Estate Planning for Individuals With Special Needs Presented By Brenna D. Mansfield, J.D.

1. Estate Planning for Individuals With Special Needs Presented ByBrenna D. Mansfield, J.D.

2. Introduction In additional to documents that generally comprise an estate plan (i.e. Pour Over Will, Revocable Living Trust (RLT), Power of Attorney for Financial Matters, Power of Attorney for Health Care Matters, Irrevocable Trusts), families and Special Needs (SN) individuals should engage in Special Needs Planning (SNP) as part of their overall estate plan to ensure the highest quality of life and quality of care for the (SN) individual. Special needs planning provides SN individuals, who are often vulnerable, with resources to help manage their lives successfully. Government programs exist to provide some basic support to SN individuals. These programs and benefits are inherently limited to the medically and financially needy (i.e. �needs-based gov�t benefits/programs) and are designed to provide only the very basic level of service and support. However, when faced with the challenge of maximizing the quality of care and quality of life for the SN individual � obtaining and maintaining government benefits is often very desirable. For example, self-funding medical costs for a serious illness, rather than applying for and obtaining eligibility for Medicaid, would likely deplete private funds. Special needs planning provides SN individuals, who are often vulnerable, with resources to help manage their lives successfully. Government programs exist to provide some basic support to SN individuals. These programs and benefits are inherently limited to the medically and financially needy (i.e. �needs-based gov�t benefits/programs) and are designed to provide only the very basic level of service and support. However, when faced with the challenge of maximizing the quality of care and quality of life for the SN individual � obtaining and maintaining government benefits is often very desirable. For example, self-funding medical costs for a serious illness, rather than applying for and obtaining eligibility for Medicaid, would likely deplete private funds.

3. Special Needs Planning SNP can ensure the following for the SN person: Quality of life Quality of care Financial protection and management Care advocacy Access to governmental resources Preservation of current or future eligibility for gov�t benefits Conservation of assets to supplement gov�t benefits

4. Special Needs Planning Establishing and maintaining gov�t benefits Probate Court involvement and representation Alternatives to Guardianship and Conservatorship Special Needs Trusts (SNT)

5. Establishing and Maintaining Government Benefits Eligibility for need-based governmental benefits, such as Supplemental Security Income (SSI), Medicaid, and US Dept. of Housing & Urban Development (HUD) Housing Choice Voucher Program (Section 8 Housing), is based on an individual�s medical and financial need. SNP is essential in providing for a SN individual without jeopardizing his/her government benefits. An individual applying for need-based government benefits cannot have over $2,000 in countable assets. Countable assets include cash or other liquid assets, or any real or personal property that an individual owns and can convert to cash. Some assets are not counted for eligibility purposes, such as one home, one vehicle, certain funeral contracts and burial plots, personal and household belongings, life insurance within certain limits, and assets necessary for employment, business, and education.An individual applying for need-based government benefits cannot have over $2,000 in countable assets. Countable assets include cash or other liquid assets, or any real or personal property that an individual owns and can convert to cash. Some assets are not counted for eligibility purposes, such as one home, one vehicle, certain funeral contracts and burial plots, personal and household belongings, life insurance within certain limits, and assets necessary for employment, business, and education.

