supplemental needs trusts & related estate planning · presentation for hydrocephalus...

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Supplemental Needs Trusts &

Related Estate Planning

Presentation for

Hydrocephalus Association

12th National Conference

June 30, 2012

Hydrocephalus Association 12th National Conference

June 30, 2012

Primary Reasons for Planning Provide for supplemental needs of child with

hydrocephalus, while preserving Medicaid and SSI

eligibility, if such eligibility is likely

Designate desired guardians for children

Transfer assets at death to intended recipients and in

desired manner

Prepare for incapacity

Simplify transitions

Protect assets from creditors

Defer and reduce taxes


June 30, 2012

Public Benefit Programs

Non-Means

Tested

Means

Tested

Income SSDI SSI

Medical Medicare Medicaid

To be eligible for any of the programs identified

above, individuals under the age of 65 must be unable

to engage in substantial gainful activity due to a

disability that is expected to last at least one year.


June 30, 2012

Exempt Assets

$2,000

Homestead property

Personal effects and household goods

Motor vehicle

Life insurance (with restrictions)

Burial funds (with restrictions) and burial space

Property used in a trade or business


June 30, 2012

Lose benefits

Disinherit child

Historical Choices


June 30, 2012

Solution for Third-Party Funded Trusts

Most states have statutes or case law that

authorize SNTs for funds outside disabled

person’s control

Trust assets exempt

No government reimbursement at death


June 30, 2012

Solution #1 for Self-Funded Trusts

OBRA Payback Trust (d-4-A Trust)

Authorizes SNTs for funds in control

of disabled person under age 65

Created by parent, grandparent, legal

guardian, or court

Trust assets exempt during life

Government reimbursement at death


June 30, 2012

Solution #2 for Self-Funded Trusts

Pooled Trust (d-4-C Trust)

Funds pooled for management purposes

No age requirement

Created by disabled person, parent,

grandparent, legal guardian, or court

Trust assets exempt during life

Government reimbursement at death


June 30, 2012

Primary Terms of

Supplemental Needs Trust

Irrevocable

Grantors’ intent important

Distributions for “supplemental needs” only

Distributions in trustee’s sole discretion

(no standards)

Distributions to providers of goods and

services, not directly to disabled person

(Continued … )


June 30, 2012

Primary Terms of Supplemental

Needs Trust (Continued)

Avoid in-kind support and maintenance

(will reduce SSI)

Trustees and successor trustees

Remainder beneficiaries at death

(after government reimbursement for

d-4-A trust)


June 30, 2012

Examples of Permissible

SNT Distributions

Dental care

Optical care

Supplemental nursing care

Expenditures for travel, recreation, or

educational or cultural experiences

Expenditures for travel of family members to

visit disabled person

Hydrocephalus Association 12th National Conference –

June 30, 2012

Coordination with Other

Estate Planning Documents

Wills of parents, grandparents, etc.

Insurance and retirement plan beneficiary

designations

No assets should pass directly to disabled child

All assets for disabled child should be allocated

to SNT

Usefulness of stand-alone SNTs

Hydrocephalus Association 12th National Conference –

June 30, 2012

Alternatives to SNT

Trust that provides for child’s health, support, and

education needs

Trust that provides generally for the child in the

trustee’s discretion, without reference to specific

standards like health and support


June 30, 2012

Probate

Six-month court procedure before final

distribution of estate

Threshold for small estates ($100,000 in

Illinois, for example)

Jointly-held assets, assets with

designated beneficiaries, and assets in

trust are excluded


June 30, 2012

Heirs

During life, parent controls assets.

If parent becomes incapacitated, successor trustee assumes control.

individually-owned

assets Parent

remaining

property at death Living

Trust

Advantages of Living Trust

Probate avoidance

Simplify transition upon incapacity

Privacy

Ease of amendment

Note: Living trust is not necessary for tax planning.


June 30, 2012

Transfer Taxes

Three types: Gift tax (35% federal)

Estate tax – federal (35%) and some states (varying state tax

rates), including on insurance proceeds

Generation Skipping Transfer (“GST”) tax (35% federal)

2012 Exemptions (Coupon Book) $13,000 per donee annual gifts

Direct tuition and medical payments

Unlimited transfers to U.S. citizen spouse and charities

$5,120,000 federal gift, estate, and GST tax exemptions

Varying state estate tax exemptions


June 30, 2012

Scheduled Federal Estate, Gift, and

GST Tax Exemptions and Rates

Year Federal Exemption Maximum

Amount Federal Rate

2012 $5,120,000* 35%

2013 $1,000,000 (subject, in the case of the GST 55% tax exemption, to inflation adjustment)

* For deaths in 2012, the unused federal estate tax exemption of a first spouse to die may be utilized at the surviving spouse’s death.


June 30, 2012

(no IL or

federal

estate

taxes)

Sample Estate Tax Planning

Husband’s Death

Wife’s Death

No Tax Planning Tax Planning with Trusts

IL estate taxes

$565,603

Children

$7,000,000

Joint Tenancy

$7,000,000

Wife

$7,000,000

Children

$6,434,397

A/B Plan for Illinois Married Couples in 2012

Family

Trust

$3,500,000

Husband

$3,500,000

Wife

$3,500,000

(no IL or

federal

estate

taxes)

If the federal estate tax exemption were to revert to $1,000,000, as scheduled, after 2012,

the estate tax savings from A/B planning could potentially be much more significant.


June 30, 2012

(no IL or

federal

estate

taxes)

Sample Estate Tax Planning

Husband’s Death

Wife’s Death

No Disclaimer Disclaimer

IL estate taxes

$565,603

(Disclaimer;

no IL or federal

estate taxes)

Family

Trust

$3,500,000

Wife

$3,500,000

Husband

$3,500,000

Children

$7,000,000

Children

$6,434,397

Disclaimer Alternative for Illinois Married Couples in 2012

Wife

$7,000,000

Husband

$7,000,000

If the federal estate tax exemption were to revert to $1,000,000, as scheduled, after 2012,

the estate tax savings from A/B planning could potentially be much more significant.


June 30, 2012

$ to pay

premiums

death benefit

Benefits: Exclude insurance proceeds from your taxable estates, subject to 3-year rule.

Provide liquidity to pay estate taxes generated by illiquid assets, such as real estate or a closely-held business interest.

Ensure that proceeds not needed for taxes pass in accordance with your estate plan.

premiums

insurance

proceeds

withdrawal

rights

[Spouse

and]

Children

Parent ILIT (owns life

insurance)

Insurance

Company

Irrevocable Insurance Trust


June 30, 2012

Primary Documents

Will

[Living Trust]

Supplemental Needs Trust(s)

Property Power of Attorney

Health Care Power of Attorney

[Irrevocable Insurance Trust]

[Deed]


June 30, 2012

Guardianship for child

with disability

Of the person

Of the estate

Alternatives to guardianship