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CONTINUING EDUCATION OF THE BAR CALIFORNIAOakland, California

Reference MaterialsApril 2021

The SECURE Act and Special Needs Trusts

Stuart D. Zimring

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For update informa�on call 1-800-232-3444Website: ceb.com

CONTINUING EDUCATION OF THE BAR CALIFORNIAOakland, California

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The 43rd Annual UCLA/CEB Estate Planning Institute via Live Stream Webinar

SCHEDULE

Thursday, April 22nd 2021 8:30 am - 9:00 am Attendees log in - Opening remarks - Introductions 9:00 am – 10:15 am California Developments

S. Andrew Pharies, DLA Piper LLP (US), San Diego 10:15 am – 10:45 am Break 10:45 am – 12:00 pm Family Offices and Private Trust Companies – An Overview Bobbi J. Bierhals, McDermott Will & Emery, LLP, Chicago Kim Kamin, Gresham Partners, LLC, Chicago 12:00 pm – 1:00pm Lunch Break 1:00 pm – 2:00 pm Practicing Law After Covid-19: What did we Learn? Randy J. Curato, Alas, Los Angeles Bruce Stone, Goldman Felcoski & Stone, P.A., Florida Ryan J. Szczepanik, Hartog, Baer, & Hand, APC, Orinda 2:00 pm - 2:30 pm Break 2:30 pm – 3:30 pm Love Makes A Family: Distinguishing Statutory Natural Parentage and

Biological Parentage Jonna M. Thomas, Wells Fargo Private Bank, Walnut Creek Naznin B. Challa, Wells Fargo Bank, N.A., San Francisco 3:30 pm - 4:00 pm Break 4:00 pm - 5:00 pm Planning in a Low Interest Rate Environment Carlyn S. McCaffrey, McDermott Will & Emery, New York Nicole M. Pearl, McDermott Will & Emery, Los Angeles

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The 43rd Annual UCLA/CEB Estate Planning Institute via Live Stream Webinar

SCHEDULE

Friday, April 23rd 2021

8:30 am - 9:00 am Attendees log in - Opening remarks - Introductions 9:00 am – 10:30 am Federal Tax Developments Charles D. (Skip) Fox IV, McGuireWoods LLP, Charlottesville, Virginia 10:30 am – 11:00 am Break 11:00 am – 12:30 pm Property Tax 12:30 pm – 1:30 pm Lunch Break 1:30 pm – 2:30 pm Employment Issues with Caregivers, Nannies, Personal Assistants David A. Wimmer, Swerdlow Florence Sanchez Swerdlow & Wimmer, Los Angeles Emily Camastra, Swerdlow Florence Sanchez Swerdlow & Wimmer, Los Angeles 2:30 pm - 3:00 pm Break 3:00 pm – 4:00 pm The SECURE Act and Special Needs Trusts Stuart D. Zimring, The Law Offices of Stuart D. Zimring, Encino

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The 43rd Annual UCLA/CEB Estate Planning Institute April 2021

Live Stream Webinar

About the Speakers

S. ANDREW PHARIES, DLA Piper LLP, San Diego, is a partner with DLA Piper LLP (US), San Diego, practicing in domestic and international estate planning, postdeath trust and estate administration, charitable planning, exempt organizations, family business planning, and related tax controversies. He received his B.S. from the University of California, Riverside, and his J.D. from the University of Oregon School of Law, where he served as Editor-in-Chief of the Oregon Law Review.

He is a Fellow of the American College of Trusts and Estates Counsel and is certified as a Specialist in Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization. Mr. Pharies is a frequent speaker and author on topics relating to trusts and estates law.

BOBBI J. BIERHALS, McDermott Will & Emery, LLP, Chicago, has built her practice by developing creative and customized solutions for her clients. Her experience centers on tax and business planning for high-net-worth individuals and families. Her clients range from executives and first-generation entrepreneurs to multi-generational families, with net worth from $15 million to many

billions of dollars, and include a number of individuals listed in the Forbes 400.

Leading publications such as The Wall Street Journal, Forbes, Business Week, MSN Money, Private Wealth magazine and Financial Advisor magazine have quoted Bobbi frequently on various family office and estate planning topics. A member of the American College of Trust and Estate Counsel (ACTEC), Bobbi has also taught legal research and writing at Harvard Law School. She received her J.D., from Harvard Law School.

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KIM KAMIN, Gresham Partners, LLC, Chicago. Kim joined Gresham after spending many years as a practicing attorney who counseled families regarding the preservation and transfer of their wealth over multiple generations. In her role at Gresham, Kim leads the development and implementation of estate, wealth transfer, philanthropic, education and fiduciary planning activities, advising clients and speaking and writing on topics related to managing multi-generational wealth.

During her legal career, Kim advised clients on a wide array of entity restructuring, succession planning, trust and estate administration, asset protection and philanthropic issues. She also represented wealth owners, beneficiaries, fiduciaries and custodians in contested matters and served as counsel for the formation and operation of not-for-profit entities. Kim is a frequent speaker at national conferences and a contributor to publications that focus on preserving, growing, managing and transferring wealth. Kim received her J.D., from the University of Chicago Law School

RANDY J. CURATO, Alas, Los Angeles. Randy counsels and educates lawyers on ethics, professional responsibility, and avoiding malpractice in his role as Vice President—Senior Loss Prevention Counsel for Alas. He also speaks regularly at outside conferences and programs on ethics and professional responsibility.

Prior to joining ALAS, Randy was a partner at Bell, Boyd & Lloyd LLP in Chicago for 18 years. While at Bell Boyd, he handled litigation, arbitration,

and trials of commercial, real estate, environmental, probate, product liability, professional malpractice, and contract cases. Randy started his practice with Wildman, Harrold, Allen & Dixon LLP in Chicago, where he handled litigation matters. Randy is a member of the American and Chicago Bar Associations, and serves on the advisory board of the Working Group on Legal Opinions. Randy received his JD, from the University of Notre Dame Law School.

