By Thomas D. Begley, Jr., CELA

A Third Party Special Needs Trust is usually used in a Medicaid context not for the benefit of the grantor of the trust, but for the beneficiary.

The grantor of the trust is typically a parent, but could be grandparent, sibling, other relative or friend. The grantor uses the grantor’s assets to fund the trust. The assets of the beneficiary cannot be used to fund a Third Party Special Needs Trust. In order for the trust to be a Special Needs Trust, the beneficiary must be disabled. Disability is usually determined ,y the fact that the beneficiary has received a Determination of Disability from the Social Security Administration and is receiving either Supplemental Security Income (“SSI”) or Social Security Disability Income (“SSDI”). The trust is designed so that the assets are not counted for Medicaid eligibility purposes. The beneficiary is then able to take advantage of the continuation of public benefits including usually SSI and Medicaid, as well as use the assets in the trust to enrich the beneficiary’s life. The trustee is given complete discretion with respect to distributions, and special needs language is used in designing the trust. Provisions made for distributions to the beneficiary during the beneficiary’s lifetime and distribution of any remaining principal and accrued income upon the death of the beneficiary.

Trustee

It is always good practice to select a professional trustee. The professional trustee has expertise with respect to public benefits law, tax Jaw, investment management, and usually has the ability to assist in navigating the disability system. Often the grantor of the trust is uncomfortable with a professional trustee, but this problem can usually be solved by appointing a family member as trust protector. The trust protector monitors the performance of the trustee and is given the authority to remove and replace the trustee. The trust protector’s power to remove and replace the trustee can be conditioned on cause, which would be defined in the trust document, or can be without cause. It is generally required that the replacement trustee be a professional with a certain amount of assets under management. In order for disability organization to qualify, the asset management limit might be as low as $50,000,000. On occasion, the grantor of the trust has worked with a financial advisor who would like to continue to be the financial advisor after the trust is established. Many professional trustees, such as Comerica Bank, have arrangements with money managers, such as Morgan Stanley or UBS, where Comerica will retain the outside money manager to invest the funds. This should be spelled out clearly in the trust document. The investment manager has an additional cost for managing the funds. The combined cost of the investment manager and the trustee usually exceeds the cost of having a professional trustee manage the funds in-house. This should be clearly understood by the client.

Alternatives to a Special Needs Trust

There a number of alternatives to Special Needs Trusts. These include the following:

• Disinherit a Child. The problem with this strategy is that one cannot be certain that public benefits, as we know them today, will continue forever. Many public benefits have been cut back in recent years and there is no guarantee that current benefits will not be reduced as well.
• Leave Money to the Child. The problem with this approach is that unless the funds being left to the child are very significant, they may not last long if the child’s needs, particularly medical needs, are great. It is usually better to maintain public benefits and establish a trust for needs or wants that will not be covered by public benefits.
• Leave Funds to Sibling. This is the common strategy that frequently backfires. The idea is to leave the share of the person with disabilities to a brother or sister with the understanding that the brother or sister will use that money to care for the child with disabilities. The problems occur when the child to whom the funds are left is sued by a creditor, is divorced, or simply says, “I want to use this money for myself. The Will says that I have to use it for my sibling with disability, but I am not going to use it for that purpose.” Sometimes it is the sibling that makes this decision, but frequently it is the spouse of the sibling who pushes for that result.
• Pooled Trust. A Pooled Trust is a good solution for relatively small amounts of money. If the trust is less than $100,000, Pooled Trust makes sense. If it is between $100,000 and $200,000, a Pooled Trust should be compared to a Third Party Special Needs Trust. If the amount involved is in excess of $200,000, a Third Party Special Needs Trust is almost always the best solution.
• ABLEAccount. New Jersey has adopted legislation authorizing ABLE accounts. These accounts are expected to come into existence sometime in the next few months. ABLE accounts are already in existence in several states, and some states, such as Ohio, permit out-of-state residents to open an ABLE account in that state. A problem is that not more than the gift tax annual exclusion amount can be contributed to an account in any one year and no beneficiary can have more than one account. The annual exclusion gift tax exemption for 2017 is $14,000. So, if the inheritance is $14,000 or less, an ABLE account might make sense.

Planning Considerations

Let’s examine the seven planning considerations in the context of a Third Party Special Needs Trust.

• Availability. Assets in a Third Party Special Needs Trust are not available for SSI or Medicaid purposes, because the Special Needs Trust gives the trustee sole discretion with respect to distributions and prohibits the beneficiary from revoking the trust. If the assets in the trust are not available, they are not counted for SSI or Medicaid eligibility purposes.
• Transfer of Asset Penalty. There is a transfer of asset penalty to the grantor for transfers to a Third Party Special Needs Trust. This is why a Third Party Special Needs Trust is seldom utilized in Medicaid planning for the grantor.
• Payback. A Third Party Special Needs Trust is not required to have a provision calling for payback to Medicaid for medical assistance paid on behalf of the trust beneficiary.
• Funding. Virtually all assets could be used to fund a Third Party Special Needs Trust. If retirement assets are being used, typically the trust is simply made the beneficiary of the retirement account upon the grantor’s death. Accumulation Trust language should be included. Beneficiary designations of life insurance, annuities or retirement accounts must be addressed. If part of the funds are going to healthy children, and part are going to the Special Needs Trust, consideration should be given to leaving the retirement accounts to the healthy children, rather than to the trust. Administration of a trust with a retirement account is somewhat complex, even for professional trustees.
• Tax Considerations
  • Income tax. A Third Party Special Needs Trust can be designed as a grantor trust or a non-grantor trust.
  • Gift tax. A Third Party Special Needs Trust can be designed as an IDGT or a non-IDGT.
  • Estate tax. A Third Party Special Needs Trust can be designed so that the assets in the trust remain in the estate of the grantor or are excluded from the estate of the grantor.
• Estate Recovery. There is no estate recovery against the estate of the grantor of a Third Party Special Needs Trust or the beneficiary, so long as the grantor retains no interest in the trust.
• Elective Share. Assets in a Third Party Special Needs Trust would be subject to the elective share stature.

