Program Materials. Today s Program 1/20/18. Drafting the World s Greatest Third Party Special Needs Trust

Transcription

1 Drafting the World s Greatest Third Party Special Needs Trust With Michele Fuller and Kevin Urbatsch Program Materials Third Party SNT Intake Form ASNP s Drafting Guide for Drafting the World s Best Special Needs Trust (third party only) Guidelines for Preparing Memorandum of Intent Two Sample Completed Memorandums of Intent Letter to Family Members Article: Professor Jeffrey Pennell s Deconstructing the SNT Draft Third Party SNT Today s Program Introduction Third Party SNT provisions Provisions common to both types of SNTs Questions 1

2 Types of Special Needs Trusts Third-Party Using Assets of Others First Party or Self-Settled (d)(4)(a) (a/k/a Payback SNT) (d)(4)(b) (Miller Trust) (d)(4)(c) (a/k/a Pooled Trust) Drafting Depends on Type of SNT First Party SNT Federal specific legal requirements State specific legal requirements Don t be creative Third Party SNT Less legal requirements = More flexibility and creativity Exceptions Sole benefit if want parent to qualify for long term Medicaid Setting up SNT for spouse Third-Party Special Needs Trust For SSI purposes, the Social Security Administration defines in the POMS SI (B)(17) a third party trust as "a trust established by someone other than the beneficiary as grantor. It defines a grantor in the POMS SI (B)(2) as "the individual who provides the trust principal (or corpus). 2

3 Third Party SNT Requirements SSI regulations impose two requirements for third party SNTs: 1. The beneficiary cannot have authority to revoke the trust; and 2. The beneficiary cannot direct the use of trust assets for his or her support and maintenance under the terms of the trust 42 USC 1382b(e)(3)(A), 20 CFR (a)(1); POMS SI (D)(2) Third Party SNT Drafting Common drafting error: focusing only on preserving public benefit eligibility Missing main planning concerns of parents (replacing what the parent does): Caregiving instructions for hiring and utilizing caregivers Advocacy preserving opportunities Housing live in home? facility? board & care? Collecting the parents/grandparents knowledge of person with a disability Memorandum of Intent Introductory provisions Naming the SNT Trust Funding Trust intent 3

4 Drafting the Third Party SNT Living (inter vivos) versus Testamentary If for spouse, must be testamentary trust (cannot use Living SNT) Revocable versus Non-Revocable Beneficiary with disability must never have right to revoke trust Others may have that right (e.g. Parents) Describing Beneficiary s disability Defining the term Special Needs Using a Memorandum of Intent Provisions for Care Manager and Advocate Providing Specific Instructions on Distributions Maintaining contact with family Social/cultural activities Sporting Defining Disability in Trust Use a general definition of terms in document May want to provide a more thorough definition If doing so, should only do so after fully discussing with client, if using a general definition from internet be prepared for upset client when definition does not match their child s condition My belief is better to provide detailed description of disability in Memorandum of Intent, easier to update and let parent define their child s condition 4

5 Defining the Term Special Needs Most SNTs define the term to include a laundry list of goods and services that can be purchased Is it necessary? Is it helpful? Be careful of placing too many limitations Be careful of allowing too many options (i.e., the shopping list) Memorandum of Intent In third party planning, most critical document for customized plans Add in specifics of person with disability Keep updated (reminder to do it on person s birthday) Prepare trust provision to have SNT Management Team review and utilize when interpreting intent Send Memo of Intent guidelines to client Refer clients to Life Planning for Adults with Developmental Disabilities: A Guide for Parents and Family Members by Professor Judith Greenbaum Advocate/Care Manager Oftentimes, the client is planning for their loved one with special needs and the client is the one providing all the care, advocacy, love, and support Planning for the loss of this essential person is one of the most critical areas, especially in providing advocacy, as one of our members recently stated: People with disabilities are repeatedly denied constitutional due process rights, reasonable accommodations under the law, and their basic needs. I think many criminals are given those and if they are not there is a significant legal response. Folks with disabilities are often given significantly less, and often victimized and punished for being a burden when they have committed no crime, says Patricia Dudek. 5

