added).”

26

Third-Party SNTs and Planning for Married Couples

Testamentary SNT created in each

spouse’s Will

Right of Election issues

Medicaid could seek to exercise on

behalf of surviving spouse

Drafting issues

27

Contingent SNT

SNT is triggered under

certain circumstances

28

Government Benefits

Not Means Tested (not so concerned)

Social Security Disability Insurance (SSDI)

Unable to do any substantial gainful activity due to disability

Medicare

Means tested (greatest concern)

Medicaid

SSI

29

Medicaid Overview

Federally based

Limited state resources

Administered through state or county

agency

Federal minimum standards, but states

allowed flexibility

DRA 2005

30

Medicaid Covered Services

Long-term care

Physician services

Hospital

Adult day care

Home health care

31

SSI Overview Federal Statute (Title XVI of the Social Security Act)

Program Operations Manual Systems (POMS)

Administered by Social Security Administration

$2,000 Resource Level SSI Restoration Act of 2014 (March 7, 2014)

Senators Elizabeth Warren (D- Mass.) and Sherrod Brown (D-Ohio)

Proposed $10,000 resource level

Food and Shelter

State Supplements

32

A Person’s Needs Transcends SSI and Medicaid

Recreation

Transportation

Dental care

Telephone and television services

Hair and nail care

Differentials in cost of housing and shelter

Supplemental nursing care

Private case management

Mobility aids (including electric wheelchairs)

33

Supplemental Needs Trusts and Guardianship

Approval of (d)(4)(A)

No parent or grandparent, so guardian or court

Petition

Copy of Trust

Some Judges do not want to be creator of trust

Alternative – Guardianship

Single Transaction Guardianship

34


Approval of (d)(4)(B)

No POA

No Spouse

Court Approval Sufficient

Guardianship not needed

Petition

Copy of Trust

Guardianship

If already in place, then seek court approval through guardianship

35


Approval of (d)(4)(C)

Medicaid planning tool

D(4)(A) not appropriate

Over 65 individual

No family member trustee

36

Reformation of Estate Planning Documents to Include

Supplemental Needs Trusts

Revocable Trusts

Irrevocable Trusts

Wills

Demonstration of Intent

Demonstration of Changed Circumstances

37

Thank You!

Howard S. Krooks, JD, CELA, CAP [email protected]

7284 W. Palmetto Park Road

Suite 101 Boca Raton, FL 33433

Additional Offices in

Aventura, Weston and West Palm Beach (561) 750-3850 • (800) ELDERLAW

www.ElderLawAssociates.com

Taxation of Special Needs Trusts

38

Matsen, Miller, Cossa & Gray, PLLC 4000 Legato Road | 11th Floor | Fairfax, VA 22033

Tel: 703.896.7696 | Fax: 703.896.7691

[email protected] | www.mmcglaw.com

Presented By:

Elizabeth L. Gray, Attorney at Law

© 2014, Matsen, Miller, Cossa & Gray, PLLC

Grantor Trusts

• A trust over which the grantor retains

sufficient interest and control such

that the trust is disregarded as a

separate taxpayer and the grantor is

treated as the owner of the trust

assets.

• It does not change the grantor’s tax

rates for state, local or federal taxes.

Trust Taxation Basics

39

Grantor Trusts

For income tax purposes all items of

income, deductions and credits are not

taxed at the trust level, but they're

reported on the personal income tax

return of the individual who is considered

the "grantor" of the trust.

Trust Taxation Basics

40

Non-Grantor Trusts

• A Non-Grantor Trust is a trust that is treated as a taxable entity.

• The assets held in the trust are treated as being owned by

the trust.

• The trust is responsible for the tax consequences of income,

deductions and credits. A separate tax return must be filed on

behalf of the trust.

Trust Taxation Basics, cont.

41

Non-Grantor Trusts

• Has its own tax return and tax accounting

• 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.


42

Tax ID Numbers

• A Grantor Trust is not required to get a new EIN, but it may.

• If the Grantor Trust does obtain an EIN it files an informational

return just to disclose that it is a Grantor Trust (but does not

report income or deductions).


