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., Esquire, CELA

CMS has released the Medicare and Medicaid numbers for 2017. They are as follows:

Medicaid

• Income Cap[1] $2,205
• Maximum Community Spouse Resource Allowance (CSRA)[2] $120,900
• Minimum CSRA[3] $24,180
• Maximum Minimum Monthly Maintenance Needs Allowance (MMMNA)[4] $3,022.50
• MMMNA (July 1, 2016 until June 30, 2017)[5] $2,002.50
• MMMNA (July 1, 2017 until June 30, 2018)[6] $2,030.00
• Excess Shelter Allowance (July 1, 2016 until June 30, 2017)[7] $600.75
• Excess Shelter Allowance (July 1, 2017 until June 30, 2018)[8] $609.00
• Maximum Resource Limit (Individual)[9] $2,000
• Minimum and Maximum Cap on Equity in the Home[10] $560,000 – $840,000

Medicare

Part A

• Medicare Co-Payment – Skilled Nursing Facility (SNF)[11] $164.50
• Hospital Deductible[12] $1,316
• Per day Co-Insurance – Day 61 -90[13] $329
• Per day Co Insurance – Day 91-150[14] $658

Part A Premium (for voluntary enrollees only)

• With 30-39 quarters of Social Security coverage[15] $227
• With 29 or fewer quarters of Social Security coverage[16] $413

Part B

• Medicare Part B Deductible[17]                                                                              $183
• Standard Part B Premium[18]                                                                                                                         $134

Medicare Part B – Single or Married and Filing Joint Return

Part B Income-Related Premium[19]

In addition, the monthly premium rates to be paid by beneficiaries who are married, but file a separate return from their spouse and lived with their spouse at some time during the taxable year are:

Standard Part D Cost-Sharing for 2017[20]

• Annual Deductible Maximum $400
• Member Pays 25% of the Next…                                        $3,300 (25% = $825)
• Initial Benefit Period Maximum                         $3,700 ($400 + $3,300)
• Donut Hole Threshold                                                                         $3,725

(Brand name drugs: 50% + 10% plan “subsidy,” Generic drug: 49% subsidy)

• Catastrophic Coverage             $4,950 ($400 + $825 + $3,725)

• Catastrophic cost-sharing:  Generic           $3.30/$8.25 or 5% (whichever is greater)
• Catastrophic cost-sharing: Brand        $7.40 or 5% (whichever is greater)

[1] 42 U.S.C. §1396a(a)(10)(A)(v); 2017 SSI and Spousal Impoverishment Standards, www.medicaid.gov.

[2] 2017 SSI and Spousal Impoverishment Standards, www.medicaid.gov.

[3] 2017 SSI and Spousal Impoverishment Standards, www.medicaid.gov.

[4] 2017 SSI and Spousal Impoverishment Standards, www.medicaid.gov.

[5] 2017 SSI and Spousal Impoverishment Standards, www.medicaid.gov.

[6] 82 Fed. Reg. 8832 (Jan. 31, 2017).

[7] 2017 SSI and Spousal Impoverishment Standards, www.medicaid.gov.

[8] 82 Fed. Reg. 8832 (Jan. 31, 2017).

[9] 20 CFR § 416.1205(c).

[10] 42 U.S.C. §1396p(f); 2017 SSI and Spousal Impoverishment Standards, www.medicaid.gov.

[11] 81 Fed. Reg. 80062 (Nov 15, 2016).

[12] 81 Fed. Reg. 80062 (Nov 15, 2016).

[13] 81 Fed. Reg. 80062 (Nov 15, 2016).

[14] 81 Fed. Reg. 80062 (Nov 15, 2016).

[15] 81 Fed. Reg. 80072 (Nov 15, 2016).

[16] 81 Fed. Reg. 80071 (Nov 15, 2016).

[17] 81 Fed. Reg. 80063 (Nov 15, 2016).

[18] 81 Fed. Reg. 80063 (Nov 15, 2016).

[19] 81 Fed. Reg. 80066 (Nov 15, 2016).

[20] http://www.medicareadvocacy.org.

A person who had a disability prior to age 26 may now setup an ABLE Account, and anyone may contribute to such account; provided, however, that total contributions to the account may not exceed $14,000. The person with the disability may use the money for “qualified disability expenses,” such as housing and basic living expenses. The utilization of the ABLE Account funds for such purpose will not be considered in-kind support and maintenance. To demonstrate the value of these accounts, I am going to use two common examples:

Parents Did Not Charge Rent: Ron’s Case

Ron is a 19-year old with Down Syndrome who lives with his parents. Ron just started to receive SSI; but, because his parents do not charge him for food or shelter, he receives a 1/3 reduction of his full benefit amount due to in-kind support and maintenance. The monthly household food and shelter expenses total $2,175, and because Ron is one of three people living in the house, he is responsible for a total of $725. Because of the reduction in income, Ron is unable to start paying his parents his pro rata share of the household food and shelter expenses. An ABLE Account is established for the benefit of Ron, and Ron’s parents contribute $2,000 to the account. Ron will pay his parents his $725 share of rent (from a combination of his SSI check and his ABLE Account). The rent payments will be reported to the Social Security Administration, and the Social Security Administration will then increase Ron’s SSI check to the full $735. To continue to receive the full benefit amount, Ron must continue to pay his parents rent. (Bear in mind that earned and unearned income may also factor into Ron’s benefit amount, but this is for a later discussion). 

Household Expenses Too High: Jackie’s Case

Jackie is a 35-year old with Cerebral Palsy who lives with her sister. When Jackie moved in with her sister, her pro rata share of household expenses totaled $1,000 and the full SSI benefit was not sufficient to cover her pro rata share. As a result, Jackie received a 1/3 reduction in her benefit due to in-kind support and maintenance. Jackie established an ABLE Account and the Trustee of her Special Needs Trust distributed $5,000 to the account. Jackie can now pay her sister $1,000 to cover her pro rata share of the expenses (via SSI and her ABLE Account). The change in circumstances will be reported to the Social Security Administration who would then increase Jackie’s SSI check to the full $735 a month. From that point forward, Jackie’s Special Needs Trust will continue to distribute money into her ABLE Account so that she can continue to pay her pro rata share of household expenses and receive her full SSI check.

Ask Kit Kat – All About Skunks

Hook Law Center:  Kit Kat, what’s the latest information about skunks, and what should you do if your pet has encountered a skunk?

Kit Kat:  Well, this can cause some problems you might not anticipate, though, generally, your pet’s encounter with a skunk can be quite harmless. Usually, the skunk gives some warning before employing its ultimate weapon—the spray. Initially, you may notice the telltale smell, but there may be other symptoms like drooling, sneezing, or vomiting. More severe symptoms can emerge a few days later like lethargy and pale gums. If the more severe symptoms appear, immediately take your pet to the vet to be checked. In most cases, the severer symptoms occur after a direct spray to the face.

Now, how to deal with cleaning your pet after a potent spray. Ordinary pet shampoo will not be strong enough. You will need to make your own mixture composed of 1 quart of 3% hydrogen peroxide, ¼ cup baking soda, and 1-2 tsps. of dishwashing liquid. Lather your pet well and let it sit for about 5 minutes. Then, thoroughly rinse with lots of water. If your pet has long hair, you may want to consider clipping them before shampooing, because a shorter coat will foster more effective results. There may be some bleaching of the fur with this procedure, but it is not harmful to them. Repeat as necessary.

To prevent your house/property from being attractive to skunks, there are several things you can do. First, if you store food in your garage/shed like bird seed or dry pet food, make sure it is in well-sealed containers. Second, make sure areas around decks are blocked, so they cannot make their home there. Third, keep exterior lights at night on or install motion-activated lights. Skunks do not like light. Fourth, discourage their nesting in your yard by sprinkling kitty litter in front of their den/hole or stuffing it with twigs and leaves. This will let them know, that they are not welcome.

Hopefully, with this knowledge, you will be well-equipped to handle your pet’s skunk encounter. If your pet is actually bitten, you should take your pet to a veterinarian right away. Skunks can carry rabies, and prompt medical attention could be crucial. (“Pets and Skunks: A Smelly Dilemma,” ASPCA Action, Issue #3, 2016, p. 8)

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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 Maximizing Your Child’s SSI by Utilizing ABLE Accounts first appeared on SEONewsWire.net.]]> http://www.seonewswire.net/2016/12/able-accounts-open-in-virginia/ Tue, 27 Dec 2016 15:35:09 +0000 http://www.seonewswire.net/2016/12/able-accounts-open-in-virginia/ For those of you who have been waiting for Virginia529 to open the enrollment process for ABLE accounts, your wait is over. The Stephen Beck, Jr. Achieving a Better Life Experience (ABLE) Act was signed into law in December, 2014…

By Thomas D. Begley, Jr., CELA

One of the trusts used in Medicaid Planning is a Disability Annuity Special Needs Trust (“DASNT”). A previous Straight Word article discussed a Disability Annuity Trust (“DAT”). These trusts are designed so that an individual can establish a trust and transfer assets to the trust for the benefit of a disabled child of any age or a disabled individual under age 65 without incurring a Medicaid transfer of asset penalty. The problem with that trust is that the assets in the trust are considered available for public benefit purposes. Therefore, if  a DAT were established for the benefit of an individual receiving Supplemental Security Income (“SSI”) and/or Medicaid, they would become ineligible for those public benefits because the assets in the trust would be countable. The solution would be to wrap a DAT inside a Special Needs Trust (“SNT”). In a Medicaid Planning context, the monies to be used to fund the trust would belong to the third party, usually a parent or a grandparent, so the SNT would be a Third-Party Special Needs Trust (“TPSNT”). In a typical situation, the parent would require long-term care and be applying for Medicaid.   In order to become immediately eligible, from an asset standpoint, the parent would transfer the assets to a DASNT. The trust is exempt from the SSI and Medicaid transfer of asset penalties, and the assets in the trust would not be considered available because of the special needs provisions.

Generally, a family member, other than the trust beneficiary, would be the trustee of the DASNT, although a professional trustee could be utilized.

There are seven main issues to be considered in drafting any trust involving a potential Medicaid recipient.

These include:

• Availability;
• Transfer of asset penalty;
• Payback provision;
• Funding;
• Tax considerations, including income, gift and estate taxes;
• Estate recovery; and
• Elective share.

Let’s examine each of these issues in the context of a DASNT.

Availability

The assets in the DASNT would not be available, because the trust would be designed to give the trustee complete discretion with respect to distributions. Standard Third­ Party Special Needs Trust language would be used in designing the trust. The standard DAT language would also be included. Because of the special needs provisions, the assets in the trust are not counted as assets of the beneficiary.

Transfer of Asset Penalty

There would be no transfer of asset penalty imposed upon the grantor, usually a parent or grandparent, by SSI and Medicaid, because there is a statutory exemption(1) from the penalties for transfers of assets to or for the sole benefit of individuals with disabilities. For a child with a disability, there is no age limit. If the beneficiary of the DASNT is an individual other than a child, there is an age limit of 65.

Payback

Whether a “sole benefit of” trust is subject to a Medicaid payback is open to question. New Jersey takes the position that such a trust must include a Medicaid payback and this issue has not been litigated. Under the provisions of HCFA Transmittal 64, a payback does not appear to be required so long as distributions are made to the beneficiary on an actuarially sound basis. This means that the distributions must be made over the actuarial life expectancy of the beneficiary as determined by the tables contained in HCFA Transmittal 64. Many states follow this interpretation with respect to “sole benefit of” trusts including DATs and DASTs.

Funding

Because a DASNT is a crisis Medicaid planning strategy, generally all assets are placed in the trust.   A careful analysis must be made as to whether to include retirement accounts. If the life expectancy of the grantor is short, a better strategy may be to take the risk and use the retirement accounts to pay for care. If the life expectancy is longer, the best strategy may be to simply pay the tax and transfer the after-tax assets to the DASNT.

Tax Considerations

• Income. The income generated by a DASNT is taxed to the beneficiary.

• Gift.  There would be a gift from the grantor to the trust for gift tax purposes.
• Estate tax. The assets in the trust would be excluded from the estate of the grantor, but included in the estate of the beneficiary.

Estate Recovery

There would be no Medicaid estate recovery from the estate of the grantor, but there would be estate recovery from the estate of the beneficiary. Since the state requires a payback, then the payback would replace the estate recovery provisions. The payback would include all medical assistance paid to the beneficiary since birth.

Elective Share

Transfers of assets to a DASNT would be subject to elective share considerations. It is good practice for both spouses to contribute the assets to the DASNT.

Comparison Between DAT and DASNT

CONSIDERATION             DAT                                                       DASNT

Typical Grantor                Parent/Grandparent                             Parent/Grandparent

Typical Trustee                 Family Member (Non-Beneficiary)         Family Member (Non-Beneficiary)

Assets Available                Yes                                                              No

SSDI/Medicare                 Yes                                                              Yes

SSI/Medicaid                    No                                                               Yes

Transfer Penalty               No                                                               No

HEMS Standard               Yes                                                              No

SNT Standard                   No                                                               Yes

(1) 42 U.S.C. §1396p(c )(2)( B).

Consider this example. Your mother created a Revocable Living Trust which divides one share of the trust among her then-living grandchildren, to be held in further trust for their benefit until they reach age 30, when they are entitled to an outright distribution of the remaining assets of their separate trust, and distributions are purely discretionary until age 30. When this trust was created, your daughter, who has Down Syndrome, was not yet born and like most people, your mother didn’t think to update her trust as a result of your daughter’s disability. When your mother dies, your daughter is 28 years old, is receiving SSI, lives in her own apartment that is subsidized by Section 8, and receives in-home support which is provided by a Medicaid waiver – she is happy and you know that your daughter’s current benefits and living arrangements provide a plan for her continued independence upon your death, and the loss of those benefits would jeopardize that plan. Your gut tells you that your daughter’s inheritance could be detrimental so you call Hook Law Center, and we inform you that a distribution of the assets at age 30 would cause your daughter to go over the $2,000 asset limit which would result in your daughter’s ineligibility for public benefits. We also explain that since your daughter is not yet 30, that pursuant to Virginia law, the trustee of the trust may exercise a decanting power by assigning trust principal or income to the trustee of a second trust (without the approval of the court of the beneficiaries) and that this second trust may be a special needs trust to protect your daughter’s public benefit eligibility.