As a reminder, ABLE accounts are for blind or disabled individuals whose blindness or disability occurred before the individual’s 26^th birthday and i) who are entitled to benefits under the Social Security Act (SSI or SSDI); or ii) who self-certify that they have a condition listed on the Social Security Administration’s list of compassionate allowances conditions and have a signed qualifying disability diagnosis from a qualified physician; or iii) who self-certify that they have an eligible disability and have a signed qualifying disability diagnosis from a qualified physician. ABLE accounts may be opened by the disabled individual in his/her own capacity if he or she is 18 years of age and competent to make financial decisions for him or herself. If the disabled individual cannot open the account independently, a guardian or attorney in fact acting under a valid durable power of attorney may open the account on the individual’s behalf. Parents can open such accounts on behalf of minors. All accounts can be opened online at able-now.com.

ABLE accounts, similar to the 529 education accounts they are modeled on, allow for contributions to grow free of federal and state income tax and for distributions for “qualified disability expenses” to be made free of federal and state income tax. A “qualified disability expense” is one which is incurred at a time when the individual is eligible (as described above), which relates to the person’s blindness or disability and which helps maintain or improve the person’s health, independence and quality of life. This standard is quite broad and can include education, housing, transportation, employment training and support, assistive technology, health, financial management, legal fees, funeral and burial expenses etc. It will be important to track and account for these expenses, because the total distributions from the account will be reported to the IRS annually. Maintaining detailed records and receipts will be an important part of administering an ABLE account. Failure to use the money in the ABLE account for a qualified disability expense (or to be able to prove such expense) will subject the withdrawal to a 10% penalty and the individual will include the amount of the withdrawal in his or her income. It is also possible that such non-qualified funds could be counted as income or as a resource for means-tested benefit programs. An important side-benefit of contributing to an ABLE account is that Virginia allows an income tax deduction of up to $2,000 per contributor.

ABLE accounts are limited in some very important ways. Contributions to an ABLE account are limited to the amount of the annual gift tax exclusion, currently $14,000/year. This limit applies to contributions from all sources, so the account cannot be used to shelter large sums of money. Furthermore, upon the death of the disabled individual, any balance in the ABLE account is subject to payback to Medicaid for funds paid by Medicaid on behalf of the disabled individual after the creation of the account. Finally, for disabled individuals collecting SSI, balances in an ABLE account in excess of $100,000 are counted as an asset for determining eligibility for SSI (but not for Medicaid eligibility). Although Virginia currently has a ceiling of $500,000 on the assets that can be in an ABLE account, ABLE accounts are not a substitute for Third-Party Special Needs Trusts or for First-Party Special Needs Trusts because of the limitations on annual contributions and the Medicaid payback requirement. However, they can function very well as an adjunct to a well-conceived plan to care for individuals with disabilities. An ABLE account can be a way to provide independence for some individuals who are able to manage their own financial affairs and may be an excellent repository for unexpected inheritances or for extra savings.

If you would like to discuss how to utilize an ABLE account in your planning for a person with disabilities, contact one of the experienced attorneys at the Hook Law Center so we can help you make sense of possibilities.

Ask Kit Kat – Sea Turtles in Danger

Hook Law Center:  Kit Kat, what can you tell us about sea turtles in the Outer Banks and how they are faring during this cold patch of weather?

Kit Kat:  Well, the sea turtles who overstayed their normal residency in the Outer Banks are having quite a time this winter. Temperatures have been unusually cold. Even though, the cold snaps don’t last for days on end, they are still a danger to these warm-water, loving creatures. According to Jeff Hampton of The Virginian-Pilot, “turtles cannot move when water temperatures fall below 50 degrees.” Most have left the area by now, but a few get fooled by a warm fall, and forget to  leave to go south for the winter. Fortunately, for them, they got delayed in the right place to get expert treatment!

8 green sea turtles, one loggerhead, and one Kemp’s ridley turtle were rescued from the beaches of Pimlico Sound over the weekend of December 10-11, 2016. They were rescued by staff from the North Carolina Aquarium-Roanoke Island, volunteers from the Hatteras Network for Endangered Sea Turtles, and rangers from the National Park Service. The turtles were then treated at the aquarium’s rehabilitation center. It’s a slow process. They are gradually warmed by a rate of 5 degrees per day, until reaching their normal body temperature. The treatment involves administering fluids and analyzing their blood. Some even require antibiotics if they happen to also catch pneumonia. Once they are stabilized, they are released to a beach further south, but they must first be able to swim and eat normally.