6. Probate Court Involvement andRepresentation Guardianship and Conservatorship for �legally incapacitated individuals� under Estates and Protected Individuals Code (EPIC) Individuals over age 18, who are not developmentally disabled, and who are unable to make some or all of their own decisions Guardianship is the appointment of an individual to make personal decisions on behalf of another (i.e. living arrangements, medical care, education, employment, etc.) Conservatorship is the appointment of an individual to make financial decisions on behalf of another. Guardianships for developmentally disabled individuals are governed by the Michigan Mental Health Code (MHC). Under MHC, an individual is appointed as the guardian of the person (to make personal decisions) and/or the estate (to make financial decisions) of a developmentally disabled individual. Such individuals have the following attributes: a severe, chronic condition; that is attributable to mental or physical impairments; that manifested before age 22; that is likely to continue indefinitely; that results in substantial functional limitations in three or more of the following: self-care, receptive and expressive language, learning, mobility, self-direction, capacity for independent living, and economic self-sufficiency; and that reflects the individual�s need for long-term special, interdisciplinary, or generic care, treatment, or other services. Guardianships for developmentally disabled individuals are governed by the Michigan Mental Health Code (MHC). Under MHC, an individual is appointed as the guardian of the person (to make personal decisions) and/or the estate (to make financial decisions) of a developmentally disabled individual. Such individuals have the following attributes: a severe, chronic condition; that is attributable to mental or physical impairments; that manifested before age 22; that is likely to continue indefinitely; that results in substantial functional limitations in three or more of the following: self-care, receptive and expressive language, learning, mobility, self-direction, capacity for independent living, and economic self-sufficiency; and that reflects the individual�s need for long-term special, interdisciplinary, or generic care, treatment, or other services.

7. Probate Court Involvement and Representation Guardianship for �developmentally disabled individuals� under Michigan�s Mental Health Code (MHC) Developmentally disabled means a severe, chronic condition that is attributable to mental or physical impairments; that manifested before age 22; that is likely to continue indefinitely; that results in substantial functional limitations in three or more of the following: self-care, receptive and expressive language, learning, mobility, self-direction, capacity for independent living, and economic self-sufficiency; and that reflects the individual�s need for long-term special, interdisciplinary, or generic care, treatment, or other services. Under MHC, an individual is appointed as the guardian of the person (to make personal decisions) and the estate (to make financial decisions) of a developmentally disabled individual.

8. Alternatives to Guardianship/Conservatorship Representative Payee � may receive payments from Social Security Administration (SSA) if the recipient is unable to manage money. Power of Attorney � an agent may be appointed by competent SN individuals to act on their behalf for financial and health care matters. Limited Guardianship/Conservatorship � guardian/ conservator is only allowed to make decisions specifically granted by the probate court for the SN individual Protective Order � when only a single transaction affecting a SN individual is required. Advocacy � family members, volunteers, professionals, community services, organizations. Trusts � substitute for a guardian and/or conservator�s functions. I. Guardianships may be required by third parties (i.e. health care providers, support service providers, financial institutions) who interact with a special needs adult. Absent such a requirement by third parties, there is no automatic need to appoint a guardian and/or conservator for SN individuals.I. Guardianships may be required by third parties (i.e. health care providers, support service providers, financial institutions) who interact with a special needs adult. Absent such a requirement by third parties, there is no automatic need to appoint a guardian and/or conservator for SN individuals.

9. Special Needs Trusts (SNT) A SNT accomplishes the following: Ensures quality of life/care Establishes/maintains eligibility for gov�t benefits Preserves funds that would otherwise be exhausted to pay for basic life necessities Allows distributions to supplement gov�t benefits Types of SNTs: Self Settled Special Needs Trust (SSSNT) Third Party Funded Special Needs Trust (TPSNT)

10. Self Settled Special Needs Trusts (SSSNT) An inheritance bequest, gift, settlement award, child support, alimony, etc. will likely result in ineligibility for need-based gov�t benefits. To preserve gov�t benefits, the SN individual�s assets can be transferred to a SSSNT. Two Types of SSNTs: Medicaid Payback Trust Community Pooled Account Trust