While we have had to decant an old irrevocable trust into a special needs trust on a number of occasions, the question has often been whether this new second trust would be considered by the Social Security Administration and Medicaid offices to be a first-party special needs trust subject to a Medicaid payback, or whether this new trust would be considered a third-party supplemental needs trust. The first notable case pertaining to this issue was In the Matter of the Application of Alan D. Kross (N.Y.Surr.Ct. (Nassau Cty.), No. 2012-369907, Sept. 30, 2013). In that case, Daniel Schreiber was the beneficiary of his grandfather’s trust. Pursuant to the terms of the trust, Daniel was entitled to discretionary distributions of income and principal until age 21. Upon the age of 21, Daniel was entitled to mandatory income distributions paid at least quarterly, half of the principal at age 25, half of the remaining principal at age 30, and the balance of the trust assets at age 35. These mandatory distributions would have disrupted Daniel’s eligibility for SSI and Medicaid, so the trustees filed a petition requesting the court to approve the decanting of trust assets into a new third party supplemental needs trust prior to Daniel’s 21^st birthday. The court determined, in addition to other things, that because the old trust was a third party trust, the decanting of the trust assets occurred prior to Daniel’s right to receive the mandatory distributions. Therefore, decanting into the third-party supplemental needs trust was proper, and that no Medicaid payback would be required for the new trust. The New York State Department of Heath appealed the decision, which was upheld by Supreme Court of New York, in Matter of Kroll v. New York State Department of Heath.

The breadth of this case’s impact is not yet known. It may be that this case, only sets a precedent in New York when a beneficiary has not yet obtained the age to receive the outright distribution, or it may extend to all states and in cases where the distribution standards of the trust cause the trust to be an available resource. Regardless of the impact, those of us that focus on helping persons with special needs now have something we can turn to in considering how the decanting of a trust into a special needs trust may be treated in the future.

Ask Kit Kat – Pet Sitters

Hook Law Center:  Kit Kat, what should someone look for in the ideal pet sitter?

Kit Kat:  Well, there are several things you can consider when deciding to hire a pet sitter. Some need a sitter while they are away at work, and others only require them while they are away on vacation. My parents use a local pet sitting service called Critter Care. They’ve used it for many years going back to the early 1990s. Over the years, we’ve had several caregivers, but all have been excellent. Critter Care screens its employees; they are bonded, so the hard work is done for you. During each caretaking session, the caregiver keeps a daily log of when they arrive and leave your house. They also write observations about how your pet(s) behaved while they were tending to them. As a bonus, they will take in the mail and trash and even water plants that might be in flower pots. Fees are based on the number of pets and number of visits needed. Since we are an all-cat family, once a day is sufficient, but they will come as often as you like. We really like this, because we get to stay in our own house, and do not have to go to the vet and hear dogs barking at all hours of the day and night. We cats find that very off-putting!

Other possible sources for finding pet sitters are through national associations such as the National Association of Pet Sitters (NAPPS) and Pet Sitters International. Or your vet may have some recommendations. Sitters through associations usually have the advantage of being able to read reviews of the possible candidates. Make sure before hiring someone, you actually interview them and see how they interact with your pet. Sometimes your instincts are the best guide. Wendy Pridgen of Boyds, Maryland says, ‘Sometimes you just have to trust your gut and go with what feels right to you.’ And if Ms. Pridgen’s experience is any guide, there will be ups and downs in the process. At first, she hired a college student, and things worked out for a year. Then, the college student became erratic. She used her to take care of her 2 large dogs who needed to be walked during Ms. Pridgen’s long work days. There were signs the student wasn’t coming, so Ms. Pridgen left a broom by the door the student would enter. Ms. Pridgen exited by another door. When she found the broom hadn’t been disturbed, she knew the student wasn’t taking care of her dogs. The student was fired, and she eventually found a new one through a listing on a bulletin board of a local convenience store.

So, be aware that when you hire a pet sitter, it’s like anything else. Sometimes your first efforts will not be successful, but you keep on trying until you find a good fit for both you and your pet. (Ruthanne Johnson, “Someone to watch over them,” All Animals, November/December 2016, p.34-37)

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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 Decanting an Irrevocable Trust to Protect Public Benefit Eligibility first appeared on SEONewsWire.net.]]> http://www.seonewswire.net/2016/10/able-account-third-party-special-needs-trust-and-pooled-trust-compare-2/ Wed, 05 Oct 2016 16:19:19 +0000 http://www.seonewswire.net/2016/10/able-account-third-party-special-needs-trust-and-pooled-trust-compare-2/ by Thomas D. Begley, Jr., CELA Below is a chart comparing an ABLE Account with a Third-Party Special Needs Trust.     ABLE ACCOUNT THIRD PARTY SPECIAL NEEDS TRUST OR POOLED TRUST Onset of Disability Qualifying disability exists prior  to age 26   No requirement Age…

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

Availability. Assets in a Self-Settled Special Needs Trust (“SSSNT”) are not considered available for Supplemental Security Income (“SSI”) or Medicaid eligibility purposes. The reason is that the trustee is given sole discretion with respect to distributions from the trust. The beneficiary cannot control distribution or revoke the trust. Special needs language should be included for guidance to the trustee with respect to distributions.

Transfer of asset penalty. There is no transfer of asset penalty for SSI and Medicaid, because there is a statutory exemption under 42 U.S.C. § 1392b and 42 U.S.C. § 1396p(d)(4)(A).

Payback. A payback to Medicaid is required by law. The payback is for all Medicaid benefits received by the beneficiary since birth. It is not sufficient to pay back Medicaid benefits received from the date of the establishment of the trust to date. In the case of a personal injury settlement, the Medicaid payback is not limited to medical assistance related to the personal injury. All medical assistance provided by Medicaid from birth, whether or not related to the injury, must be included in the payback.

Funding. SSSNTs are generally funded by personal injury recoveries, inheritances, equitable distribution, alimony or child support. However, any asset can be used to fund an SSSNT.

Tax considerations.

• An SSSNT is considered a grantor trust. Therefore, the income earned by the trust is taxed to the beneficiary at the beneficiary’s tax rates.

• Transfers to an SSSNT are not completed gifts.

• Estate tax. Assets in an SSSNT are included in the estate of the beneficiary.

Estate recovery. There is no Medicaid estate recovery against an SSSNT, but a payback provision has the same effect.

Elective share. Assets in an SSSNT would be considered subject to the elective share.

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 by 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 SSI or 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.

by Thomas D. Begley, Jr., CELA

There are four main issues to be considered in drafting any trust involving a potential Medicaid recipient. These include:

• Availability;
• Transfer of asset penalty;
• Payback provision; and
• Tax considerations, including income, gift and estate taxes.

Let’s examine each of these issues in the context of a DASNT.

Availability. The assets in the DASNT would not be available, because the trust would be designed to give the trustee complete discretion with respect to distributions. Standard Third-Party Special Needs Trust language would be used in designing the trust. The standard DAT language would also be included. Because of the special needs provisions, the assets in the trust are not counted as assets of the beneficiary.

Transfer of Asset Penalty. There would be no transfer of asset penalty imposed upon the grantor, usually a parent or grandparent, by SSI and Medicaid, because there is a statutory exemption^[1] from the penalties for transfers of assets to or for the sole benefit of individuals with disabilities. For a child with a disability, there is no age limit. If the beneficiary of the DASNT is an individual other than a child, there is an age limit of 65.

Payback. Whether a “sole benefit of” trust is subject to a Medicaid payback is open to question. New Jersey takes the position that such a trust must include a Medicaid payback and this issue has not been litigated.

Tax Considerations

• Income. The income generated by a DASNT is taxed to the beneficiary.

• Gift. There would be a gift from the grantor to the trust for gift tax purposes.

• Estate tax. The assets in the trust would be excluded from the estate of the grantor, but included in the estate of the beneficiary.

[1] 42 U.S.C. §1396p(c)(2)(B).

by Thomas D. Begley, Jr., CELA

One of the trusts used in Medicaid Planning is a Disability Annuity Special Needs Trust (“DASNT”). A previous article discussed a Disability Annuity Trust (“DAT”). These trusts are designed so that an individual can establish a trust and transfer assets to the trust for the benefit of a disabled child of any age or a disabled individual under age 65 without incurring a Medicaid transfer of asset penalty. The problem with that trust is that the assets in the trust are considered available for public benefit purposes. Therefore, if a DAT were established for the benefit of an individual receiving Supplemental Security Income (“SSI”) and/or Medicaid, they would become ineligible for those public benefits because the assets in the trust would be countable. The solution would be to wrap a DAT inside a Special Needs Trust (“SNT”). In a Medicaid Planning context, the monies to be used to fund the trust would belong to the third party, usually a parent or a grandparent, so the SNT would be a Third-Party Special Needs Trust (“TPSNT”). In a typical situation, the parent would require long-term care and be applying for Medicaid. In order to become immediately eligible, from an asset standpoint, the parent would transfer the assets to a DASNT. The trust is exempt from the SSI and Medicaid transfer of asset penalties, and the assets in the trust would not be considered available because of the special needs provisions.

Generally, a family member, other than the trust beneficiary, would be the trustee of the DASNT, although a professional trustee could be utilized.

Moving to another state is a big undertaking for any family, but it can be particularly complicated when a family member has a disability. The secrets to a successful transition are advance planning and a backup plan in case of problems. Here are a few specifics to keep in mind.

Know what to expect with public benefits

If your family member with a disability is receiving Social Security Disability Insurance (SSDI) benefits, there should be no disruption in payments, as long as you inform the Social Security Administration as early as possible of your change of address. Supplemental Security Income (SSI) benefits should not be disrupted either, but the amount could change. In 2016, the federal maximum SSI benefit for an individual is $733 per month. However, some states add an optional state supplement or make food stamps or other benefits available to SSI beneficiaries, so those benefits may vary by state.

Plan in advance for health care needs

Health care is a primary concern, and in this area much can change when moving to another state. In addition to finding new doctors, therapists and other service providers, you should be prepared for changes in coverage. Private health insurance policies may have different coverage or premiums in another state. If you signed up for health insurance through the Affordable Care Act state exchanges, you can take advantage of a 60-day special enrollment period, but be sure to check the eligibility requirements ahead of time. Medicare benefits should not be affected by an interstate move, but Medicaid will need to be reapproved in the new state, and the services and support available through Medicaid varies from state to state.

Special education and other services

While students with disabilities are guaranteed a free and appropriate public education by the federal Individuals with Disabilities Education Act (IDEA), a special needs student’s Individualized Education Program (IEP) will need to be renegotiated. Other services, such as day care, social programs and in-home services vary greatly from state to state. ABLE Act legislation has not yet been enacted in all 50 states, and special needs trusts should be reviewed by an attorney to ensure that they are up to date and there are no problems created by the move.

Moving to a new state is a big project, but creating a checklist and engaging in advance planning will help you have an organized approach. Even with a detailed plan, it is a good idea to have a backup plan, and an emergency fund, in case of pitfalls along the way.

Learn more about our special needs planning and special education advocacy services at www.littmankrooks.com or www.specialneedsnewyork.com.

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by Thomas D. Begley, Jr., CELA

A Disability Annuity Trust (“DAT”) can be established for a disabled child or any disabled individual.^[1] However, in considering the use of a DAT for a disabled person, care must be taken to examine the other government benefits currently being received, or which may be received in the future by the person with disabilities.

If the person with disabilities is receiving Supplemental Security Disability Income (“SSDI”), this is usually accompanied by Medicare. SSDI and Medicare are insurance-based programs, rather than means-based programs. Receipt of income from the DAT would not cause a loss of SSDI or Medicare. However, consideration should be given to other benefits that the person with disabilities may receive in the future. For example, will the person with disabilities be a candidate for group housing in the future? If so, the existence of the DAT may cause them to lose that benefit.

If the person is receiving Supplemental Security Income (“SSI”), that person also receives Medicaid. SSI is a means-based program. Both resources and income are considered in determining eligibility. If the person with disabilities receives distributions from the DAT, this may well disqualify that person from receiving SSI and cause a loss of Medicaid. The assets in the DAT would be “available” which would also disqualify the SSI recipient from both SSI and Medicaid, because the assets in the trust would be considered resources. If a DAT is designed as a Special Needs Trust, public benefits may be preserved.

[1] HCFA Transmittal 64 § 3257(B)(6).

by Thomas D. Begley, Jr., CELA

Introduction

The United States Supreme Court in a 9-0 unanimous ruling held that an inherited IRA is not protected in bankruptcy under federal law.[1] Heidi Heffron-Clark inherited an IRA from her mother in 2001 and filed for bankruptcy nine years later. The court held that the IRA was not shielded from her creditors, because the funds were not earmarked exclusively for retirement. The Supreme Court indicated that creditor protection does not apply to inherited IRAs for a number of reasons:

• Beneficiaries cannot add money to an inherited IRA like IRA owners can to their accounts;
• Beneficiaries of inherited IRAs must generally begin to make Required Minimum Distributions (RMDs) in the year after they inherit the accounts regardless of how far away they are from retirement;
• Beneficiaries can take total distributions of their inherited accounts at any time and use the funds for any purpose without a penalty. IRA owners must generally wait until age 59-1/2 before they can take penalty-free distributions.

The court held that inherited IRAs do not contain funds dedicated exclusively for use by individuals during retirement. As a result, the favorable bankruptcy protection afforded to retirement funds under the Federal Bankruptcy Code does not apply.

The court did not rule on whether a Spousal Rollover IRA is protected from creditors. Like other IRA owners, if the money is rolled into their own IRA, they may have to pay a 10% early-withdrawal penalty if money is taken before age 59-1/2. If the money is not rolled over into the Spousal Rollover account, then it would appear that the assets will not be protected in bankruptcy.

A way to safeguard IRA and other retirement account assets from creditors is to name a trust as beneficiary of the retirement account.

Trust as Beneficiary

• The best practice is to name a standalone retirement trust as beneficiary for IRAs and other tax-deferred retirement accounts. Naming a trust as beneficiary provides more control. A trust can be drafted to protect the assets from a beneficiary’s creditors.
• If retirement account monies are left directly to heirs, the funds may be squandered by the heirs defeating any benefit of the long-term tax deferral. The trust provides protection from premature withdrawal.
• If the heir is divorced, the retirement account funds may be subject to claims of the non-heir spouse, or if the IRA is in a trust, the non-heir spouse will not be able to attach them.
• Benefit of Beneficiary. If a parent names a child as beneficiary of the parent’s retirement account and subsequently the child dies, that child may name the child’s spouse as beneficiary and the child’s spouse may remarry naming the new spouse as beneficiary. The retirement account would no longer remain in the bloodline. The trust can be designed so that on the death of the child the account passes to other family members and is kept in the bloodline.
• Special Needs. If the beneficiary has special needs, the trust can be drafted to protect the beneficiary’s entitlement to government programs such as SSI, Medicaid or any other means-tested public benefits.
• Finally, if the funds are placed in a trust no guardianship proceeding is needed upon the beneficiary’s incapacity.