This current rescue effort was quite small compared to last year. At that time, the rescue teams were overwhelmed with the number of  turtles needing care when caught in a prolonged cold snap. Rosemary Lucas, coordinator of the rehabilitation center, said they had tubs of warming water all over the center—even in hallways and bathrooms. Contributions from the community help in these efforts. If you would like to donate to this cause, you may do so online at ncaquariums.com/roanoke-island with the code SEATURTLE2016.  Contributions by check may be sent to NC Aquarium, 374 Airport Rd., P.O.Box 967, Manteo, NC 27954 with the notation of STAR or SEA TURTLE in the subject line. (Jeff Hampton, “Stunned by the cold,” The Virginian-Pilot, December 14, 2016, p. 4)

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Hook Law Center encourages you to share this newsletter with anyone who is interested in issues pertaining to the elderly, the disabled and their advocates. The information in this newsletter may be copied and distributed, without charge and without permission, but with appropriate citation to Hook Law Center, P.C. If you are interested in a free subscription to the Hook Law Center News, then please telephone us at 757-399-7506, e-mail us at mail@hooklawcenter.com or fax us at 757-397-1267.The post ABLE Accounts Open in Virginia first appeared on SEONewsWire.net.]]> http://www.seonewswire.net/2016/10/alternatives-to-a-third-party-special-needs-trust/ Thu, 06 Oct 2016 19:47:02 +0000 http://www.seonewswire.net/2016/10/alternatives-to-a-third-party-special-needs-trust/ by Thomas D. Begley, Jr., CELA There are a number of alternatives to a Third Party Special Needs Trusts. These include the following: Disinherit a Child. The problem with this strategy is that one cannot be certain that public benefits,…

by Thomas D. Begley, Jr., CELA

New Jersey has passed the Achieving a Better Life Experience ACT (“ABLE”). While the Act has passed, it will take some time to implement. Many commentators believe that by the end of the year accounts will be authorized.

Under the ABLE Act, people with disabilities and their families may set up special savings accounts similar to 529 Plans to be used for disability-related expenses. Earnings on these accounts are non-taxable. Generally, if the fund does not exceed $100,000, it will not be counted for Supplemental Security Income (“SSI”) purposes. If the fund exceeds $100,000 then SSI will be suspended, but Medicaid can be continued so long as the total amount in the account does not exceed the amount authorized for 529 Plans. To be eligible, an individual must become disabled prior to age 26 and be disabled. If the individual receives Supplemental Security Disability Income (“SSDI”) or SSI or files a Disability Certification under IRS Regulations, she will be considered disabled.

Funds can be used for education, housing, transportation, employment training, support, assistive technology, personal support services, health, prevention and wellness, financial management and administrative fees as well as legal fees and expenses for oversight and monitoring.

The total amount contributed to an ABLE account in any one calendar year by all contributors cannot exceed the amount of the federal annual gift tax exclusion, which for 2016 is $14,000. The drawback to these accounts is on the death of the account owner, any funds remaining in the account must be used to repay Medicaid for any funds advanced on behalf of the account holder. The best strategy seems to be to use these accounts for small gifts. Normally, these accounts would be used for gifts from parents. As long as the gifts are less than $14,000 per year and do not accumulate very much, these accounts might make sense. However, because of the Medicaid payback, it does not make sense to have these accounts grow. A Third Party Special Needs Trust is a much better option, if the amount involved is significant.

The advantages of an ABLE account are the tax-free income. However, realistically this is not a significant advantage because the income on small accounts is low and the other income of the beneficiary with a disability is usually low, so the tax saving sounds more attractive than it actually is. A second advantage is that there is a minimal cost to establishing the account when compared to establishing a Pooled Trust or a Third Party Special Needs Trust. A third advantage is that distributions from an ABLE account for the beneficiary’s food and shelter do not reduce the beneficiary’s SSI payment.

The disadvantages are the Medicaid payback and the possible loss of SSI. Because of the Medicaid payback, it makes little sense to build up a large account. The SSI benefit of approximately $750 per month is a significant benefit that should be protected.

Ideally, ABLE accounts appear to be useful if they are in the $25,000 to $50,000 range, but not for larger accounts. A Pooled Trust or Special Needs Trust would be more appropriate.

Many public benefits available to persons with disabilities, such as Supplemental Security Income (SSI) and Medicaid, place limits on income and certain types of assets. Exceeding such limits can lead individuals to lose some or all of their benefits. Individuals receiving SSI are limited to $2,000 of assets. For many individuals, their Medicaid is linked to their SSI. Today there are many Medicaid Waiver Programs. In many states the asset limit for these waiver programs is also $2,000, but this varies from program-to-program and from state-to-state. Assets held in ABLE accounts do not affect SSI until the ABLE account reaches $100,000, at which point SSI is suspended. Assets in ABLE accounts do not affect Medicaid eligibility, so long as the assets do not exceed the state limit for 529 Plans. This varies considerably from state-to-state. Most states do not have an asset limit for Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamps), but a few states do. Section 8 Housing has not had an asset limit, but effective December of 2016 there will be an asset limit of $100,000 for the household. SSDI and Medicare do not have asset limits. Therefore, individuals receiving benefits that set these kinds of limits must continually monitor their assets and ensure that their “countable” assets never exceed the program limit.