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BRUCE STONE, Goldman Felcoski & Stone P.A., Florida, is a shareholder of the firm. His practice consists primarily of estate planning for both domestic and foreign clients. A significant portion of his practice involves disputed or complex problem situations in which he is retained to find creative planning solutions or to serve as expert witness, mediator or arbitrator. Bruce is admitted to practice in Florida.

Bruce is a Fellow and Past President of the American College of Trust and Estate Counsel. He is a past chair of the Real Property, Probate and Trust Law Section of The Florida Bar. Bruce is chair of the Joint Editorial Board for Uniform Trust and Estate Acts, which monitors and recommends updates to the Uniform Probate Code, the Uniform Trust Code, and all other trust and estate related uniform laws on a nationwide basis. He is a member of the Advisory Committee of the Heckerling Institute on Estate Planning. He is an Academician in the International Academy of Estate and Trust Law. In addition to his practice, Bruce is an adjunct professor at the University of Miami School of Law, where he teaches in the graduate masters program in estate planning. He is a frequent lecturer for various organizations.

RYAN J. SZCZEPANIK, HARTOG, BAER & HAND, Orinda. Mr. Szczepanik is a Certified Specialist in Estate Planning, Trust and Probate Law, his practice is devoted exclusively to trust and estate litigation. He has tried numerous matters in both California and federal courts. He became a Principal of Hartog, Baer & Hand in 2016. Mr. Szczepanik has presented on trust and estate topics at organizations throughout California and has authored numerous published articles on

trust and estate topics. Mr. Szczepanik is a Member of the Executive Committee of the Trusts and Estates Section of the California Lawyers Association (TEXCOM). He is the Vice President of the East Bay Trusts & Estates Lawyers (EBTEL). He is a delegate to the Conference of California Bar Associations (CCBA). He serves as a Court Appointed Special Master and Referee for the Alameda County Probate Court. Mr. Szczepanik received his J.D., from Emory Law School.

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JONNA THOMAS is a vice president and senior fiduciary advisory specialist located in the Walnut Creek Wells Fargo Private Bank office. She is a State Bar Certified Specialist in Estate Planning, Trust and Probate Law. Ms. Thomas works with clients to integrate fiduciary and investment knowledge into each client’s custom wealth plan. She coordinates with investment strategists to align investments with the

client’s goals and values. Based on the particular situation, Ms. Thomas can coordinate a variety of Specialized Wealth Services in order to help grow and protect assets, while working toward the client’s overall wealth management goals. Prior to joining Wells Fargo, Ms. Thomas served for eight years as a senior associate attorney with Hartog, Baer and Hand APC, assisting clients to resolve conservatorship, trust and estate related disputes.

She earned her Juris Doctorate with distinction from Pacific McGeorge School of Law and was admitted to the State Bar of California in 2005, although currently not practicing. She received her Master of Laws (LL.M.) in taxation with honors from Golden Gate University in 2014.

NAZNIN BOMI CHALLA, Wells Fargo Bank, N.A., is senior counsel with Wells Fargo Bank, N.A., practicing in the Trust and Investment section. Prior to working at Wells Fargo, she was with the law firm of Evans, Latham and Campisi, practicing in probate/trust administration and trust litigation. Naznin received her J.D. and her L.L.M. in Taxation from Golden Gate University.

Naznin has co-authored various articles relating to trusts and estates law, including, “Heirs in the Freezer: Bronze Age Biology Confronts Biotechnology,” 36 ACTEC J. 179 (Summer 2010), California Trusts and Estate Quarterly, Vol. 23, Issue 2, 2017, “Reports of Their Death are Greatly Exaggerated: The Viability of No Contest Clauses Against Direct Contests Brought Without Probably Cause, and was co-editor of various updates to CEB’s “California Trust and Probate Litigation” practice guide.

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CARLYN S. MCCAFFREY, McDermott Will & Emery, New York, focuses her practice on tax and estate planning for high net worth individuals. A partner in the firm, she is co-leader of the private client practice in the firm's New York office. Ms. McCaffrey is a fellow and a past president of the American College of Trust and Estate Counsel (ACTEC); a fellow of the American College of Tax Counsel; and a member of the International Academy of Trust and Estate Counsel, the

New York State Bar Association's Tax Section, and the Joint Editorial Board for Uniform Trust and Estate Act of the National Conference of Commissioners on Uniform Laws. In addition, she is a past member of the council of the Real Property, Trust, and Estate Law Section of the American Bar Association and the former chairperson of the section's Generation-Skipping Transfer Tax Committee. An adjunct professor of law at New York University School of Law and the Miami Law School, she serves on the advisory committee of the University of Miami's Philip E. Heckerling Institute on Estate Planning and the board of directors of the ACTEC Foundation. Since 2006, Ms. McCaffrey has been listed in "Chambers USA" as a "Star" lawyer for business and wealth management and in each of the past 17 years in "The Best Lawyers in America" for trusts and estates. She lectures frequently and writes extensively on subjects relating to tax law, trusts and estates, foreign trusts, and matrimonial law. Ms. McCaffrey is the coauthor of "Structuring the Tax Consequences of Marriage and Divorce."

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NICOLE M. PEARL, McDermott Will & Emery, Los Angeles, advises clients on estate planning, wealth transfer planning, marital property agreements, business succession planning and post-death administration. Her clients include

family offices, entrepreneurs and business owners, real property investors, private equity fund managers, and entertainment industry figures.

Nicole helps high-net-worth individuals pass wealth to the next generation, while minimizing their tax burden. To that end, she creates estate plans and charitable giving programs designed to meet her clients’ family succession and wealth management objectives. She also advises families in the creation and ongoing administration of their family offices, and works with business owners to maintain control of their companies through buy-sell agreements or to relinquish control via responsibly conducted transition of ownership to family members or employees.

Nicole primarily works with clients throughout Southern California, but also maintains a statewide practice that includes a strong Northern California client base.