[1] Clark v. Rameker, 134 S. Ct. 2242 (2016).

by Thomas D. Begley, Jr., CELA

There are seven Trust that should be addressed in considering Medicaid. These are: Revocable Trusts, Income Only Trusts, Children’s Trusts, Disability Annuity Trusts, Disability Annuity Special Needs Trusts, Self-Settled Special Needs Trusts, and Third Party Special Needs Trusts.

There are seven considerations in drafting trusts. These are: availability of trust assets, applicability of a Medicaid or SSI transfer penalty, Medicaid payback provisions, good and bad assets for funding trusts, tax considerations (including income, gift and estate), estate recovery, and elective share issues. This chart is designed to address each of those issues with each of those trusts at a glance.

Articulating what you both think your child’s abilities and needs are

The best place to start is to be clear that you both agree on what the child can and cannot do for themselves and the degree of assistance or care they will need. This will cover the additional help needed at home, school or with counselors.

Choosing who the child will live with

Deciding on who gets custody of the child, and whether it will be sole custody or joint custody, are hard decisions to make even with kids who don’t have special needs. When you factor in the unique needs of a special needs child, this decision becomes even more critical to the well being of the child. it will be important to put your child first when you decide on where he or she will stay. For a child with autism for instance, pulling them out of a familiar environment will make an already difficult situation harder. Try and work it out so that the parent who will be responsible for the child stays on in the family home. Don’t shift neighborhoods if you can avoid it, so they continue going to the same school and are not uprooted from a familiar social circle.

Working out a plan for adulthood

With special needs kids, the need for parental support may last well into their adult years. Provisions must be made for the emotional and financial well being of the child and decisions made on what happens once the child becomes an adult. Insurance plans may also be needed to offer them additional protection in the event of the death of the primary caregiving parent.

Alimony, child support, and public benefits

While working out alimony and child support, keep in mind that your child may need financial support even as an adult, in some cases this is a lifelong need. You will also have costs related to additional care, counseling or special medical treatment. However, you may also be eligible for public benefits.

Estate planning

Work through what happens in the event you or your ex pass away.  How will the estate be handled? Will there be someone appointed to oversee managing the estate? Work out these details to ensure you secure future for your child who may need to live off their inheritance from you and your ex. Detail what happens should either of you remarry and have kids.

Wherever possible try and consult with a divorce attorney familiar with special needs cases. They will be able to guide you on the role of Medicaid or SSI, special needs trusts and other benefits that apply to your situation, to ensure the best outcome for you, your spouse and your special needs child.

Gerald A. Maggio is an experienced Orange County divorce and family law attorney and family law attorney located in Irvine, California, serving the Orange County and Riverside areas. Mr. Maggio assists clients with legal issues including divorce, legal separation, divorce mediation, child custody, prenuptial agreements, stepparent adoptions, and other family law issues. Mr. Maggio has practiced law in California since 1999, and founded The Maggio Law Firm in 2005, focusing exclusively on divorce and family law matters.

by
Thomas D. Begley, Jr., CELA

Below is a chart comparing an ABLE Account with a Third-Party Special Needs Trust.

[An article originally published in the Straight Word, March 2016.]

By Thomas D. Begley, Jr., CELA

A Self-Settled Special Needs Trust is funded with the assets of the individual trust beneficiary. These trusts usually involve funds received as a result of a personal injury, inheritance, alimony, or child support. Under federal law, 1 a Self­Settled Special Needs Trust may be established by a parent, grandparent, guardian or court. In cases involving an adult with capacity court involvement is often unnecessary, so it is convenient to have the trust established by a parent or grandparent. In some states, such as New Jersey, it is possible to establish a “dry trust.” This means that the trust is established but not funded until a later date. In other states, a trust is not established until it is funded with at least a nominal amount of money. These are called “seed trusts.” In a strange but significant case,2 the parents of Stephany Draper sought to establish a self­settled special needs trust for a personal injury settlement that Stephany was receiving. Under the federal statute, a parent of the trust beneficiary is permitted to establish a self-settled special needs trust but the individual is not. Stephany was a competent adult who had executed a power of attorney appointing her parents as agents. The trust was funded by the personal injury settlement. It should be noted that Stephany’s parents did not use the power of attorney to establish the trust. The Social Security Administration (SSA) held the trust to be invalid. There could be no question but that Stephany is the type of person whom Congress intended to benefit from a self-settled special needs trust. What went wrong?

Generally, under traditional trust rules, a trust does not come into existence until it is first funded. The person who first funds the trust is considered the person who established the trust. However, some states, such as New Jersey, permit the establishment of a “dry” or “empty” trust, while other states require that a trust be seeded to be valid. These are called “seed trusts.”

When the parents established the trust, they made no reference to acting as agents under the power of attorney for Stephany. If they had been acting as agents, they would be acting on Stephany’s behalf and the trust would be invalid, because it would have been established by an individual. What the parents did not do was either recite its status as a dry trust and cite the statutory authority, or treat it as a seed trust and fund it with the parents’ money (i.e., $10). It is not entirely clear that treating the trust as a dry trust would have satisfied SSA. Had the parents paid the $10 into the trust, it is likely SSA would have recognized the trust as a valid trust. It should be noted that at the Hearing before the Administrative Law Judge, the Drapers did not rely on the fact that South Dakota permitted dry trusts.

In the appeal to the Federal District Court, counsel for the plaintiffs further confused the issue by stating that the trust is created by the funder and that the trust was funded by the parents using a power of attorney from Stephany. Under traditional trust doctrine, the person who first funds the trust is the establishor. The problem with plaintiff’s counsel’s argument is that if Stephany’s parents usecl a Power of Attorney from Stephany to fund Stephany’s trust, this would mean that Stephany funded the trust ancf was, therefore, the establisher. The Trial Judge noted that the amount of money placed in the trust was the exact amount of the personal injury settlement. This supported the argument of SSA that since Stephany’s money funded the trust, Stephany was the establisher of the trust and, thus, the trust was invalid. The court never determined whether South Dakota was a dry trust state or a seed trust state. The court found that Stephany’s trust was never an empty trust.

It was funded with Stephany’s money and, therefore, she was the establishor.

The Drapers could have avoided the problem had they funded the trust with $10 of their own money. They may also have avoided the problem if they had recited reliance on the South Dakota trust statute declaring that South Dakota recognizes dry trusts.

In the appeal to the 8111 Circuit, the issue was first funding. Unfortunately, the 8111 Circuit upheld the District Court with the result that Stephany’s trust was determined to be invalid, because it was established by Stephany. Essentially, the court held that the person who first funds the trust is the establishor of the trust.

So where does Draper leave us? At a recent conference at Stetson Law School, Ken Brown and Eric Skidmore, from the Social Security Administration (SSA), indicated that SSA is now taking the position that whoever first funds the trust is the establishor of the trust regardless of whether state law authorizes dry trusts. SSA trust reviewers are looking at trusts to determine if a parent deposited $10 or more of the parent’s money. One way to do this is to send Social Security a trust with a $10 bill attached. A better way would be to open a trust bank account with $10 and deposit that $10 before the personal injury settlement is deposited. It is always best practice in selecting a trustee for a First-Party or Third-Party Special Needs Trust to use a corporate fiduciary rather than an individual. The rules for administering these trusts are extremely complex. SSI and Medicaid rules change constantly, and individuals do not have the time or the expertise to keep up with these changes. Improper administration of a Special Needs Trust will cause SSI and/or Medicaid to declare the trust to be invalid. Failure to open a trust bank account with $10 and deposit that first and then deposit the personal injury settlement, may result in the trust being held to be invalid. This is one more technicality.

Although this raises another issue. If a Special Needs Trust is funded with the assets of a third party, it is a Third-Party Special Needs Trust. If a Special Needs Trust is funded with the assets of the beneficiary of the trust, it is a First-Party or Self-Settled Special Needs Trust. What Social Security is now requiring is a hybrid. The trust would be first funded with the assets of a third party (i.e., the parents) and then funded with the assets of the trust beneficiary; however, the trust would be considered a Self-Settled Special Needs Trust.

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., CELA

Historically, a member of the military could arrange for a pension and provide a survivor’s benefit to a spouse or child. A problem arose where the child had a disability and was receiving means-tested public benefits such as Supplemental Security Income (“SSI”) or Medicaid.   If the child with disabilities receiving those benefits or other means-tested public benefits received the pension, they would lose the benefits. This is because any income received from any source reduces the SSI income dollar-for-dollar, and if the pension exceeded the amount of SSI income, SSI would be completely lost. Medicaid is frequently linked to SSI, so that if SSI is lost, the Medicaid would be also be lost. What follows is a story of the Power of One.

An Elder and Disability Law attorney in Virginia, named Kelly Thompson, took up the cause of these beneficiaries with disabilities. Kelly enlisted help from the Special Needs Alliance, which is a national organization of lawyers practicing in the disability field and also the National Academy of Elder Law Attorneys. After several years of hard work, in late 2014 Congress enacted the Disabled Military Child Protection Act in the 2015 National Defense Authorization Act. This legislation allows military retirees and service members to designate their survivor benefit to a Special Needs Trust for the benefit of their disabled child or children.

By having the survivor pension benefits irrevocably paid into a Special Needs Trust, those funds are not counted in determining the financial eligibility of the disabled child. The net result is that the military member’s or retiree’s children with disabilities are able to benefit from the pension as well as maintain their vital public benefits.

Part of the requirements under the Disabled Military Child Protection Act is that an attorney certify that the child has previously applied for, or may in the future apply for, SSI or other benefits, and that the Special Needs Trust is compliant with all applicable state and federal laws. A template is provided for completion and signature

by Thomas D. Begley, Jr., CELA

Settlement Protection Trusts can be very useful tools in the settlement of a personal injury case. A Settlement Protection Trust is very flexible. However, it cannot be used where an individual is receiving means-tested public benefits. A Settlement Protection Trust is essentially a Support Trust designed to provide for the health, education, maintenance and support of the trust beneficiary.

A budget is prepared and the trustee can often simply write a monthly check to the beneficiary, so that the beneficiary can pay all of his or her monthly bills. In other cases, the beneficiary will simply obtain a credit card and send the credit card bills to the trustee for payment, so long as the expenditures are within the agreed-upon budget. The budget should be designed so that the money will last as long as the plaintiff lives, if that is possible.

When to Use a Settlement Protection Trust

Minor or Incapacitated Person—Plaintiff Not Receiving Means-Tested Public Benefits

In these situations, a Settlement Protection Trust is ideal. If there is a minor or incapacitated person, the monies can be deposited into the Settlement Protection Trust rather than the probate court.

In cases involving a minor or incapacitated person, the establishment of the Settlement Protection Trust must be approved by the court.

Competent Adult Not Receiving Means-Tested Public Benefits

Where a competent adult is not receiving public benefits, both New Jersey and Pennsylvania allow distributions to be made from income and principal without court approval. The beneficiary enjoys the advantages of the Settlement Protection Trust, and the trust serves to protect the settlement from being squandered by the injured plaintiff or being coveted by family members and friends.

Large Settlement—Client Receiving Means-Tested Public Benefits

In many large settlements, the client may be receiving SSI and Medicaid. In some cases, the Medicaid benefit may be modest and, therefore, unnecessary. In other cases, the Medicaid benefit may be significant, but can be replaced by insurance under the Affordable Care Act or a combination of Medicare and private insurance. In these cases, it is often beneficial to consider giving up the public benefits in exchange for greater flexibility in administration and avoiding the Medicaid payback.

by Thomas D. Begley, Jr., CELA

Personal Injury attorneys must inquire as to whether their clients are receiving public benefits. Certain benefits are means-tested, so that if the client receives money directly those benefits are reduced or lost completely. This article will outline the common public benefits and indicate whether the receipt of a personal injury settlement will affect those benefits.

Supplemental Security Income (SSI)

Supplement Security Income (SSI) is a means-tested federal program that provides income (a cash assistance grant) to certain aged (65 or over), blind, and persons with disabilities. If an individual has more than $2,000 of assets, he or she will lose SSI. Therefore, the receipt of a personal injury settlement will disqualify the plaintiff from SSI, unless the funds are placed in a Special Needs Trust.

Social Security Disability Income (SSDI)

This program is known as SSDI. It provides an income to disabled workers. It is an insurance program, not a welfare program. Receipt of a personal injury settlement will not affect the plaintiff’s SSDI.

Medicaid

Medicaid is a medical insurance program. There are many ways that individuals qualify for Medicaid. The vast majority of Medicaid recipients receive that benefit, because they are also receiving SSI. If they lose their SSI, they also lose their Medicaid. However, since the Affordable Care Act (ACA), millions of Americans now receive Medicaid regardless of whether or not they are disabled and regardless of whether they are receiving SSI.

For SSI-based Medicaid, there is an asset limit of $2,000. For ACA Medicaid, there is no resource limit. Therefore, receipt of a personal injury settlement by an SSI recipient will cause a loss of Medicaid. However, receipt of a personal injury settlement by a Medicaid recipient who obtained Medicaid through the ACA will not affect eligibility, except that the income from the settlement may push the income of the plaintiff above the income limits for eligibility under the ACA. The solution for an individual receiving SSI-linked Medicaid is a Special Needs Trust.

Medicaid Waiver Programs

Medicaid Waiver Programs are designed to provide Medicaid coverage for long-term care services. These services are typically delivered in the home or assisted living facilities. These services are vital to catastrophically-injured individuals. These programs have an asset maximum of $2,000. Receipt of a personal injury settlement would disqualify the plaintiff from Medicaid Waiver services, unless the funds are placed in a Special Needs Trust.

Medicare

Medicare is a program that pays medical costs of eligible beneficiaries. Unlike Medicaid, which is a welfare program, Medicare is an insurance program. Receipt of a personal injury settlement will not affect Medicare eligibility.

by Thomas D. Begley, Jr., CELA

Countable Asset for SSI and Medicaid

A question arises as to whether assets held in an MSA are countable for SSI and Medicaid purposes. This has been addressed by CMS in the WC context, but the same line of reasoning should apply to third party liability cases. CMS has stated that:[1]

Medicare Set-Aside Arrangements are not subject to any special treatment under Medicaid resource rules. These funds should be evaluated to determine whether they meet the legal definition of a resource for Supplement Security Income (SSI) and, therefore, Medicaid purposes, i.e., ‘cash or other assets that an individual owns and could convert to cash to be used for his or her support and maintenance.’ The funds must be in interest-bearing accounts. The funds may meet the SSI/Medicaid resource definitions.