Virtually all public benefit programs have income limits. For example, in SSI any dollar of unearned income reduces the SSI payment dollar-for-dollar. If the unearned income exceeds the maximum SSI benefit, then SSI is lost, and if Medicaid is linked to SSI, Medicaid is lost as well. Frequently, in a personal injury settlement a portion of the settlement is used to purchase a Structured Settlement Annuity. If this Structured Settlement is paid directly to the plaintiff, it will be counted as income and public benefits will be lost. However, if the Structured Settlement Annuity payments are paid directly to the Self-Settled Special Needs Trust, they will not be counted as income. Distributions from the trust to third parties for the benefit of the trust beneficiary are not counted as income. Distributions of cash directly to the beneficiary are counted as income. If the beneficiary or a family member obtains a credit card and sends the bills and receipts to the trustee and the trustee pays the credit card bill, this is not considered income.

In 1993, Congress authorized the use of Self-Settled Special Needs Trusts.1 Under most means-tested public benefit programs, assets in the trust are not counted. If a person with disabilities expects to receive a settlement, an inheritance, or any other monies that would increase his or her countable assets to more than the program limit or will pay income in excess of the amount permitted under the program, it is very important that the person and /or his or her family meet with an attorney who specializes in elder and disability law. The attorney can ensure that proper planning is done to protect the person’s continued eligibility for public benefits.

1 42 U.S. §1396p(d)(4)(A).

The following case studies illustrate the difference proper planning can make to the well-being of a person with a disability.

CASE STUDY 1: A PERSONAL INJURY SETTLEMENT – PUBLIC BENEFITS LOST

John suffered a disabling brain injury as a result of an automobile accident. Initially, he received SSI as well as Medicaid. His medical costs of approximately $7,700 per month were completely covered by Medicaid.

Upon settling his lawsuit, John received $500,000 in net proceeds. He immediately lost his SSI and Medicaid because he had more than $2,000 in countable assets. John began paying for services out of his own pocket at the rate of $7,700 per month, using up his entire $500,000 in 64 months. John then reapplied for SSI and Medicaid. He received SSI immediately, but since there were a limited number of slots for his type of Medicaid waiver, he was put on a waiting list and told that it would likely be two or three years before he received a slot. In the meantime, John’s medical services stopped.

CASE STUDY 2: A PERSONAL INJURY SETTLEMENT – PUBLIC BENEFITS RETAINED

Bill suffered a serious head injury in an automobile accident, which left him disabled and unable to work. He receives SSI and Medicaid. Bill settled his lawsuit for $500,000. Because he wanted to protect his public benefits, he decided to contact an Elder and Disability Law Attorney. At the advice of the attorney, Bill used the first $75,000 of his settlement to buy a handicap-accessible van and to pay off outstanding debts. Bill then took $100,000 as a lump sum to set aside for emergencies and arranged to receive the remaining $375,000 as a structured settlement, which would guarantee him periodic payments over his lifetime. Based on Bill’s life expectancy, which the insurance company considered to be shortened as a result of his injury, the structure gave him $2,000 a month for life with a 20-year guarantee.

Both the lump sum and the structure were paid to the trustee of a Self-Settled Special Needs Trust, which was prepared by Bill’s Elder and Disability Law attorney. As a result, Bill was able to keep his SSI and have Medicaid continue to pay for the extensive therapy he will need for maximum restoration. In addition, the monies in the Special Needs Trust will be used to enrich Bill’s life, providing for a caregiver, travel, and other goods and services he could not otherwise afford.

CASE 3: AN INHERITANCE

Mary is 32 years old and has cerebral palsy. She has been physically disabled since birth, but is mentally competent. Mary receives SSI and Medicaid and has always lived in an apartment with her mother and her sister, Joan. Mary’s mother died unexpectedly, leaving a will that named Joan as its executor. Mary and Joan have no other siblings, and the will leaves the mother’s estate to Mary and Joan equally. As a result, Mary will receive $125,000 from the estate.

Mary and Joan recognized that Mary might have a problem with her public benefits if she received the inheritance outright, so they decided to see an attorney who specializes in elder and disability law. The attorney recommended that Mary place the inherited funds into a Self-Settled Special Needs Trust, so she could benefit from the money while preserving her SSI and Medicaid. The Special Needs attorney filed a petition with the local court to establish the Special Needs Trust with Joan as the trustee, and Mary funded the trust with the inheritance proceeds. Mary notified Social Security and Social Services that she had received an inheritance and had placed the proceeds into a Special Needs Trust. Mary retained her SSI and Medicaid, and Joan, as trustee, distributes funds from the trust for items and services that Medicaid and SSI will not cover, such as Mary’s computer and Internet service, entertainment, education, trips to see her cousins, dental care, and eyeglasses.

If Mary and Joan had not received the assistance of a Special Needs attorney, the outcome would have been very different. Mary would have received her inheritance outright and would have had to notify Social Security. Instead of retaining her SSI and Medicaid benefits, Mary would have had her benefits terminated, and she would not receive them again until her funds were reduced to below $2,000. Mary would have been responsible for covering her extensive medical expenses and other needs until the inherited funds were exhausted. Once Mary was again eligible for SSI and Medicaid, she would have had no funds left for items and services that could enhance the quality of her life.

CASE 4: A STRUCTURED SETTLEMENT

Jose was injured at birth. Jose is receiving SSI and Medicaid linked to SSI. He received $2,000,000 net from a personal injury settlement after paying legal fees, costs and liens. His parents decided to take $1,000,000 in cash and fund a Self-Settled Special Needs Trust, and take the other $1,000,000 and fund a Structured Settlement Annuity that would pay Jose $2,500 per month over his life expectancy. The insurance company made the payments directly to Jose. Because of the monthly payments under the Structured Settlement, Jose lost his SSI and Medicaid. Monies in the Self-Settled Special Needs Trust had to be used to pay for his medical care and the trust was quickly exhausted.