CHARLES D. (“SKIP”) FOX IV, McGuire Woods, Charlottesville, VA, is a partner in the Charlottesville, Virginia office of the law firm of McGuire Woods LLP and head of its Private Wealth Services Industry Group. Prior to joining McGuire Woods in 2005, Skip practiced for 25 years with Schiff Hardin LLP in Chicago. Skip concentrates his practice in estate planning, estate administration, trust law, charitable organizations, and family business succession. He is a frequent lecturer across the country at seminars on trust and estate topics. Skip received his A.B. from Princeton, his M.A. from Yale, and his J.D. from the

University of Virginia.

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EMILY CAMASTRA, Swerdlow Florence Sanchez Swerdlow & Wimmer, Los Angeles, represents employers on a wide range of labor and employment law issues. She defends employers in single-plaintiff, multi-plaintiff, and class-action lawsuits in federal courts, state courts, and private arbitrations regarding claims of wrongful termination, harassment, discrimination, retaliation, and wage-and-hour matters. She also represents employers in administrative proceedings before the California Division of Labor Standards Enforcement, the California Department of Fair Employment and Housing, and the United States Equal Employment Opportunity Commission. Additionally, Ms. Camastra advises employers on a wide range of labor and employment matters, including, but not

limited to, leaves of absence, reasonable accommodations, and terminations. She conducts workplace investigations as well as trainings in preventing harassment and discrimination in the workplace. Ms. Camastra drafts handbooks and other human resource policies to comply with federal, state, and local laws. Ms. Camastra is a partner with Swerdlow, Florence, Sanchez, Swerdlow & Wimmer and is fluent in Spanish.

DAVID WIMMER, Swerdlow Florence Sanchez Swerdlow & Wimmer, Los Angeles, has extensive experience advising management on a wide range of labor and employment issues, including establishing effective human resource policies, maintaining a union-free workplace, and complying with federal, state, and local laws. Mr. Wimmer represents companies throughout

the United States in labor-relations matters, such as union-avoidance strategies, election campaigns, collective bargaining, supervisory training, arbitrations, state and federal court litigation, and proceedings before the National Labor Relations Board.

Mr. Wimmer defends employers in single-plaintiff through class-action wrongful termination, harassment, discrimination, and wage-and-hour matters, and in criminal investigations and prosecutions. He represents companies involved in state and federal court litigation, arbitration, and mediation matters, as well as administrative proceedings before the California Division of Labor Standards Enforcement, California Department of Fair Employment and Housing, California Division of Occupational Safety and Health, California Occupational Safety and Health Appeals Board, Federal Occupational Safety and Health Administration, Federal Mine Safety and Health Administration, and United States Equal Employment Opportunity Commission.

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STUART D. ZIMRING, The Law Offices of Stuart D. Zimring, Encino, was admitted to the Bar in 1972, and is admitted to practice in California and U.S. District Court, Central and Northern Districts of California and the U.S. Supreme Court. He received his B.A. degree in 1968 from UCLA and his J.D. degree in 1971 from the UCLA School of Law and is “AV” rated in Martindale-Hubbell. He is a member of the Los Angeles Superior Court Probate Volunteer Panel. Mr. Zimring is a Fellow

of and Past President of the National Academy of Elder Law Attorneys (NAELA), and a Charter Member of NAELA’s Council of Advanced Practitioners (CAP). He is a Fellow of the American College of Trusts and Estate Counsel (ACTEC), is certified as a Specialist in Estate Planning, Probate and Trust Law by the Board of Legal Specialization of the State Bar of California and is one of the 7 California members of the Special Needs Alliance. He is a frequent speaker and writer on Elder Law, Special Needs Trusts and related issues throughout the country. He is co-author of “Tax, Estate and Financial Planning for the Elderly – California Guide” and “Fundamentals of Special Needs Trusts,” both published by Matthew Bender/Lexis-Nexis, as well as a member of Matthew Bender’s Elder Law Editorial Committee.

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The 43rd Annual UCLA/CEB Estate Planning Institute via Live Stream Webinar

April 2021

Chaired by Monica Dell’Osso, Wendel Rosen Black & Dean LLP, Oakland Paul Gordon Hoffman, Hoffman, Sabban & Watenmaker, APC, Los Angeles The Advisory Board John A. Hartog, Hartog, Baer & Hand, Orinda Nancy E. Howard, Sheppard Mullin Richter & Hampton LLP, Los Angeles Nicole M. Pearl, McDermott Will & Emery, Los Angeles S. Andrew Pharies, DLA Piper LLP, San Diego Linda J. Retz, Law Offices of Linda J. Retz, Torrance Kim T. Schoknecht, Pillsbury Winthrop Shaw Pittman LLP, Palo Alto Warren A. Sinsheimer, McCormick Barstow LLP, San Luis Obispo Michael V. Vollmer, Murtaugh Treglia Stern & Deily LLP, Irvine Connie Madera Voos, Continuing Education of the Bar, Oakland Thomas B. Worth, Friedman McCubbin Law Group LLP, San Francisco

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Thank you to our 2021 EPI sponsors

Legal Practice Management and Client Intake Software.clio.com

Contact: Emma Raimi | emma.raimi@clio.com

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Contact: Amy Olsen | aolsen@pfac-pro.org

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The SECURE Act & Special Needs Trusts

orIRS Joins the Alphabet Soup of SNTs, SSA, DHCS &

HUD Scrabble Anyone?

STUART D. ZIMRING

April 2021

The SECURE Act & Special Needs Trusts

Or

IRS Joins the Alphabet Soup of SNTs, SSA, DHCS & HUD

Scrabble Anyone?

15

SECURE Act Definitions

“Eligible Designated Beneficiaries”(EDB)

Persons who are allowed to take RMDs frominherited retirement benefits using life expectancymethod under IRC §401(a)(9)(B) and TreasuryRegulations §1.401(a)(9)-5, A-5. Includes “disabled”and “chronically Ill” beneficiaries as defined in IRC§§401(a)(9)(E)(ii), 72(m)(7) and 7702B(c)(2) andcorresponding Regulations

Definitions

Eligibility is determined as of date ofdeath of the participant. Someone whobecomes disabled or chronically ill latercannot switch over from the 10 year ruleto life expectancy payout.