There may be cases in which funds in a Medicare Set-Aside Arrangement are placed into trusts, possibly trusts that would satisfy the definition of “special needs trusts” under Section 1917 of the Social Security Act. In those cases, the funds might not be a countable resource, but that result would be solely on the basis of Medicaid, not Medicare, rules.

If the MSA funds are wrapped into a special needs trust, they would be considered inaccessible for SSI-related Medicaid and Food Stamp purposes. It is always good practice to have a professional trustee to administer a Self-Settled Special Needs Trust, because of the complexity of the issues involved. Most professional trustees will then retain the services of a professional custodian, such as MediVest Advisors, to administer the MSA subaccount. If the size of the MSA is significant, the cost can be sharply reduced by funding the MSA with a Structured Settlement. The average savings by utilizing a Structured Settlement, rather than a lump sum, is 46%.[2]

The Structured Settlement payment stream is paid directly to the special needs trust, and the trustee allocates the funds to the MSA subaccount.

[1] CMS Memorandum Questions and Answers, July 11, 2005, Q & A 13.

[2] Policy Clarifications—Food Stamp—Medicaid—SSI, PMS 13182340, PFS 13182540 (revised July 20, 2007).

by Thomas D. Begley, Jr., CELA

Introduction

Housing for an individual with disabilities is a major concern. The purchase of a residence is a very important decision involving a number of factors. This is particularly true where the individual is receiving means-tested public benefits such as Supplemental Security Income (SSI) and Medicaid. If there is a special needs trust involved, the SSI and State Medicaid Regulations must be carefully considered.

Selecting the Right Home

Often, a home must be made handicap accessible. In selecting a home, care must be taken to ensure that the home can be adapted for the individual with disabilities.

How Much to Spend

In determining how much to spend for the home, there are certain constraints that must be observed. The trust should last the lifetime of the beneficiary. How much can be spent on the home depends on the size of the trust. Most professional trustees will limit expenditures for a home purchase to between 15% and 25% of trust assets.

Who Should Own the Home?

In New Jersey, if the trust pays for the home, it must be titled in the name of the trust. This means that there are only two good options for homeownership:

• Special Needs Trust Purchases the Home. If the Special Needs Trust is a First-Party Special Needs Trust, that is funded with assets of the beneficiary, such as proceeds of a personal injury settlement, an inheritance, or equitable distribution, there are many disadvantages to the trust owning the home:

• One disadvantage is that when the trust beneficiary dies, the home must be sold to payback Medicaid.

• Sole Benefit Of. First-Party Special Needs Trusts follow a “sole benefit of” rule. If other individuals reside in the home with the beneficiary, such as other family members, they must contribute toward the operating expenses of the home.

• Parents Purchase the Home. Another option is to ask the court for an allocation of the personal injury settlement proceeds to one or both parents. Courts will usually be willing to make such an allocation, so long as it is reasonable. If the parents own the home, the Medicaid payback is avoided. However, if the parents own the home, the trust can only pay a pro rata share of the expenses of maintaining the home. If the family consists of two parents and two adult children, all of whom live in the home, the trust could only pay 25% of the expenses of maintaining the home.

Conclusion

Homeownership in personal injury settlement is always a complex issue. If the plaintiff suffers from disabilities, a First-Party Special Needs Trust should always be considered, and a professional trustee should be engaged to administer the trust.

by Thomas D. Begley, Jr., CELA

1. Grandchildren

Many grandparents would like to leave something to their grandchildren. Frequently, the grandparents have not thought of this idea, but are enthusiastic when it is presented to them. One way to remember the grandchildren in a Will is to leave a flat sum of money, i.e., $10,000 per grandchild, another is to leave the grandchildren a separate share. For example, grandparents with three children may want to divide their estate into four shares, one for each of the children and one to be divided equally among the grandchildren. Some grandparents want to establish trusts for their grandchildren and limit distributions for education. 529 Plans are also a popular idea for many grandparents.

2. Gifts/Loans to Children

Frequently, parents have made gifts or loans to one or more children, but not to all children. The Estate Planning attorney should ask whether the parents intended the gifts to be an advancement against the child’s share of the estate and whether they intend the loans to be repaid from the child’s share of the estate. Frequently, these loans are not documented and often children make no payments or default rather quickly.

3. Blended Families

A fairly high percentage of the population is engaged in a second or subsequent marriage. They have children by a previous marriage or marriages. Do the parents want to treat their children and stepchildren equally? If not, do they want to provide for their current spouse, and upon the death of the current spouse direct their estate to their own children? Do they want a portion of the estate to go outright to the children immediately upon death? Do they want their current spouse to have a life estate in the real estate in which the couple resides at the time of the first death? If so, who will pay the taxes, utilities and upkeep? Would the life estate end if the surviving spouse cohabits or remarries? Has a Prenuptial Agreement been signed? Should a Contract to Make a Will be considered?

4. Disability

Is there a family member with a disability? If so, is that family member receiving or likely to receive in the future any means-tested public benefits such as SSI or Medicaid? If so, a Special Needs Trust should be prepared.

5. Beneficiary Designations

The beneficiary designations on life insurance policies, annuities and retirement plans must be coordinated with the client’s estate plan. Clients should be advised to retitle any POD or TOD assets. IRA beneficiaries should be designated with a view toward rolling over and/or stretching out IRA distributions.

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

Generally, Medicare Set-Aside Arrangement (MSA) funds are deposited in a custodial account with a professional trustee or given to the client to self-administer. For cases less than $100,000, giving the funds to the client to self-administer makes sense. CMS has issued a letter of instructions to be delivered to the client who would be administering his or her own custodial account. Even if a client misuses the money, the personal injury attorney should be off the hook with respect to a subsequent malpractice claim.

If the MSA funds are self-administered by the client or administered by a professional custodian and held in a custodian account, they will be considered countable assets that will disqualify the client from asset-tested public benefits such as SSI and Medicaid. The solution to that problem is to deposit the funds in a Special Needs Trust. MSAs are generally administered by custodians such as Medivest. However, money in a custodial account is considered a countable asset for someone receiving asset-tested public benefits. In those situations, a Special Needs Trust (“SNT”) is required and the trust is designed so that the MSA funds are placed in a separate sub-trust within the SNT. Generally, a professional trustee will hire a professional custodian to administer the MSA sub-account. By wrapping the MSA sub-account in the SNT, the assets in that sub-account are no longer countable to the trust beneficiary.

[This article was originally printed in the Straight Word, a publication of the Burlington County Bar Association.]

by Thomas D. Begley, Jr., CELA

There are a number of mistakes that scriveners make in drafting special needs trusts. This article will discuss those that frequently occur.

1. Including a Payback Provision in a Third-Party Special Needs Trust. Payback provisions are a creature of Omnibus Budget Reconciliation Act of 1993 (OBRA-93).[1] This statute relates solely to first-party special needs trusts. There is no federal statute governing third party special needs trusts. These trusts are governed by the Program Operating Manual System of the Social Security Administration (POMS). There is no requirement in the POMS for a payback provision in a third-party special needs trust. Inclusion of such a provision would require the trustee to make such a payback and subject the scrivener to a potentially serious malpractice action.
2. Creating a Self-Settled Special Needs Trust for an Individual Over Age 65. Frequently, there is a personal injury settlement for a beneficiary over age 65. Often, these beneficiaries reside in assisted living facilities or nursing homes. They are receiving Medicaid and, in many instances, SSI. The personal injury attorney is anxious to protect the settlement and preserve public benefits. The trust attorney then drafts a self-settled special needs trust without inquiring as to the age of the beneficiary. Once the beneficiary attains age 65, he or she is no longer eligible for a special needs trust.[2]
3. Requiring Mandatory Distributions of Income. If a trust distributes income to a beneficiary, it is considered unearned income by SSI and Medicaid. If the income distribution is less than the amount of the SSI payment, the SSI payment is reduced dollar-for-dollar so nothing is gained. If the distribution exceeds the SSI payment, then SSI is lost and if the Medicaid is linked to SSI, then Medicaid is lost as well. The key to a special needs trust is that the trustee must have full discretion over distributions. A mandatory distribution provision would mean that the trustee does not have discretion over these distributions.
4. Inclusion of Crummey Powers. Often, an irrevocable life insurance trust (ILIT) is wrapped in a special needs trust. The trust is funded by a life insurance policy. If the special needs trust contains a Crummey Power giving the disabled beneficiary a right of withdrawal, then that right is income to the beneficiary in the month during which the right of withdrawal may be exercised and may disqualify the disabled beneficiary from SSI and Medicaid linked to SSI. The solution is to use a Cristofani Power giving someone other than the beneficiary with disabilities the right to withdraw.
5. HEMS Standard in a Special Needs Trust. Most trusts include a direction to the trustee to make distributions to the beneficiary for the beneficiary’s health, education, maintenance, and support. This is commonly known as a “HEMS” standard. Such a trust is generally done for an individual who is not receiving public benefits. This is called a support trust. However, if a special needs trust contains a HEMS standard it is not a special needs trust, because the essence of the special needs trust is the discretion in the trustee in making distributions.
6. Failing to Make the Trust Irrevocable. In the case of a self-settled special needs trust, the document must provide that the trust is irrevocable. If the trust is revocable, it is an available asset to the beneficiary and public benefits will be lost. In a third-party special needs trust, the document may provide that the third-party grantor may revoke the trust. Typically, the language will give the grantor the right to revoke the trust until the death of the grantor or until the trust is funded by someone other than the grantor.
7. Failing to Adequately Fund a Special Needs Trust. This is perhaps the most common problem with third-party special needs trusts. Parents want to establish a trust for their child with disabilities. They have three children, two of whom are healthy and one whom has a disability. They want the trust assets divided equally among the three children upon death. Good practice dictates that a Life Care Plan be obtained outlining the level of funding that will be required to maintain the child with disabilities in the lifestyle that the parents want for that child. The healthy children can work, so one solution would be to leave them no money or a smaller percentage. The other solution is to fund the third-party special needs trust with a second-to-die life insurance policy on the parents. These two strategies can be used in combination.
8. Selection of a Non-Professional Trustee. This is a very common and serious mistake. A professional trustee knows public benefits law, has investment expertise or hires such expertise, knows tax law, and is familiar with navigating the disability system. The professional trustee has no conflicts of interest and is in a position to say “no” to inappropriate distributions. The reason many individuals want a family member is cost. By the time the family member pays the bonding premium, if they can get a bond, hire someone to manage the money, and hire someone to prepare the tax return, they’ve usually spent far more money than they would in hiring a professional trustee. Family members often have conflicts of interest in that they will be receiving any money not distributed for the benefit of the beneficiary. Family members are often inclined to make a distribution that would be inappropriate. There is often conflict between the family member trustee and the beneficiary that destroys a family relationship.
9. Failure to Appoint a Trust Protector. When a professional trustee is selected, for the most part, the result are satisfactory to all concerned. However, there are occasions when a beneficiary is legitimately dissatisfied with the performance of the trustee. A trust protector is a good check and balance on the professional trustee. The Trust Protector can removed and replace trustee.
10. Failing to Give a Minor with Capacity a Power of Appointment over Trust Assets on Death. In New Jersey, a trustee cannot do estate planning for a minor. The typical self-settled special needs trust states that on death after the Medicaid payback, remaining trust assets go by intestacy. By giving the minor beneficiary a limited power of appointment upon attaining majority, the remainder of the trust assets can be distributed in a more appropriate manner.

[1] 42 U.S.C. §1396p(d)(4)(A).

[2] 42 U.S.C. §1396p(d)(4)(A).

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.

1. Is the Trust Necessary? Are public benefits, such as SSI and Medicaid, important to the client? The attorney must consider the restrictions on distributions. There are three important factors that must e considered before determining to use a self-settled special needs trust:

• Sole Benefit of Rule. Distributions from self-settled special needs trusts must meet the “sole benefit of” rule. This means that distributions can only be made for the beneficiary of the trust. This is frequently a problem with family members who tend to look at the personal injury settlement as the family bank account.
• Payback Rules. Under federal law,[1] on the death of the beneficiary of a self-settled special needs trust, Medicaid must be repaid for all medical assistance paid on behalf of the beneficiary since birth.
• Payments to Third Parties. Distributions from a self-settled special needs trust cannot be made directly to the trust beneficiary. This would be considered income and would reduce or eliminate not only SSI but Medicaid linked to SSI. A simple solution is to obtain a credit card in the name of a family member (i.e., a parent). That credit card bill can then be presented monthly to the trustee for payment.

If SSI and Medicaid are not important, then it is not necessary to be bound by these restrictions. An alternative to a self-settled special needs trust is a settlement protection trust, which is much more flexible. Other family members are permitted to incidentally benefit from the trust. There is not Medicaid payback, and distributions can be made directly to the trust beneficiary. The advantage of the settlement protection trust is it provides expert management of funds and prevents the beneficiary from squandering the settlement. Both settlement protection trusts and self-settled special needs trusts can be used in conjunction with structured settlements. The structured settlement is simply paid into the trust.

2. Size of Personal Injury Settlement. Is the personal injury settlement large enough so that public benefits are no longer necessary? A third party could use the transferred funds to pay the client’s expenses during the lookback periods and establish a third-party special needs trust with the balance. That strategy might work like this:

• Transfer the personal injury settlement.
• Lose SSI for three years – calculate the value of that benefit.
• Lose Medicaid for five years if an institutional level of care is involved, or no loss of Medicaid if an institutional level of care is not involved. Calculate the value of the lost Medicaid.]
  • Advantage
  • Third-party special needs trust (TPSNT)
  • No sole benefit rule
  • No Medicaid payback

Calculation – SSI:

$_________    Current SSI Monthly Benefit

x   36  Months

=

$_________    Total Loss of SSI

Calculation – Medicaid:

$_________    Average Annual Medicaid Benefit, Hospital and Physician

+

$_________    Average Annual Medicaid Payment for Prescriptions

+

$_________    Average Annual Payment for HCBS

+

$_________    Other Annual Medicaid Payment

=

$_________    Total Lost Medicaid Payment

x  5  Years

=

$_________    Total Loss of Medicaid – 5 Years

$_________    Total Loss of SSI

+

$_________    Total Loss of Medicaid – 5 Years

=

$_________    Total Loss of SSI and Medicaid

3. Private Medical Insurance. Is private medical insurance available under the Affordable Care Act (ACA) or in the open market to provide the services that Medicaid would otherwise be called upon to provide? One factor that must be considered is coverage. Typically, insurance under the ACA covers hospitals and doctor visits. It is similar to typical Blue Cross or Aetna policies. Many individuals who suffer from personal injuries need additional coverage for home care or extensive therapies. Insurance policies under the ACA can limit the number of visits for such things as psychological counseling, speech therapy, etc. Medicaid has no such limits. If it is anticipated that the trust beneficiary may eventually require care in a group home, this type of care is not covered by ACA or other private insurance. It is funded with Medicaid dollars.