CASE 5: CHILD SUPPORT PAYMENTS

Richard and Barbara have a 19-year-old daughter, Kathy, who has Down Syndrome and who is receiving SSI and Medicaid. Richard and Barbara are in the process of getting a divorce. Kathy will be living with Barbara, and Richard will be paying child support for the rest of Kathy’s life. The divorce decree specifies the amount of the monthly child support payments. When Barbara reports the child support payments to Social Security and Social Services on Kathy’s behalf, she is told that Kathy will lose both SSI and Medicaid because her monthly income is now too high to receive either benefit. Richard and Barbara will now have to pay for Kathy’s expensive medical treatment themselves.

If Richard and Barbara had known that they needed assistance because of Kathy’s disabilities, they could have consulted with an attorney who specializes in Elder and Disability Law. The attorney would have advised Richard and Barbara that the court could establish a Self- Settled Special Needs Trust for Kathy, with Barbara as trustee, and then the court could order Richard to pay the child support payments directly to Barbara as trustee of the trust. Barbara would have reported the existence of the trust to Social Security and Social Services, and she would have presented both agencies with the divorce decree directing the payment of child support to the trust. Kathy’s Medicaid and SSI would have continued, and the child support payments paid to the Special Needs Trust could have been used for Kathy’s needs above and beyond those met by SSI and Medicaid.

CASE 6: STRUCTURED SETTLEMENT PAID TO SPECIAL NEEDS TRUST

Branden was injured at birth. Branden is receiving SSI and Medicaid linked to SSI. He received $2,000,000 net from a personal injury settlement after paying legal fees, costs and liens. His parents decided to take $1,000,000 in cash and fund a Self-Settled Special Needs Trust, and take the other $1,000,000 and fund a Structured Settlement Annuity that would pay Branden $2,500 per month over his life expectancy. The insurance company made the payments directly to Branden’s Self-Settled Special Needs Trust and neither the income nor the assets in the trust were counted for Branden’s public benefits purposes.

WHAT YOU SHOULD KNOW ABOUT SELF-SETTLED SPECIAL NEEDS TRUSTS

When is a Self-Settled Special Needs Trust Required?

A Self-Settled Special Needs Trust is required if a person with disabilities currently receives (or is likely to receive in the future) SSI, Medicaid, SNAP (Food Stamps), Section 8 Housing, certain types of state disability benefits, or benefits under any other means-tested program, and is about to receive a settlement or other monies that will bring the person’s countable assets to more than the asset limit for the particular program, frequently $2,000. There are four alternatives to establishing a Self-Settled Special Needs Trust:

 Accept the Money. The person with disabilities will lose public benefits, but if the amount is large enough or the likelihood of requiring expensive medical treatment is small enough, this could be considered.

 Transfer the Money to Family Members. The transfer of the funds will disqualify the person with disabilities from receiving public benefits for a period of time, depending on the amount of the transfer. If the amount is large enough and the person does not need means-tested public benefits for the period of time for which he or she will be ineligible, this could be considered.

 Spend the Money. If a settlement is small, this option often makes the most sense. Examples of how monies could be spent include repayment of debt or purchase of a home, car, furniture or appliances. A Special Needs attorney should be consulted to design a spend down plan.

 Place the Money in a Pooled Trust. If a settlement is small and spending down the money is not a viable option, it may be more practical to place the litigation proceeds into a Pooled Trust. Pooled trusts are Special Needs Trusts that house the assets of many individuals. They vary with respect to the amount of attention provided to individual beneficiaries.

What Are the Requirements of a Self-Settled Special Needs Trust?

 Assets of the Individual. The trust must be funded with assets owned by the individual, such as litigation proceeds.

 Age. The individual must be under 65 years of age at the time the trust is funded.

 Disability. The individual must be disabled as defined in the Social Security Act.

 Benefit. The trust must be for the benefit of the individual with disabilities.

 Establishment. The trust must be established by a parent, grandparent, guardian or the court.

 Payback. The State Medicaid Agency must be reimbursed upon the death of the person with disabilities.

Additionally, the trust must be irrevocable (i.e. permanent), and it must give the trustee discretionary authority to make distributions.

What Public Benefits are Protected by the Trust?

The purpose of a Special Needs Trust is to preserve public benefits programs for the person with disabilities. Typically, these benefits include:

 SSI. A monthly income program.

 Medicaid. A medical payment program.

 SNAP. This is a program formerly known as Food Stamps.

 Section 8 Housing. A low-income housing program.

 State Disability Programs. These include group homes, vocational training, etc.

What Can the Trust Pay For?

The trust can pay for a very broad range of goods and services as long as payment is made directly to the provider, rather than to the person with disabilities. Examples include personal effects such as furniture, appliances, computers, and automobiles, rent, home improvements, pools, utilities, medical insurance, newspaper subscriptions, the services of a care manager, federal and state taxes, prepaid funeral, and legal fees. Payments for food and shelter are likely to reduce the SSI payment by one-third or one-third plus $20, depending on living arrangements.

Trusts can purchase homes and vehicles. While these assets are non-countable, they are considered special assets. If the trust will be used to purchase these items, there are several options that must be considered in consultation with the Special Needs attorney to ensure that the assets are properly titled.