43


44

Trust Tax Brackets 2015

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

income on trusts in excess of $12,300.

For a single taxpayer, the tax rate on taxable income of $12,300 is

only 15%.

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

individual taxpayer until taxable income reaches over $413,000.


45


46

Exemptions: 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 2015 is $4,000.

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

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


47

Qualified Disability Trusts (QDTs)

Congress passed legislation to establish qualified disability trusts

(QDTs), which qualify for much higher exemptions than regular

trusts, so that in many cases, an SNT will pay no taxes at all.


48


QDTs eligible to receive the same exemption as an individual filing a

personal return ($4,000 for 2015)

Income distributed to beneficiary during tax year is deducted from trust

income and enjoys the individual exemption ($4,000 for 2015)

This means up to $8,000 of annual income for 2015 can be tax-free!

Don’t forget additional deductions, such as trustee fees, may also apply


49


The qualified disability trust must satisfy certain statutory requirements

under IRC section 1396p(c)(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.

http://www.law.cornell.edu/uscode/text/42/1396p

http://www.law.cornell.edu/uscode/text/42/1396p

Income Taxation

50

Affordable Care Act

Tax on Qualified Unearned or Passive Income of Individuals,

Trusts and Estates.

Tax will be at 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.

Income Taxation

51

Affordable Care Act

Remember:

Individuals subject to tax only if receive passive income and their

modified adjusted gross income (MAGI) exceeds a certain

threshold.

For single individuals, the MAGI threshold is $200,000.

For married individuals, the MAGI threshold is $250,000.

($125,000 for married individuals filing separately).

When an individual’s MAGI exceeds applicable threshold, and

he/she received passive income during the year, Medicare surtax

will be assessed against the lesser of the taxpayer’s net

investment income or the amount by which the taxpayer’s MAGI

exceeds the applicable threshold

Income Taxation

52

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).

http://www.law.cornell.edu/uscode/text/26/subtitle-A/chapter-1/subchapter-J/part-I/subpart-E







Income Taxation

53

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.

Income Taxation

54

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.

Income Taxation

55

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, the taxable

ordinary income will be taxable to the beneficiary, and taxed on

the beneficiary's personal income tax return (but generally not the

capital gains).

• The trustee must complete Form 1041 & issue a Schedule K-1 to

the beneficiary, showing the amount and type of income from the

trust.

http://www.irs.gov/pub/irs-pdf/f1041sk1.pdf





Gift Tax

56

A gift is a transfer for property for less than full and adequate

consideration. The transfer of property constitutes a completed gift to

the extent that the donor has parted with dominion and control of the

property.

1. Funding of a First Party Trust to hold litigation proceeds resulting

from a negotiated settlement, does not constitute a gift from the

grantor because the amount received from the settlement is in

exchange for a release of claim for consideration.

2. Grantor does not intend to make a gift because the First Party

Trust is intended to be for the sole benefit of Grantor.

3. If Grantor retains a power over the disposition of the trust assets,

such as a limited power of appointment at death, there would be

no completed gift for gift tax purposes.

Gift Tax

57

Is the payment into a self-settled SNT a gift?

controversy as to whether funding the trust is a completed gift?

Is it avoided by giving the beneficiary a testamentary power of

appointment?

Is the payment into a 3rd party SNT a gift?

contributions to this type of trust are not completed gifts of a

present interest and will not qualify for the annual exclusion.

no Crummy powers.

Estate Tax

58

The value of the gross estate shall include the value of property

to the extent of any interest therein of which the decedent has at

any time made a transfer (except in the case of a bona fide sale

for an adequate and full consideration in money or money’s

worth), by trust or otherwise, under which he has retained for

his life or for a period not ascertainable without reference to his

death or for any period which does not in fact end before his

death — (1) the possession and enjoyment of, or the right to the

income from, the property.

59

Thank you

4000 Legato Road | 11th Floor | Fairfax, VA 22033

Tel: 703.896.7696 | Fax: 703.896.7691

[email protected] | www.mmcglaw.com

60

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