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Definitions – “Disabled” SECURE Act: An individual is a disabled

beneficiary if she is “unable to engage in anysubstantial gainful activity by reason of anymedically determinable physical or mentalimpairment which can be expected to result indeath or to be of long-continued andindefinite duration.” IRC §72(m)(7), Regs.4.72-17A(f).

Definitions – “Disabled” SSA: An individual shall be considered to be

disabled for purposes of this subchapter if heis unable to engage in any substantial gainfulactivity by reason of any medicallydeterminable physical or mental impairmentwhich can be expected to result in death orwhich has lasted or can be expected to lastfor a continuous period of not less thantwelve months. 42 U.S.C. §1382c(a)(3)(A)and (B).

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Definitions – “Disabled” Note the difference - IRC §72(m)(7) requires

an “indefinite” period of disability. Thisbenefit, unlike SSDI or SSI is expected to lasta lifetime.

Further, IRC §72(m)(7) requires that proof theof the disability must be provided. How andto whom and when is not addressed yet.

Definitions – “Chronically Ill”

The definition of “chronically ill” generallytracks the criteria used to qualify for benefitsunder a long-term care contract as defined inIRC §7702B(c)(2)(A), i.e.

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Definitions – Chronically Ill” Unable to perform (without substantial

assistance from another individual) at least 2of 5 ADLs of those listed in IRC§7702B(c)(2)(B) indefinitely;

Have a disability similar to definition of“disability” above; or

Require substantial supervision to protect thebeneficiary from threats to health and safetydue to severe cognitive impairment.

Definitions – “Chronically Ill”

The determination of “chronically ill”must be certified as such by a licensedhealth care practitioner (as defined).

Again, it is not clear to whom or whenthe certification must be given. IRS?Plan Administrator?

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Practice Point

Don’t “knee jerk” to “disabled.”

.“Chronically Ill” may be more helpfulbecause it isn’t based on an inability towork but rather on actual conditions andneeds of someone who requires careand supervision.

“AMBTs” – Our new BestFriend

Applicable Multi-Beneficiary Trust

More than one beneficiary

All are treated as DBs

At least one is an EDB

Must qualify as a “see-through” trust

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AMBT Advantages

The AMBT rule supersedes the normalrule regarding determination of theapplicable distribution period when asingle trust divides into separatesubtrust. Under the new rule, separatesubtrusts are treated as separateaccounts regardless of the designationon the beneficiary designation form

AMBT Advantages

The share for the EDB goes to a SNT ofwhich the EDB is the sole lifetimebeneficiary, not the sole beneficiary,thus the SNT get life expectancy payouttreatment even though the EDB is notthe sole beneficiary.

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SNTs & Public Benefits – A Refresher

Public Benefit Programs

Medicaid (Medi-Cal)

SSI

CalFresh

VA

HUD

Dependent Adult Child SS

“Means Tested” Programs

SSI

Medicaid (Medi-Cal)

CalFresh

VA

HUD

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SNTs

First Party aka (d)(4)(A)

Standalone

Pooled SNTs aka (d)(4)(C)

Third Party

First Party SNTs

“Sole Benefit”

Under 65

Reimbursement to Medicaid at death ortermination

Different Rules for First Party PooledTrust subaccounts

Payback not necessarily required ifcorpus goes to charity

Age 65 may not apply

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Third Party SNTs & SECURE

Trust not subject to statutoryrequirements, but

Distributions should not violateapplicable regulations

Unless….

Is the Stretch-Out Worth It?

Do the tax benefits of the stretch-outoutweigh Quality-of-Life benefits ofhaving access to funds?

What is the “true” life expectancy?

What is the projected timeline for a“Quality Life”? (whatever that means)

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Miscellany What about disabled Plan participant with

EDB beneficiary?

Durable Power of Attorney with authority tochange beneficiaries?

Conservatorship with PC 2580 Petition tochange beneficiary designation and create(or flow to existing) SNT for the benefit ofthe EDB.

)What about PC 3604 et seq.?

Spouses with Disabilities

Create Testamentary Trust for spouse

Name Trustee of Testamentary Trust asbeneficiary of IRA, not the Estate.

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Q&A

STUART D. ZIMRING, The Law Offices of Stuart D. Zimring,Encino, was admitted to the Bar in 1972, and is admitted to practice inCalifornia and U.S. District Court, Central and Northern Districts ofCalifornia and the U.S. Supreme Court. He received his B.A. degree in1968 from UCLA and his J.D. degree in 1971 from the UCLA School ofLaw and is “AV” rated in Martindale-Hubbell. He is a member of the LosAngeles Superior Court Probate Volunteer Panel. Mr. Zimring is aFellow of and Past President of the National Academy of Elder LawAttorneys (NAELA), and a Charter Member of NAELA’s Council ofAdvanced Practitioners (CAP). He is a Fellow of the AmericanCollege of Trusts and Estate Counsel (ACTEC), is certified as aSpecialist in Estate Planning, Probate and Trust Law by the Board ofLegal Specialization of the State Bar of California and is one of the 7California members of the Special Needs Alliance.

He is a frequent speaker and writer on Elder Law, Special NeedsTrusts and related issues throughout the country. He is co-author of“Tax, Estate and Financial Planning for the Elderly – California Guide”and “Fundamentals of Special Needs Trusts,” both published byMatthew Bender/Lexis-Nexis, as well as a member of MatthewBender’s Elder Law Editorial Committee.

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2021 UCLA/CEB ESTATE PLANNING INSTITUTE

The SECURE Act & Special Needs Trusts or

IRS Joins the Alphabet Soup of SNTs, SSA, DHCS & HUD – Scrabble Anyone?

