structuring special needs trusts for the elderly and disabled to...
TRANSCRIPT
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Presenting a live 90-minute webinar with interactive Q&A
Structuring Special Needs Trusts for the
Elderly and Disabled to Protect Public Benefits Administering First- and Third-Party Trusts; Addressing the
Interplay Between SNTs, Guardianships and Conservatorships
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, APRIL 18, 2017
Shirley B. Whitenack, Partner, Schenck Price Smith & King, Florham Park, N.J.
Elizabeth L. Gray, Principal, McCandlish Lillard, Fairfax, Va.
Kyla G. Kelim, Esq., Aging in Alabama, Fairhope, Ala.
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5
Structuring Special Needs Trusts for the Elderly
and Disabled to Protect Public Benefits
Kyla G. Kelim, Esq.
AGING IN ALABAMA
Fairhope, AL
Special Needs Trust Overview
• Special needs trust is established pursuant to 42 U.S.C.
Section 1396p(d)(4)(A) or (C)
• Authorized by Congress to protect the income and
medical benefits of a disabled individual
• The trust must strictly comply with the law to protect the
beneficiary
• There are several types of special needs trusts
• The law controls depending on circumstance and age
6
Types of Special Needs Trusts
• 1st party trust
• 3rd party trust
• Pooled Trust
• Supplemental Trust
• Support Trust
7
First party trust
• Most common type, and also known as “self-settled”, this
trust is funded by the beneficiary’s own funds or funds to
which the beneficiary is entitled
• Must be established by a parent, grandparent, guardian
or Court
• Now, after Special Needs Fairness Act, competent
beneficiary may establish
• If incapacitated and no parent, grandparent, or guardian
available, then you must request the Court to approve
• Medicaid and Social Security must also approve
• Commonly funded with personal injury settlements,
inheritance 8
Third party trust
• Established with assets that do not belong
to beneficiary
• No “payback provision” is required
• Must abide by same rules otherwise
9
Pooled trust
• Each state has one or more company that
provides pooled trust services
• The trust is established through a more
streamlined process and the “trustee” is really a
co-trustee, at best, with the trust administrator
• Must use a pooled trust for those over 64 years
of age
• Must have a payback provision
10
Supplemental vs. Support Trust
• Supplemental Trust “supplements” the
beneficiary’s lifestyle
• Can pay for cable, cell phone, furniture,
electronics, vacation, car, car insurance, funeral
arrangements, etc.
• Does not pay for “support” items like food,
shelter, medical care
11
Interested parties in SNT
• Settlor
• Trustee
• Beneficiary
• Guardian
• Court
• Social Security Administration
• Medicaid Agency
12
PUBLIC BENEFITS
CONSIDERATIONS
• Goal in most is not to lose means tested
benefits
• SSI vs. SSDI
• Medicaid benefits
• Lookback period
• Penalty
• Termination of benefits
• Payback and estate recovery
13
SSI vs. SSDI
• SSDI is not means tested benefits
• Caution! Those on SSDI may qualify for
substantial discounts or Medicaid waiver
or nursing home and will lose it if assets,
income, rise
• SSDI otherwise does not need 1st party
trust, use 3rd party trust
• All SSI must have 1st party trust
• All Medicaid must have 1st party trust
14
Medicaid benefits
• Caution! Those on SSDI may qualify for
substantial discounts or Medicaid waiver
or nursing home and will lose it if assets,
income, rise
• There are many many different types of
Medicaid so important to find out if the
beneficiary receives any of them
• Ex: caregivers at home, QMB, SNP,
Sobra, CHIP
15
Five Year Lookback Period
• Deficit Reduction Act of 2005 imposed a 5 year lookback
period (effective for most states 2/8/2006)
• Restrictions on transfers of assets
• Established penalty period for transfers for less than fair
market value
• Penalty Period is UNLIMITED
• Changed beginning point of penalty period
• This will affect nursing home benefits/Medicaid waiver
• SSI recipients not in need of those services will have 24
month benefit interruption
16
Penalty Period
• Will be imposed for transfers for less than fair market
value after 2/8/2006
• Will not start running until applicant otherwise qualifies
for Medicaid benefits
--in a covered long term care facility
--spent down financially
--income qualified
• UNLIMITED
17
How the penalty is calculated
• Penalty may be imposed for even minimal
transfers
• The amount of the penalty is calculated by
adding up the transferred amounts and dividing
by the average cost of nursing home care in the
area or state as determined by the jurisdiction
• Can vary wildly by state
18
Cost of long term care relating to
Penalty • Can vary by state: may affect placement:
-- Mom transfers her home worth $100,000 to
daughter in July 2011. She falls, hits her head, and enters
a nursing home for long term care in July 2015. She
spends her savings and is under $2000 and eligible in
October, 2015. In Alabama, divisor is $5800, so penalty
period ends March 2017 and in Florida, divisor is $8346 so
penalty period is 12 months, she would be eligible in
October, 2016
• No long term care costs as little as $5800.00 in Alabama
19
Cost of long term care relating to
Penalty • If you said apply in August, 2016, you win!!
