What Every Financial Advisor Should Know about Special Needs Planning

1. What Every Financial Advisor Should Know about Special Needs Planning Tara Anne Pleat, Esq.| - Financial Planning Association of Northeastern New York April 12, 2018

2. Today’s Discussion Means Tested Government Benefits and why they are important Special Needs Estate Planning and Third Party Supplemental Needs Trusts First Party Supplemental Needs Trusts ABLE Accounts

3. Understanding the Landscape • Population that Benefits from establishment and administration of SNTs • ID/DD Community and services through OPWDD • TBI Community and services through the DOH TBI Waiver • MH Community and Medicaid funded services overseen by OMH • Seniors who are in need of assistance with their Activities of Daily Living seeking services from the NHTD Waiver or MLTC to stay in their homes • The Constantly changing Service Delivery System • “Medicaid Funding”

4. Supplemental Security Income (SSI) • For impoverished individuals over the age of 65 and disabled individuals under the age of 65 • Federal income maintenance program for those who qualify to provide basic necessities (food and shelter) • Means Tested – Has a resource limit of $2,000 for single individuals and $3,000 for married couples • Earned and Unearned Income will effect eligibility for SSI and the amount of the benefit • Deeming rules for individuals under the age of 18. • Often introduced to parents when they are considering transition planning (children aging out of the school system) • In NY SSI is a doorway into the Medicaid Program, which serves as a funding stream for implementation of supports and services from OPWDD, DOH and OMH.

5. Medicaid Program • Joint Federal and State Program (for now) that provides a basic means of health insurance to impoverished individuals who qualify. • Serves as the funding stream for various waiver programs that help support individuals of all ages and all disabilities in the community. • Medicaid has income limits and resource limits • SSI Doorway • Direct Doorway (when there is no SSI or individual loses SSI for some reason)

6. Income/Resource Limits SSI and Medicaid • The Supplemental Security Income and Medicaid programs use household budgeting and deeming when determining eligibility and are typically the most important to programs to young adults with disabilities. • SSI (single person 2018 Limits) • Resources - $2,000 • Medicaid (single person 2018 Limits) • Resources - $15,150 • Income - $862

7. Means Tested Government Benefits TO PROPERLY ADVISE CLIENTS ON THE NECESSITY OF SUPPLEMENTAL NEEDS TRUSTS YOU NEED TO UNDERSTAND WHAT IS MEANS TESTED AND WHAT ISN’T and YOU NEED TO VERIFY THE BENEFITIS (sometimes your clients and their families don’t know). • What are: • Supplemental Security Income (SSI) • Medicaid • Section 8 • HEAP • What aren’t: • Social Security Disability (SSD) / Disabled Adult Child Benefits (CDB) • Medicare

8. SPECIAL (SUPPLEMENTAL) NEEDS TRUSTS Individual Supplemental Needs Trusts (usually drafted by a lawyer for a specific client and beneficiary): * Assets are held by a Trustee and usually managed for a single individual * Trustee is often a bank, financial institution or individual * The Trust document is often tailored to meet other, more specific needs of the beneficiary, as desired by the Creator 8

9. SPECIAL (SUPPLEMENTAL) NEEDS TRUSTS Two main types: * First Party Supplemental Needs Trusts * Third Party Supplemental Needs Trusts The distinction is drawn by the identity of the person whose assets funded the Trust and how these Trusts can be established 9

10. SNTs Generally • Are usually Irrevocable • Are Discretionary • Are designed to provide goods and services to supplement what might otherwise be available to the beneficiary through a means tested government benefit program to an individual who has been determined disabled. New York’s Statutory Framework for SNTs can be found at EPTL 7-1.12

11. Third Party Supplemental Needs Trusts • Typically created and funded by parents and/or other family members who wish to provide for a family member with a disability and funded through gift or bequest from that family member or others. • Families considering future costs of caring for a loved one or child with a disability will fund with life insurance, many times second to die insurance. Competent advice to families warrants an understanding about how they help their child on a daily basis. • No payback provision to the State Medicaid Agency and thus family members can leave funds remaining at end of child’s lifetime to any individuals or entities they choose. Wilcenski & Pleat 2016

12. Intervivos vs. Testamentary • Prefer Intervivoswhenever possible: • to allow for modification without court order after the Trust is funded; • Typically far less problems in naming Intervivos Trust as beneficiary of IRA/Insurance; • To allow funding by other family members by gift or bequest during life

13. Empathy – Understanding the Family Experience with Service Delivery • Transition out of the Educational Setting and System • Discussion of Guardianship • Benefits • Continued cuts in funding and access to services • Benefit Eligibility and Financing for Supports and Services • Increased Oversight & Scrutiny by Courts and Oversight Agencies • Need to Ensure Ongoing Advocacy Wilcenski & Pleat PLLC 2015