6 Considerations for Advocacy and Care Management The SNT Trustee does not have legal authority to manage a beneficiary s life, however, the drafter can provide them authority to manage or pay for that type of advocacy Great topic for a Memorandum of Intent Drafting for Care Management and Advocacy Drafters should focus on Settlor s desires for: Coordinating and evaluating existing care to make sure it is being done efficiently and thoroughly; Applying to obtain services the person with a disability may require if no one else can do so; Determining if Beneficiary is receiving all services and public benefits; Visiting the Beneficiary to inspect and review home care; Speaking with the Beneficiary s medical personnel to make sure health care is appropriate and care plans are being followed; or Advocating for services and care if in the opinion trust management team, it is not. ASNP Drafting Guide s Options Option One: Provides a discretionary standard on when to hire a Care Manager or Advocate Option Two: General provision allowing trustee to hire professionals as needed 6

7 SNT Disbursement Provisions to Enhance Quality of Life When drafting a third party SNT, one of the best ways to make you a hero for your client is discussing specialized services that will enhance the quality of life of a child with a disability Usually can determine in an intake form by asking such questions as: Does child attend annual camp Does child attend religious services Does child participate in Special Olympics or other athletic events Does child enjoys concerts, movies, or other social activities Is visiting family a priority ASNP Drafting Guide: Some Provisions There are provisions that can be customized for your client s specific situation: Recreation and Social Activities Family Activities Payment for Vacations 1. Third party SNT taxation provisions 2. Termination provisions Loss of public benefits Substantial gainful employment No longer disabled Uneconomical to administer Death 3. General or Limited Power of Appointment 4. Remainder beneficiaries Setting up contingent SNT for heirs 7

8 Trust Income Tax Trust is a taxpayer, like you or me, EXCEPT Trust marginal tax rates are UGLY For $418,400 For $12, % Trust Income Tax Trust is a taxpayer, like you or me, HOWEVER BIG DIFFERENCE Between revocable and irrevocable trusts Trust Income Tax Beat the Irrevocable Trust compressed rates ---- Grantor Trust Income taxed to the Grantor, who has a lower marginal rate (usually) Give Grantor or other persons certain non-fiduciary powers to: 1. Add beneficiaries. 674(b)(5) 2. Reacquire trust corpus by substituting property of equivalent value. 675(4)(C) Don t give these powers to the SNT primary beneficiary 8

9 Third party SNT taxation! Do it Right! I m STILL broke!! Qualified Disability Trust I. Applies to a non-grantor complex trust (not only SNTs) II. Allows trust a $4,050 personal income tax exemption Qualified Disability Trust To be treated as a QDT, the trust must be 1. Irrevocable 2. Sole benefit of beneficiary 3. Beneficiary is under the age of sixty-five 4. All current beneficiaries have been determined disabled by the SSA I.R.C. 642(b)(2)(C)(ii); 42 U.S.C. 1396p(c)(2)(B)(iv). 9

10 Trust Termination provisions DEATH Nuff Said Oh, and don t forget to provide for contingent beneficiaries.... Trust Termination provisions Loss of Public Benefits 1. Cure the trust flaws (trustee or trust protector) 2. Kick out to beneficiary (or treat as support trust?) 3. The Moral Imperative kick to someone else... and pray. SSI office Trust Termination provisions No longer disabled Trustee determines beneficiary is not disabled per SSA definition Period of SGA -- Meet own needs for X months CAUTION: some disabilities may return, such as mental illness Trustee should have discretion to retain assets in trust 10

11 Trust Termination provisions Uneconomical to Administer Give trustee discretion to terminate and distribute THEN NOW Final Expenses Trustee should have discretion to pay beneficiary s: A. Last debts properly due from beneficiary B. Funeral expenses C. Taxes IF not enough cash outside the SNT to cover Then What? Final distribution of remaining assets 1. Give beneficiary the option to say where remainder goes Limited/Special Power of Appointment (NOT general POA) By will or inter vivos writing 2. Residuary Clause 3. Ultimate contingent intestacy provision 11

12 Then What? Final distribution of remaining assets Contingent Beneficiary has Disabilities? Provide for share to remain in SNT! -- On terms of current SNT, or -- With new terms disposition Then What? Final distribution of remaining assets Contingent Beneficiary is too young? Minority Trust! Discretionary until age milestone/s Distribution on attaining age/s Whaddaya mean I have to wait til I m 30 for my Buggati? 1. Establishing third party SNT for spouse 2. Gifting provisions for charity, family or friends 3. Commingling Provision 12

