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1 2017 National Conference on Special Needs Planning and Special Needs Trusts Considerations in the Termination of Special Needs Trusts Allison Bren Ferris & Imtiaz Jindani October 19 th, 2017 Allison Bren Ferris is the National Director of Wells Fargo Bank s Special Needs Trust Services. Imtiaz Jindani is in house counsel for Wells Fargo Bank and provides support to Wells Fargo Bank s Special Needs Trust Services.

2 Considerations in the Termination of Special Needs Trusts

3 Introduction When terminating a SNT, Trustee must consider Human Issues Administrative Issues Differences between 1 st /3 rd party SNTs Fiduciary Issues Legal Issues

4 Human Element of SNT Termination Important to remember: Family has just lost a loved one Life may have revolved around individual living with a disability for many years It s not just administrative Communication is key Be sincere and genuine Cultural sensitivity (flowers? food?) Take a little time

5 Termination of First Party SNTs Medicaid Payback Overview Post Death Distributions Tax Issues on Termination of a First Party SNT Court Accounting Requirements upon Termination of First Party SNT Final disposition after Medicaid Payback General Administrative Issues Early Termination

6 Medicaid Payback Medicaid Lien applies to trusts drafted on or after August 11, 1993 ( post OBRA SNTs ) No payback language No right to recover beyond trust balance Pro rata share Ask family if lived in other states? Medicaid expenses prior to accident?

7 Medicaid Payback Overview Request detailed claim Trustee review Review by family/guardian Review by professional Court resolution if disputes Release from Agency The case of the nine year termination

8 Post Death Expenses POMS allow: Taxes due from the trust to the State(s) or Federal government because of the death of the beneficiary Reasonable fees for administration of the trust estate POMS prohibit: Taxes due from the estate of the beneficiary other than those arising from inclusion of the trust in the estate; Inheritance taxes due for residual beneficiaries; Payment of debts owed to third parties; Funeral expenses; and Payments to residual beneficiaries.

9 Post Death Expenses Administrative expenses which can generally be paid: Trustee fees Cost of lien review Fiduciary tax prep fees Fees related to sale of trust property Trustee to keep detailed records Request lien amount from Agency If Medicaid lien < trust corpus, may pay non administrative expenses If Medicaid lien > trust corpus, do not pay non administrative expenses Mitigation of post death expenses Request immediate billing Vendors require deposit Pay bills promptly Set expectations

10 Post Death Expenses Funeral Expenses Important to discuss/purchase at trust inception Pre paid irrevocable burial plan Many items not covered by prepaid burial plan The case of the 25 doves and horsedrawn carriage Many Agencies allow allocation Will only provide for basic services Agency does not have to cover

11 Other Post Death Considerations Trust Owned Homes: Set expectation at beginning of relationship and document Revisit situation Suggest attorney review options as part of pre settlement conversations Life Estates

12 Tax Issues on Termination of a First Party SNT Assets in a First Party SNT are generally included in the beneficiary s taxable estate for purposes of Federal Estate Taxes, State Estate Taxes and State Inheritance Taxes Step up basis to date of beneficiary s death File Form 706 if Federal Estate Tax Exemption exceeded State estate and inheritance taxes often have lower amount return required GST rare could arise depending on value and ultimate beneficiary

13 Court Accounting Requirements upon Termination of First Party SNT First party SNTs are typically court monitored Likely require final accounting to the court May need approval from court prior to distribution to remainder beneficiaries Some jurisdictions may want to see a zero balance at final accounting Trust counsel to guide

14 Final disposition after Medicaid Payback Final Disposition after payback depends on document and local and state law Trust may provide that assets pass to PR of probate estate Probate estate must be opened and PR appointed Trustee delivers assets to PR per court order Trust may provide that assets pass to named individuals/entities No probate required Trustee distributes to named individuals/entities, usually pursuant to court order

15 Final disposition after Medicaid Payback Continued Trust may provide beneficiary with special power of appointment If beneficiary has capacity to exercise, may execute will Probate estate opened by named PR Will submitted to probate Trust may provide for assets to pass to intestate heirs Trustee required to determine heirs May require significant research to determine the identity of/locate intestate heirs Disputes among the heirs at law. Heirship proceeding may need to be opened in court Disposition of Structured Settlement Annuity Commuted value?