11. Medicaid Payback Trust SN individual must be �disabled� pursuant to SSA�s definition of disability and be under age 65 when the Trust is established and funded. Trust must be established by the disabled individual; his/her parents, grandparents, legal guardian or by court order. Trust must be irrevocable and for the sole benefit of the SN individual. Trust must provide that at disabled beneficiary�s death, the Trust will reimburse the State for Medicaid benefits paid on behalf of the disabled individual. Any remaining trust property may be distributed to the trust�s remainder beneficiaries. Although the State must be reimbursed for past benefits upon the death of the beneficiary, heirs are benefitted by the deferral during the beneficiary�s lifetime for the following reasons: There is no period of ineligibility for Medicaid caused by the creation of the trust, the corpus will not be deemed available to the beneficiary, and the income need not be counted for Medicaid eligibility purposes. The Trust enable the disabled individual to have his /her financial needs met during his/her lifetime since principal and income can be used for the individual�s benefit so long as trust distributions do not jeopardize eligibility requirements for SSI and Medicaid. Medicaid for nursing home residents is the only program that requires reimbursement. The State does not charge interest on the deferred payments (i.e. the State is offering the equivalent of an interest free loan). The State will pay less for the services than the beneficiary would have to pay privately. Some Medicaid programs and services for disabled individuals are unavailable to individuals not receiving Medicaid. If there is nothing left in the trust, the State receives no reimbursement for Medicaid payments. Although the State must be reimbursed for past benefits upon the death of the beneficiary, heirs are benefitted by the deferral during the beneficiary�s lifetime for the following reasons: There is no period of ineligibility for Medicaid caused by the creation of the trust, the corpus will not be deemed available to the beneficiary, and the income need not be counted for Medicaid eligibility purposes. The Trust enable the disabled individual to have his /her financial needs met during his/her lifetime since principal and income can be used for the individual�s benefit so long as trust distributions do not jeopardize eligibility requirements for SSI and Medicaid. Medicaid for nursing home residents is the only program that requires reimbursement. The State does not charge interest on the deferred payments (i.e. the State is offering the equivalent of an interest free loan). The State will pay less for the services than the beneficiary would have to pay privately. Some Medicaid programs and services for disabled individuals are unavailable to individuals not receiving Medicaid. If there is nothing left in the trust, the State receives no reimbursement for Medicaid payments.

12. Community Pooled Account Trust Nonprofit organization establishes and manages a master trust with subaccounts for SN individuals. Trust account must be established by the SN individual; his/her parent, grandparent, legal guardian, or by court order. SN individual must be �disabled� pursuant to SSA�s definition. Trust must be for the sole benefit of the disabled beneficiary. Any trust property remaining at the disabled beneficiary�s death must be retained by the nonprofit organization for the benefit of other SN individuals, or used to reimburse the State for past Medicaid benefits, with any remaining trust property distributed pursuant to a Protective Order. This type of Trust is preferred over the Medicaid Payback Trust when the amount of assets owned by the SN individual is not significant enough to justify the cost of establishing and administering a Medicaid Payback Trust. Unlike the Medicaid Payback Trust, federal law clearly mandates that a disabled individual does not have to be under age 65 to take advantage of a Pooled Account Trust. However, Michigan�s current rules for Pooled Account Trusts are highly ambiguous as they state that transfers to such a trust by a person age 65 or older �might� be a divestment (i.e. a transfer for less than fair market value that results in a period of ineligibility for gov�t benefits). This type of Trust is preferred over the Medicaid Payback Trust when the amount of assets owned by the SN individual is not significant enough to justify the cost of establishing and administering a Medicaid Payback Trust. Unlike the Medicaid Payback Trust, federal law clearly mandates that a disabled individual does not have to be under age 65 to take advantage of a Pooled Account Trust. However, Michigan�s current rules for Pooled Account Trusts are highly ambiguous as they state that transfers to such a trust by a person age 65 or older �might� be a divestment (i.e. a transfer for less than fair market value that results in a period of ineligibility for gov�t benefits).