Generally, funds in the Self-Settled Special Needs Trust can be used only for the benefit of the person with disabilities. Other family members or friends who benefit from the trust are usually required to pay a proportional share for their benefit. For example, if a parent lives with a disabled child in a house covered by funds from the trust, the parent must pay his or her share of expenses. Trust assets usually cannot be used by a parent as a means of meeting his or her legal obligation to support a child.

How Much of the Settlement Should be Structured?

Upon receiving a settlement, persons with disabilities and their families often want to purchase a new home and vehicle and take a dream vacation. They also may wish to pay off a certain amount of debt. A lump sum should be set aside for these items and to prepare for future emergencies. Only after those needs are met should the amount of the structure be determined.

Structured settlements have significant advantages, including:

 Tax Benefits. The income, including the investment income, is tax-free to the trust beneficiary.

 Rated Age. Many plaintiffs have a “rated age.” This means that an insurance company believes that, as a result of injuries, the person with disabilities is much older physically than in actual age and therefore has a shorter life expectancy. In this case, an annuity can be purchased to pay for the lifetime of a much older person, thereby significantly increasing the monthly payment.

 Preservation. The average personal injury settlement, like the average lottery winning, lasts three to five years. By obtaining a structured settlement, a person with disabilities can be guaranteed a monthly income for life with a fixed period guaranteed, even if he or she dies prematurely.

What Features Should be Considered in a Structure?

 Cost of Living. Over time, cost-of-living increases reduce the purchasing power of a dollar. Structures can be designed to include a cost-of-living adjustment (COLA) feature. Generally, insurance companies offer a maximum COLA of 2% per year compounded. The price of the COLA is that the initial payments are sharply reduced. An analysis should be made as to how long it will take for the payment to increase to what would have been available had there been no COLA, and then again from that point how long will it take to make up the revenue lost prior to the “breakpoint.”

 POPs. It is usually possible to anticipate that certain events will occur during the lifetime of a person with disabilities which will require lump sums of money. The structured settlement contract can be designed to take these into consideration. POPs establish that additional lump sums will be paid out at certain stages of the disabled person’s life. For example, if the individual is likely to go to college, a significant lump sum could be paid to cover college tuition when he or she turns 18.

 Commutation Rider. Many states now require that the Structured Settlement have a commutation rider. The payee on death must be the trust or the State Medicaid Agency. State Medicaid Agencies require this so that the Medicaid payback can be achieved.

If a settlement is large, there may be federal and/or state estate tax due after the person with disabilities dies. A commutation rider in the structure ensures that monies will be available to pay these taxes, if necessary.

How is the Trust Established and Funded?

Federal law requires that the trust be established by a parent, grandparent, guardian or the court. The trust cannot be established by the person with disabilities. The trust is funded by having the court order the defendant to pay the lump sum by check directly to the trustee of the Self-Settled Special Needs Trust. If a structured settlement is involved, the court also must order that the monthly payments from the structure be paid by check directly to the trustee of the Self-Settled Special Needs Trust. Payments made to the Personal Injury attorney constitute “constructive receipt.” This means that public benefits agencies will consider the money in the attorney’s trust account to be available to the person with disabilities, thereby disqualifying him or her from those benefits.

How Should the Money be Invested?

Any money placed in the self-settled special needs trust, other than the structure, should be invested in accordance with the Uniform Prudent Investor Act. Because the assets need to last throughout the lifetime of the person with disabilities, they should be invested conservatively, with the objective of preserving principal while providing the growth necessary to outpace inflation and taxes. There should be a written investment policy statement in place that specifies the acceptable level of investment risk to be taken and that outlines the trust’s investment strategy.

How is a Trustee Selected?

Family members often want to serve as trustees of Special Needs Trusts. However, to ensure that the trust will be administered properly and will continue to protect the public benefits of the person with disabilities, a corporate trustee should ALWAYS be utilized.

Since family members rarely have the necessary expertise, a better solution is to select a professional trustee. Family members can remain involved by serving as trust protectors. The trust protector is given the right to remove and replace the trustee, if the performance of the corporate trustee is unsatisfactory.

What Can a Counseling Session Accomplish?

When establishing a Self-Settled Special Needs Trust, it is wise to have a counseling session with the Special Needs attorney, the person with disabilities, the trustee and other interested family members. The person with disabilities and/or his/her family should prepare a budget. The family and the trustee should then agree on which budget items will be paid by the trustee, which items will be paid by the disabled person, and which items, if any, can be purchased through use of a credit card that ultimately will be paid by the trustee.

It also is important to run a “Monte Carlo Simulation.” This is a type of financial calculation that can be used to show how long the trust will last assuming varying conditions, such as different levels of expenses and investment returns. Once it is understood that the trust should last the lifetime of the person with disabilities, and a Monte Carlo Simulation has shown how long the trust is likely to last under various scenarios, the disabled person and /or family may agree to reduce expenditures to a more appropriate level.

Finally, the counseling session is an opportunity for the Special Needs attorney to review with the trustee, the family, and the person with disabilities, the state law requirements pertaining to the administration of a Self- Settled Special Needs Trust. At the end of the session, everyone should understand the rules and a game plan should have been adopted which will enable the person with disabilities to receive maximum benefits from the trust during his or her lifetime.

What Agency Approvals are Required?

 SSA. If the person with disabilities is receiving SSI, the Self-Settled Special Needs Trust should be filed with the Social Security Administration.

 Medicaid. If the person with disabilities is receiving Medicaid, the trust should be filed with the State Medicaid Agency.

