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

The Concept

A sole benefit of trust is a creature of HCFA Transmittal 64.’ These trusts have traditionally been used in crisis planning. They can be established for the benefit of disabled persons—a Disability Annuity Trust (“DAT”).2 The idea is that assets would be transferred to an irrevocable trust for the sole benefit of the disabled individual. The assets in the trust were then paid out to the beneficiary on an actuarially sound basis using the actuarial tables contained in HCFA Transmittal 64.;i However, some states, including New Jersey, maintain that despite the clear language in HCFA Transmittal 64, the language in the statute “sole benefit of” means that a Medicaid payback provision is required. Because the assets were transferred to an irrevocable trust “for the sole benefit of” a disabled individual, the transfer is not subject to the Medicaid transfer penalty rules.

This is a particularly useful device where (1) there are highly appreciated assets and utilization of the trust makes it possible for a “step up” in basis to be obtained, and (2) advanced planning has not been done and the transfer of assets to children would result in significant periods of Medicaid ineligibility. There are two issues to be considered in utilizing “for the sole benefit of” trusts: transfer rules and availability.

Transfer of Asset Penalty

A sole benefit of trust is exempt from the Medicaid transfer of asset penalties.

Age limit

If the sole benefit of trust is established for a disabled child, there is no age limit.

Sole Benefit of child

The trust can be established for a disabled child age 65 or older.4

Sole benefit ofother disabled individual

If the sole benefit of trust is established for an individual other than a child, the other individual must be under age 65 years of age and disabled.5

Definition of sole benefit of

HCFA Transmittal 64 deals with transfers of assets and treatment of trusts.6 For the sole benefit of is defined as follows:

A transfer is considered to be for the sole benefit of a spouse, blind or disabled child, or a disabled  individual if the transfer is arranged in such a way that no individual or entity except for the spouse, blind or disabled child, or disabled individual can benefit from the assets transferred in any way, whether at the time of the transfer or at any time in the future. For a transfer or trust to be considered for the sole benefit of one of these individuals, the instrument or document must provide for the spending of funds involved for the benefit of the individual on a basis that is actuarially sound based on the life expectancy of the individual involved.7

Despite the clear definition of sole benefit of in HCFA Transmittal 64, many states, including New Jersey, require that the sole benefit of trust have a provision requiring a payback on the death of the beneficiary to the state Medicaid agency.

The key issue concerning trusts “for the sole benefit of” is availability. In a private letter, HCFA, now CMS, has taken the position that a trust established for the sole benefit of a community spouse under HCFA Transmittal 64 is an available resource.8 HCFA maintained that there is a material difference between a standard annuity and an “annuitized” trust. HCFA states:

A standard annuity can protect the funds used to purchase the annuity from being counted as resources in determining eligibility for Medicaid. However, there is a fundamental difference between a standard annuity and the “annuitized” trust you established. A standard annuity requires the actual purchase of a commodity; i.e., the annuity itself. A specific amount of money is given to the entity selling the annuity, in return for which the entity contractually agrees to provide an income stream for a specified period of time. Upon completion of the transaction, the buyer no longer owns the funds used to purchase the annuity. Instead, the buyer owns the annuity itself. If the annuity is irrevocable, as most annuities are, the buyer cannot reclaim ownership of the funds used to purchase the annuity. The buyer is only entitled to the income stream purchased and only for as long as the annuity stipulates. This is essentially the same as the purchase of any item or product where funds are exchanged for ownership of something else.

Therefore, it is clear from this letter that assets in a sole benefit of trust are available to the beneficiary of the trust.

Therefore, if the beneficiary is receiving Social Security Disability Income (“SSDI”) and Medicare, a DAT is appropriate. Beneficiaries receiving Supplemental Security Income (“SSI”) and Medicaid must utilize a Disability Annuity Special Needs Trust.

An advantage of a DAT are there is no transfer of asset penalty. However, a Medicaid payback is required on the death of the beneficiary of the trust. Income from the trust is taxed to the beneficiary. There is a gift for gift tax purposes, but because of the $5,450,000 lifetime exemption, this is not a major consideration for most people. The assets of the trust would be included in the estate of the beneficiary of the trust, not the Grantor.

Begley Law Group, P.C. has served the Southern New Jersey and Philadelphia area as a life-planning firm for over 85 years. Our attorneys have expertise in the areas of Personal Injury Settlement Consulting, Special Needs Planning, Medicaid Planning, Estate Planning, Estate & Trust Administration, Guardianship, and Estate & Trust Litigation.

1 HCFA Transmittal 64 § 325 7.

2 HCFA Transmittal 64 § 3258.9B.

1 HCFA Transmittal 64 § 3258.9B.

* 42 U.S.C. § 1396p(c)(2)(B)(iii).

5 42 U.S.C. § 1396p(c)(2)(B)(iv).

6 HCFA Transmittal 64 § 3257.

7 HCFA Transmittal 64 § 3257(B)(6).

8 Letter dated April 16, 1998, from Robert A. Streimer, Disabled and Elderly Health Programs Group, Center for Medicaid and State Operations, Health Care Financing Administration, to Jean Galloway Ball.