• Remember the 5 year lookback, if you wait to apply until
August 2016, then the 5 years has run…
• NO PENALTY
• If you apply in July of 2016, call your insurance carrier
• THE PROBLEM: Most nursing homes have your client
sign a Medicaid application on admission and routinely
file them
20
Payback provision and estate
recovery
• A first party or pooled trust must have payback
provision to reimburse Medicaid at death
• The moment of death, the payback kicks in (if
you are going to pay for funeral…pay for it now!)
• After death, if Medicaid is owed anything, they
will come after estate assets
21
Kyla G. Kelim, Esq.
AGING IN ALABAMA
68 N. Bancroft Street
P.O. Box 109
Fairhope, AL 36533
(855) ELD-RLAW
http://www.elderconsults.com
22
Special Needs Trusts: Drafting Considerations and Pitfalls to Avoid
Presented by: Shirley B. Whitenack, Esq.
Schenck, Price, Smith & King, LLP
Florham Park, Paramus & Sparta, NJ
Schenck, Price, Smith & King, LLP
GENERAL TRUST REQUIREMENTS
• Supplement, not supplant, government benefits
24
Schenck, Price, Smith & King, LLP
Self-Settled Special Needs Trust
• 42 U.S.C. §1396p(d)(4)(A) • Established with assets of individual with
disabilities • Individual must be under 65 at time of the
establishment and funding BUT – SSA says payments from structured settlement
beginning before age 65 and continuing thereafter are ok
• Individual must be disabled as defined in Social Security Act
25
Schenck, Price, Smith & King, LLP
SOCIAL SECURITY ACT DEFINITION OF “DISABLED”
“unable to engage in any substantial, gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months”
26
Schenck, Price, Smith & King, LLP
DEFINITION OF DISABLED FOR CHILD UNDER 18
Child “suffers from any medically determinable physical or mental impairment of comparable severity” to adult
27
Schenck, Price, Smith & King, LLP
ADDITIONAL REQUIREMENTS OF PAYBACK TRUSTS
• Trust may be established by
– Parent or
– Grandparent or
– Legal guardian or
– Court or
– Competent individual with disabilities
28
Schenck, Price, Smith & King, LLP
Self-Settled Special Needs Trust
• Certain regions require the trust of a competent beneficiary to be “seeded.”
• The parent or grandparent nominally funds the trust and then the assets of the beneficiary with disabilities are transferred to the trust.