14. MAJOR QUESTION: WHO STEPS IN WHEN PARENTS AND OTHER CAREGIVERS ARE GONE? • Agencies that serve the disability community • Friends and family members • Case Managers and • Advocates

15. History of First Party Supplemental Needs Trusts • In 1993 Congress Enacted The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) • This law permitted a parent, grandparent, guardian or court to establish a self-settled SNT for an individual with disabilities under the age of 65 with the individuals own assets. • OBRA-93 provided that assets contained in a properly drafted Self-Settled SNT do not disqualify the individual with a disability from continuing to receive government benefits such as Medicaid and/or SSI.

16. First Party Supplemental Needs Trusts – When your clients do not or can not plan • Must be established by • Parent • Grandparent • Guardian; or • Court Order • The Individual (SNT Fairness Act) • Feds December 13, 2016 • NY enabling legislation has been introduced • For an individual with a disability who is under the age of 65 • Upon the Death of the individual with the disability Medicaid expenses to be paid back to the State (exclusive of school supportive service charges) – Every state in which the beneficiary received benefits must be paid back its proportional share of the assets remaining in the Trust.

17. Special Needs Trust Fairness Act 12/13/16 • OBRA-93 did not provide a mechanism for individuals with disabilities who had legal capacity to establish their own Supplemental Needs Trust. • The 21st Century Cures Act inserts the term “the individual” into the class of those who can “establish” a First Party Supplemental Needs Trust. • For Adults with capacity who don’t have living grandparents or parents, this change in the law has corrected an oversight that caused a great degree of time and expense for those who had legal capacity but could not self establish under the prior law.

18. The Payback Provision • The terms of the Trust must say that upon the death of the Trust Beneficiary that the State of New York (or other state where Medicaid funded services were provided to the Beneficiary) must be repaid to the State. • The only expenses that can be paid before the Payback are “Reasonable Fees” for Trust Administration and income/estate taxes. • Funeral Expenses CAN NOT be paid nor can any pre-existing debts. Those expenses should be paid prior to the death of the Beneficiary. • Obtaining the Lien Detail and County contracting with HMS. • Review the Medicaid Lien Detail and Demand the History before advising the Trustee to pay the lien. • School Supportive Service Charges • 104(b) Liens that have already been paid

19. Who should agree to be Trustee? • Family Member Trustees • Dependent upon assets under management • Risks to family chemistry • Ability and desire of siblings to have that role • Institutional Trustees • Use of Trust Protector or Committee • Use of Advisory Group to make recommendations about distributions to the beneficiary • Concerns about commissions – often a misunderstanding

20. ABLE ACCOUNTS – A NEW TOOL • Achieving a Better Life Experience Act (ABLE) became federal law in December of 2014 and NY enabling legislation was passed in 2015. – For Federal Law it is Section 529-A of the Internal Revenue Code. • Law allows states to set up programs that permit people with disabilities or their families to make contributions to accounts that are of similar structure to a 529 college savings plan. • Rather than focus on educational needs, the ABLE accounts will help pay for disability related expenses.

21. Federal Tax Reform Legislation enhances ABLE On December 22, 2017, federal tax reform legislation, H.R. 1 of the 115th Congress (the Tax Cuts and Jobs Act of 2017), was signed into law. This legislation includes the following new provisions for ABLE programs: • ABLE account owners who earn income may contribute more to their accounts than the program's annual $15,000 limit. The additional annual contribution is equal to the federal poverty line for a one-person household ($12,060 for the 2018 tax year) or the account owner's income, whichever is less. (ABLE TO WORK ACT) • ABLE account owners who contribute to their accounts may receive a federal tax credit, called a Saver's Credit, for up to $2,000 to help save for retirement. Eligibility is based primarily on Adjusted Gross Income and other eligibility criteria, namely being Age 18 or older, not a full-time student; and not claimed as a dependent on another person’s return. (ABLE TO WORK ACT) • 529 College Savings Program account owners are eligible to roll over 529 Plan assets to an ABLE account owned by a beneficiary or a member of that beneficiary’s family* with no federal tax impact.** These rollovers are subject to the annual contribution limit for ABLE accounts. – This may not make sense to do, but is an option. (ABLE FINANCIAL PLANNING ACT)

22. How to use the 529 to 529A Rollover • Don’t be so quick to rollover those 529 plans to ABLE. • Uses up the 15K limit • 529 penalties for distributions are less restrictive than 529A payback • Use selectively to convert education $$ to rent (eliminate ism) • Consider new contributions to 529 Plans for follow-on rollover as needed. • No penalty and no tax for rollover