16 Sample Administrative Checklist Notify State Medicaid Agency of death and request payback amount and full documentation (recommended that actual formal request be sent via letter) Request Step Up of Cost Basis on Assets (step up to date of death) Review Annuity Contracts and determine remainder beneficiaries Code account as closing for investment purposes and consider liquidation of the account to avoid market fluctuation Work through disposition of any illiquid assets (e.g. new deeds, titling, etc.) Review distributions and stop any automatic distributions (consider payment of credit cards, payments for care giving, utility bills etc.)

17 Sample Administrative Checklist Cont d Notify fiduciary tax preparer of death of the beneficiary (may need to change from grantor to complex trust return) If funds will remain after Medicaid Payback, update beneficiary notifications Determine whether a probate estate for beneficiary s estate will need to be established. Make sure known creditors other than Medicaid are provided with notice and publish for unknown creditors Determine if the trust requires a final court accounting Determine whether a federal estate or state estate and state inheritance tax return will need to be filed Make sure that the closing letter is received prior to final distributions, and prior to partial distributions obtain release/refunding agreements

18 Early Termination Cessation of Disability Trustee, Trust Protector or Court may be given authority under the terms of the document to determine if beneficiary no longer suffers from disability Typically governing document will include criteria for making determination that beneficiary no longer suffers from disability Trust becomes uneconomical Value of trust decreases over time so that costs of administration no longer make sense Consider purchase of Exempt Assets Pooled SNT? Consider impact of early termination on beneficiary due to potential Medicaid payback and loss of means tested benefits Consider independent Counsel and/or medical examination request

19 Termination of Third Party SNTs Final disposition Court Accountings and Medicaid Payback Administrative Issues Other issues in 3 rd party termination

20 Final Disposition Will be dictated by the governing document Distributes to remainder beneficiaries, may include charities Locating remainder beneficiaries may be a challenge Issue if a charity no longer exists

21 Court Accountings and Medicaid Payback Court Accountings are typically not required but Trustee should make sure prior to final termination Accountings to remainder beneficiaries may be required Medicaid payback is typically not required Note address improperly included payback upon account acceptance

22 Administrative Issues Develop a documented administrative process for terminations of SNTs Following of a documented process allows for minimizing missing items that need to be completed Helpful if more than one person will be working through the termination process

23 Administrative Issues Cont d Checklist May include: Do not step up cost basis on assets unless the assets are includible in the beneficiary s estate Code account as closing for investment purposes and consider liquidating the investment portfolio to avoid market fluctuation Work through disposition of any illiquid assets(e.g. new deeds, titling, etc.) Review distributions and stop any automatic distributions (consider payment of credit cards, payments for care giving, utility bills etc.) Analyze the trust to determine whether funds distribute outright to remainder beneficiaries, or remain in trust for remainder beneficiaries, etc. Determine whether the trust is subject to Generation Skipping Taxes on termination Communicate with remainder beneficiaries regarding distributions and collect and necessary administrative documentation, e.g. transfer instructions

24 Other issues in 3 rd party termination Early Termination of 3 rd party SNTs Consider impact of early termination on beneficiary due to potential Medicaid payback and loss of means tested benefits Pooled SNT Exempt Assets? Lack of language for payment of funeral and burial expenses Pre paid funeral may alleviate this issue, subject to discretionary standard Remainder beneficiaries may agree to allow payment of these

25 Conclusion When terminating a SNT, Trustee must consider Human Issues Administrative Issues Differences between 1 st /3 rd party SNTs Fiduciary Issues Legal Issues This information is provided for educational and informational purposes only and reflects our own views and does not necessarily reflect the views of Wells Fargo Bank, N.A.