4. Long-Term Care Planning. Would long-term care planning be a better option than establishing a special needs trust? For example, if a client is in a nursing home, the Medicaid payback could be significant. If the client has a long life expectancy, would traditional Medicaid planning involving transfers of assets to third parties make more sense? For example, suppose the net recovery was $2,000,000. Let’s suppose the private pay rate for the nursing home was $10,000 per month plus the client’s other income. The cost would be $600,000 plus inflationary increases over five years. Would it be better to retain this sum of money, have the client private pay, and transfer the balance of the funds to other family members to either use for themselves or to establish a third-party special needs trust for the nursing home resident? Nursing home abuse cases frequently involve plaintiffs who are over age 65 and who are ineligible for a self-settled special needs trust. In those situations, long-term care planning is the only truly viable strategy.

5. Would a guardianship account be as effective as a special needs trust? The problem with a guardianship account is that the funds in that account are considered an “available resource” for public benefits purposes. It is also sometimes difficult to get a court to approve distributions from a guardianship account. In almost every instance, a settlement protection trust is a better alternative than a guardianship account.

6. Alternatives to Public Benefits. While public benefits may be the immediate source of medical treatment, food, or housing, are there other alternatives that could be found to obviate the need for a special needs trust? Where the settlement is large, public benefits may be unnecessary. Depending on the type of coverage the plaintiff needs, private insurance may be available, either on the open market or through the ACA. The monthly SSI payment may not be important.

7. Costs of drafting the trust and administering it must be considered. The cost of drafting a trust is usually very modest in comparison to the total value of the personal injury settlement. The cost of administering the trust is also minimal.

8. Transfer of Assets. Can the beneficiary transfer assets to a third party, wait for three years for SSI, or five years for institutional Medicaid? See item #2 for a calculation as to how this may work.

[1] 42 U.S.C. §1396p(d)(4)(A).

[This article was originally printed in the Straight Word, a publication of the Burlington County Bar Association.]

In administering a special needs trust, it is crucial that the trustee not advance cash to the beneficiary. Historically, beneficiaries have sent their bills to the trustee for payment. An easier way to accomplish this objective is to obtain a credit card for the trust beneficiary. If the beneficiary has good credit, the card can be obtained in the beneficiary’s name. If the beneficiary does not have good credit or is a minor or is incapacitated, a credit card could be obtained in the name of a family member. The process of determining distributions from a special needs trust should begin by a trustee and beneficiary and/or beneficiary’s family developing a budget. The budget would be broken into three main categories.

One would be shelter expenses. The second would be transportation, and the third would be personal items. Generally, trustees should avoid paying for in-kind support and maintenance (ISM). ISM is defined as food and shelter. There are ten items of shelter expense that constitute ISM. Other categories of shelter expense do not count as ISM. The ten items that do constitute ISM are: mortgage payments, property insurance (if required by the mortgage holder), rent, gas, electricity, heating fuel, water, sewer, garbage collection service and real estate taxes. Frequently, the trustee must pay these expenses because the beneficiary simply does not have sufficient income to do it. Payment of these expenses results in a reduction of the SSI payment of one-third or one-third plus $20, depending on living arrangements. Transportation expenses include the purchase of a vehicle and maintenance including gasoline. It is easier for the beneficiary to get a credit card and pay for gas by a credit card than it is to pay cash. There are a whole host of personal items that can be more easily paid for by credit card than by cash or by sending bills to the trustee for payment.

During the last year, the POMS were changed to permit a special needs trust to reimbursement a third party for goods or services purchased on behalf of the trust beneficiary. This makes it easy for a parent to use a credit card to buy items for the beneficiary and have the credit card bills sent to the trustee for payment. However, there are certain rules that must be strictly followed. If it is impossible for the beneficiary or a family member to obtain a credit card due to bad credit, a secured credit card should be considered. Under a secured credit card, a deposit is made with the credit card issuer and an agreement signed so that if the credit card is not paid, the issuer can obtain payment through the funds on deposit to secure the card. The agreement must be carefully drafted to insure that under no circumstances will the beneficiary ever receive the funds on deposit with the credit card issuer. Rather, those funds would be returned to the trustee.

Credit Cards

In appropriate cases, the trust beneficiary, if an adult and competent, should obtain a credit card. The credit card should have a low limit so that it is not abused. Credit cards are loans, and loans are not considered income for SSI purposes.[1] The POMS state, “If a trust pays a credit card bill for the trust beneficiary, whether the individual receives income depends on what was on the bill. If the trust pays for food or shelter items on the bill, the individual generally will be charged with in-kind support and maintenance (ISM) up to the Presumed Maximum Value (PMV). If the bill includes non-food, non-shelter items, the individual usually does not receive income as a result of payment, unless the item would not be a totally or partially excluded non-liquid resource the following month.”[2] The trustee must examine each credit card bill to determine a number of factors:

• Did the beneficiary obtain cash from the credit card? If so, the cash would be income in the month received.

• Did the beneficiary charge any items that constituted ISM?

• Did the beneficiary charge any items that were for the benefit of a third party, rather than the trust beneficiary? If so, there would be a violation of the sole benefit rule and there may be a transfer of asset penalty.

The trustee may refuse to pay an inappropriate credit card bill or the inappropriate portion of a credit card bill.

In some situations, the beneficiary of a trust utilizes a credit card for items that violate the sole benefit rule. The trust may refuse to pay the bill. For certain beneficiaries, the trustee may want to negotiate a payment plan so that the beneficiary can make payments from his or her Social Security income. If negotiations fail, the trustee should petition the court prior to paying for a debt incurred for purchases made in violation of the sole benefit rule. Additionally, the credit card should not be used to pay for items that would be ISM, if this can be avoided.

If there is a third-party special needs trust, distributions for payment of credit card balances where the beneficiary has purchased items for the benefit of others do not violate the sole benefit rule. The trustee may want to seek reimbursement for such charges in appropriate cases.

Gift Cards/Gift Certificates

Trustees love to give trust beneficiaries gift cards or gift certificates. However, gift cards and gift certificates are considered cash equivalents. If a gift card/certificate can be used to buy food or shelter (e.g., restaurant, grocery store or VISA gift card), it is unearned income in the month of receipt. Any unspent balance on the gift card/certificate is a resource beginning the month after the month of receipt. If the store does not sell food or shelter items (e.g., book store or electronic store), but the card does not have a legally enforceable prohibition on the individual selling the card for cash, then it is still unearned income.[3] Best practice dictates the use of credit cards for beneficiaries of special needs trusts rather than gift cards.

[1] 20 C.F.R. 416.1103(f); POMS SI 01120.201 I 1 d.

[2] POMS SI 01120.201.I.1.d.

[3] POMS SI 01120.201 I 1 e.

THE IMPORTANCE OF A FINANCIAL ANALYSIS TO DETERMINE IF A SPECIAL NEEDS TRUST IS REQUIRED IN A PERSONAL INJURY CASE

by Thomas D. Begley, Jr., CELA

When a plaintiff receiving public benefits achieves a personal injury settlement, the plaintiff essentially has four choices:  (1) use a special needs trust (SNT) only; (2) use the SNT, but also buy ACA private health care; (3) do not use an SNT and buy ACA private insurance; or (4) do not use an SNT and attempt to become eligible for Medicaid-funded insurance through programs such as New Jersey Family Care.

Analysis of the Four Options with Respect to Special Needs Trusts

Let’s examine the advantages of each option.

1. Using an SNT only.  The advantage is that the plaintiff will continue to receive SSI, Medicaid, and other means-tested public benefits.  The disadvantages are that distributions from the trust must be for the sole benefit of the individual and that there is a Medicaid payback on the death of the trust beneficiary.

1. Use the SNT but also buy ACA private health care.  The advantage here is that the plaintiff’s SSI and Medicaid are protected.  The ACA insurance will result in a reduction or elimination of the Medicaid payback. Also, purchase of the ACA insurance may result in better health care and more access to health care providers than Traditional Medicaid.  The disadvantage is that the trust must pay the premiums for the ACA insurance, so this is a consideration in smaller trusts but definitely a good strategy for larger trusts.

1. Not use an SNT and buy ACA private insurance.  The advantage is that there is greater flexibility with respect to accessing the recovery.  The disadvantages are that the personal injury victim may squander the money and ACA insurance only covers what typical private medical insurance covers (i.e., hospitals and physicians), but does not cover what Medicaid Waiver programs cover, such as home- and community-based services or placement in group homes, assisted living facilities, or nursing homes.

1. Not use an SNT but rely on programs such as New Jersey Family Care.  The advantage is that there is greater access to the litigation proceeds.  The disadvantage is the money may be squandered, not everyone is eligible for New Jersey Family Care, and New Jersey Family Care does not cover hospital and physician costs.

Importance of SSI

If a personal injury victim is receiving means-tested public benefits such as SSI, Medicaid, Medicaid Waiver benefits, etc., it is often assumed that the plaintiff will require an SNT to preserve those benefits.  In the past, that conclusion was almost always true.  However, with the passage of the Affordable Care Act effective January 1, 2014, individuals with pre-existing conditions are now able to obtain private medical insurance and may not need to rely on Medicaid as much as prior to the ACA.  However, the analysis does not stop there.

Currently in New Jersey an SSI recipient is entitled to approximately $750 per month.  SSI comes with a COLA.  The value of the SSI payment over a lifetime is usually hundreds of thousands of dollars.

Who Will Hold the Money

In most cases, it makes financial sense to utilize an SNT if the plaintiff also receives SSI, unless the net settlement to the plaintiff exceeds roughly $3,000,000.  The SNT preserves SSI, which is often the individual’s only access to income.  In addition, if the plaintiff is incapacitated and is receiving means-tested public benefits, the litigation recovery must be placed in some kind of court-supervised entity, typically a guardianship or the Surrogate’s office.  It is always less expensive and easier to access funds held in an SNT than those held by a guardianship account or the Surrogate’s Court.  Funds held in a guardianship account or Surrogate’s Court are considered to be available for public benefits purposes and would cause a loss of both SSI and Medicaid.

Protecting the Plaintiff from Himself and Predators

Even if the plaintiff has legal capacity, frequently they do not have the sophistication to properly manage wealth.  An SNT allows the plaintiff to preserve eligibility for benefits, usually without court supervision in New Jersey, and to have a trustee with a fiduciary obligation to utilize the funds for the plaintiff’s sole benefit under a prudent investment strategy.  The trust also offers protection from financial predators including strangers, members of the opposite sex, and even family members looking to take advantage.  Under these circumstances, the SNT will provide the best option to safeguard and protect the person with a disability.

Budgeting

According to an analysis by Scott MacDonald, CSNA, Affordable Care Act’s Financial Effect on Settlement Planning, an individual receiving a net settlement of $1,000,000 that is placed into an SNT will receive an attainable annual total budget of $33,484.  If instead the plaintiff took the settlement and purchased private health care, even under the ACA, the annual budget would be reduced to $15,494.  If you add in the loss of the SSI COLA estimated at 2.5% over time, the plaintiff would be taking a 52% annual pay cut by not utilizing an SNT.  Using a similar analysis with a $100,000 net settlement, the SNT could provide $12,610 toward an annual budget, but if the beneficiary took the funds directly and lost SSI, the annual spending amount would be $3,614, a 71% reduction for life.  Under MacDonald’s analysis unless the plaintiff is netting at least $3,000,000, he will always be better off with an SNT.

New York State residents who receive Supplemental Security Income (SSI) also receive a state supplement.  For 2014, the maximum federal SSI amount is $721 and the NYS supplement is $87 bringing the maximum SSI benefit to $808 per month.  At this time, New York State residents receive these benefits in one payment from the Social Security Administration (SSA), usually direct deposited into the recipient’s bank account.  Starting October 1, 2014, New York SSI recipients will receive their federal SSI benefit and the state supplement benefit separately.  The reason for this change is because New York State will realize significant savings by administering the state supplement benefits directly instead of paying the SSA to administer this program on its behalf.

The New York State Supplement Program, Bureau in the Center for Employment and Economic Supports within the NYS Office of Temporary and Disability Assistance (OTDA) will be responsible for administering this benefit. All business will be conducted by telephone, fax or mail only. There will not be walk-in offices to handle questions or requests. A customer support center with a toll free number will be available to assist recipients and is expected to be available starting August 2014.

The only change NYS SSI recipients will notice is that they will receive two monthly payments instead of one.  NYS SSI recipients will receive their state supplement benefits in the same manner that they receive their SSI benefit. Direct deposits will go into the same account and payments will be issued on or before the first of each month.  Starting in August 2014, NYS SSI recipients should receive notice by the State Supplement Program Bureau of this change. If the recipient has a representative payee for SSI purposes, this payee will remain the same for the state supplement benefit.

For more information please visit http://otda.ny.gov/programs/ssp/.

Public benefits must always be considered in the settlement of a personal injury case.  They are important for two reasons:  (1) whether there is a lien to repay the public benefits, and (2) whether the plaintiff’s continued eligibility for public benefits depends on the establishment of a self-settled special needs trust.  Common public benefits include the following:

Supplemental Security Income (SSI) 

SSI is a monthly payment from the Social Security Administration to the SSI recipient.  The maximum payment for an individual for 2014 is $721 per month.[1]  For many people this is a significant benefit.  Over a calendar year, it is $9,132.  With inflation adjustments over a five-year period it might amount to $50,000.  SSI is essentially a welfare program.  It is “means-tested,” which means that there are income and asset tests to determine eligibility.  SSI does not have a lien against a personal injury settlement, but a special needs trust is required to maintain the plaintiff’s eligibility.

Social Security Disability Income (SSDI) 

The amount of the SSDI benefit, like Social Security Retirement, is based on the amount the worker paid into the system during his working career.  This is known as a PIA.  SSDI has no lien against the personal injury settlement and a special needs trust is not required to maintain eligibility.

Medicaid 

Medicaid is a medical payment program.  It provides very broad coverage.  There are a number of variations on this program.  One is straight Medicaid.  If a person’s income is less than $972 per month, he or she is aged, blind or disabled, and has assets of less than $2,000, he or she is eligible for Medicaid.  Another variation is New Jersey Family Care.  This is an income-based program.  There is no asset test.  Medicaid has a lien against a personal injury settlement.  A special needs trust is required to preserve eligibility for regular Medicaid, but not for New Jersey Family Care.