Stuart D. Zimring, Esq. Law Offices of Stuart D. Zimring 16133 Ventura Blvd. Suite 1075

Encino, CA 91436 818-755-4848

e-mail: zimzim@elderlawla.com

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The SECURE Act & Special Needs Trusts or

IRS Joins the Alphabet Soup of SNTs, SSA, DHCS & HUD – Scrabble Anyone? Introduction The Setting Every Community Up for Retirement Enhancement Act of 2019, aka the SECURE Act (hereafter “the Act”) was signed into law December 20, 2019, effective January 1, 2020. To say that the adoption of the Act constituted a tectonic shift in the way estate planners had designed the estate plans of persons who had tax-favored retirement plans is an understatement. More than 30 years of almost “knee jerk” planning to incorporate “stretch” IRAs or other retirement plans into multi-generational tax-deferred cash-flow streams for younger generations went out the window. Now, for the most part, the designated beneficiary of an IRA (other than an “Eligible Designated Beneficiary) will have to withdraw the entire account within 10 years rather than being eligible to use the traditional life expectancy table payout. Numerous articles have already been written regarding the challenges faced by estate planners and their clients in dealing with this new reality. This paper will focus on a new category of Designated Beneficiary, the “Eligible Designated Beneficiary” and in particular, a subset of that category, persons who are disabled or who are chronically ill. To put the subject in its proper context, the paper will also review the basics of Special Needs Trusts (aka Supplemental Needs Trusts, hereafter “SNTs”) and the various rules, regulations and procedures, both Federal and State, that apply to them. I. SECURE ACT- Definitions

A. Beneficiaries

1.The Act creates 3 categories of beneficiaries: Designated Beneficiaries, Eligible Designated Beneficiaries and Beneficiaries who are not designated beneficiaries.

2.Designated Beneficiaries (DB) are individuals who must withdraw the benefits of the IRA within 10 years after the death of the participant unless that individual is an Eligible Designated Beneficiary.1

3.Eligible Designated Beneficiaries are individuals who by virtue of their status are entitled to continue to use the life expectancy payout under the same rules as before. However, at such time as the EDB ceases to be

1IRC §401(a)(9)(E)(i).

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“eligible” the life expectancy payout rule ceases to apply and the new, 10 year payout rule applies.2

4.Beneficiaries who are not DBs are charities, a trust that does not qualify as a “see through trust” or the participant’s estate.3

B. “Eligible Designated Beneficiaries” (EDBs)

There are 5 types of individuals who can qualify as EDBs and are therefore entitled to use the life expectancy payout rules:

1.A person with a disability (as defined). When an EDB who qualifies by virtue of her or his disability dies, the 10 year payout rule applies to the balance of the IRA account.4

2.A chronically ill individual (as defined). Again, when an EDB who qualifies by virtue of her or his chronic illness dies, the 10 year payout rule applies.5

3.The participant’s surviving spouse. The surviving spouse uses the life expectancy payout with the same special rules as existed before the Act, (i.e. their life expectancy is recalculated annually and annual distributions must begin the later of the year after the year of the participant’s death (or the year the participant would have reached age 70 ½ ).6

4.The participant’s minor child. However, upon reaching majority, the 10 year rule applies.7

5.A beneficiary who is not more than 10 years younger than the participant. Again, on her or his death, the 10 year payout rule applies.8

2IRC §401(a)(9)(E)(ii). 324 Reg. §1.401(a)(9)-4, -3.

4IRC §401(a)(9)(h)(iii). 5Ibid.

6IRC §401(a)(9)(E)(ii)(I). 7IRC §401(a)(9)(H)(iii). 8Ibid.

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6.Eligibility is determined as of the date of death of the participant. An individual who becomes disabled or chronically ill later cannot switch over from the 10 year rule to the life payout method.9

The balance of this paper will focus exclusively on EDBs who qualify either because they have a disability or are chronically ill.

C. The EDB With A Disability

1.Under the Act “An individual shall be considered to be disabled if he is 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 to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require”.,10

2.However, under the Social Security Act an individual “...shall be considered to be disabled for purposes of this subchapter if he is 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.”11

3.Note the difference between the 2 definitions. IRC §72(m)(7) requires an “indefinite” period of disability. The Social Security definition requires a period of disability that has lasted at least 12 months or is expected to last not less than 12 months or is expected to result in death. Thus, under the IRC, the life expectancy payout can be utilized because the benefit, by definition, is to last a lifetime whereas under the Social Security Act definition there is the possibility that the individual may recover from her disability, albeit not under a year.

4.An additional difference is the requirement that proof of the disability must be provided. Presumably the methodology for reporting will be similar to that required for documenting a chronic illness, described below.

9IRC §401(a)(9)(E)(ii)(V). 10 IRC §72(m)(7), Regs. 4.72-17A(f). 1142 U.S.C. §1382c(a)(3)(A) and (B).

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D. The Chronically Ill EDB

1.An EDB who is chronically ill is defined under IRC §7702(B)(c)(2) “...except that the requirements of subparagraph (A)(I) thereof shall only be treated as met if there is a certification that, as of such date, the period of inability described in such subparagraph with respect to the individual is an indefinite one which is reasonably expected to be lengthy in nature)...”12

2.IRC §7702(B)(c)(2) defines a “chronically ill individual” as:

“...any individual who has been certified by a licensed health care practitioner as-

(i) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity,

(ii) having a level of disability similar (as determined under regulations prescribed by the Secretary in consultation with the Secretary of Health and Human Services) to the level of disability described in clause (I), or

(iii) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment.

Such term shall not include any individual otherwise meeting the requirements of the preceding sentence unless within the preceding 12-month period a licensed health care practitioner has certified that such individual meets such requirements.”

3.The determination of “chronically ill” must be certified as such by a licensed health care practitioner (as defined).

4.As noted above, it is not clear to whom or when the certification of disability or chronic illness is to be provided. Some have suggested that the certification will have to be furnished to the IRA Custodian or Plan Administrator by October 31st of the year following the participant’s death

12IRC §7702B(c)(2). “Activities of Daily Living” are defined in this section as eating, toileting, transferring, bathing, dressing and continence.

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since this is the same date by which a trustee of a see-through trust must submit a copy of the trust.13

5.Again, the beneficiary’s status is determined as of the date of death of the participant and a beneficiary who becomes chronically ill at a later date cannot switch over from the 10 year payout to the life expectancy payout. And again, on the death of the chronically ill EDB, the life expectancy payout terminates and the 10 year rule is applicable to subsequent beneficiaries.

