2019 Edition

Special Needs Trust Essentials

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LawPracticeCLE:Special Needs Trust Essentials

Amelia Crotwell, CELAElder Law of East Tennessee, PLLC

903 N. Hall of Fame Dr.Knoxville, TN 37917

www.elderlawetn.com

Certified by the National Elder Law Foundation

Special Needs Trusts (SNTs)

I. Most common means-tested benefits

II. Two kinds of SNTs: self-settled and third party

III. Important considerations in drafting SNTs

IV. Pitfalls to avoid in making distributions

V. ABLE account essentials

VI. Trust drafting tips

Client intake

• System for obtaining critical information• Prep client to bring SSA documentation of benefits

• Verify independently

• Develop comprehensive intake questionnaire

Means-tested vs entitlement benefits

• What is an entitlement program• Examples: Medicare, Social Security retirement or disability

• What is a means-tested entitlement program• Examples: Medicaid, SSI

• What is a non-entitlement program• Examples: Medicaid waiver, Section 8 housing vouchers

• Which ones matter for SNTs?

I. Most common means-tested benefits

• Rules and regulations vary among agencies and regions

• Most common benefits:• SSI

• Medicaid

• TANF

• MSPs – QMBs, SLMB, QI, Extra-help

• Section 8 Housing

• Supplemental Nutrition Assistance Program

• CHIP

• VA

SSI –Title XVI – 1974 by Nixon• Cash benefit from Social Security Administration

• 2019- $771 (single) or $1,157 (couple);

• Max resources: $2000 (single) or ($3000) couple• Not linked to inflation• Last increase 1989

• Exempt resources: home, car, life ins <1500, burial space <1500, hh goods

• For people who are blind, age 65+, or have a disability according to SSA rules and meet income and asset limits

• 36-month lookback period

• Recipients automatically eligible for Medicaid in many states

• Resources:• 42 U.S.C. §1381 et seq. and 20 CFR §415 et seq.• Federal POMS (ssa.gov)• Regional POMS

• NOT OASDI under Title II

Medicaid – Title XIX – 1965 Johnson • Health care for people who are aged, blind, or have a

disability

• Not Medicare

• Technical, medical, and financial eligibility requirements

• 60-month lookback period

• Resources:• 42 U.S.C. §1396 and 42 CFR §§430, 431 and 435• Tennessee statutes: 71-5-101 et seq., the Tennessee Secretary of

State publication of rules and regulations found primarily in 1200 Chapter 13 of the Rules of the Tennessee Department of Health

• HCFA Eligibility Policy Consolidated• T.C.A. 4-5-101 - APA

Other means-tested benefits• TANF – Temporary Assistance to Needy Families

• Cash assistance to parents with children who have financial need

• Recipients automatically eligible for Medicaid

• TN: “Families First”; lifetime benefit limit of 60 months (some exceptions)

• Resource: Web FF Guide 809

• MSPs - QMBs – Qualified Medicare Beneficiaries• State pays some or all of Medicare Part A and B premium, annual

deductible, copay, or co-insurance – State Medicaid agency administers

• Income: 2019 $1,061 (single), $1,430 (married)

• Assets: $7,730 (single), $11,600 (married)

• “Dual eligible”: qualified for Medicaid AND Medicare – Medicaid covers out of pocket costs

• Resource: Medicare.gov

Other means-tested benefits (cont.)

• Section 8 Housing – subsidized housing• Vouchers for rent or reduced rent in public housing

• Income limit (generally 1/3 gross income/mo), no resource guidelines

• Administered locally; regulated by HUD

• SNTs maybe countable assets

• HOTMA - 2016

• Resources: 12 U.S.C. §1701; HUD Guidebook No. 7420.10G

• SNAP – Supplemental Nutrition Assistance Program• Food stamps

• Administered by state agency

• Income and resource-based eligibility: $1316 income $2,250 resources higher # in hh and if someone in hh has disability or is 60+ years old

Other means-tested benefits (cont.)

• CHIP – Children’s Health Insurance Program- 1997• Administered by the state under federal law

• State and federal dollars fund- criteria may vary by state

• Low/no-cost health insurance for children and pregnant women

• Household income and family size guidelines for eligibility

• Resource: Medicaid.gov/chip

• VA• Low Income Pension

• Special Monthly Compensation

• Housebound Benefits

• Aid and Attendance

• SNTs not helpful for these benefits

Benefits drive planning

II. Two kinds of SNTs: self-settled and third party• Distinction based on source of assets

• Self-settled• Assets funding trust belong to person with disability (even if someone

else establishes the trust)

• “Special Needs Trusts”

• Third party• Assets funding trust belong to someone else, e.g. parent or grandparent

• “Supplemental Needs Trusts”

• Pooled trusts – may be either type• Allow beneficiaries to pool assets under management of one trustee

SNT law: self-settled

• 42 U.S.C. §1382b(e)(5) for SSI eligibility

• 42 U.S.C. §1396p(d) for Medicaid eligibility• d4A – established by third party or person with disability (defined

by SSA) and under age 65

• d4C – pooled trust established by third party or person with disability of any age – but be careful – SSA for SSI and states vary

• Irrevocable, inter vivos, one lifetime beneficiary

• Payback provision

• POMS SI 1120

SNT law: third party

• POMS SI 01120.200

• Created by third party with assets of third party for benefit of person with disability (as defined by SSA)