Affordable Care Act (ACA) 

The ACA is funded with Medicaid dollars for individuals who have income less than 138% of the Federal Poverty Level.  While it is unclear from the legislation and regulations and there has been no case law, it would appear that if an individual is receiving a Medicaid subsidy under the ACA, then there would be a lien against the personal injury settlement to the extent that Medicaid dollars were paid.  There is no asset test for ACA insurance, but to the extent the assets produce income, it affects eligibility and premiums.  Generally, a special needs trust would not be required.

Medicaid Waiver 

There are a number of Medicaid Waiver Programs in New Jersey.  Typically, these programs have an income cap of $2,163 per month for 2014 and an asset test of $2,000.  Medicaid Waiver Programs typically provide home care and care in residential settings such as group homes, assisted living facilities, and nursing homes.  Medicaid Waiver Programs have liens against personal injury settlements and special needs trusts are required in order to maintain eligibility.

Medicare 

Medicare is essentially a medical insurance program.  To be eligible, an individual must be over age 65 or disabled and receiving SSDI or Railroad Retirement Disability or suffer from End Stage Renal Disease (ESRD) or Amyotrophic Lateral Sclerosis (ALS).  Coverage is very broad, but there are copayments, deductibles, and premiums.  There is a Medicare lien against a personal injury settlement, but a special needs trust is not required to preserved eligibility.

Medicare Advantage 

A Medicare Advantage Plan is essentially a Medicare HMO.  Medicare Advantage Plans must provide all of the benefits covered by Medicare and they do offer additional coverage relating to deductibles and copayments.  Clients often purchase Medicare Advantage Plans rather than stay with Traditional Medicare, so that a Medicare Supplement is not required.  Medicare Advantage has a lien against personal injury settlements and a special needs trust is not required in order to maintain Medicare Advantage.

Supplemental Nutrition Assistance Program (SNAP) (formerly Food Stamps)  

SNAP provides assistance to eligible individuals and families to assist in the purchase of food.  There is an income test related to total household income.  There is also an asset test.  There is no lien against a personal injury settlement.  A special needs trust is often required to maintain benefits.

Federally-Assisted Housing 

Federally-Assisted Housing provides housing assistance, usually rental assistance, to low-income individuals and families.  There is a Regional Income limit for purposes of determining eligibility and, if an individual or family is determined to be eligible, the individual typically pays 30% of his or the family’s actual adjusted gross income as rent.  There is no lien against a personal injury settlement for federally-assisted housing.  There is no asset test, but income from assets is considered income.  A special needs trust is sometimes, but not always, required to maintain eligibility.

Temporary Assistance to Needy Families (TANF) 

The TANF program in New Jersey is called WorkFirst NJ.  The program provides temporary cash assistance and many other support services.  The program known as General Assistance is part of the WorkFirst NJ program and provides benefits to families or individuals even if they do not have children.  There is a lien against the personal injury settlement.

Therefore it is critical to obtain correct information from clients, so that liens can be satisfied, trusts can be established where necessary, and MSA accounts can be set up in appropriate cases.

This is the second part of a two-part article dealing with the impact of Windsor on taxation and public benefits.  This article will examine the impact of Windsor on public benefits planning.

In United States v. Windsor,[1] the United States Supreme Court declared §3 of the Defense of Marriage Act (DOMA) unconstitutional.  This section limited marriage to a union between one man and one woman.  Windsor did not apply to §2 of DOMA, which permits states to refuse to recognize the actions of another state on the issue of same-sex marriage.  Therefore, a couple married in New Jersey would have a valid marriage because the marriage was celebrated in a state that recognizes same-sex marriages.  However, if that same couple then moved to Pennsylvania, §2 of DOMA permits Pennsylvania to refuse to recognize the valid marriage celebrated in New Jersey.

• SSI.  The Social Security Administration (SSA) has taken the position that post-Windsor[2] for a same-sex married couple to be entitled to SSI benefits as a married couple, the applicant must have been married and domiciled in a state recognizing same-sex marriages.  Same-sex marriage is relevant in the SSI context in the application of SSI deeming rules and benefit amounts.[3]  In other words, if a member of a married couple applied for SSI, the income and resources of the other spouse would be deemed to the applicant’s spouse.  This could not have a positive effect, but could have a negative effect on the applicant’s eligibility.  Also, if there are two eligible spouses, the combined SSI benefit is only $1,082 per month for 2014[4] as opposed to $721[5] per month for a single individual or $1,442 for two unmarried individuals.  In this case, the marriage penalty is $360 per month.
• SSDI.  SSA has taken the position that to be eligible for SSDI, the applicant must have been married in a state recognizing same-sex marriages and domiciled in a state recognizing those marriages.[6]

• Lump Sum Death Benefits.  With respect to lump-sum death benefits, Social Security will recognize a claim assuming the same-sex couple was married in a state that recognizes same-sex marriages and that the deceased spouse was domiciled at the time of death in a state that recognizes same-sex marriages.[7]

• SSDI – Spousal Survivor Benefits.  To be eligible, the marriage must have been performed in a state recognizing same-sex marriages and the decedent must have been domiciled in a state recognizing same-sex marriages at the time of death.[8]

• Medicaid and CHIP.  The Centers for Medicare and Medicaid Services (CMS) has issued guidelines on how Windsor will affect Medicaid and the Children’s Health Insurance Program (CHIP).[9]  CMS has stated that there is two-prong test for many of these public benefits.  One is the state of celebration.  Was the marriage celebrated in a state that recognizes same-sex marriages?  Two is the state of domicile.  Does the same-sex couple reside in a state that recognizes same-sex marriages?

Medicaid is a joint federal/state program.  Funding comes partly from the federal government and partly from the state government.  Therefore, state law in the state of domicile must be considered.

Under the CMS guidance, CMS takes the position that to apply for Medicaid benefits the marriage must have been celebrated in a state that recognizes same-sex marriages and the couple must be domiciled in a state that recognizes same-sex marriages.  Suppose a same-sex couple is married in New Jersey and later applies for Medicaid in New Jersey.  Since New Jersey is the state of celebration and domicile, Medicaid should recognize the marriage.  This means that the assets of the community spouse would be deemed to the institutional spouse, and the community spouse would be entitled to keep the Community Spouse Resource Allowance, which is one-half of the couple’s combined countable assets with a maximum of $117,240 for 2014.[10]

The community spouse would also be entitled to the Minimum Monthly Maintenance Needs Allowance (MMMNA), which until June 30, 2014, is $1,938.75,[11] and which will increase to $1,966.25 for the period July 1, 2014 until June 30, 2015.[12]

• Medicare.  SSA has announced that Medicare Advantage Plans must provide coverage of post-hospital extended care services to Medicare enrollees through a home skilled care nursing facility, if the enrollee elects to receive coverage from such a facility and if the facility either has a contract with the MA organization or agrees to accept substantially similar payment under the same terms and conditions that apply to similar skilled nursing facilities that contract with the MA organization.[13]

• Veterans Benefits.  For most federal Veterans benefits, the same-sex marriage must be celebrated in a state that recognizes same-sex marriages, but there is no requirement that the applicant be domiciled in a state recognizing such benefits at the time of application.[14]

CHART

THE EFFECT OF WINDSOR ON TAXATION AND

PUBLIC BENEFIT PROGRAMS

R = Required; NR = Not Required

The second case showed problems at the opposite end of the spectrum.  In that case[2] BNY started with $403,000 in a trust.  The trustee expended almost $60,000 per year only $3,253.03 was left at the time of the accounting.  The court held that the trustee breached its fiduciary responsibilities to the beneficiary by failing to make decisions based on the long-term needs of the beneficiary that would extend the life of the trust for as long as possible.   BNY breached its fiduciary duty by authorizing each and every discretionary disbursement requested by the infant plaintiff’s mother.  A significant portion of the trust assets were expended on caregivers.  The court held that the trust had an obligation to inquire as to whether those services could be covered by Medicaid.  BNY did not show a good faith effort to seek Medicaid’s assistance for home health services.  BNY claimed that it was aware of communication that others had with Medicaid.  The court held that it was the duty of BNY, not the plantiff’s mother, to pursue Medicaid.  The court pointed out that considerable funds were expended on taxi services, i.e., in excess of $50,000 over four years.  The court held that this expenditure was excessive and inappropriate.  Funds were also expended for security deposits for housing, but when the beneficiary’s mother moved from one residence to another, no effort was made to obtain a refund of those security deposits from the landlords.  It was noted that notwithstanding the fact that the beneficiary was on SSI and Medicaid (excluding Home Health Services) considerable trust funds were expended for medicine that should have been paid by Medicaid.  The court also held that BNY breached its duty by failing to investigate whether $400 monthly payments to the beneficiary’s mother for food and clothing could have a negative impact on the beneficiary’s SSI and in turn on their Medicaid benefits.  The court pointed out that BNY made no effort to consult a professional on government benefits or assistance programs as required by the trust.  The conclusion stated that as one trust representative stated, “It was easier to accede to Mrs. Beltres’ monetary requests than to deny them.”

Planning

Special needs planning involves much more than trusts. Trusts are simply documents. The real value that an elder and disability law attorney and other members of the disability team bring to the table is the ability to assist in lifetime financial and personal care planning for the person with disabilities. The lawyer must understand the clients, their disabilities, their limitations, their strengths, their hopes, and their dreams. Planning involves an understanding of public benefits laws, tax laws, and the laws pertaining to special needs trusts.

In planning for special needs the following concerns must be addressed:

• An Individualized Education Plan (IEP) must be developed. The IEP must take into consideration the transition from high school at age 18 to post-school activities ensuring that all transition services are accessed.
• Letter of Intent
• Cost of services
• Apply for SSI at age 18
• Decide who will be guardian and obtain appointment of guardian at age 18, if the disability is mental illness or a cognitive disability that creates incapacity
• Decide how funds will be managed
• Prepare a Special Needs Trust
• Explore all health care options

Disability

What is a disability? The Social Security definition of disability is set forth in the Social Security Act, which reads:

“Disability means the inability to do any substantial gainful activity by reason of any medically-determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months. The impairment must be so severe that the individual is unable to do his or her previous work or any other ‘substantial gainful activity’ which exists in the national economy. The person’s ‘residual functional capacity’ and age, education and work experience will be considered in determining whether the person is able to do other work.”[2]

Substantial gainful activity (SGA) for a person with a disability is the ability to earn $1,040 per month in the workplace effective January 2013. For a blind person, SGA is $1,740. This is indexed for inflation.[3] SGA is now determined by the ratio of the national average wage index for the previous two years, comparing that amount to the current SGA level and taking the greater of the two. Section 7501 of the Deficit Reduction Act (DRA)[4] requires the Social Security Administration (SSA), before payments begin, to review eligibility decisions for people age 18 or older made by the state disability determination agencies in order to ensure that the individuals are, in fact, eligible for SSI benefits. Known as “pre-effectuation reviews,” these reviews are already conducted for people in the Old Age, Survivors, and Disability Insurance Program (OASDI) and for SSI beneficiaries who also receive OASDI benefits.[5]

The Hartford Study

The Hartford issued a study revealing some interesting facts about the lack of preparation on the part of parents of children with disabilities.[6] The study showed that parents of America’s 2.6 million children with special needs have not planned for the future of their children after the parents are gone. Highlights of the study included the following:

• 62% of parents of children with special needs have no plan to cover the cost of caring for the child when they are no longer able to do so.
• Parents who do have a plan often make mistakes that will disqualify their child from government benefits on which they now depend.
• 23% of parents spend at least $500 per month to address their children’s special needs.
• 60% of parents believe these costs will continue into adulthood, but less than half have a plan to cover the costs.
• Of the parents with a plan, only 42% are confident that it will cover their child’s lifetime needs.
• 65% plan to cover the anticipated cost of care with life insurance.
• 85% with a child under age 5 have life insurance.
• Only 46% with a child between the ages of 13 and 18 have life insurance.
• Half of all parents of children with special needs plan to leave money directly to the child.
• 58% name their child as beneficiary of life insurance, annuities, or retirement accounts.
• Only 25% of parents have established a special needs trust.
• Only 16% of parents with a plan created it with the help of a financial advisor or attorney.

Choosing a trustee of a special needs trust is a crucial decision to be made by the grantor of the trust. The range of options includes:

• Parent, sibling (or other individual)
• Financial institution
• Nonprofit organization
• Co-trustees

Each of these possibilities has potential advantages and disadvantages.

The appointment of a proper trustee and the drafting of appropriate removal powers are of critical importance in this type of trust. Very often, the family considers the money to belong to the family rather than to the beneficiary of the trust. The family often wants to be named as trustee in order to be in a position to control distributions. Such an arrangement can be fraught with peril insofar as public benefit eligibility is concerned. It is always advisable to have an independent, nonfamily member serve as the sole trustee or, at a minimum, as a co-trustee. A professional trustee can be objective and usually has skills, such as investment expertise, that family members lack. Requiring the trust to have an independent trustee also prevents a family trustee from being caught in an endless series of conflicts of interest. Often the court will insist upon the appointment of an independent trustee. If necessary, have a family member serve as trust protector with the right to remove and replace a professional trustee.

Advantages of selecting a professional trustee are:

• Knowledge of public benefits laws
• Knowledge of tax law
• Investment expertise
• Avoidance of conflict of interest
  • Familiarity with the system of social services available to the beneficiary.

It is good practice wherever possible to have a professional trustee for every special needs trust.

Whether a professional trustee can be removed is an important question. The first issue is whether the trustee can only be removed for cause, or whether he or she can be removed for any reason or no reason at all. If the trustee can be removed for any reason without cause, there should be limitation on the number of times that the removal authority can be exercised in any given period. The next issue is who will have the right to appoint or remove the trustee. A family member, other than the beneficiary, can be appointed as trust protector and can be given the authority to remove and replace a trustee. The authority should be limited to replacing the professional trustee with another professional trustee with trust assets under management of a certain size (i.e., $20 million). While $20 million may seem like a relatively small amount, it makes it possible to appoint a nonprofit as trustee or to deposit trust assets in a pooled trust. Many nonprofits do not have more than $20 million under management. The beneficiary should not have the authority to appoint or remove a trustee.

Parent/Sibling/Individual

The advantage in naming a parent or sibling as trustee is that the parent or sibling generally knows the beneficiary well.  It is thought that a parent or sibling will serve without compensation, but frequently this turns out not to be the case.  Even if the parent or sibling is willing to serve without compensation, the courts will generally require that they post a bond.  In order to ensure that the trust funds are properly managed, the trustee would need to hire a professional money manager.  The cost of the professional money manager and the bond frequently exceeds the cost of the professional trustee.  The family trustee usually has no knowledge of SSI and Medicaid rules, tax law, or investment expertise.  There is often friction between the family member and the trust beneficiary as to distributions.