 Housing Authority. If the individual is residing in public housing, a copy of the trust should be furnished to the director of the local housing authority.

 Filing. It is very important to file notices and copies of the trust document with the Social Security Administration and /or State Medicaid Agency. The Special Needs attorney is generally responsible for this. It is also important to submit a separate cover letter that shows SSA and the State Medicaid Agency exactly how the trust document complies with their requirements. The agencies seldom respond with specific approval of the trust, but if they do not approve, they will respond with specific reasons.

What Estate Planning Documents Does the Person with Disabilities Need?

If the individual with disabilities is a competent adult and has such non-countable assets as a home, a vehicle, or personal effects, he or she should consider executing a Will. The individual also should execute an Advance Medical Directive/Living Will and a Durable Power of Attorney. Advance Medical Directives/Living Wills are important for anyone wishing to avoid a Terri Schiavo-type situation, in which an individual who has no hope of recovery may be kept alive longer than he or she wishes. A Durable Power of Attorney is extremely helpful in the event that an individual becomes incapacitated and is no longer able to take certain actions on his or her own behalf.

What Estate Planning Documents Do Family Members Need?

If the family members of an individual with disabilities intend to leave money to that individual, or for his or her benefit, they should execute a Will, an Advance Medical Directive/Living Will, a Durable Power of Attorney, and a Third-Party Special Needs Trust (sometimes called a Supplemental Needs Trust). Leaving money directly to a person with disabilities will jeopardize public benefits, while leaving it to a Self-Settled Special Needs Trust will trigger a Medicaid payback requirement. Placing the funds in a Third-Party Special Needs Trust can allow a family to supplement the lifestyle of the person with disabilities without the loss of public benefits. Third- Party Special Needs Trusts operate in much the same way as Self-Settled Special Needs Trusts, except that there is no Medicaid payback, and there are no Medicaid accounting requirements. Families who wish to establish Third-Party Special Needs Trusts should consult with a Special Needs attorney. It is also important that the family’s beneficiary designations be reviewed to ensure that the Third-Party Special Needs Trust is the beneficiary of any funds intended for the individual with disabilities.

by Thomas D. Begley, Jr., CELA

New Jersey has now enacted the Achieving a Better Life Experience Act (“ABLE”). It is understood that by Fall this Act will be ready for implementation. The question will then remain: “What is the best option? Should the parent intending to set aside money for a child with disabilities establish an ABLE account or a Third Party Special Needs Trust?” Generally speaking, if the individual would be the beneficiary became disabled prior to attaining age 26, then an ABLE account might be considered, if the account will be small. There is very little point to establishing an ABLE account for a significant amount of money. There are two primary advantages to an ABLE account: (1) the income builds up tax free, and (2) the cost of establishing and administering the account is relatively small. The disadvantage is that on the death of the beneficiary any funds remaining in the account must go first to repay Medicaid for medical assistance paid during the beneficiary’s lifetime.

Therefore, it would seem that if the account is to be relatively small (i.e., $25,000), an ABLE account might make sense. However, once the account exceeds that amount it probably makes more sense to transfer the funds to a Pooled Trust Third-Party Subaccount. While there is a set-up fee and administrative costs, there are also benefits and there is no Medicaid payback. For accounts between $25,000 and $100,000, a Pooled Trust probably makes more sense. This is true even though the Pooled Trust does not enjoy the advantage of tax-free income. The truth of the matter is that on an account of $100,000, the income tax savings is minimal. The beneficiary is also usually in a low tax bracket.

Once the account exceeds $100,000, a Third-Party Special Needs Trust probably makes sense. Yes, there are costs of establishing and administering the trust, but there is no Medicaid payback on death. Once an ABLE account reaches $100,000, the beneficiary’s Supplemental Security Income (“SSI”) is suspended. If the funds are in the Third-Party Special Needs Trust, SSI remains in effect. Between the benefit of the SSI payment and the advantage of no Medicaid payback, the cost of establishing and administering the Third-Party Special Needs Trust probably makes the most sense.

by Thomas D. Begley, Jr., CELA

New Jersey has passed the Achieving a Better Life Experience ACT (“ABLE”). While the Act has passed, it will take some time to implement. Many commentators believe that by Fall accounts will be able to be opened.

Under the ABLE Act, people with disabilities and their families may set up special savings accounts similar to 529 Plans to be used for disability-related expenses. Earnings on these accounts are non-taxable. Generally, if the fund does not exceed $100,000, it will not be counted for Supplemental Security Income (“SSI”) purposes. If the fund exceeds $100,000 then SSI will be suspended, but Medicaid can be continued so long as the total amount in the account does not exceed the amount authorized for 529 Plans. To be eligible, an individual must become disabled prior to age 26 and be disabled. If the individual receives Supplemental Security Disability Income (“SSDI”) or SSI or files a Disability Certification under IRS Regulations, she will be considered disabled.

Funds can be used for education, housing, transportation, employment training, support, assistive technology, personal support services, health, prevention and wellness, financial management and administrative fees as well as legal fees and expenses for oversight and monitoring.

The total amount contributed to an ABLE account in any one calendar year by all contributors cannot exceed the amount of the federal annual gift tax exclusion, which for 2016 is $14,000. The drawback to these accounts is on the death of the account owner, any funds remaining in the account must be used to repay Medicaid for any funds advanced on behalf of the account holder. The best strategy seems to be to use these accounts for small gifts. Normally, these accounts would be used for gifts from parents. As long as the gifts are less than $14,000 per year and do not accumulate very much, these accounts might make sense. However, because of the Medicaid payback, it does not make sense to have these accounts grow. A Third Party Special Needs Trust is a much better option, if the amount involved is significant.