• No payback provision

• No liens on corpus of trust for medical assistance provided to beneficiary

• Revocable or irrevocable

• Beneficiary must have no right to compel distribution

• Wise to consider for most estate plans

III. Important considerations in drafting SNTs - overview

• Availability of assets

• Transfer rules

• Drafting considerations

• Trustee provisions

• Trust advisors

Availability of assets

• Standards for distribution• Avoid HEMS (health, education, maintenance, and support)

standards – may cause assets to be “countable”

• Beneficiary must not be able to compel distribution for any purpose

• Supplemental/discretionary

• Mandatory right to income stream and SSI• Value calculated by SSA and counted as asset

• Crummey Powers – NO!• Newly gifted assets in trust considered available income

• Not advisable

Transfer rules (SSA and Medicaid)

• d4A or d4C: no transfer penalty if done properly

• Third party SNT: transfer rules could adversely affect grantor

• Grantor may contribute to sole-benefit SNT for disabled third party under age 65 without transfer penalty

• Section 8: d4A trust may increase rent for beneficiary b/c interest is calculated on corpus – see HOTMA and

• Decambre v. Brookline Housing Auth, 826 F.3d 1 (1st Cir. 2016)

Drafting considerations

• Prohibit court invasion

• Use spendthrift clause, care manager

• Termination provisions • Comply with POMS

• Necessary?

• Include residual beneficiary in self-settled SNT

• Use POMS first, then state law

• Seed money for d4A trust - $10

• Payback clauses

Trustee provisions

• Beneficiary must never be trustee

• Selection of trustee: laypeople can be problematic; consider independent co-trustee

• Appointment and removal powers• Should beneficiary have removal power?

• Consider trust advisor

• Powers of trustee – include decanting

• Compensation

Trust advisors and trust protectors

• Power to amend trust to comply with benefits programs

• Power to remove and replace trustee

• Annual accounting of trust

• Provide checks and balances

Care managers

• Credentialed professional with experience relevant to diagnosis and needs of beneficiary

• Routine visits, recommendations, and purchases of needed items to improve quality of life

• Accounting for use of funds to meet care/quality of life needs

• Assistance to trustee for making best use of funds

Advising the SNT trustee

• Letter of intent

• Attorney sends trust to SSA and state agency

• Attorney sends TTE letter• TTE duties

• Distributions

• Seek advice

• Attorney or CPA gets EIN

• Tax treatment letter to TTE

Distributions to beneficiaries and third parties

• Distributions for some purposes may count as income/assets for beneficiary of SNT - possible penalty periods or loss of benefits

• Lay trustee must be educated; wise to hire counsel

• Consider True Link cards: allow trustee to monitor and control beneficiary’s purchases - POMS 1120.201

• Make distributions to ABLE account; fund to permit access to cash within limits

Problematic distributions

• Direct distribution of cash to beneficiary

• Distributions that cause ISM

• Distributions to third parties for services/assets that will not be considered resources in the following month

• Distributions from self-settled SNT for someone other than beneficiary (sole benefit)

• Distributions to pay for credit card bills

Achieving a Better Life Experience –2014 – IRC 529A

• For people with disability onset before age 26 – must meet SSA definition of disability and provide proof of disability

• May be able to deposit up to $15,000/year – not counted as resources for benefits

• Cannot shelter income most for eligibility purposes

• State variations

ABLE account benefits

• Low-cost, tax-free investment growth

• Accumulation of assets over base resource level of $2,000 for benefits programs

• Access to cash for SSI recipients without problem of in-kind support and maintenance rules

• Tax-free withdrawals for Qualified Disability Expenses (QDEs) (10% penalty + income tax for non-QDEs)

ABLE essentials

• $350,000 in TN• $100,000 + $2,000 in other countable resources – SSI suspended,

but Medicaid continues

• SSI reinstated when account balance drops below $100,000

• Payback provision• May transfer to another ABLE designated beneficiary (sibling, step-

sibling, or half-sibling)

• Remaining funds following payback paid to estate

ABLE accounts vs. SNTsRestriction ABLE 3rd Party SNT Self-Settled SNT Pooled Trust

AgeDisabled before age26

None Funded before age 65 None

Who controls TN Dept. of Treasury Any capable person Any capable person Non-profit trustee

Investment discretion14 options: growth tobank account

Unlimited ifreasonable

Unlimited ifreasonable

Somewhat limited

DistributionsQDEs w/o tax; non-QDEs, 10% penaltyand income tax

Any want or needthat will notdisqualify from thebenefit

Any want or needthat will notdisqualify from thebenefit

Any want or needthat will notdisqualify from thebenefit

Payback at death Yes No Yes Yes

Transferrable

Yes, to another familymember who isdisabled before age26

Yes, to any otherperson ororganization at death

Not until the state isreimbursed

State is reimbursed ornon-profit retains

ABLE accounts vs. SNTs (cont.)Restriction ABLE 3rd Party SNT Self-Settled SNT Pooled Trust

TaxesNo taxes paid on growth if used forQDE; but non-QDE is taxed

Taxes must be paidon growth

Taxes must bepaid on growth

Taxes must bepaid on growth

Funeral costs Can pay before or after deathCan pay before orafter death

Can pay beforedeath

Can pay beforedeath

Total balance No more than $100,000 to keep SSI Any size Any size Any size

Contributionlimit

No more than $14k/year; $350k lifetime None None None

ISM effectQDE distributions are not ISM if used inmonth received

ISM to $0, loseMedicaid

ISM to $0, loseMedicaid

ISM to $0, loseMedicaid

Cash tobeneficiary

Okay; if beneficiary has a receipt forexpense, will not lose SSI

No No No

Timing to set up Quick and on-line Now Now Now