SPECIAL NEEDS TRUSTS

1. SPECIAL NEEDS TRUSTS Presented by Special Needs Alliance for The National Big Sky Visioning Sessions and the 2007 United Cerebral Palsy Annual Conference Buena Vista Palace and Resort Orlando, Florida April 12 – 14, 2007

2. TRUSTS FOR THE BENEFIT OF A DISABLED BENEFICIARY • Special Needs “Payback” Trust • U.S.C. §1396p(d)(4)(A) • Third Party Special Needs Trust • Also known as Supplemental Benefits Trust

3. Finding a Special Needs Attorney • Special Needs Alliance • Network of disability and public benefits attorneys. • www.specialneedsalliance.com • 1.877.572.8472

4. GENERAL TRUST REQUIREMENTS • Supplement, not supplant, government benefits • Definition of “special need” or “supplemental benefit” • No definitive explanation

5. What is NOT a Special Need • Basic necessities of life • i.e., food, clothing, shelter, utilities • Incidental spending money (unearned income) • Gifts • Insurance on life of disabled beneficiary

6. Special Needs “Payback” Trust • Established with assets of disabled individual • Individual must be under 65 at time of the establishment and funding • Individual must be disabled as defined in Social Security Act

7. 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”

8. DEFINITION OF DISABLED FOR CHILD UNDER 18 • Child “suffers from any medically determinable physical or mental impairment of comparable severity” to adult

9. ADDITIONAL REQUIREMENTS OF PAYBACK TRUSTS • Trust may be established by • Parent or • Grandparent or • Legal Guardian or • Court

10. PAYBACK REQUIREMENTS • Medicaid agency entitled to reimbursement from any assets remaining in trust upon death of beneficiary or trust termination for other reasons

11. PAYBACK REQUIREMENTS • Reimbursement “dollar for dollar” up to amount paid by Medicaid on behalf of individual

12. Court-created Special Needs Trusts • If trust is created or authorized by court may retain oversight in following areas: • Accountings • Trustee’s commissions • Investments • Limitations on Purchases of Major Assets

13. GOVERNMENT BENEFITS • SSI • Medicaid • SSD • Medicare • Federally-Assisted Housing • Other Agency Supported Housing

14. LIENS • Medicaid • Arkansas HHS v. Ahlborn, 2006 U.S. Supreme Court decision • Medicare • State Department of Human Services • Workers Compensation • ERISA

15. IMPORTANT! • CHECK STATE REQUIREMENTS!

16. FUNDING ISSUES • Structured Settlements • Payments made directly to disabled beneficiary may render beneficiary ineligible to receive means-tested government benefits • Trust should be payee. • Payments should “pour over” into trust.

17. CHECKLIST FOR SELF-SETTLED SPECIAL NEEDS TRUST 1. Check for compliance with federal law. • Is the beneficiary under age 65? • Is the beneficiary “disabled?” • Is the trust created by the beneficiary’s parent, grandparent, guardian or by the court? • Does the trust contain a provision requiring repayment of the state Medicaid program upon termination of the trust?

18. CHECKLIST FOR SELF-SETTLED SPECIAL NEEDS TRUST 2. Check for compliance with state law. 3. Verify that statutory liens have been paid prior to the funding of the trust.

19. THIRD PARTY SUPPLENTAL BENEFITS TRUST • Living trust or • Testamentary trust created by will

20. NO PAYBACK CLAUSE? • Generally, no payback provision required BUT • Check state regulations to make sure no payback is required. • Include specific dispositive provisions for final disposition of trust assets.

21. Estate Recovery • State regulations may provide for right of recovery of assets held in testamentary trust established by third party, including community spouse for benefit of surviving beneficiary spouse, where disabled beneficiary transferred assets to predeceased third party and those assets were used to fund the trust.

22. THIRD PARTY TRUST • Periodic additions can be made through lifetime giving or inheritances. • Rights of withdrawal (“Crummey” rights) should be incorporated in situations of lifetime giving. • Exclude disabled beneficiary from serving as Crummey beneficiary.

23. ADDITIONS TO TRUST • Unless payback trust is very small, discourage additional funding by third parties • Additions of beneficiary’s assets to third party trust may result in ineligibility for certain government benefits

24. Tax Treatment of Supplemental Benefits Trust • Unless it is an elective share trust requiring all income to be paid to surviving spouse, testamentary SBT will be taxed as a complex trust. • As distributions are made, whether from income or principal, the beneficiary will be taxed with his or her proportionate share of “Distributable Net Income” (“DNI”).

25. Tax Treatment of Supplemental Benefits Trust • If trust distributions do not equal “Net Accounting Income” or are less than DNI, trust will pay tax on accumulated income at the federal and state level. • Trust will also pay tax on short and long term capital gains. • If capital losses were not applied to other current year gains, the losses will be used to reduce accumulated income, if any.

26. Tax Treatment of Supplemental Benefits Trust • Elective share trust will be taxed as a “simple trust.” • Short and long term capital gains will be included in DNI and taxed to the trust unless otherwise distributed to the spouse.

27. Trust Administration Issues • Must consider resource and income limitations of means-tested benefits such as SSI and Medicaid

28. SSI Resource Limitations • Single beneficiary can have no more than $2,000 worth of “countable resources.”

29. Common SSI Excluded Resources • The home, if it is the beneficiary’s “principal place of residence.” • Household goods and personal effects (household furniture, furnishings and equipment commonly found in or about a home). • Vehicle • Life insurance owned by individual (and spouse, if any) if face value does not exceed $1,500. • Burial spaces and certain funds up to $1,500 for burial expenses.