13. Third Party Funded Special Needs Trusts (TPSNT) Estate Planning options for Special Needs Families: 1) Distributing assets outright to the SN individual (not recommended); 2) Disinheriting the SN individual (not recommended); 3) Leaving property to another family member with the �understanding� that the property will be used for the benefit of the SN individual (not recommended) 4) Establishing a third party discretionary support trust for the SN individual (not recommended); and 5) Establishing a (TPSNT) for the SN individual (highly recommended). (1) is not recommended because the assets distributed outright may disqualify the individual from receiving need-based gov�t benefits. (2) is not recommended because the individual will have no �safety net� if gov�t benefits are subsequently reduced or eliminated. (3) is not recommended because this arrangement is not legally enforceable and the family member�s creditors may be able to seize the assets (4) is not recommended because the trust may disqualify the individual from receiving need-based gov�t benefits.(1) is not recommended because the assets distributed outright may disqualify the individual from receiving need-based gov�t benefits. (2) is not recommended because the individual will have no �safety net� if gov�t benefits are subsequently reduced or eliminated. (3) is not recommended because this arrangement is not legally enforceable and the family member�s creditors may be able to seize the assets (4) is not recommended because the trust may disqualify the individual from receiving need-based gov�t benefits.

14. Features of TPSNT Purpose of a TPSNT is to preserve current or future eligibility for need-based gov�t benefits while supplementing the disabled beneficiary�s lifestyle with private funds. TPSNT may be (1) testamentary or inter vivos; (2) revocable or irrevocable; (3) funded during the grantor�s lifetime or funded upon the grantor�s death; (4) incorporated into the grantor�s RLT; or (5) created as a stand-alone trust.

15. Benefits of TPSNT Trust can be established any third party, such as parents, grandparents or siblings. Grantor can decide the terms/conditions of the Trust such as appointing the initial trustee and successor trustees, thereby avoiding a probate court guardianship for the SN individual�s inheritance. Grantor can appoint remainder beneficiaries, rather than having to reimburse Medicaid and/or �cost of care� benefits provided to the SN individual. SN individual can be any age (the trust is not limited to an individual under age 65, as with Medicaid Payback Trusts).

16. Benefits of TPSNT Trust can provide for the appointment of an independent advocate for the SN individual, regardless of whether the individual has a guardian. Trust Protector can be appointed with the power to: direct the trustee�s actions receive financial statements and trust accountings terminate the trust (and have assets distributed to the remainder beneficiaries) remove and replace a trustee. Trust can authorize employment of a care manager and/or government benefits advisor, and authorize the purchase a home and/or life insurance (i.e. Trustee does not have to adhere to the Prudent Investor Rule). Trust provides creditor protection for the SN individual and avoids the imposition of a Medicaid lien.

17. Financial Planning Issues The following assets and applicable beneficiary designations should be reviewed to ensure they will not be paid or given directly to a SN individual: Retirement benefits Life insurance benefits Accidental death and travel insurance benefits Annuities Savings Bonds Any property not subject to the grantor�s Will or Trust UGMA or UTMA accounts Accounts, bonds or securities with TOD, POD, ITF designations Inheritances, gifts, or bequests through another person�s Will or Trust (if not directed to be distributed to a SNT) Joint accounts and jointly titled property Personal injury and/or wrongful death proceeds payable to the grantor�s estate Successful SNP requires a team approach (i.e. an attorney, accountant, financial planner, etc.). Financial planning issues should be addressed before legal documents are finalized to avoid changing the documents to coordinate with the financial planning. Successful SNP requires a team approach (i.e. an attorney, accountant, financial planner, etc.). Financial planning issues should be addressed before legal documents are finalized to avoid changing the documents to coordinate with the financial planning.