The advantages of an ABLE account are the tax-free income. However, realistically this is not a significant advantage because the income on small accounts is low and the other income of the beneficiary with a disability is usually low, so the tax saving sounds more attractive than it actually is. The other advantage is that there is a minimal cost to establishing the account when compared to establishing a Pooled Trust or a Third Party Special Needs Trust.

The disadvantages are the Medicaid payback and the possible loss of SSI. Because of the Medicaid payback, it makes little sense to build up a large account. The SSI benefit of approximately $750 per month is a significant benefit that should be protected.

Ideally, ABLE accounts appear to be useful if they are in the $25,000 to $50,000 range, but not for larger accounts. A Pooled Trust or Special Needs Trust would be more appropriate.

by Thomas D. Begley, Jr., Esquire, CELA

Congress enacted and the President has signed legislation known as the Achieving a Better Life Experience (ABLE) Act of 2014.387 The Act is modeled on 529 Plans and will provide tax-favored accounts for individuals with disabilities to pay for qualified expenses. Before these accounts can be implemented, two things must happen: (1) the federal government must adopt regulations governing the accounts, and (2) state must either create their own ABLE accounts or contract with other states to do so. It is likely that these accounts will operate in a manner similar to existing 529 accounts.

The advantages of ABLE accounts are as follows:

• Low Cost Set-Up. The other advantage is that there is little or no cost in establishing these account.
• Non-Countable Resource. Assets in the ABLE account are not counted for public benefit eligibility purposes, so long as the total account size does not exceed $100,000.
• Tax-Free Income. The investment income earned on ABLE accounts is not taxed, so long as it is distributed for the individual’s qualified expenses related to the disability, such as health, education, housing, transportation, training, assistive technology, personal support, related activities and expenses. This benefit is likely to be minimal, since income earned on a relatively small account would be small.

There are a number of disadvantages to these accounts. The disadvantages to these accounts are as follows:

• Medicaid Payback. There is a Medicaid payback from the account on funds remaining in the account on the death of the designated beneficiary.
• Contribution Limit. Contributions are limited to $14,000 aggregate from all contributors in any one year. Accounts that size would generate very little income.
• Prior to Age 26. The disability must have occurred prior to the beneficiary attaining age 26.
• Asset Cap. The total assets in the account cannot exceed $100,000. If the assets do exceed this amount, the beneficiary’s SSI is suspended, but not terminated. The individual would again be eligible for SSI when the account limit dropped below $100,000.
• Loss of SSI Benefits. If the account exceeds $100,000. Since the 2015 SSI benefit is $733 and most states have a small state supplement, a loss of the SSI benefit would likely cost more than the value of the income tax exemption.
• Qualified Disability Expenses. The use of the funds is limited to qualified disability expenses. A Third Party Special Needs Trust is much more flexible with respect to distributions.

A Third Party Special Needs Trust is always a better solution for larger sums of money. In many instances, a Third Party Pooled Trust might be a better alternative than an ABLE account. Presumably, an ABLE account would be managed by either the disabled beneficiary or a parent or other family member. If distributions from the account were made improperly, this would presumably cause a loss of public benefits.

387 I.R.C. §529A.

by Thomas D. Begley, Jr., Esquire, CELA

On December 16, 2014, Congress enacted and sent to the President for signature an Act known as Achieving a Better Life Experience (ABLE) Act of 2014.[1] This Act is to provide a tax-favored account, similar to a 529 Plan, for individuals with disabilities to pay for qualified expenses. The effective date of this legislation is December 31, 2014. Highlights of this Act are as follows:

• State Established or Contracted. Each state is authorized to establish and operate an ABLE program. This must be done by each state before these accounts can be opened in that state. States may contract with other states to operate these programs.
• Income Non-Taxable. Income earned by the accounts would not be taxable. These accounts would be similar to 529 Plans in that the income earned by the 529 Plan is non-taxable, if it is used for certain purposes. This is the major benefit of these accounts.
• Distributions, including portions attributable to investment earnings generated by the account, to an eligible individual for qualified expenses are not taxable.
• Qualified Expenses. Qualified expenses are expenses related to the individual’s disability, such as health, education, housing, transportation, training, assistive technology, personal support, related services and expenses.
• Medicaid Payback. Upon the death of the individual, amounts remaining in the account must be paid back to Medicaid. This is known as a Medicaid payback.
• One Account. Individuals would be limited to one ABLE account, although an unlimited number of people could make contributions to that ABLE account.
• Contribution Limit. Total annual contributions by all individuals to any one ABLE account are limited to the gift tax annual exclusion amount, which is $14,000 for 2015.
• Age 26. Eligible individuals must be severely disabled before turning age 26. Individuals who become disabled after turning age 26 would not be eligible for ABLE accounts.
• Non-Countable Asset. Individuals with ABLE accounts could maintain eligibility for means-tested benefit programs, such as SSI and Medicaid. The assets in the account are non-countable for federal means-tested benefit program eligibility purposes.
• Maximum Account Size. ABLE accounts are limited to $100,000. If the account exceeded $100,000, the individual would be suspended from receipt of SSI, although SSI-linked Medicaid would remain in effect.

[1] H.R. 5771.