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

Funding

Many clients who use Children’s Trusts as part of their Medicaid planning are non-crisis planning clients. They either have an early diagnosis or are elderly but in good health. They are doing advance planning and want a sense of independence. They do not want all of their assets in a trust. Good practice dictates that the lawyer have a discussion with the client and determine how much the client feels should be kept out of the trust to give the client a feeling of comfort. The client should understand that the funds retained outside the trust are at risk, unless they are transferred to children to be held pursuant to the terms of a Family Agreement. Ideally, the trust will be funded with the least amount of assets possible. In calculating how much to put in the trust, the client can carve out assets that can be used in the future for the following:

• Amount of Community Spouse Resource Allowance (CSRA);
• Amount of the anticipated spend down as set forth in the client’s Asset Protection Plan;
• Key money to gain admission to a facility; or
• Any amount of money the client is willing to lose. Typically, a single client will want to retain $50,000 – $100,000 of assets and risk losing that amount in order to preserve a sense of independence. To a certain extent, this will be determined by the medical condition of the client.

Ideal Assets

Ideal assets to fund a Children’s Trust would include appreciated real estate, such as a primary residence or a vacation home, or appreciated securities. There are significant tax advantages in utilizing trusts for these assets as opposed to transferring outright to children. Careful consideration must be given to rental real estate, because the parent would no longer be entitled to the rent after the property is transferred to the Children’s Trust.

Bad Assets

Bad assets to use in funding trusts include retirement accounts, deferred annuities, and government bonds with significant accumulated interest. The problem is the transfer of those assets would result in immediate income tax. To the extent possible, these assets should be left outside the trust.

Tax Considerations

Income Tax

A Children’s Trust can be designed as a grantor trust so that the grantor pays the tax on any income, or .a non-grantor trust where the income is taxed either to the trust itself or to the beneficiary, depending on the design of the trust.

Gift Tax

A Children’s Trust can be designed so that the Grantor retains a limited power of appointment over the trust corpus. The limited power of appointment would enable the Grantor to appoint the remainder of the trust to a limited class of people. Limited power of appointment could be either testamentary or inter vivos.

Estate Tax

If the trust is designed as a grantor trust, then the assets in the trust will be included in the estate of the grantor for estate tax purposes. The Children’s Trust can be designed so that it is not a grantor trust and the assets in the trust would be excluded from the estate of the grantor for estate tax purposes. In determining how to draft the trust, the capital gain tax saving resulting from a step-up in basis must be weighed against any estate tax savings. Usually, payment of the New Jersey estate tax is the lesser of the two evils.