When a family member is serving as trustee, fair and reasonable is not enough. Frequently, family members make mistakes resulting in the loss of public benefits to the trust beneficiary. These mistakes include failure to keep detailed records of expenditures, misuse of trust funds for the benefit of the trustee rather than the beneficiary, and failure to read the trust document or understand its terms. Family trustees must actively supervise all trust activity, which can be a time-consuming job. Grantors appointing family members as trustee often assume they will not have to pay trustee’s commissions. More often than not, the family member does charge these commissions. Frequently, family members resign from the job once they realize what is involved.

Frequently the family member named as trustee fails to realize the time and effort that is required to do the job correctly, and they do not understand the risk of liability in the increasingly contentious world of SSI and Medicaid eligibility and reimbursement.  Many family members who accept the job as trustee resign.  The family member serving as trustee serves with a target on his back.  The trustee has liability for failure to act properly.  The trustee is liable not only to the beneficiary, but the State Medicaid Agency and other remainder beneficiaries.

The solution is to appoint a professional trustee and name a family member as trust protector with the right to remove and replace the professional trustee with another professional trustee.

I.          2014 FIGURES

            A.         Medicaid

$2,163             Income Cap[1]

$117,240         Maximum Community Spouse Resource Allowance (CSRA)[2]

$23,448           Minimum CSRA[3]

$2,931             Maximum Minimum Monthly Maintenance Needs Allowance[4]

(MMMNA)

$1,966.25        MMMNA (July 1, 2014 until June 30, 2015)[5]

$589.87           Excess Shelter Allowance (July 1, 2014 until June 30, 2015)[6]

$2,000             Maximum Resource Limit (individual)[7]

            B.        Social Security

1.5%                For 2014 there has been a 1.5% increase for Social Security Benefits[8]

$2,642             The Maximum Social Security benefit for a single individual for 2014[9]

$721                Supplemental Security Income (SSI) – Single[10]

$1,082             Supplemental Security Income (SSI) – Couple[11]

$361                Supplemental Security Income (SSI) – Essential Person[12]

$8,657.26        Maximum Annual SSI benefit – Single[13]

$12,984.44      Maximum Annual SSI benefit – Couple[14]

$1,070             Substantial Gainful Activity (SGA) – Disabled[15]

$1,800             SGA – Blind[16]

7.65%              Tax Rate Employee[17]

15.30%            Tax Rate Self Employed[18]

$770                Trial Work Period[19]

$117,000         Maximum Social Security Wage Base[20]

$1,200             Quarter of Coverage[21]

            C.        Medicare

1.         Part A

$152    Medicare Co-Payment – Skilled Nursing Facility (SNF)[22]

$1,216 Hospital Deductible[23]

$304    Per day/Co-Insurance Day 61 -90[24]

$608    Per day/Co Insurance Day 91-150[25]

Part A Premium (for voluntary enrollees only)

$234    With 30-39 quarters of Social Security coverage[26]

$426    With 29 or fewer quarters of Social Security coverage[27]

2.         Part B

$147                Medicare Part B Deductible[28]

$104.90           Standard Part B Premium[29]

Medicare Part B – Single or Married and Filing Separate Return

Part B Income-Related Premium[30]

In addition, the monthly premium rates to be paid by beneficiaries who are married, but file a separate return from their spouse and lived with their spouse at some time during the taxable year are:

Standard Part D Cost-Sharing for 2012[31]

$310                Deductible

$2,850             Initial Benefit Period

$4,550             Donut Hole Threshold

$2.55               Catastrophic cost-sharing:  Generic

$6.35               Catastrophic cost-sharing:  Brand

            D.        Tax

$14,000           Annual Gift Tax Exclusion[32]

$145,000         Gifts to Non-Citizen Spouse[33]

$12,150           Income Level/Maximum Tax Estates and Trust[34]

$406,750         Income Level/Maximum Single Individual Income Tax[35]

$5,340,000      Federal Estate Tax Exemption[36]

$3,950             Personal Exemption[37]

$1,900             FICA Wage Threshold[38] Domestic Workers

$7,000             FUTA Wage Base[39]

$5,500            Maximum IRA Contribution[40]

$1,000             “Catchup” IRA Contribution[41]

$114,000 –

$129,000         Applicable Allowable Limit Roth IRA Single Taxpayer[42]

$181,000 –

$191,000         Applicable Allowable Limit Roth IRA Married Taxpayer Filing

Jointly[43]

0.9%                Medicare Tax on Earned Income over $200,000 – Single, over $250,000 – Married[44]

3.8%                Medicare Tax on Unearned Income over $200,000 – Single, over $250,000 – Married[45]

            E.         Long-Term Care Insurance

$330                Exclusion from income taxation of daily LTC insurance benefits[46]

Tax Deduction of LTC Premium[47]

$370                40 years old or less

$700                41 to 50 years old

$1,400             51 to 60 years old

$3,720             61 to 70 years old

$4,660             more than 70 years old

            F.         Standard and Poor’s 500 Index

2.12% average S&P dividend yield January 14, 2013.[48]

            G.        Veterans Aid and Attendance/House-Bound Benefits[49]

1.         Aid and Attendance 

$1,759 per month       Veteran with no dependents

$2,085 per month       Veteran with one dependent

$1,130 per month       Spouse of deceased Veteran with no dependent

            2.         House-Bound Benefits

$1,289 per month       Housebound Veteran, no dependents

$1,615 per month       Housebound Veteran, one dependent

$864 per month          Housebound spouse of deceased Veteran, no dependent

II.        EXPLANATION OF TERMS

            A.        Medicaid

1.         Income Cap.  Many states use an income cap to determine eligibility for some or all Medicaid Programs.  These are known as income cap states.  Generally the income cap is calculated at 300% of the maximum federal SSI benefit rate for a single individual.[50]

2.         CSRA.  The Medicaid Catastrophic Coverage Act (MCCA)[51] was designed to avoid impoverishing a community spouse where one spouse is institutionalized.  Some states permit the community spouse to retain all countable resources up to the maximum CSRA.  Other states permit the community spouse to retain one half of the countable resources not to exceed to maximum CSRA and to retain all countable resources up to the minimum CSRA.[52]

3.         MMMNA.   Under MCCA, the Community Spouse is entitled to a Minimum Monthly Maintenance Needs Allowance.[53]  If the income of the Community Spouse falls below the MMMNA, the Community Spouse can retain income from the Institutionalized Spouse to bring the Community spouse up to the MMMNA. Some states permit the Community Spouse to keep all of the income up to the Maximum MMMNA.  In other states, the MMMNA is made up to two components, the basic allowance and the excess shelter allowance.

4.         Excess Shelter Allowance.  Excess Shelter Allowance is calculated by totaling the Shelter Expenses of the Community Spouse.  These expenses are limited to rent, a mortgage (including principal and interest), taxes and insurance, utility expenses, and maintenance charges for condominium or co-op.   Some states use a flat amount or amounts for the utility allowance.

5.         Maximum Resource Allowance.  Medicaid has a maximum resource allowance for single individuals of approximately $2,000.  SSI states follow SSI rules.  The SSI resource limit is $2,000 for an individual and $3,000 for a married couple when both apply for benefits.[54]

            B.        Social Security

1.         Cost of Living.  Social Security benefits are indexed to inflation and are adjusted annually to reflect increases in the cost of living.

2.         Maximum Social Security Benefit.  Social Security Benefits fall into three categories: Social Security Retirement, Social Security Disability Income (SSDI) and Supplemental Security Income (SSI).  Social Security Retirement and Social Security Disability Income (SSDI) are based on payments made into the Social Security System by wage earners during their working careers.  SSI is a welfare program.  There is a maximum Social Security Benefit for any single individual.  This is also adjusted annually.

3.         SSI Benefit.  There is a maximum federal benefit for SSI for single persons and a separate maximum for married couples.  Some states provide a state supplement to the federal benefit.  There is also a maximum annual SSI benefit.

4.         Substantial Gainful Activity.  To be eligible for either SSDI or SSI, the applicant must be disabled as defined in the Social Security Act.[55]  The statute references the applicant’s inability to perform “substantial gainful activity.”  Substantial gainful activity is the ability to earn more than a certain amount published by the Social Security Administration (SSA) on an annual basis.  There are two income levels to determine substantial gainful activity.  One is for the general population and one is for blind.

5.         Trial Work Period.  During a trial work period, a Social Security beneficiary receiving disability benefits may test his or her ability to work and still be considered disabled.  Social Security does not consider services performed during the trial work period as showing that the disability has ended until services have been performed in at least 9 months (not necessary consecutive months) in a rolling 60 month period.  Any month in which earnings exceed the trial work period amount is considered a month of service for the individuals trial work period.  The trial work period amount is adjusted annually.

6.         Social Security Wage Base.  There is a Social Security tax imposed on income up to the maximum Social Security Wage Base.  Income in excess of the wage base is not subject to the Social Security tax.[56]

7.         Insured Status.  To be eligible for Social Security Retirement Benefits or Disability Benefits, a worker must have insured status.  This means the wage earner must accumulate a certain number of quarters of coverage.  The wage earner is “fully insured” for life if he or she has 40 quarters of coverage.  The wage earner is currently insured if he or she has 6 quarters of coverage during a 13 quarter period ending with the quarter in which the person became entitled to benefits.  The amount of earnings required for a quarter of coverage is adjusted annually.

            C.        Medicare

1.         Medicare Part A.   Medicare is a medical insurance program that pays for a broad range of medical services.  Generally, Medicare Part A covers hospitalization and certain limited coverage in skilled nursing facilities as well as the first 100 days of home care and hospice benefits for the terminally ill.  There are premiums, co-payments, deductibles and maximums per spell of illness.[57]

2.         Medicare Co-Payment – Skilled Nursing Facility.  If a person is eligible for Medicare in a skilled nursing facility, Medicare pays the first 20 days in full but days 21 to 100, the Medicare recipient pays a co-payment and Medicare pays the balance.[58]

3.         Deductible.  Under Medicare Part A, Hospital coverage is limited to 90 days per spell of illness.[59] For 60 days there is a deductible which is adjusted annually.

4.         Co-Insurance.  For the next 30 days of hospitalization, the patient pays co-insurance of 25% of the deductible.[60]  For days 91 to 150 for spell of illness, utilizing “lifetime reserve days,” there is a co-payment of one half of the deductible.[61]

5.         Medicare Part B.   Medicare Part B covers physicians, diagnostic tests, medical equipment, ambulance services, outpatient physical and speech therapist, certain home care and prostheses.[62] Medicare Part B is available to persons over 65 years of age or eligible for Part A and who are receiving SSDI after two years.

6.         Medicare Part B Deductions.  There is a deduction for services covered by Medicare Part B.  The amount of the deduction is adjusted annually.

7.         Premiums.  Under Medicare Prescription Drug Improvement and Modernization Act of 2003 (Medicare Act of 2003), beneficiaries pay premiums depending on their income.  Premiums are adjusted annually.[63]

8.         Medicare Part D.  The Medicare Act of 2003[64] provides a prescription drug benefit known as Medicare Part D. To be eligible, individuals must be eligible for either Part A or Part B of Medicare. Individuals may obtain the prescription coverage either through a standalone prescription drug plan (PDP) or through a Medicare Advantage Plan (MA-PD).

            D.        Tax

1.         Annual Gift Tax Exclusion.  Tax payers are permitted to make gifts up to a certain amount each year without any gift tax consequences.  This is known as the annual gift tax exclusion.  The exclusion is indexed to inflation.[65]

2.         Gifts to Non-Citizen Spouse.  The estate and gift tax marital deduction is not allowed for transfers to a spouse or a surviving spouse who is not a U.S. Citizen.[66]  The concern is that the non-citizen spouse will leave the country and avoid federal estate tax.  For federal gift tax purposes, the maximum that a spouse can give to a non-citizen spouse is adjusted annually.

3.         Income Level/Maximum Tax, Estates and Trust/Single Individual Income Tax.  Generally, it is advantageous to distribute income from estates and trusts to individuals rather than pay the tax at the estate or trust tax level. Under the federal Internal Revenue Code, income is taxed on a graduated basis.  The maximum income tax rate is 35%.  The maximum income tax rate for an estate or trust is achieved at a much lower level of income than the maximum tax rate for an individual.[67]

4.         Federal Estate Tax Exemption.  There is an exemption from the federal estate tax for each taxpayer’s estate.  This is sometimes known as the unified credit.[68]

5.         Personal Exemption.  Each taxpayer is entitled to a personal exemption which is adjusted annually.  If a person pays more than 50% of support of a relative and a relative had gross income for the year less than the personal exemption amount and has not filed a joint return with his or her spouse and the person paying the support may claim the relative as a dependant on the person’s federal income tax return.[69]

6.         Federal Insurance Contributions Act (FICA) Wage Base.  Social Security and Medicare Part A taxes are imposed on all employers and employees on cash wages in excess of the threshold in any calendar year.[70]  Social Security Old Age, Survivors, and Disability Insurance (OASDI) taxes are limited to the Social Security wage base.[71]  There is no limit for the imposition of the tax for Medicare Part A.

7.         Federal Unemployment Tax Act ( FUTA) Wage Base.  If an employee receives total cash wages in excess of the FUTA Wage Base in any calendar quarter, Federal Unemployment Taxes must be withheld.[72]

8.         Deductible Contribution Traditional IRA.  Taxpayers are permitted to take a tax deduction for contributions to a traditional IRA.  The deductible amount is $5,000 for 2012.  In addition, taxpayers 50 years and over are entitled to a “catch up” contribution of $1,000 per year.[73]  In calendar year 2012, a maximum deductible contribution is indexed to inflation in increases in multiples of $500.[74]

9.         Applicable Dollar Limit Roth IRA.  Generally a Roth IRA is treated in the same manner as a Traditional IRA.  However, no deduction is allowed for contributions.  Contribution limits are the same as for Traditional IRAs.  To be eligible to contribute to a Roth IRA, the bona fide adjusted gross income cannot exceed the applicable dollar amount.[75]

            E.         Eligible Long-Term Care Insurance

1.         Exclusion from Taxable Income.  A person who is insured under a qualified long-term care insurance policy is entitled to an exclusion from taxable income a daily amount of long term care insurance benefit.  This is adjusted annually for inflation.

