Presenting a live 90-minute webinar with interactive Q&A Structuring Special Needs Trusts as IRA Beneficiaries: Avoiding Tax Traps in Funding SNTs With Retirement Accounts WEDNESDAY, MAY 3, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Elizabeth L. Gray, Principal, McCandlish Lillard , Fairfax, Va. Scott K. Tippett, Attorney, The Tippett Law Firm , Oak Ridge, N.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 . NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted.
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Structuring Special Needs Trusts as IRA Beneficiaries Elizabeth L. Gray, Esq. 5
Special Needs Trusts Why? SNTs avoid many of the costly mistakes people make when planning for a child with special needs, such as: • Disinheriting your child • Relying on your other children to provide for child with special needs • Failing to provide privacy for the child with special needs • Inheritances = over-resources • Personal Injury settlements = over-resources/spending all the funds at young age leaving child destitute 6
Special Needs Trusts Criteria for eligibility for means-based benefits: </= $2,000 Resources & Low Income Options: Accept the Money Transfer penalty period issues Spend down the Money No Government benefits 7
Special Needs Trusts Benefits of SNTS: Protects eligibility for government benefits i. Required to be disregarded as available income and resources for eligibility purposes ii. Assets in SNT are NOT owned by the beneficiary iii. No transfer penalty period for funding the SNT 8
Special Needs Trusts Benefits of SNTS, continued: • Provides for a higher quality of life • Provides framework for care and management of assets • Allows the parent to express his/her desires for child with special needs (Memorandum of Intent) • Protects assets from creditors and predators • Extends life of assets 9
Special Needs Trusts Types of Special Needs Trusts First-party Trust Self-settled Trust 1396p(d)(4)(A) Trust Payback Trust Pooled or (d)(4)(C) Trust (d)(4)(B) or Miller Trust 10
Special Needs Trusts Types of Special Needs Trusts Third-Party Trust Family Funded Trust Non-Payback Trust 11
Special Needs Trusts 1 st Party Special Needs Trusts • Protects the resources of individuals with disabilities without sacrificing their government benefits; • Must be in writing; • Must be irrevocable; • Must be Inter-Vivos . 12
Special Needs Trusts 1 st Party Special Needs Trusts A trust created for the sole benefit of an individual with disabilities when such an individual is under the age of sixty-five (65) . Trust established by the individual’s parent, grandparent, legal guardian or court; Assets not available; An Individual May Now Establish a 1 st Party SNT per Title V, Section 5007 of the 21 st Century Cures Act, Pub. L. No. 114-255. Distributions not considered income; No penalty period for SSI & Medicaid; 13
Special Needs Trusts 1 st Party Special Needs Trusts • Gifts to this type of trust should NOT be made by third parties! • Sole Benefit Rule: the disabled individual must be the sole beneficiary of the trust during his/her lifetime • Payback Provision: funeral expenses cannot be paid after death; Multiple states = pro rata 14
Special Needs Trusts 1 st Party Special Needs Trusts Why do it? • Reimbursement is only for Medicaid, not all public benefits • Reimbursement is based on the actual Medicaid expenditures, not prevailing market costs • No interest • Some services not covered by Medicaid 15
Special Needs Trusts 1 st Party Special Needs Trusts Please see the Fact Guide for National Trust Training 16
Special Needs Trusts 3 rd -Party Special Needs Trusts • Can direct corpus at death of the beneficiary to any individual (no payback requirement!) • Not described in any federal statute • Designed to supplement, rather than supplant, government benefits for which the individual is otherwise eligible 17
Special Needs Trusts 3 rd -Party Special Needs Trusts Why do it? • Improves the quality of life of an individual with disabilities • Medicaid has no right of recovery/No payback requirement • Can be Inter-Vivos or Testamentary • Can be for the benefit of an individual of any age • At death of the beneficiary, any remaining money can go to other family members 18
Special Needs Trusts Drafting Practices & Funding the Trust 1. Where the trust is being established by a parent or grandparent, the parent/grandparent MUST execute the trust and SEED the trust: Initial funding MUST be from the parent/grandparent and NOT the beneficiary 2. Where the trust is being established by a court the order MUST establish and direct the transfer of the beneficiary’s assets. 19
Special Needs Trusts Drafting Practices & Funding the Trust, continued 3. In defining the term “special needs” for distribution purposes, SNT attorneys have traditionally included a list of specific distributions that could be made from the trust. This “laundry list” has proven problematic when it includes items which Social Security later deems improper. 20
Special Needs Trusts Drafting Practices & Funding the Trust, continued 4. A 3rd party special needs trust must be irrevocable to the beneficiary (POMS Rule). It was believed that this required the trust to be initially irrevocable, but today we know that a revocable 3rd party SNT is allowed so long as the beneficiary cannot have access to the trust assets (and it eventually will become irrevocable). 5. Even when the trust converts to irrevocable, needs to include flexibility: • Trust Protector • Trust Advisory Committee • Trustee 21
Special Needs Trusts Drafting Practices & Funding the Trust, continued 4. A 3rd party special needs trust must be irrevocable to the beneficiary (POMS Rule). It was believed that this required the trust be initially irrevocable, but today we know that a revocable 3rd party SNT is allowed so long as the beneficiary cannot have access to the trust assets. 5. Even when the trust converts to irrevocable, needs to include flexibility: • Trust Protector • Trust Advisory Committee • Trustee 22
Special Needs Trusts Drafting Practices & Funding the Trust, continued 6. The advantages of the trust being revocable to the grantor: • Changes can easily be made • No tax return • Assets – if any are taxed to the grantor • Assets get a step up in basis upon the death of the grantor – Example – trust holding real estate 23
Special Needs Trusts Drafting Practices & Funding the Trust, continued 6. IRA Distributions to SNT • Accumulation Language • Not Conduit Language 7. Crummy Powers vs. Cristofani Powers 8. ABLE Accounts together with SNTs 24
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