E. Disability v. Chronically Ill

1.As Ms. Welber notes in her article cited above, many special needs trust planners may “knee jerk” to the definition of “disabled” under the Act because of its similarity to the definition of “disabled” under the Social Security Act, the Medicaid statutes and other provisions of federal law that use the term to determine eligibility for various public benefits. However, the definition of “chronically ill” may prove more useful since there the “ability to work” component of the definition of disabled under the Act is not part of the definition of chronically ill. Chronically instead relies on actual needs and conditions of the EDB who requires supervision and care.

F. “AMBTs” - Our New Best Friend

1.An “Applicable Multi-Beneficiary Trust” is defined under the Act as a trust:

“(i)which has more than one beneficiary,

(II)all of the beneficiaries of which are treated as designated beneficiaries for purposes of determining the distribution period pursuant to this paragraph, and

(III)at least one of the beneficiaries of which is an eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii).”14

1326 CFR §1.401(a)(9)-4, A-6. See Nancy H. Welber “Security for Disabled and Chronically Ill Beneficiaries,” Trusts & Estates, March 25, 2020 (www.wealthmanagement.com

14IRC §401(a)(9)(H)(v)

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2.The first thing to note here is that an AMBT must qualify as a see-through trust under pre-Act minimum distribution trust rules. This is because the Act requires that all of the beneficiaries of the AMBT must be treated as designated beneficiaries.

3.As a result, an AMBT has two advantages under the Act:

a.If the trust instrument requires that it be divided into separate trusts for each beneficiary immediately upon the death of the participant, the payout rules applicable to the EDB with a disability or chronic illness are applied separately to the EDB.15

b.As a result, this special rule supercedes the Service’s normal rule which provides that when retirement benefits name a single trust as beneficiary, which trust then divides into separate subtrusts for separate beneficiaries, the division does not create separate accounts in connection with the determination of the applicable distribution period. This is true unless the subtrusts are named specifically in the beneficiary designation form for the plan. Under the new rule contained in the Act, separate subtrusts are treated separate accounts regardless of whether or not they are specifically identified in the beneficiary designation form.

c.As a result, the second advantage is that if the share for the EDB who is disabled or chronically ill is distributed to a subtrust in which the EDB is the sole lifetime beneficiary, that EDB (and hence her subtrust) qualifies for the life expectancy extension. Almost by definition this subtrust would need to be a Special Needs Trust.

d.As Natalie Choate points out in her “must read” Planning for Retirement Benefits, Recent Developments (11/20/20 edition):

“How is this treatment different than for other EDBs? For one thing, this special rule is saying the disabled or chronically ill EDB does not have to be the sole beneficiary of the trust - just the sole life beneficiary. This an accumulation trust for a disabled beneficiary, for example, could get the life expectancy payout treatment, even though (under the

15IRC §401(a)(9)(H)(iv)(I), (v).

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regulations) the disabled beneficiary is not considered the sole beneficiary.”16

4.The planning opportunity we now have is that we can name an AMBT as the beneficiary of the plan, have the AMBT the divide into subtrusts on the death of the participant with the share allocable to the EDB who is disabled or is chronically ill flow into a special needs trust and the other shares go outright to the DBs subject to the 10 year rule under the Act.

II. Special Needs Trusts & Public Benefits - A Refresher

A. Public Benefits Programs

1.In the context of this paper, “Public Benefits Programs” generally include Medicaid (Medi-Cal in California),17 Medicare,18 Social Security Disability (SSDI),19 Supplemental Security Income (SSI),20 Veteran’s Benefits,21 and various subsidized housing programs under the Department of Housing and Urban Development (HUD). There are, of course, numerous local city and county public benefit programs.

2.Some of these programs such as SSI, Medicaid, certain VA benefits and certain HUD programs are designed to assist persons with limited means and those with disabilities (including chronic illnesses). In these cases, the individual must show that her income and/or resources fall below certain defined minimums. These programs are therefore referred to as “means-tested programs.” In contrast, programs such as Medicare and SSDI are based on contributions made by the individual during her working life. Anyone with an adequate work history who has paid into the Medicare program during her working life will be entitled to Medicare at age 65 regardless of her wealth at that time.

16Natalie Choate, Planning for Retirement Benefits, Recent Developments, ver 2020-3, p44. www.ataxplan.com.

1742 U.S.C. §1396 et seq.; 42 C.F.R. Parts 430-456

1842 U.S.C. §1295 et seq.; 42 C.F.R. Parts 405-489

1942 U.S.C. §402 et seq.; 20 C.F.R. Part 404

20 42 U.S.C. §1381 et seq.; 20 C.F.R. §416 et seq.

21 38 U.S.C. §101 et seq.; Title 38 C.F.R.

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B. The Double-Edge Sword aka “The windfall”

1.Generally speaking, the rules governing economic eligibility for means-tested programs are rather draconian and in most cases are determine on a month-by-month basis. For example, if a person is receiving SSI, they cannot have more than $2,000 in liquid assets at any given time. If they have more than that they risk losing their SSI benefits until the amount they have falls below the $2,000 maximum. Since in most cases a person receiving SSI automatically qualifies for Medicaid, losing SSI will usually cause a loss of Medicaid eligibility.

2.Thus an inheritance or birthday present from Uncle Charlie of even a modest amount, or being named the beneficiary on an IRA, while well-meaning, can have catastrophic consequences to the individual whose safety net has just been ripped to shreds. In addition, cash (or any asset that can be converted to cash) received directly by an individual receiving SSI will result in a dollar-for-dollar reduction in her monthly benefit.22 Enter the Special Needs Trust.

C. The History and Background of SNTs

Historically, a “special” or “supplemental needs” trust (the terms are used interchangeably in this paper) was a trust created by or for an individual with a disability. The concept was to create a fund that could be used to provide the beneficiary with a disability with items and services not otherwise provided by public benefit programs and to provide prudent management of the fund.Prior to the adoption of OBRA ‘9323 SNTs were used by attorneys without “formal” sanction, frequently as a method for third parties to leave bequests for the benefit of a person with a disability as a way to improve that individuals quality of life. Contrary to the philosophy and purpose of many trusts which are designed to benefit future generations, SNTs by definition are designed primarily for the beneficiary with a disability and the knowledge that there might not be anything remaining on the death of the primary beneficiary for remainder beneficiaries.