18. Funding the SNT Considerations: Grantor�s financial planning. Age of the disabled beneficiary. Grantor�s desire to provide for other family members, individuals, or charities. Type of trust - TPSNT vs. SSSNT; revocable vs. irrevocable; testamentary vs. lifetime; incorporated into RLT vs. stand-alone SNT. If the TPSNT is testamentary, funding will depend upon the remaining assets in the deceased grantor�s estate. The problem arises as to whether there are any remaining funds. Accordingly, financial planning is essential to ensure funds for a testamentary TPSNT. If the TPSNT is revocable, it offers greater flexibility, but any funds in the TPSNT are deemed to be owned by the grantor for both income tax and estate tax purposes, and for eligibility for need-based government benefits should the grantor need long-term care. Irrevocable TPSNT may be less flexible, but funds in an irrevocable trust are not considered part of the grantor�s estate nor are the assets countable for long-term care needs. The TPSNT is a separate entity for tax purposes and must file a tax return depending on the type of funding. Assets in a RLT with special-needs provisions are not protected from the settlor�s creditors, whereas a stand-alone SNT provides asset protection for the trust assets from both the settlor�s creditors and the special needs child�s creditors. Stand-alone TPSNTs can be drafted to receive gifts/bequests from parents, siblings, grandparents, family members, friends, etc. through their own estate planning documents without placing the SN individuals gov�t benefits in jeopardy. When SNT provisions are incorporated into the RLT, government agencies are able to view the RLT when a SN individual applies for government benefits. Only the stand-alone SNT (and not the RLT) must be disclosed to the government agency during the application process, thereby preserving privacy concerning the terms of the RLT. A stand-alone SNT can remain unfunded under the grantor�s death (i.e. the grantor�s Will or RLT simply �pours over� all or part of the grantor�s assets into the SNT for the benefit of the SN individual). If the TPSNT is testamentary, funding will depend upon the remaining assets in the deceased grantor�s estate. The problem arises as to whether there are any remaining funds. Accordingly, financial planning is essential to ensure funds for a testamentary TPSNT. If the TPSNT is revocable, it offers greater flexibility, but any funds in the TPSNT are deemed to be owned by the grantor for both income tax and estate tax purposes, and for eligibility for need-based government benefits should the grantor need long-term care. Irrevocable TPSNT may be less flexible, but funds in an irrevocable trust are not considered part of the grantor�s estate nor are the assets countable for long-term care needs. The TPSNT is a separate entity for tax purposes and must file a tax return depending on the type of funding. Assets in a RLT with special-needs provisions are not protected from the settlor�s creditors, whereas a stand-alone SNT provides asset protection for the trust assets from both the settlor�s creditors and the special needs child�s creditors. Stand-alone TPSNTs can be drafted to receive gifts/bequests from parents, siblings, grandparents, family members, friends, etc. through their own estate planning documents without placing the SN individuals gov�t benefits in jeopardy. When SNT provisions are incorporated into the RLT, government agencies are able to view the RLT when a SN individual applies for government benefits. Only the stand-alone SNT (and not the RLT) must be disclosed to the government agency during the application process, thereby preserving privacy concerning the terms of the RLT. A stand-alone SNT can remain unfunded under the grantor�s death (i.e. the grantor�s Will or RLT simply �pours over� all or part of the grantor�s assets into the SNT for the benefit of the SN individual).

19. Funding the TPSNT Life insurance: Most commonly used and practical funding vehicle for both revocable and irrevocable trusts. Provides an assurance of funds for the SNT. Allows for fair or equal treatment of other heirs. Proceeds are free of income tax and estate tax if the trust is irrevocable. Does not have market fluctuation as with other investment products. Uses leverage to create a larger asset with small contributions of principal.

20. Funding the TPSNT Tax deferred annuities � during the annuitant�s lifetime, the annuity grows tax deferred; the SNT is the beneficiary upon the annuitant�s death and gains are subject to ordinary income taxes. Investment accounts � stocks, mutual funds and other growth products providing more in appreciation and capital gains than ordinary income. Retirement Benefits � often an inefficient and income tax expensive method of funding a TPSNT.

21. Trustee of a SNT distributes trust funds for permissible �extra� quality of life items and services not provided by governmental benefits. Permissible distributions will not jeopardize the SN beneficiary�s receipt of or qualification for gov�t benefits. SNT can be drafted to expressly prohibit the Trustee from making distributions that would disqualify the SN beneficiary from gov�t benefits. SNT can be drafted without any express restrictions on distributions, which permits the Trustee to make disqualifying transfers to the SN beneficiary if the distributions are in his/her best interests.