special needs trusts. overview of public benefit programs

SPECIAL NEEDS TRUSTS

OVERVIEW OF PUBLIC BENEFIT PROGRAMS

PROGRAMS NOT BASED ON FINANCIAL NEED

Social Security (Survivor’s, Retirement or Disability Benefits)

SSD – Permanently and Totally Disabled

Medicare

PROGRAMS THAT ARE NEEDS BASED Supplemental Security Income

(SSI) 65, Blind or Totally and

Permanently Disabled Assets $2,000 or less

SUPPLEMENTAL SECURITY INCOME Monthly cash payments to aged,

blind or disabled Administered by Social Security

Administration (SSA) Called Title XVI benefits

SSI QUALIFICATION Be aged, medically disabled or

blind US Citizen or meet alien status

criteria

SSI QUALIFICATION Disability – Inability or engage in

“substantial gainful activity” (SGA) Physical or mental impairment that

can be expected to last for continuous period of at least 12 months or result in death

Earnings level

SSI Payments Maximum Benefit rate depends on

Recipient’s living arrangements Marital status Whether recipient is elderly, disabled or

blind Person living alone or with others in own

household Federal SSI benefit $623 (living alone) Federal and NJ State combined $654.25

SSI QUALIFICATION Resources Countable or Non-countable

COUNTABLE RESOURCE INCOME Single - $2,000.00 Married - $3,000.00

COUNTABLE RESOURCES Cash (which is not the current

month’s income) Income producing property,

including real estate Stocks, bonds, investments Life Insurance with c.v. in excess

or $1,500.00 Vehicle

Non-countable Resources Personal Residence Automobiles that are specially

equipped or used for medical appointments

Life Insurance with cash value of less that $1,500.00

INCOME Earned, Unearned or In-kind

UNEARNED INCOME Social Security

benefits Annuities Alimony Child Support Dividends Interest Rents

Royalties Prizes Awards Gifts Inheritance Distributions from

Special Needs Trust

UNEARNED INCOME An SSI recipient may receive up to

$20 per month of unearned income In excess of $20 per month

reduces SSI benefit on dollar for dollar basis

EARNED INCOME Receipt of earned income over $65 per month (or

$85 per month if no unearned income) will reduce SSI benefit dollar for dollar

Formula for determining reduction if there is earned income Deduct the SSI General Exclusion of $20 (if no

unearned income) Deduct $65 per month (earned income exclusion) Deduct one-half of the remaining earned income The balance is total countable earned income Deduct this form maximum SSI benefit Remaining balance is the reduced SSI benefit

IN-KIND INCOME SSI recipient is expected to pay for

food and shelter Recipient of food or shelter from

third party is “in-kind income” May reduce SSI benefits Regulations effective March 9, 2005

Clothing eliminated from definition of income or determination of ISM

TWO WAYS TO CALCULATE IN-KIND SUPPORT AND MAINTENANCE (ISM)

One-third Reduction Rule Used in limited situations SSI recipient lives for full calendar

month in household of another person who provided both food and shelter to him without charge

SSI benefit amount reduced by one-third of federal benefit rate

Presumed Maximum Value Rate Used when SSI recipient has received food or

shelter from outside source and one-third reduction rule doesn’t apply

Example – Recipient lives in own home and received outside help for expenses

SS presumes that maximum value of item is 1/3 of Federal benefit plus $20

SS does not apply both One-third Reduction Rule and PMV Rule in any one month

No reduction if third party pay directly to vendor for items that are not food or shelter

SSI FOR CHILDREN Blind or disabled children may

receive Under age 18, parents’ assets and

income are deemed to the child

SOCIAL SECURITY DISABILITY INSURANCE (SSDI)

Monthly cash benefits to disabled workers (and dependents) Eligibility not based on economic need Eligibility Requirements

Sufficient quarters of covered employment Medically disabled If working, earn less than $900 per month ($1500 if blind) Family benefits available No asset limit No limit on unearned income or in-kind income SNT not necessary unless dual recipient

SOCIAL SECURITY DISABILITY INSURANCE (SSDI)

Amount of benefit depends on PIA (Primary Insurance Amount) If SSDI recipient receives low monthly

benefit, may also receive SSI Dual recipients

PROGRAMS THAT ARE NEEDS BASED Medicaid

Federal/State partnership Based on SSI qualification

Medicaid Qualification Income Test Asset Test

SPECIAL NEEDS TRUSTS

Special Needs Trusts Preservation of Public Benefits Types of available Trusts Failure to consider Medicaid