13 Establishing a Third Party SNT for Spouse When do you use this provision? providing for an ill spouse in the event the wellspouse predeceases Provides structure and oversight if someone cannot (for whatever reason) handle the property Preventative LTC planning Post Medicaid planning when one spouse is in a nursing home or receiving some other type of Medicaid benefit Benefit to the Spouse Integral part of a comprehensive Medicaid crisis plan Medicaid crisis plans are completely thwarted without implementation of planning in the event the well-spouse predeceases Provides safety and protection for the NH spouse For spouses in the home on waiver, in home support benefits, or PACE, they need the exempt resources to pay for additional caregiving, home repairs, taxes, to age in place. Prevents having to do planning to re-qualify: Half-loaf or annuity What to Include in Estate Plan A third-party SNT MUST be established by Will If your state is simple probate, terms of the will can establish the spousal testamentary SNT If there is a revocable living trust-there must be a pour back provision to have the assets go through probate in order to establish the SNT The method of establishment and funding is state-specific 13

14 Third-Party SNT Gifting A third-party trust is not administered under the sole benefit rule A fundamental difference between first and third party When drafting consider putting guidelines for the trustee and limits on what can be disbursed Can the trustee gift to self? Cults? Religious organizations? Limit amount of gift? duration? scope? Gift even if running out of money? Set floor in document Good points to be addressed in the Memorandum of Intent In absence of direction leaving it up to the Trustee 3p SNT Gifting provisions Third-Party SNT Gifts 14

15 Third-Party SNT Gifts Comingling in a Third-Party SNT Comingling in a Third-Party SNT Do not place the Beneficiary s assets into a thirdparty SNT Many non-professional trustees dislike multiple accounts The Beneficiary s assets are COUNTABLE while in the third-party trust First-party money does not poison the third-party trust-but after a while may take a forensic accountant to unravel 15

16 1. Sole benefit trust if Settlor needs Medicaid 2. Adding POMS Third Party requirements 3. Funding a Pooled SNT Drafting the Third Party SNT Following POMS SSA eligibility workers use this to evaluate whether snt qualifies Make sure Third Party SNT meets all SSA requirements of: POMS SI Trusts 1. Multiple SNT beneficiaries 2. Drafting for receipt of IRA proceeds 16

17 Multiple SNT Beneficiaries Unlike first party SNT, a third party SNT can have multiple beneficiaries Typical planning scenarios are when: Family has more than one child with a disability; or Family wants to create a Pot Trust or Children s Trust with their entire inheritance SNT Drafting for Multiple Beneficiaries Must ensure the trust distribution provision takes into account Settlor s intent: If two or more children with disabilities, how will Trustee decide to allocate resources among children, e.g., if one has substantially more needs than another If only one child has disability, must make sure that the Trustee has appropriate discretionary distribution standard for the child with a disability ASNP s Guide on Drafting for Multiple Beneficiaries Option One: Basic provisions on naming multiple beneficiaries when only one child has special needs Option Two: Common Trust for all children and grandchildren with disabilities 17

18 IRA Accumulation Provisions If do not feel comfortable planning in this area, Melanie Marmion s program will answer ALL your questions Next, Natalie Choate s book Life and Death Planning for Retirement Benefits is essential reading Drafting SNT to Receive IRAs An SNT can be a Designated Beneficiary of an IRA if drafted correctly This allows an IRA to continue in existence and provide tax deferral benefits If no Designated Beneficiary the IRA must be distributed within 5 years after the owner's death. IRC 401(a)(9)(B)(ii) Bad tax result because the beneficiary will incur significant ordinary income tax during those 5 years and lose the benefit of deferred income tax SNT as Designated Beneficiary Trust has no life expectancy and regulations state that trust cannot be a designated beneficiary. Treas Reg 1.401(a)(9) 4, A- 5(a) The beneficiaries of a named trust will be recognized as designated beneficiaries if the following requirements are met (Treas Reg 1.401(a)(9) 4, A-5(b)): 1. Trust is valid under state law; 2. Trust is irrevocable, by its terms, on the participant's death; 3. Trust beneficiaries are individuals who are identifiable from the trust instrument; and 4. Plan administrator is provide a copy of the trust instrument and a list of all of the beneficiaries of the trust) See Treas Reg 1.401(a)(9) 4, A-6 18