29
Schenck, Price, Smith & King, LLP
PAYBACK REQUIREMENTS
• Medicaid agency entitled to reimbursement from any assets remaining in trust upon death of beneficiary or trust termination for other reasons
• Reimbursement “dollar for dollar” up to amount paid by Medicaid on behalf of individual
• Irrevocable
30
Schenck, Price, Smith & King, LLP
Court-created Special Needs Trusts
• If trust is created or authorized by court it may retain oversight in following areas:
– Accountings
– Trustee’s commissions
– Investments
– Limitations on Purchases of Major Assets
31
Trust Protector
Ensures that trustee is acting properly
May have power:
to receive account statements
to remove and replace trustee
May include additional powers of trust protector
Consider: Is trust protector a fiduciary? Compensation?
32 Schenck, Price, Smith & King, LLP
Self-Settled Special Needs Trust
• Check state requirements for additional drafting provisions
33 Schenck, Price, Smith & King, LLP
Schenck, Price, Smith & King, LLP
THIRD PARTY SPECIAL NEEDS TRUST
• Living trust or
• Testamentary trust created by will
• Revocable or
• Irrevocable
34
THIRD PARTY SPECIAL NEEDS TRUST
• Trust provisions need not be as restrictive as those in self-settled special needs trusts
35 Schenck, Price, Smith & King, LLP
Drafting Considerations for All SNTs
• Beneficiary cannot compel or control distributions
• Trustee has unfettered discretion
– Authorize trustee to make distributions that may reduce or eliminate public benefits
– Authorize trustee to amend trust to comply with current public benefits laws
36 Schenck, Price, Smith & King, LLP
Drafting Considerations for All SNTs
• Grantor or Non-Grantor Trust?
• Trustee compensation
• Accountings
• Successor and Substitute Trustees
• Trustee Powers
• Ultimate Beneficiaries
37 Schenck, Price, Smith & King, LLP
Grantor Trusts
All items of income, deductions and credit are
not taxed at the trust level, but are reported on
the personal income tax return of the individual
who is considered the "grantor" of the trust for
income tax purposes.
Trust Taxation Basics
39
Non-Grantor Trusts
Distributions to or for the benefit of a non-grantor trust beneficiary carry
out income in that beneficiary.
Trust income that is not distributed to or expended on behalf of the
beneficiary (retained income) in a given year (or by March 5th of the
following year) is taxed to the trust.
Trust Taxation Basics, cont.
40
Trust Tax Brackets 2016
The highest federal tax bracket of 39.6% is reached at taxable income on
trusts in excess of $12,400.
For a single taxpayer, the tax rate on taxable income of $12,400 is only
25%.
The highest federal tax bracket of 39.6% does not apply to a single
individual taxpayer until taxable income reaches over $415,050.
Trust Taxation Basics, cont.
41
Trust Taxation Basics, cont.
Exemption on non-Grantor Trusts
$100 [unless the trust requires all income be distributed annually in which
case the exemption amount is $300, but SNTs should not have such a
requirement].
Individual Exemption for 2016 is $4,050.
The Trustee should file a Form 56 (“Notice Concerning Fiduciary
Relationship”) with or before the first SNT tax return is filed.
42
Trust Taxation Basics, cont.
Exemptions for Qualified Disability Trusts (QDT):
A qualified disability trust is a non-Grantor trust and entitled to a Personal
Exemption:
• (For 2016 = $4,050)
43
Trust Taxation Basics, cont.
Personal Exemption Update for Qualified Disability
Trusts Subject to Phaseout for 2016.
All qualified disability trusts with modified AGI in excess of $250,000 are subject
to a phase-out of the personal exemption deduction.
A qualified disability trust allows the exemption if the trust’s modified AGI is less
than or equal to $259,400.
44
Income Taxation
3.8% Net Investment Income Tax
Tax on certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.
Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $250,000
45
Income Taxation
• Will be imposed at a 3.8% rate and is designated as a
Medicare contribution tax (the Medicare surtax).
• The Medicare surtax also applies to estates and trusts once the taxable income reaches the top marginal tax rate.
• Some SNTs will end up with income subject to this new tax.
3.8% Net Investment Income Tax
46
Income Taxation
3.8% Net Investment Income Tax
Individuals are subject to the new tax only if they receive passive income during a year in which their modified adjusted gross income (MAGI) exceeds a certain threshold.
