TRUSTS FOR THE BENEFIT OF A DISABLED BENEFICIARY Special Needs - PDF document

TRUSTS FOR THE BENEFIT OF A DISABLED BENEFICIARY • Special Needs “Payback” Trust • U.S.C. §1396p(d)(4)(A) SPECIAL NEEDS TRUSTS • Third Party Special Needs Trust Presented by Special Needs Alliance – Also known as Supplemental Benefits Trust for The National Big Sky Visioning Sessions and the 2007 United Cerebral Palsy Annual Conference Buena Vista Palace and Resort Orlando, Florida April 12 – 14, 2007 GENERAL TRUST Finding a Special Needs Attorney REQUIREMENTS • Special Needs Alliance • Supplement, not supplant, government benefits – Network of disability and public benefits attorneys. – www.specialneedsalliance.com • Definition of “special need” or – 1.877.572.8472 “supplemental benefit” • No definitive explanation What is NOT a Special Need Special Needs “Payback” Trust • Established with assets of disabled • Basic necessities of life individual – i.e., food, clothing, shelter, utilities • Incidental spending money (unearned • Individual must be under 65 at time of the income) establishment and funding • Gifts • Insurance on life of disabled beneficiary • Individual must be disabled as defined in Social Security Act 1

SOCIAL SECURITY ACT DEFINITION OF DISABLED FOR DEFINITION OF “DISABLED” CHILD UNDER 18 • “unable to engage in any substantial, • Child “suffers from any medically gainful activity by reason of any medically determinable physical or mental determinable physical or mental impairment of comparable severity” to impairment which can be expected to adult result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months” ADDITIONAL REQUIREMENTS PAYBACK REQUIREMENTS OF PAYBACK TRUSTS • Trust may be established by • Medicaid agency entitled to reimbursement from any assets remaining – Parent or in trust upon death of beneficiary or trust termination for other reasons – Grandparent or – Legal Guardian or – Court Court-created Special Needs PAYBACK REQUIREMENTS Trusts • Reimbursement “dollar for dollar” up to • If trust is created or authorized by court amount paid by Medicaid on behalf of may retain oversight in following areas: individual – Accountings – Trustee’s commissions – Investments – Limitations on Purchases of Major Assets 2

GOVERNMENT BENEFITS LIENS • SSI • Medicaid • Medicaid – Arkansas HHS v. Ahlborn, 2006 U.S. Supreme Court decision • SSD • Medicare • Medicare • State Department of Human Services • Federally-Assisted Housing • Workers Compensation • Other Agency Supported Housing • ERISA IMPORTANT! FUNDING ISSUES • Structured Settlements • CHECK STATE REQUIREMENTS! – Payments made directly to disabled beneficiary may render beneficiary ineligible to receive means-tested government benefits – Trust should be payee. – Payments should “pour over” into trust. CHECKLIST FOR SELF-SETTLED CHECKLIST FOR SELF-SETTLED SPECIAL NEEDS TRUST SPECIAL NEEDS TRUST 1. Check for compliance with federal law. 2. Check for compliance with state law. – Is the beneficiary under age 65? 3. Verify that statutory liens have been paid prior to the funding of the trust. – Is the beneficiary “disabled?” – Is the trust created by the beneficiary’s parent, grandparent, guardian or by the court? – Does the trust contain a provision requiring repayment of the state Medicaid program upon termination of the trust? 3

THIRD PARTY SUPPLENTAL NO PAYBACK CLAUSE? BENEFITS TRUST • Living trust or • Generally, no payback provision required BUT • Check state regulations to make sure no • Testamentary trust created by will payback is required. • Include specific dispositive provisions for final disposition of trust assets. Estate Recovery THIRD PARTY TRUST • State regulations may provide for right of • Periodic additions can be made through lifetime giving or inheritances. recovery of assets held in testamentary trust established by third party, including • Rights of withdrawal (“Crummey” rights) should community spouse for benefit of surviving be incorporated in situations of lifetime giving. beneficiary spouse, where disabled beneficiary transferred assets to • Exclude disabled beneficiary from serving as predeceased third party and those assets Crummey beneficiary. were used to fund the trust. Tax Treatment of Supplemental ADDITIONS TO TRUST Benefits Trust • Unless payback trust is very small, • Unless it is an elective share trust discourage additional funding by third requiring all income to be paid to surviving parties spouse, testamentary SBT will be taxed as a complex trust. • As distributions are made, whether from • Additions of beneficiary’s assets to third income or principal, the beneficiary will be party trust may result in ineligibility for taxed with his or her proportionate share certain government benefits of “Distributable Net Income” (“DNI”). 4

Tax Treatment of Supplemental Tax Treatment of Supplemental Benefits Trust Benefits Trust • If trust distributions do not equal “Net • Elective share trust will be taxed as a Accounting Income” or are less than DNI, “simple trust.” trust will pay tax on accumulated income • Short and long term capital gains will be at the federal and state level. included in DNI and taxed to the trust • Trust will also pay tax on short and long unless otherwise distributed to the spouse. term capital gains. • If capital losses were not applied to other current year gains, the losses will be used to reduce accumulated income, if any. Trust Administration Issues SSI Resource Limitations • Must consider resource and income • Single beneficiary can have no more than limitations of means-tested benefits such $2,000 worth of “countable resources.” as SSI and Medicaid Checklist for Evaluating SSI Common SSI Excluded Resources Resource Limitations • The home, if it is the beneficiary’s “principal 1. Determine whether the asset to be purchased place of residence.” is exempt from being counted by SSI. • Household goods and personal effects 2. If the asset is countable consider whether the (household furniture, furnishings and equipment $2,000 resource limitation will be excluded in commonly found in or about a home). light of the following: • Vehicle A. Other countable resources owned by the • Life insurance owned by individual (and spouse, beneficiary. if any) if face value does not exceed $1,500. B. Other countable resources owned by parents of • Burial spaces and certain funds up to $1,500 for minor beneficiary if residing in same household burial expenses. C. Other countable resources owned by spouse. 5

State Medicaid Resource Common Medicaid Excluded Limitations Assets • Principal residence • Consult with local attorney or check state • Proceeds from sale of home or other real Medicaid manual to determine state property used to purchase another home. Medicaid resource limitations. • Household goods and personal effects • Certain types of resources are exempt. • Vehicle • Exempt resources can be no more • Life insurance if face value does not exceed $1,500. restrictive than for SSI. • Burial vaults, crypts and plots up to $1,500. • Burial contracts of a reasonable amount if irrevocable. Deficit Reduction Act of 2005 Deficit Reduction Act of 2005 • Extends Medicaid's "look-back" period for • Prohibits States from "rounding down" fractional periods of ineligibility when determining all asset transfers from three to five years. ineligibility periods resulting from asset transfers. • Changes the start of the penalty period for • Permits States to treat multiple transfers of transferred assets from the date of transfer assets as a single transfer and begin any to the date when the individual transferring penalty period on the earliest date that would the assets enters a long-term care facility apply to such transfers. and would otherwise be eligible for Medicaid coverage. Deficit Reduction Act of 2005 Deficit Reduction Act 0f 2005 • Requires all states to apply the so-called • Establishes new rules for the treatment of “income-first” rule to community spouses who annuities, including a requirement that the state appeal for an increased resource allowance be named as the remainder beneficiary. based on their need for more funds invested to meet their minimum income requirements. • Allows Continuing Care Retirement Communities to require residents to spend down • Requires the purchase of a life estate to be their declared resources, including a resident’s included in the definition of "assets" unless the entrance fee, before applying for Medicaid. purchaser resides in the home for at least one year after the date of purchase. 6