19 Two General Types of Trusts May be Designated Beneficiary Conduit Trust is a safe harbor the language of this trust allows for Required Minimum Distributions (RMD)s to flow through trust directly to beneficiary IRS uses age of lifetime beneficiary to determine RMD RMDs from conduit affects SNT beneficiary s public benefits Accumulation Trust allows for RMDs to be paid to trust, but not require immediate distribution IRS uses age of oldest beneficiary to determine RMD, including contingent remainder beneficiaries Issue arises if contingent beneficiary is not a natural person, e.g, a charity or is older than SNT beneficiary SNT IRA Drafting Issues Drafting SNT so all contingent beneficiaries are natural persons Drafting SNT so oldest beneficiary is person with a disability Make sure even a Power of Appointment in trust limits allowable appointees to natural persons younger than beneficiary Drafting Solutions in ASNP Guide Option One: Not leaving IRAs to person with a disability, leave it to other beneficiaries and even up with other assets Option Two: Basic accumulation trust provisions, must make sure there are no charities as contingent remainder beneficiaries Option Three: Trigger sub-accumulation trust. Creates sub-trust for IRA proceeds in event trust is a beneficiary Option Four: Creates a conduit trust and attempts to limit RMDs to only one month a year 19

20 Trustee Provisions Trustee provisions Identifying initial trustee Replacement of Incapacitated Trustee Successor trustee (independent or interested) Removal of trustee Exculpatory clauses Professional trustee provisions Default of designation Trustee Provisions Initial trustee 1. Individual nonprofessional trustee 2. Co-trustees 3. Private professional fiduciary 4. Corporate trustee Removal of Trustee Permanent Removal of Trustee By Grantor (only third party SNTs) By Trust Protector By Court of competent jurisdiction (for cause) Cause? Gross negligence, insolvency, failure to act, inability to manage financial assets, willfulness 20

21 Trustee Exculpatory Provisions Trustee provisions 1. Only liable for gross negligence and intentional acts all trustees 2. Only liable for gross negligence and intentional acts individual trustees 3. No liability for failing to ID benefit 4. No liability for failing to maintain benefits Using Professional Fiduciary Professional Trustee Provisions 1. Provide for scheduled fees as permissible compensation 2. Required language allowing self-dealing 3. Consider only replacing a professional fiduciary with a professional fiduciary 4. Have professional fiduciary review draft Default of Designation What happens when there are no named trustees left? Provide mechanism for filling the vacancy! 1. Settlor (if alive) 2. Trust Protector 3. Trust Advisory Committee 4. Court 21

22 Provisions Common to Both SNTs 1. Trust Advisory Committee/Trust Protector 2. Hiring professionals 3. Distribution provisions Supplemental Discretionary 4. Making SNT distributions Specific Provisions in SNT Drafting 1. Regular contact with Beneficiary 2. Reporting to SSA and others 3. Null and void clauses 4. Allocating disbursements among multiple SNTs Setting Up the SNT Management Team Need to consider possible decades of SNT administration Establish lifetime trust management team Trustee Individual or Professional Trust Advisory Committee Good check and balance on Trustee Remove and replace Trustee Trust Protector Backup to Trust Advisory Committee Allowed to modify SNT terms to keep current with changes in law 22

23 Helpful Provision: What Can t a SNT Pay For? A SNT CANNOT give cash directly to Beneficiary (this includes gift cards unless strict definition) If SNT pays for food, shelter or medical care already being provided by SSI or Medicaid it will reduce (or eliminate) public benefits. Shelter is defined as food, gas, electricity, water, sewer, heating fuel, garbage removal, real estate taxes, rent or mortgage Drafting the SNT Distribution Standard Knowing the Right Distribution Standard Supplemental No payments if reduce or eliminate public benefits Discretionary Allows Trustee to make disbursements even if affects public benefits WARNING State Specific WARNING Health, Education, Maintenance and Support Standard Could be Hazardous to Your SNT Making SNT Distributions A provision that outlines how to make SNT distributions is not legally necessary, but it can be helpful for an SNT trustee who may not be aware of how SNT administration can still jeopardize public benefits eligibility The ASNP Drafting Guide includes a checklist that should be performed each time Trustee is making an SNT distribution then provides some sample methods on how to make such a distribution if the person is on public benefits 23