Modified Adjusted Gross Income for purposes of the Net Investment Income Tax: is adjusted gross income and tax-exempt interest income.
47
Income Taxation
Self-Settled SNTs
Grantor Trust Status
Self-settled SNTs are considered grantor trusts under the Internal Revenue Code (IRC sections 671-679).
The beneficiary will pay the tax even if the income is accumulated.
In self-settled SNTs, the grantor is the source of trust assets (even if the
grantor named in the actual trust is the parent, grandparent, legal guardian
or court).
48
Income Taxation
Self-Settled SNTs
Grantor Trust Status
As a grantor trust, the self-settled SNT is ignored for income tax purposes
and the grantor is treated as having received the income directly even
though the trust receives the income.
All income from the self-settled SNT will be taxed directly to the
beneficiary.
49
Income Taxation
Self-Settled SNTs
Grantor Trust Status
Grantor trusts only need to file an information fiduciary income tax return
indicating that all items are reported on the grantor's personal income tax
return.
50
Income Taxation
Third-Party SNTs
Grantor Trust – revocable SNT will be treated as a Grantor Trust. Non-Grantor Trust - pays income tax at the trust level on any taxable income retained by the trust. If the trust makes a distribution to a beneficiary, such distribution will pass the taxable ordinary income (but generally not capital gains) to the beneficiary, to be taxed on the beneficiary's personal income tax return. The trustee must complete Form 1041 and issue a Schedule K-1 to the beneficiary, showing the amount and type of income from the trust to be included on his/her individual tax return.
51
Income Taxation
Third-Party SNTs Qualified Disability Trusts – Third-Party SNTS
The qualified disability trust must satisfy certain statutory requirements under IRC section 1396p©(2)(B)(iv): The trust must be irrevocable. The trust must be for the sole benefit of the beneficiary who is disabled. The trust itself cannot be a grantor trust (i.e., it must be a taxpaying entity). The beneficiary must be under the age of 65 at the time the trust is established and must have a disability determination from the Social Security Administration.
52
Income Taxation
Third-Party SNTs Qualified Disability Trusts – Third-Party SNTS
A qualified disability trust is eligible for a deduction equal to the personal
exemption in lieu of the $100 complex trust exemption.
The personal exemption is $4,050 for the 2016 tax year.
If the third-party SNT cannot meet the requirements of a qualified
disability trust, then it will be taxed as a complex trust and receive a
significantly lower exemption.
53
Gift Tax Issues
Self-Settled SNTs A self-settled SNT that provides the beneficiary with a testamentary power of appointment over the property remaining in the SNT at the Beneficiary's death and after the pay-back is satisfied, does not result in a completed gift upon the funding of an irrevocable SNT with the Beneficiary's assets. This is true even if the beneficiary is not capable of exercising the power of appointment. The mere possession of the power is insufficient to preclude a completed gift upon funding.
54
Estate Tax Issues
Self-Settled SNTs “Present value" of remaining future guaranteed annuity payments to a self-settled SNT is fully includable in the beneficiary's gross estate. Estate tax deduction for payback amount. “Stepped-up" basis.
55
Estate Tax Issues
Third Party SNTs 2016 federal estate tax on >$5,450,000 Irrevocable life insurance trust removes the value of the policy from the taxable estate of the insured person. Irrevocable life insurance trusts can be coordinated with SNTs. Drafters of irrevocable life insurance trusts often make a common error when the trust is intended to serve special needs beneficiaries:
inclusion of so-called “Crummey” powers in the trust instrument!!
56
Recognize
“Income” for tax purposes is defined
differently
than “Income” for Social Security purposes.
Different Terms
57
Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the Tax relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The author, or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.
Circular 230
58
Elizabeth L. Gray, Esq.
11350 Random Hills Road, Suite 500
Fairfax, Virginia 22030
(703) 934-1104
59