30. Checklist for Evaluating SSI Resource Limitations 1. Determine whether the asset to be purchased is exempt from being counted by SSI. 2. If the asset is countable consider whether the $2,000 resource limitation will be excluded in light of the following: A. Other countable resources owned by the beneficiary. B. Other countable resources owned by parents of minor beneficiary if residing in same household C. Other countable resources owned by spouse.

31. State Medicaid Resource Limitations • Consult with local attorney or check state Medicaid manual to determine state Medicaid resource limitations. • Certain types of resources are exempt. • Exempt resources can be no more restrictive than for SSI.

32. Common Medicaid Excluded Assets • Principal residence • Proceeds from sale of home or other real property used to purchase another home. • Household goods and personal effects • Vehicle • Life insurance if face value does not exceed $1,500. • Burial vaults, crypts and plots up to $1,500. • Burial contracts of a reasonable amount if irrevocable.

33. Deficit Reduction Act of 2005 • Extends Medicaid's "look-back" period for all asset transfers from three to five years. • Changes the start of the penalty period for transferred assets from the date of transfer to the date when the individual transferring the assets enters a long-term care facility and would otherwise be eligible for Medicaid coverage.

34. Deficit Reduction Act of 2005 • Prohibits States from "rounding down" fractional periods of ineligibility when determining ineligibility periods resulting from asset transfers. • Permits States to treat multiple transfers of assets as a single transfer and begin any penalty period on the earliest date that would apply to such transfers.

35. Deficit Reduction Act of 2005 • Establishes new rules for the treatment of annuities, including a requirement that the state be named as the remainder beneficiary. • Allows Continuing Care Retirement Communities to require residents to spend down their declared resources, including a resident’s entrance fee, before applying for Medicaid.

36. Deficit Reduction Act 0f 2005 • Requires all states to apply the so-called “income-first” rule to community spouses who appeal for an increased resource allowance based on their need for more funds invested to meet their minimum income requirements. • Requires the purchase of a life estate to be included in the definition of "assets" unless the purchaser resides in the home for at least one year after the date of purchase.

37. Deficit Reduction Act of 2005 • Mandates that funds loaned in exchange for a promissory note or mortgage be included among assets unless the repayment terms are actuarially sound; provide for equal payments and prohibits the cancellation of the balance upon the death of the lender. • Renders any individual with home equity above $500,000 ineligible for Medicaid nursing home benefits, although states may raise this threshold as high as $750,000.

38. Checklist for Evaluating Medicaid Asset Limitations • 1. Determine whether the applicable state Medicaid program counts resources. • 2. If resources are counted, determine whether the asset to be purchased is exempt from being counted by the state.

39. Checklist for Evaluating Medicaid Asset Limitations 3. If the asset is countable, consider whether the asset limitation for Medicaid benefits will be exceeded in light of the following: A. Other countable assets owned by the beneficiary. B. Other countable assets owned by parents of minor beneficiary if residing in same household C. Other countable assets owned by spouse.

40. SSI Monthly Payments • SSI consists of monthly payments to beneficiary. • Base amount is called the “Federal Benefit Rate.” • $643.00 in 2007 • Changes every year according to cost of living • States sometimes increase base amount (adjusted each year).

41. SSI Income • Anything beneficiary can receive in cash or in kind that can be used to meet needs for food and shelter. • Income diminishes amount of SSI payment.

42. SSI Income Limitations • Earned Income • Wages, net earnings from self-employment, federal income tax refunds. • Excluded Earned Income • Food stamps, school lunches, energy assistance payments and certain educational grants and loans.

43. SSI Income Limitations • Unearned Income • All income that is not earned income. • Includes annuities, pensions, other periodic payments, alimony and support payments, dividends, interest, rents, death benefits, prizes and awards, gifts and inheritances, support and maintenance provided for beneficiary.

44. SSI Income Limitations • Payments from supplemental benefits trust TO beneficiary are unearned income.

45. SSI Income Limitations • Excluded unearned income • Portions of grants, scholarships or fellowships used to pay tuition or other educational expenses • 1/3 of child support payments received by a minor • $20 per month. • After that, unearned income reduces SSI payment by 100 cents for every dollar of unearned income received.

46. SSI Income Limitations • In Kind Income • Any kind of food or shelter given to the beneficiary. • If SBT pays beneficiary’s rent or portion of cost of food, trust is providing in kind income. • Presumption that food or shelter provided is worth 1/3 of the SSI payment otherwise entitled to plus $20.00. • Beneficiary can rebut presumption by proving value of in kind income is less than presumed value.

47. Choosing Appropriate Trustee • Can post a bond or is already bonded. • Has knowledge of means-tested public benefits eligibility requirements such as SSI and Medicaid. • Understands applicable investment principles. • (Prudent Investor Act may apply). • Is sensitive to special needs beneficiary and family.

48. Home Ownership • Options include: • Trust owns house, rent is not charged. • Trust owns house, rent is charged. • Trust buys house and transfers house to beneficiary • Trust buys fractional interest in house, such as life estate.

49. MODIFYING IMPROPERLY DRAFTED SNT • May be able to modify or reform trust • Trustee may be able to transfer assets into another SNT without court approval