PRESERVATION OF PUBLIC BENEFITS

Needs based benefits interrupted~Gift~Inheritance~Litigation Proceeds

Supplemental Trust No direct receipt of funds by

beneficiary May receive discretionary

distributions Maintain benefit qualification

TYPES OF TRUSTS

Beneficiary may not have right to revoke

Beneficiary may not direct use of assets for support

Funds not used for food or shelter

TYPES OF TRUSTS

Self-settled Trusts Includes transfers made by

spouse Five year lookback (if not d4A or

d4C) Income only trust

Types of Trusts

Proper Drafting Proper Administration Support vs. discretionary

TYPES OF TRUSTS

Income-Assignment Trusts Miller Trusts

Not available any longer

TYPES OF TRUSTS

Third Party Testamentary Self Settled Pooled

TYPES OF TRUSTS Third Party Trusts

Funded with monies belonging to other individuals

No payback provisions Trustee must be given discretion Beneficiary may not have control

over funds May name residual beneficiary

TYPES OF TRUSTS

Third Party Trusts Grandparents establish trust for

disabled grandchild and funds with stock

Grandparent is trustee. Children’s mother is successor trustee

Funds used to purchase computer, computer training, vacation with paid companion

TYPES OF TRUSTS

Testamentary Trust created under Last Will and Testament

Creation of testamentary trust is not transfer for less than FMV

Residual beneficiary permitted

POOLED TRUST (d)(4)(C)

Pooled Trusts are authorized under OBRA-93

These trusts are funded with the assets of a disabled person

The definition of “disability” is used

POOLED TRUST (d)(4)(C) Pooled Trust Requirements

Pooled Trusts must be established and managed by a non-profit organization

There must be a separate account for each beneficiary

Funds are pooled for investment and management

The account is solely for the benefit of the disabled individual

The Trust must be established by a parent, grandparent, legal guardian, or court

POOLED TRUSTS (d)(4)(C)

Advantages Corpus is not counted as an asset A person can be over 65 at the time of

establishment of a Trust A disabled person can establish his

own Trust The Community Trust already exists

and does not have to be created The Community Trust requires only a

joinder agreement


Taxation The Grantor Trust rules apply to

income tax The Trustee must track each sub-

account Gift tax issues must be explored If there is a pooled income fund,

the remainder interest may be tax deductible


May pool assets for investing and management

After Beneficiary’s death, amounts not retained by trust paid to state to reimburse Medicaid

Most Trusts will retain funds

SUPPLEMENTAL NEEDS TRUSTS (d)(4)(A)

Allows individual to retain funds while maintaining eligibility for public benefits programs

Tort proceeds Divorce Settlement Workers Compensation

SUPPLEMENTAL NEEDS TRUST (d)(4)(A)

Funds may be used to pay for items not provided by governmental programs

Restrictions apply Inter Vivos Irrevocable


Authorized under OBRA-93 For the benefit of disabled

persons Person must be under 65 at the

inception of the Trust Transfers to and from the Trust

are not subject to the transfer of assets rules or the income and resource rules of Medicaid


Trusts Established by: Parent Grandparent Legal guardian Court


Distribution on Death The Trust must provide that on

death the funds remaining in the Trust go first to reimburse Medicaid and then for the benefit of other beneficiaries


Types of Payments OBRA-93 contains no express

limitation on the amount or types of payments.

Wise to limit payments to “in-kind” payments

Does not reduce public assistance


In-Kind Support In-kind support consists of goods

or services from third parties Cannot include food or shelter Or anything that could be used to

obtain food or shelter. If in-kind support includes food or shelter, there may be a reduction of up to 1/3 of the SSI benefit

CHOOSING A TRUSTEE

Family members may be best qualified to determine special needs of the child

May lack expertise regarding administration

CHOOSING A TRUSTEE

Responsibility for proper investment of trust assets

Accurate record keeping Ensuring that distributions will

not disqualify from governmental benefits

CHOOSING A TRUSTEE

Choose someone familiar with Prudent Investor Act Principal and Income Act Rules of SSI, Medicaid and other

governmental programs

CHOOSING A TRUSTEE

Unsophisticated trustee runs risk of exposure of liability

Goals of trust may not be satisfied

CHOOSING A TRUSTEE

Consider choosing a professional Bank Disability Organization Private Fiduciary Attorney

CHOOSING A TRUSTEE

Consider choosing a professional Trust Advisory Committee (TAC)

could be used to advise trustee as to needs

TAC could be made up of family member, social worker, CPA, Attorney

CHOOSING A TRUSTEE

Appoint co-trustees Family member and professional

trustee

FUNDING THE TRUST

Proper titling What to put in the trust

ADMINISTRATION OF TRUST

Personally distributes goods or services directly to beneficiary

Pay the provider directly and provider delivers goods or services

Give beneficiary non-transferable and non-refundable right to obtain goods and services (voucher)

No credit cards

TRUST DISTRIBUTION STANDARDS

Discretionary Trust Not support Trust Trustee needs to understand

the law before administration of trust

SUMMARY OF DISTRIBUTION RULES

Determine benefit program No cash distributions (treated as

income) Pay for services and exempt

resources In-Kind maintenance and

support (food and shelter) if trust allows it

Don’t reduce SSI to $0

SPECIAL SITUATIONS Providing housing Providing Transportation General Distribution Rules Distributions that benefit

others Paying members of

beneficiary’s family

HOUSING

Home owned by d4A Trust must be paid over to Government after Beneficiary’s death