24 Regular Beneficiary Contact When advising SNT trustees during administration, one of the biggest surprises is how little many of the trustee s communicate or visit with the Beneficiary Beneficiaries when contacted oftentimes have unmet needs the trust could be providing The ASNP Drafting Guide provides a provision that requires a trustee to visit (or hire an agent) to visit the Beneficiary on a regular basis Maintaining Beneficiary s Public Benefits One of our pet peeves is reviewing an SNT that requires a Trustee to obtain all the beneficiary s public benefits and do all the reporting to public benefit agencies Issue is that Trustee oftentimes does not have the legal right to do so because the government will only deal with beneficiary directly or their legal representative who is in charge of their person During SNT administration the Trustee must then decide to comply with trust terms (which may be impossible) seek court intervention to instruct on how to proceed, or be in breach of trust Better SNT Provision on Public Benefits Better SNT provision included in ASNP s Drafting Guide requires Trustee to cooperate with Beneficiary in obtaining and maintaining public benefits, but does not require them to obtain or maintain benefits 24

25 Null and Void Clauses The SSA does not recognize either null and void provisions or exculpatory clauses in a trust NOTE: While exculpatory clauses, use clauses, trustee discretion and restrictions on distributions, etc., do not affect a trust's countability, they do have an impact on how the various components are treated. For example, a prohibition in a discretionary irrevocable trust that limits the trustee to distributing no more than $10,000 to an individual has no effect on whether or not the trust is countable, but does affect the amount that is countable. Allocating Among Multiple SNTs A person with a disability can have multiple SNTs, it could be a (d)(4)(a) SNT and one third party SNT In one case, I had a client who had 5 third party SNTs and 1 first party SNT, the 5 included funding from each set of grandparents, one from mother s separate property, one from father s separate property, and one jointly from mother and father, each with their own trustee and different remainders An allocation clause was essential to make sure disbursements were made from the appropriate trust Multiple SNTs Allocation The ASNP Drafting Guide includes a provision that requires that first distributions come from first party SNT, then if there are multiple third party SNTs, an allocation among each of them 25

26 Common SNT Phrases The ASNP Drafting Guide includes a section on commonly used public benefit and person with a disability phrases that can be included in the definition sections of an SNT Provisions Common to Both SNTs 1. Spendthrift provisions 2. Real estate provisions 3. Funding an ABLE account Spendthrift Provisions Common SNT provision-prevents Beneficiary from transferring or selling their interest in the trust Even if Beneficiary received regular recurring income from the trust-creditors cannot reach it In best practice SNT administration, this wouldn t happen anyway Does your state recognize spendthrift protection? If not, SSAs directive is to recognize the value of the Beneficiary s right to income as a countable resource because it can be sold 26

27 Spendthrift Provisions Drafter should include a spendthrift provision Prevents Beneficiary from legally assigning interest Prevents creditors from attachment to future disbursements Clarifies legal rights of the Beneficiary, relationship to creditors, and authority of Trustee to deny claims Real Estate Provisions Real Estate Provisions Dealing with real estate is one of the most difficult propositions for an SNT Trustee Drafting considerations: What type of SNT is it? Family wishes (see Memo of Intent for further guidance that doesn t belong in the legal document); Specific condition of the Beneficiary-keep in mind prognosis and how aging may affect future needs The expertise of the Trustee(s) 27

28 Real Estate Provisions Role of drafter is to create written guidance in light of the type of SNT Identify purchase options: rent, own, lend? Management and maintenance: who s responsible? Sustainability? Public assistance? Section 8? In home supports? Roommates? Answer the what if s Funding an ABLE Account Funding an ABLE Account Valid disbursement from an SNT Empowers Beneficiary Improves relationship with Trustee Reduces Trustee fees May prevent ISM reduction for SSI recipients 28

29 ABLE Account Provisions Drafting considerations: Ability of the Beneficiary to handle money: limit the scope of how much the Trustee can fund? Or up to annual max? Frequency? Can the trust afford it? The type of SNT: third-party funds now subject to payback Insert guidance for SSA regarding disregard of ABLE disbursements for QDE as income even if for shelter OR just rely on the discretion and judgment of the Trustee Add provisions to help Trustee make decisions Questions? 86 29