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.

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, 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. Many parents who have severely disabled children, whose needs are covered by public benefits, will consider disinheriting the children, but they should be made aware that current public benefits may not be there when the child needs them in the future.

• 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, not in the Will says that I have to use it for my sibling with disability and I am not going to use 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.

• ABLE Account. New Jersey has adopted legislation authorizing ABLE accounts. These accounts are expected to come into existence sometime in the Fall. 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 2016 is $14,000. So, if the inheritance is $14,000 or less, an ABLE account might make 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 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.

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.

What public benefits are means-tested?

• SSI – SSI is an income stream.  In 2013, the income will be $710 per month.  In addition, some states provide a supplement.  There is an asset limit of $2,000 for an individual and $3,000 for a married couple.  Unearned income reduces the benefit dollar-for-dollar.  Earned income reduces the benefit by one dollar for every two dollars earned after $85 per month.  Until a child is 18, the income and assets of a parent are deemed to the child.

• Medicaid – Medicaid provides broad medical coverage for recipients.  Medicaid covers not only acute care, but also chronic care.  It should be noted that most private insurance covers acute care with limited, if any, coverage for chronic care.  The income and asset limits tend to be the same as for SSI.  In many states, if an individual receives SSI, they automatically receive Medicaid.

• Medicaid Waiver – Most states have Medicaid Waiver programs that provide coverage similar to basic Medicaid.  Many states have an income cap.  In 2013 the income cap is $2,130 per month. Most Medicaid Waivers have an asset limit, but they vary significantly from state-to-state and from program-to-program.

• SNAP (Food Stamps) – SNAP provides an Electronic Benefit Transfer (EBT) card to pay for food.  The amount depends on household income.  There is an assets limit of $2,000 or $3,000 if elderly.  Income varies with the size of the household.  All household members’ income is counted.

• Federally-Assisted Housing – This is also sometimes known as Section 8.  This program provides subsidized rent.  The rent is capped at 30% of family adjusted income.  There is no asset text.  Income must be at or below the Regional Maximum. This varies from region to region.

• Group Homes – Many states have group homes for disabled persons.  Generally, Medicaid pays for these group homes.  The income and asset tests tend to be the same as general Medicaid.

• CHIP – The Children’s Health Insurance Program (CHIP) provide medical assistance to low and middle-class individuals.  The recipient need not be disabled.  Only three states have an asset test. There is an income limit that varies from 90% of the federal poverty limit to 350%.

If an individual is receiving means-tested public benefits, a Special Needs Trust is required.

Public Benefits That Are Not Means-Tested

Certain public benefits are not means-tested.  These include:

• SSDI – SSDI is a cash benefit.  The amount depends on the amount paid into the Social Security system.  There are no income or asset tests.

• Medicare – Medicare provides medical coverage for hospital, out-patient, and prescription drugs.  Generally, Medicare is limited to acute care.  There are premiums, deductibles, copays, and maximums per spell of illness.  There are no income or asset tests.

If a person is receiving public benefits that are not means-tested, no special needs trust is required.

What is a Special Needs Trust and How Does it Operate?

A Special Needs Trust is a creature of statute.  These trusts were authorized by Congress in 1993.[1]  Essentially, there are seven requirements:

• Assets of the Individual – The trust must consist of assets of the individual.  The personal injury settlement is an asset of the individual.

• Under 65 – The individual must be under age 65 at the time the trust is established and funded.  A structure in place prior to the individual attaining age 65 can continue afterward.

• Disabled – The individual must be determined to be disabled by the Social Security Administration or the State Medicaid Agency.

• Sole Benefit Of – Distributions from the trust are limited to the sole benefit of the individual.  This is often a problem as family members tend to view the trust as the family bank account.  A strong trustee is essential.

• Established By – The trust must be established by a parent, grandparent, guardian, or a court.  A Self-Settled Special Needs Trust cannot be established by the individual except in the case of a Pooled Trust.

• Payback – On the death of the beneficiary, or upon the termination of the trust during the beneficiary’s lifetime, the assets in the trust must be used to repay Medicaid for all medical assistance paid to the beneficiary since birth.

• Irrevocable – The trust must be irrevocable.

Trustee

A professional trustee should always be utilized.  Family members often want to serve as trustee.  The trustee must be familiar with SSI law, Medicaid law, tax law, have investment expertise, and be familiar with fiduciary standards.  The trustee must also be able to say “no” to requests for inappropriate trust distributions.  Many states require corporate trustees in all but the smallest of Special Needs Trusts.  Most states require an individual trustee to be bonded, which is often difficult if not impossible.  Where an individual serves as trustee it is inevitably a question of when, not if, the trust will blow up in everyone’s face.  Family members can be appointed as Trust Protectors and given the right to remove and replace the corporate trustee with another corporate trustee.  This gives the family members comfort.

Essentially, the trustee makes distributions to third parties who provide goods and services, rather than to the trust beneficiary. A distribution to the trust beneficiary would reduce the SSI payment dollar-for-dollar.  Payment to third party providers for good and services are not considered income, unless they provide food or shelter, in which event the SSI payment is reduced by approximately one-third, but Medicaid continues.

Structured Settlement

If a structured settlement is paid to an individual plaintiff, that would cause a loss of means-tested public benefits.  By having the same structure paid into a Self-Settled Special Needs Trust, benefits are preserved.  Most states require that the beneficiary of the structure on death be the trust to ensure the Medicaid payback.