1. OBRA ‘93 amended the Medicaid statute to include 2 types of SNTs which, when properly drafted and funded with the assets of the individual with a disability effectively render those assets “invisible” to the

22For a more detailed discussion of the SSI eligibility rules, see Stuart D. Zimring, Rebecca C. Morgan, Bradley J. Frigon & Craig C. Reeves, Fundamentals of Special Needs Trusts, 9.04 (LexisNexis 2021) (hereafter referred to as “Fundamentals”), Continuing Education of the Bar California, Special needs Trusts: Planning, Drafting and Administration, vol 1, chapter 3 (hereafter referred to as “CEB-SNTs”, and Deborah J. Tedford, Special Needs Planning, ACTEC virtual Summer Meeting, June, 2020, www.actec.org (Hereafter referred to as “Tedford.”.

23Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66 (August 10, 1993).

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public benefit programs thus enabling the beneficiary to continue to receive public benefits. Since these types of SNTs are funded with the beneficiary’s own assets, they are referred to as “First Party SNTs.”24

2. It is important to note that a SNT funded with funds belonging to someone other than the beneficiary are not covered by OBRA ‘93 or any other statute. These are referred to as “third Party Trusts” and are the primary planning vehicle used as a receptacle for IRA benefits and other retirement assets. However, distributions from such SNTs are subject to the same rules as First Party SNTs regarding distributions that could have an adverse effect on the beneficiary. It is not the source of the distribution that necessarily matters. It is the fact that it is received by the beneficiary directly in a manner or for a purpose that negatively impacts her eligibility for public benefits. As a result, while many (if not most) trusts SNTs or otherwise contain clauses authorizing the Trustee to make distributions “to or for the benefit of...”, in the SNT context, whether First Party or Third Party, distributions most likely will be made “for the benefit of” rather than “to.”25

D. First Party Trusts

1. Under OBRA ‘93 there are 2 types of self-settled or First Party SNTs, those established under 42 U.S.C. §1396p(d)(4)(A) and those established under 42 U.S.C. §1396p(d)(4)(C). These two types of First Party SNTs are commonly referred to as “(d)(4)(A)” and “(d)(4)(C)” trusts.

2. The criteria for a (d)(4)(A) trust are:

a) The individual’s own funds are used to fund the trust;

b) The individual has a disability as defined under the Social Security Act;

c) The individual is under the age of 65 at the time the trust is funded;

d) The trust is established by the individual, the individual’s parent, grandparent, legal guardian or pursuant to a Court Order;

e) The Trust contains a provision that mandates that on the death of the beneficiary or earlier termination of the trust, the state Medicaid agency is paid back all sums paid by the agency on

24Fundamentals §1.04, CEB-SNTs §§1.1 et seq.

25Fundamentals chapter 4, CEB-SNTs Chapter 8.

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behalf of the beneficiary up to the full amount of the trust corpus before any other distributions may be made; and

f) The trust provides that it is for the “sole benefit” of the individual.26

3. A (d)(4)(C) trust is a trust containing the assets of an individual with a disability that meets the following conditions:

a) It is established and managed by a not-for-profit entity;

b) Separate accounts are maintained on paper (or spreadsheet) for each beneficiary of the trust but for investment and management purposes the trust “pools” the assets of all subaccounts together hence the name “Pooled Special Needs Trust;

c) The accounts are established by the individual, her parents, grandparents, legal guardian or Court Order; and

d) On the death of the beneficiary, any funds remaining in the beneficiary’s account that are not retained by the trust for the benefit of the non-profit’s general purposes, are paid to the state Medicaid Agency in the same manner as a (d)(4)(A) trust.

4. Note that(d)(4)(C) trusts do not appear to contain an age restriction as (d)(4)(A) trusts do. This is a contentious point around the country and is being litigated in various jurisdictions with states claiming that the “not over age 65" restriction applies to (d)(4)(C) trusts as well as (d)(4)(A) trusts. Currently California is taking the position that a Medi-Cal recipient who is not receiving Medi-Cal Long Term Care benefits can create a Pooled Trust subaccount. However, the Social Security Administration takes the position that for purposes of receiving SSI, a person over age 65 cannot create a Pooled Trust subaccount.

5. Finally, states may impose additional rules regarding SNTs. For example, California Probate Code §§3604 et seq. Impose additional requirements in the form of specific findings a court must make in order to authorize the creation or funding of an SNT pursuant to Court Order.

2642 U.S.C. 1396p(d)(4)(A) as amended by Pub. L. 114-255 §5007 (the “Fairness in Medicaid Supplemental Needs Trusts Act which finally permitted the individual herself to establish her own SNT, effective December 13, 2016). See also Fundamentals & CEB

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E. Third Party SNTs and SECURE

1. As noted above, a Third Party SNT is a creature of common law and is not subject to the funding or payback provisions of the applicable statutes.

2. However, since the primary purpose of the SNT in the first place is to protect the beneficiary’s public benefits, a Third Party SNT is going to look a lot like a First Party SNT in terms of the guidance, both mandatory and precatory it will place on the Trustee.

3. Thus, a Third Party SNT will contain language cautioning or restraining the Trustee from making distributions directly to the beneficiary or making distributions for food or shelter (prohibited under the SSI rules) or making distributions that reduce or eliminate her eligibility for public benefits unless there is an overriding reason to do so. For example, under no circumstances should any SNT (First- or Third-Party) contain the words Health, Maintenance or Support since these have been interpreted as rendering the trust is “available” to support the beneficiary and therefore there is no need for public benefits.