23. Characteristics of ABLE Accounts • Only individuals who had a disability onset date prior to the age of 26 can set up ABLE accounts. • Only individuals living in a state that has authorized ABLE Act accounts can participate. If a given state has declined to authorize ABLE, its residents can not create ABLE accounts at all (even in another state). • Only one ABLE Act account can be established per individual, but there is no limitation on the number of individuals who can contribute to that one account. • TOTAL CONTRIBUTIONS for the benefit of a given ABLE act beneficiary (who is not earning wage income) can not exceed $15,000 in a given year. (Like the federal gift tax exclusion, this amount is expected to go up by $1,000 every few years, but it will always be keyed to the maximum annual federal gift tax exclusion amount).

24. Characteristics of ABLE accounts (cont.) • Upon the death of the ABLE Act participant, every dollar remaining in the account, including gifts from family members and account earnings, must be repaid to the state Medicaid Agency for Medicaid dollars paid out on behalf of the beneficiary during their lives. • If the ABLE Account balance grows to exceed $100,000, the participant will lose SSI eligibility, but not Medicaid eligibility. In New York, in order to lose Medicaid eligibility the account would have to exceed $375,000. (26.7 years). • ABLE Act Funds can be used for “qualified disability expenses” (which are still not fully defined). If the Funds are used for something other than a qualified disability expense, will result in the account becoming a countable asset and likely cause disqualification from the SSI and Medicaid Program.

25. Scenarios Where ABLE Accounts may work THE BENEFICIARY WHO SAVES MONEY For beneficiaries who are regularly trying to spend funds to stay below the SSI or Medicaid resource limits, the ABLE account is likely to benefit them. If their personal funds are pushing the thresholds, they can deposit funds into an ABLE account and save them as opposed to purchasing goods simply to stay below the threshold.

26. Scenarios where ABLE may work BENEFICIARY WHO RECEIVES A SMALL INHERITANCE OR PERSONAL INJURY LAWSUIT PARENTS OR GRANDPARENTS WITH SMALL ESTATES AND A FEAR OF LAWYERS FAMILY WHO IS INTERESTED IN GIVING THEIR LOVED ONE MORE CONTROL AND AUTONOMY OVER THEIR FUNDS - Many parents are more concerned about the dignity of their loved ones then they are the funds and the Medicaid Payback. These parents can’t put $5,000 in the child’s checking account without eliminating SSI eligibility, but they can put them into an ABLE Account and give the child full control and use of the funds. The value of Self-Determination may be worth more than the limitations of the ABLE act in some family cases.

27. What are “qualifying disability expenses”? • Education • Housing • Transportation • Employment Training and Support • Assistive tech and personal support services • Health • Financial Management • Legal Fees • Funeral and Burial • Anything else that may be permitted by Treasury Regulations

28. ABLE in NY • Governor Cuomo signed the Act into law in December of 2015 • https://www.mynyable.org/ • Program Name: NY ABLE ProgramProgram Manager: AscensusProgram Investment Institution: Vanguard, Sallie Mae, Fifth Third Bank • Additional ABLE Resources: http://www.ablenrc.org/

29. Additional Tax Reform Items Affecting Special Needs Estate Planners and Elder Law Practitioners • Medical Expense Deduction – IRC Section 213(f) Floor is 7.5% for all taxpayers for 2017 and 2018 – In 2019 it goes back to 10% for everyone (with no special treatment for seniors). ---Less folks are likely to itemize however… • QDisTs – IRC Section 642(b)(2)(C)(iii) • Says that QDisTs will stil get exemption of $4,150 in 2018 and will be indexed for inflation • This is a good development because all other personal exemptions are suspended until 2025 under the Act • Kiddie Tax – IRC Section 1(g) • Prior law imposed tax at parents’ highest marginal rate • New Law – Zero tax rate up to $2600 • Tax due: 37% of income over $12,500 (LT cap gains at 20%+3.8%) - Trust and Estate Tax Rates • Low-income parents might pay well less than 37%/23.8%, so effect may be substantial tax increase • Applies to minor’s first party (Grantor )Trusts • KIDDIE TAX APPLIES WHETHER OR NOT THE CHILD IS CLAIMED AS A DEPENDENT 

30. Closing Thoughts • Need for ongoing Advocacy and Public Private Partnerships • Documenting clients intentions for their loved one with a disability • www.specialneedsalliance.org – The Voice Newsletter • Special Needs Estate Planner Newsletter – quarterly from our office. I have sign up sheet for anyone interested.

31. Questions?

32. Thank you! Tara Anne Pleat Wilcenski & Pleat PLLC www.wplawny.com