2.         Premium Deduction.  A portion of the premium for long-term care insurance is deductible as a medical expense.  The amount of the allowable deduction depends on the age of the policy holder and is adjusted annually.[76]

            F.         Standard and Poor’s 500 Index

The Standard and Poor’s 500 Index (S&P 500) is an index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors.  The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe.  Companies are selected by a team of analysts and economists at Standard and Poor’s.  The S&P 500 is a market-value weighted index – each stock’s weight in the index is proportionate to its market value.  The front-end yield is the average dividend yield for the entire group of stocks.[77]

            G.        Veterans Aid and Attendance/House-Bound Benefits

1.         Aid and Attendance.  A Veteran or the spouse of a deceased Veteran may qualify for Veterans Aid and Attendance benefits.  Essentially, the claimant must be so helpless as to require the aid of another person to perform the functions required by everyday living.  The need for A&A need not be permanent.  Aid and Attendance is a monthly check from the Veterans Administration to the Veteran.  It may be used to pay for a health companion, friend or relative who is caring for an elderly Veteran or the Veteran’s spouse.  It is particularly useful for eligible Veterans in assisted living facilities, because these funds can be used to offset the cost of the assisted living facility.

2.         House-Bound Benefit.  House-bound benefits are available to Veterans who are totally and permanently disabled.  The Veteran must be permanently house-bound.  If a Veteran is 65 or older, he is presumed to be disabled.  No disability rating is required, but the VA will require a physician’s affidavit regarding the claimant’s condition.  The Veteran is entitled to HB benefits, if he or she has a disability rated at 100% disabling under the VA rating schedule and the Veteran is substantially confined to home.[78]  If the Veteran has a 100% disability with an additional disability independently ratable at 60% or more, house-bound is not a factor.[79]

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.

1. Liens.  It is important to determine at the outset of the case and then reaffirm at the conclusion of the case whether the plaintiff is receiving any public benefits.  Is the plaintiff receiving Medicare?  If so, there will likely be a Medicare lien and this must be satisfied from the settlement proceeds.  If the plaintiff is receiving SSDI, he will receive Medicare within two years after his Disability Determination.  It is good practice to obtain a Conditional Payment Letter prior to mediation, and later obtain a Final Payment Letter from CMS.
2. Medicaid Lien.  If the plaintiff is receiving SSI, he automatically receives Medicaid in New Jersey.  Even if the plaintiff is not receiving SSI, he may be receiving Medicaid under a waiver program.  It is important to ascertain whether the plaintiff is receiving Medicaid and, if so, to obtain a Medicaid Payoff Letter.
3. Other Liens.  Other liens  must be addressed.
4. Medicare Set-Aside Arrangement (MSA).  If the plaintiff is receiving Medicare or has a reasonable expectation of receiving Medicare within 30 months, an MSA should be considered even in a third party liability (TPL) case.

Determine the following:

• Is plaintiff receiving benefits from Social Security Disability Insurance (SSDI)?
• Is plaintiff receiving benefits from Railroad Retirement Disability (RRD)?
• Has plaintiff applied for SSDI?
• Has plaintiff applied for RRD?
• Is plaintiff appealing an SSDI denial?
• Is plaintiff appealing an RRD denial?
• Does plaintiff suffer from End Stage Renal Disease?
• Does plaintiff suffer from ALS?
• Will the plaintiff be receiving any further treatment related to this injury?

1. Structured Settlement.  Has a structured settlement been considered?  Has a proper allocation been made between a lump sum and a structured settlement?  It is always good to have a lump sum if the plaintiff wants to buy a home, a vehicle, take a vacation, or buy personal effects as a television, etc.  It is ALWAYS wise to set aside an emergency fund in a lump sum.  Generally, a balance of 50% lump sum, 50% structure makes sense, but this ratio varies on a case-by-case basis.
2. Investment Management.  If the plaintiff is receiving a significant lump sum for all or a portion of a settlement, have a recommended expert money manager to assist in investing the funds.
3. Special Needs Trust.  If the beneficiary is receiving any means-tested public benefits including, but not being limited to, SSI, Medicaid, Medicaid Waiver, SNAP (formerly Food Stamps),  Section 8 Housing, or Group Home, a Special Needs Trust should be considered.  The plaintiff should be disabled and have a Disability Determination from the Social Security Administration.  If he does not have such a determination, could he apply?
4. Settlement Preservation Trust.  If the individual is a minor, an incapacitated person, or a young adult, has a Settlement Preservation Trust been considered?  If there is a large settlement where money management is important, has a Settlement Preservation Trust been considered?  If there is to be a structured settlement, has a Settlement Preservation Trust been considered?  If the plaintiff has a structured settlement, he can sell it on the open market.  If the structured settlement is held by a Settlement Preservation Trust, it is much more likely that the structured settlement will not be sold.  The trustee of the Settlement Preservation Trust will manage the money in such a way to avoid needing to sell the annuity contract.  In addition, the trustee will withhold consent to the sale of the structured settlement in almost all instances.
5. Tax Issues.  Have income, estate and gift tax issues been considered?
6. Estate Planning Documents.  Does the injured plaintiff have a Will, Living Will, and Power of Attorney? Are all of his beneficiary designations on life insurance, annuities, and IRAs appropriate?
7. Estate Planning Documents – Parents.  In the case of a plaintiff who has a disability, do the parents have estate planning documents including Wills, Living Wills, Powers of Attorney, and Third Party Special Needs Trust?  If the parents die and leave money to the child with a disability, he will lose his public benefits.  By utilizing a Third Party Special Needs Trust, the child’s public benefits may be maintained and the child can enjoy the inheritance from the parents.
8. Medical Insurance.  Does the plaintiff have adequate medical insurance?  Even if the plaintiff has Medicaid and Medicare, better insurance may be available.  Not all providers accept Medicaid.  Medicare has deductibles, copayments, and maximums per spell of illness.  Any plaintiff having Medicare should have either a Medicare Supplement or convert to Medicare Advantage.  If the plaintiff has a pre-existing condition as a result of the injury, a Medicare Supplement may not be available, but a conversion to Medicare Advantage is possible during an open enrolment period.  A number of alternatives are available to obtain private medical insurance.
9. Public Benefits.  Has the plaintiff applied for all public benefits for which he may be eligible?
10. Probate.  Is probate necessary?  In a wrongful death case probate is almost always necessary.  In addition to qualifying as an executor or administrator, it is often necessary to file a federal or New Jersey estate tax return or a New Jersey inheritance tax return based on the amount of the personal injury settlement and any other assets the estate of the deceased plaintiff may have.

In 2002, there were well under $2 billion in the sales of prescription stimulants. In 2012, such sales approached $8.5 billion.

The Centers for Disease Control and Prevention reports that 15% of high school students now have this diagnosis and that the number of children on such medications has increased from 600,000 in 1990 to 3.5 million currently.

What is perhaps most striking is the loosened definition of ADHD. A child may be diagnosed if, for example, she “makes careless mistakes” or “often has difficulty waiting his or her turn.”

This means that there is a similarly striking increase in the number of children who are diagnosed with this disability and have a right to an Individualized Educational Plan (IEP).

The cost to school districts is enormous. They must pay for aides, special services, and sometimes private tuition in a specialized school if the mainstream educational system is not able to handle a severely disabled child. As a result, there are fewer resources for those who are most severely disabled.

If given a choice, every parent would choose a course of action that will allow a child to perform brilliantly.

One doctor who has published prolifically on this point, told Reuters Health: “If a child is brilliant but is doing just okay in school, that child may need treatment, which would result in their performing brilliantly at school.” The New York Times article quotes Dr. Joseph Biederman, a “prominent child psychiatrist at Harvard University in Massachusetts General Hospital.” Dr. Biederman’s research has been substantially funded by the pharmaceutical industry.

Today one in seven children is diagnosed with ADHD by the age of 18. Because the medical literature and pharmaceutical information indicates that one never graduates from this condition, it is a life long diagnosis.

The article points out that the drug industry is now targeting adults.

In 2012, the article points out that almost sixteen million prescriptions for ADHD medication were written for individuals between ages 20 and 39. This is triple the amount from just five years before.

Impact on Public Benefits, Social Services

The excellent and very lengthy New York Times article did not identify or explore the impact on our public benefits and social services systems. With an explosive growth in diagnoses, there has not been a comparable growth in funding for needed support services. The impact on income programs – SSDI and SSI – has not been explored. Yet, the impact is profound. Millions of adults are now receiving or seeking “disability” status so that they can receive government income benefits and Medicaid and/or Medicare as their health insurance programs. This places enormous fiscal strains on such income and health programs. Again, those who are severely and, some would say, legitimately disabled are now sharing limited resources with a dramatically expanded pool of public benefits recipients. The bottom line is that they receive fewer services and, inevitably, lower quality services.

To understand how loose, all inclusive, and arguably inappropriate this is, look at the New York Times article and take the online test that asks “whether you could have ADHD, too.” They reprint a web page of drug marketer Shire and its quiz that, in effect, encourages adults to believe they have or might have ADHD. The New York Times conducted a poll of 1,106 Americans. Almost half had a result of “ADHD possible” or “ADHD may be likely.”

The quiz asks, for example, “How often to you fidget or squirm your hands or feet while you have to sit down for a long time?” It asks, “When you have a task that requires a lot of thought, how often do avoid or delay getting started?” The other four questions identify behaviors that, arguably, the vast majority of us have on a daily basis.

I took the test. I scored 14, which means “ADHD may be likely.” I wonder what would have happened if, when I was in high school, I was given this test. Would I have been medicated? Would I have been as successful?

There is no doubt that millions of Americans have conditions that can be helpfully addressed by sport, counseling, and sometimes pharmaceutical assistance. The inescapable conclusion of the article – a conclusion reinforced by my experience – is that the pharmaceutical industry has been far too successful in generating millions of additional ADHD diagnoses. All of us are harmed as a result.

Pioneers of Elder Law – For over 30 years, Gilfix & La Poll Associates LLP has innovated creative legal solutions to help you manage and plan the future of your estate.
To contact an estate planning lawyer visit http://www.gilfix.com/ or call 800.244.9424.

Disabled individuals who cannot work are entitled to Social Security disability benefits, but the process of applying can be lengthy and difficult. The majority of applicants are denied benefits at the outset, and they may be uncertain of how to proceed.

When we discuss Social Security disability benefits, we are talking about two different programs. Social Security Disability Insurance (SSDI) is available to people who have paid into the Social Security system through taxes during the 10 years before they became disabled. Supplemental Security Income (SSI) is available for people who have not paid enough into the system to be eligible for SSDI. To be eligible for either type of benefits, one must be “unable to engage in any substantial gainful activity” – i.e. “work” – because of a “medically determinable” disability lasting one year or more or expected to result in death. The questions of whether or not an individual is disabled and whether or not he or she can work are the key factors in determining eligibility for benefits.

The first stage in the process is the initial interview. A disabled individual may contact the Social Security Administration (SSA) to set up an appointment. One must have been disabled for five months before applying for SSDI benefits; there is no waiting period for SSI benefits. An applicant should bring two forms of identification to the interview, and any medical records that provide evidence for the disability. If there are records the person has not obtained, he or she may sign a medical records release form permitting the SSA to obtain them. If an individual is not able to go to a Social Security office, he or she may conduct the interview by telephone or appoint another person such as a family member to represent the disabled person at the interview. The process of deciding on the application takes from three to six months.

The majority of claims are denied at the initial application stage, but this should not deter disabled individuals from continuing with the process. Often a denial is the result of insufficient records or information that has not been presented persuasively. The second stage of the process is a request for reconsideration, which also involves an interview and the submission of any additional evidence. If the request is denied, then the third stage is to file for a hearing before an administrative law judge. An attorney can assist an applicant at any stage of the process; at the hearing stage and beyond, such assistance may be invaluable.

At an administrative hearing, the disabled person may present the testimony of witnesses and any other additional evidence. The government may also hear the testimony of a vocational expert and/or a medical expert who will offer their expert opinions regarding whether the applicant is disabled and whether he or she is unable to work. If the applicant is unsuccessful at this stage, he or she may file a claim with the Appeals Counsel Review Board. If the appeal is denied, then the last option is a civil lawsuit in District Court.

At any stage at which the benefits are granted, they will be retroactive to the date of the original application. If it is determined that the disabled individual is not able to handle the cash benefit appropriately, then a representative payee will be appointed to handle the money for the disabled person’s benefit.

For more information about disability law, visit www.specialneedsnewyork.com.

Supplemental Security Income (SSI) is an ongoing source of funds meant to pay for food and shelter; Medicaid pays for medical expenses. Both are designed for an individual who has assets totaling no more than $2,000. So, if you or your loved one is receiving SSI and Medicaid and then also receives a personal injury settlement, you (or your loved one) will become ineligible for SSI and Medicaid.

Back in 1993, Congress authorized the establishment of special needs trusts, and assets transferred to one of these trusts is typically not counted when determining if there is asset eligibility for SSI or Medicaid. That is why a special needs trust is so attractive: funds can be placed in the trust to help with expenses, such as travel, education, and recreation, if structured that way. Special needs trusts can offer flexibility, which can be much needed financial support when the individual has only SSI and Medicaid for final support for the rest of his or her lifetime. But there are limits on what a special needs trust can and cannot be used for.

If you are interested in what a special needs trust can do to help protect assets, please contact me. Together we can design the trust that best fits your needs.

Learn more at http://www.michiganelderlawattorney.com/

By:   Sheryl R. Frishman, Esq.

Many parents of adult disabled children do not realize that their children may be entitled to Social Security Disability Insurance Benefits (SSDI) and Medicare.

SSDI and Medicare adult disabled child benefits are designed to provide financial and Medical support to disabled children, over the age of 18, of parents who have paid into the Social Security program. The eligibility rules for these benefits are extremely complex.

Basically, an applicant needs to be able to prove the following:

• He or she is unable to earn a substantial income through work as a result of a qualifying physical, mental or emotional condition that he or she has had since before the age of 22; and

• At least one of his or her parents has worked enough quarters to qualify for Social Security benefits and has since died, retired or become disabled from working.

A disabled adult child may be entitled to SSDI and Medicare in addition to SSI and Medicaid.  Additionally, the adult with a disability, in some circumstances may be eligible to work and remain eligible for SSDI and Medicare benefits.  Further, the Social Security Administration has numerous work incentives, allowing the adult child to work and still receive benefits.

The Social Security Administration puts out a guide for “Benefits for Children with Disabilities” which can be found at http://www.ssa.gov/pubs/10026.pdf.

If you or your spouse are retired or disabled and receiving Social Security benefits and have a disabled adult child who has been denied the SSDI benefits, the experienced attorneys at Littman Krooks, LLP can assist you in filing an appeal, so that your child can obtain the benefits they are entitled to. Our firm represents adult children with disabilities in SSDI appeals on a contingent fee basis, which means that there is no out of pocket legal costs for filing the appeal.

For more information, visit www.specialneedsnewyork.com.