Trust can pay all expenses or charge rent Trustee must decide how to treat other

family members living in home (d4A Trust must be for sole benefit of Beneficiary)

Beneficiary received equitable interest in month of purchase – reduction in SSI in that month

If Trust pays other shelter or household expenses – reduction in SSI benefits

HOUSING “Countable” Housing expenses

Mortgage (principal and interest) Rent Real Estate Taxes Electricity, Water, Sewer Homeowner’s Insurance Condominium Charges

HOUSING “Noncountable” Housing Expenses

Telephone Cable Television Premiums for personal property

insurance Paper products Laundry and cleaning supplies Staff salaries Repairs to recipient’s home Capital improvements

HOUSING Trust buys home and titles in

Beneficiary’s name Trust renovates home purchased by

Beneficiary Countable income in month

received by Beneficiary Excluded resource unless law

changes Trustee loses control (Beneficiary

can sell, gift or mortgage house)

HOUSING

Renovating home owned by another

Usually for handicap accessibility

Doctor’s prescription to help justify expense

HOUSING

Can pay rent to third person Countable Income (ISM) Pay for non-countable

expenses

PROVIDING TRANSPORTATION

Not food or shelter Biggest issues is how to title vehicle Should not be owned by trust

(exposes trust assets to liability claim)

Can purchase and title in name of beneficiary or reliable care provider

Can pay operating expenses (gas, maintenance, repairs, insurance)

PROVIDING TRANSPORTATION

One automobile is excluded If used for transportation for

the individual or member of household

Under new regs, no limit on value

GENERAL DISTRIBUTION RULES

Do not distribute cash Do not distribute food or

shelter or anything convertible


Personal property (stereo, computer, furniture)

Memberships to library, swimming pool

Subscriptions Bus Pass Medical Insurance Premiums


Services of care providers Vacations (not food or shelter) Travel expenses for person to

accompany and assist the beneficiary on a trip

Entertainment Medical services Social services Personal services (like house keeper)

DISTRIBUTIONS THAT BENEFIT NON-BENEFICIARIES

Example: Family of Beneficiary lives rent free in home owned or paid for by the Trust

Trustee must analyze expenditure

No bright line test

PAYMENTS TO FAMILY MEMBERS

Family care provider may quit job or reduce work hours to provide care

Would have to pay outside party or institutional placement

PAYMENTS TO FAMILY MEMBERS

Suggest hourly basis Survey home health agencies

for appropriate rate Payments are taxable income May provide health insurance,

retirement plan and employee benefits

TERMINATION OF TRUST Death of lifetime beneficiary

terminates trust Could continue to remainder

beneficiaries Trustee remains in office for

reasonable period

TERMINATION OF TRUST Pay final expenses of trust Final accounting to remainder

beneficiaries Distribute remaining assets

TERMINATION OF TRUST

Payment of expenses tricky if insufficient funds

Pay debts Administrative costs Income taxes Estate taxes Beneficiary’s personal debts Funeral expenses Medicaid reimbursement Remainder Beneficiaries

TAX ISSUES

Estate Tax Assets sometimes included in

estate of beneficiary Self-settled trust usually included Third party trust

Depends on how much control beneficiary has

Normally not included

TAX ISSUES Income Tax

Apply for employer identification number

Use SS-4 Grantor

third party trust self-settled trust

Don’t use Beneficiary social security number

TAX ISSUES

Income Tax Any income not distributed from

non-grantor trust is taxed at trust rate

Tax rate is 35% imposes at $9,750 Individuals top tax rate imposes at

$326,450

TAX ISSUES

Income Tax Income earned by grantor trust

taxed at beneficiary’s tax rate Grantor trust treated as pass

through entity

TAX ISSUES SSA crosschecks with IRS Trust earnings reported to IRS Income reported for tax

purposes may not constitute income for SSI purposes

Proactive approach suggested

TAX ISSUES

Income Tax Reduction strategies Purchase tax-free investments Distribute income to beneficiary

FIVE PLANNING POINTERS FOR PARENTS WITH DISABLED CHILDREN

PLANNING POINTERS

Buy enough life insurance Parent can’t be replaced Services will be necessary

PLANNING POINTERS

Set up a trust Public Benefits will be

jeopardized Management of Funds Disinheritance can pose

problems Sibling can be sued, divorced,

shirk responsibility, tax issues

PLANNING POINTERS

Create a will and appoint a guardian

Might make sense to put guardian in place while parent is living

PLANNING POINTERS

Write down the care plan Parent’s wishes for care Group home, live on own, live

with family member Disclose estate planning

arrangements to family

FAILURE TO CONSIDER MEDICAID

Beneficiary loses benefits Attorney exposure to

malpractice claim Make sure all Medicaid and

Medicare liens on settlement are satisfied before funding trust

special needs trusts. overview of public benefit programs

Documents

ssi benefit dollar

householdfederal ssi

chargessi benefit

ssi general exclusion

unearned incomededuct

calendar month

definition of income

cash value