4. As a result, especially where the Third Party SNT is to be the recipient of an IRA (or other retirement account) for the benefit of the beneficiary, either directly or through an AMBT, the trust must be drafted as an “accumulation trust” rather than a “conduit trust.”27

5. The drafting attorney and the Trustee must be conversant with the very detailed rules set out in the Social Security Administration’s Program Operating Manual System (“the POMS”) which, for all intents and purposes, is the “Bible” which guides all interpretations and decisions regarding anything involving SNTs starting with the very definition of “what is a trust”and moving on from there.28

6. In addition, the drafting attorney and Trustee need to be familiar with the Medicaid rules and regulations. While it is true that for the most part, the rules for Medicaid generally track the SSI rules, the do diverge from time-to-time.

27See Natalie B. Choate, Life and Death Planning for Retirement Benefits, 442-436, (8th ed. Ataxplan Publications).

28Https://secure.ssa.gov/apps10/poms.nsf/aboutpoms. See also Stuart D. Zimring, You Just Think You Know the POMS - Or Wonder Why You Should,” 2013 Special Needs Trusts - The National Conference, www.stetson.edu (2013).

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7. Finally, SSI and Medicaid are not the only means-tested programs. The Veterans Administration has its own programs designed to assist veterans with disabilities. There are also various housing programs around the country which utilize various types of means-testing to determine eligibility. Being an expert in these areas is not required, but being aware of them and knowing who to contact is.

F. Can We Use (d)(4)(A) Trusts with The Act?

1. If for whatever reason the individual with a disability is the named beneficiary on the plan, the benefits are going to be paid out to her on at least an RMD basis. As a result, her public benefits are going to be adversely affected to the point of ineligibility.

2. Theoretically, if the plan administrators permit it, presumably the beneficiary could assign the benefit stream to an (d)(4)(A) trust and avoid physical receipt of the distributions. Whether any plan administrator or the SSA or IRS would accept this is unknown.

3. On the other hand, if the beneficiary is under a Conservatorship, the Conservator could file a Petition for Substituted Judgement seeking to have the plan directed to make payments to the SNT. The author has seen this done in a few situations and is not aware of any push back from the SSA.

4. Finally, if the beneficiary is under the age of 65, she could take her RMD each year and quickly contribute it to her SNT. At worst, this would result in a one-month loss of SSI benefits but not Medi-Cal (at least in California). On the other hand, there could be an issue of making continuing contributions after she turned 65.

G. Is the Stretch out Worth It?

1. While the Act has certainly given special needs planners a valuable tool in the creation of EDBs and the ability to retain the life expectancy option, given the raison d’etre of SNTs in the first place, it is fair to ask the question “how valuable is EDB status?”

2. SNTs are not designed to be multi-generational planning tools. They exist to improve the quality of life of the beneficiary with a disability. Towards that end, in assessing the utility of emphasizing the benefits of the ability to utilize the life expectancy table, the special needs planner and the Trustee should ask some really hard questions:

a) What is the life expectancy of the beneficiary?

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b) Is the disability going to become more severe and more incapacitating over time, i.e. what is the overall long-term prognosis?

3. Based on the answers (or best guesstimates) to those questions, it may be more appropriate to accelerate distributions in order to give the beneficiary the greatest quality of life at a time when she can most enjoy it.

4. In this regard, a word about Trustees is appropriate. Many families, when asked who the Trustee of the SNT is going to be instantly respond “Her sibling, of course. They are so devoted to each other.” And well they may be. But given human nature, consideration must be given to the reality that there is a built-in conflict of interest in naming someone who is most likely a remainder beneficiary of the SNT as the Trustee especially when the question of “spend now and therefore reduce my remainder interest or do the right thing” is not just a hypothetical question.

III. Miscellany

A. What About The Participant With A Disability and an EDB?

1. What can we do if the plan participant herself has a disability and is unable to change the beneficiary designations on her plan to take advantage of the Act for the benefit of her EDB child?

2. Any well drafted estate plan should contain a strong Durable Power of Attorney for Asset Management that:

a) Authorizes the Agent to modify the beneficiary designations on the plans; and

b) Contains the “hot power” that enables the Agent to amend/modify/create trust documents to take advantage of the Act (generally, the Trust to be amended must contain a reciprocal clause allowing an Agent to amend or modify).

3. If there are no such documents then (hopefully), a Conservatorship could be established and if permitted by state law, a petition to modify the estate plan to accomplish the necessary modifications could be filed.29

29See Calif. Prob. Code §§2580 et seq. for example.

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B. Participant’s Spouse is the EDB

1. Where the EDB is the spouse of the participant, it is necessary under the Medicaid statute to have the plan benefits flow to a testamentary trust for the benefit of the spouse. It cannot go to a trust created during the lifetime of the plan participant. This bizarre rule is (apparently) the result of legislative ignorance. No one has ever been able to explain why this requirement is in the statute.30

C. Qualified Disability Trust and SECURE

1. If the beneficiary with a disability or chronic illness is under age 65 at the time of the participant’s death, the SNT may also be eligible for treatment as a qualified disability trust under IRC §642(b)(2)(C) thus entitling the trust a personal exemption against trust income. Drafters should consider specifically referencing the statute if qualified disability trust status is a goal.31

IV. Conclusion The Act has certainly opened opportunities for special needs planners at the same time it has complicated the professional lives of traditional estate planner. Given that, it may be useful to remember the words of our colleague, Steven Trytten: “If this is all too complicated, remember: sometimes the best planning is not tax planning.32 . Q&A

3042 U.S.C. §1396p(d)(2)(A)(ii). Under this subsection, “an individual shall be considered to have established a trust if the assets of the individual were used to form all or part of the corpus of the trust and if any of the following individuals established such trust other than by will: ...(ii) the individual’s spouse.[emphasis added]” Thus, if 2 spouse leaves an inheritance to the surviving spouse in a SNT created during the deceased spouse’s lifetime, it does not qualify as an exempt SNT under the statute since it was created “other than by will.” 31IRC §642(b)(2)(c), 42U.S.C §1396p(c)(2)(B)(iv), Fundamentals §12.07[3], CEB-SNT §13.55. 32Steven E. Trytten, Estate Planning for Retirement Assets after the SECURE ACT: “The Sequel”, ACTEC Summer Meeting 2020, www.actec.org. (2020).

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