Supplemental Needs Trusts & Related Estate Planning

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Gabriel Jones
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1 Supplemental Needs Trusts & Related Estate Planning Presentation for Hydrocephalus Association 12 th National Conference 440 Milwaukee Ave., Suite 200, Lincolnshire, Illinois PHONE (847) FAX (847) WEB

2 Primary Reasons for Planning Provide for supplemental needs of child with hydrocephalus, while preserving Medicaid and SSI eligibility, if such eligibility is likely Designate desired guardians for children Transfer assets at death to intended recipients and in desired manner Prepare for incapacity Simplify transitions Protect assets from creditors Defer and reduce taxes Page 2

3 Public Benefit Programs Non-Means Tested Means Tested Income SSDI SSI Medical Medicare Medicaid To be eligible for any of the programs identified above, individuals under the age of 65 must be unable to engage in substantial gainful activity due to a disability that is expected to last at least one year. Page 3

4 Exempt Assets $2,000 Homestead property Personal effects and household goods Motor vehicle Life insurance (with restrictions) Burial funds (with restrictions) and burial space Property used in a trade or business Page 4

5 Historical Choices Lose benefits Disinherit child Page 5

6 Solution for Third-Party Funded Trusts Most states have statutes or case law that authorize SNTs for funds outside disabled person s control Trust assets exempt No government reimbursement at death Page 6

7 Solution #1 for Self-Funded Trusts OBRA Payback Trust (d-4-a Trust) Authorizes SNTs for funds in control of disabled person under age 65 Created by parent, grandparent, legal guardian, or court Trust assets exempt during life Government reimbursement at death Page 7

8 Solution #2 for Self-Funded Trusts Pooled Trust (d-4-c Trust) Funds pooled for management purposes No age requirement Created by disabled person, parent, grandparent, legal guardian, or court Trust assets exempt during life Government reimbursement at death Page 8

9 Primary Terms of Supplemental Needs Trust Irrevocable Grantors intent important Distributions for supplemental needs only Distributions in trustee s sole discretion (no standards) Distributions to providers of goods and services, not directly to disabled person (Continued ) Page 9

10 Primary Terms of Supplemental Needs Trust (Continued) Avoid in-kind support and maintenance (will reduce SSI) Trustees and successor trustees Remainder beneficiaries at death (after government reimbursement for d-4-a trust) Page 10

11 Examples of Permissible SNT Distributions Dental care Optical care Supplemental nursing care Expenditures for travel, recreation, or educational or cultural experiences Expenditures for travel of family members to visit disabled person Page 11

12 Coordination with Other Estate Planning Documents Wills of parents, grandparents, etc. Insurance and retirement plan beneficiary designations No assets should pass directly to disabled child All assets for disabled child should be allocated to SNT Usefulness of stand-alone SNTs Page 12

13 Alternatives to SNT Trust that provides for child s health, support, and education needs Trust that provides generally for the child in the trustee s discretion, without reference to specific standards like health and support Page 13

14 Probate Page 14 Six-month court procedure before final distribution of estate Threshold for small estates ($100,000 in Illinois, for example) Jointly-held assets, assets with designated beneficiaries, and assets in trust are excluded

Advantages of Living Trust Probate avoidance Simplify transition upon incapacity Privacy Ease of amendment Parent individually-owned assets Living Trust remaining property at

15 Advantages of Living Trust Probate avoidance Simplify transition upon incapacity Privacy Ease of amendment Parent individually-owned assets Living Trust remaining property at death Heirs During life, parent controls assets. If parent becomes incapacitated, successor trustee assumes control. Note: Living trust is not necessary for tax planning. Page 15

16 Transfer Taxes Three types: Gift tax (35% federal) Estate tax federal (35%) and some states (varying state tax rates), including on insurance proceeds Generation Skipping Transfer ( GST ) tax (35% federal) 2012 Exemptions (Coupon Book) $13,000 per donee annual gifts Direct tuition and medical payments Unlimited transfers to U.S. citizen spouse and charities $5,120,000 federal gift, estate, and GST tax exemptions Varying state estate tax exemptions Page 16

17 Scheduled Federal Estate, Gift, and GST Tax Exemptions and Rates Year Federal Exemption Maximum Amount Federal Rate 2012 $5,120,000* 35% 2013 $1,000,000 (subject, in the case of the GST 55% tax exemption, to inflation adjustment) * For deaths in 2012, the unused federal estate tax exemption of a first spouse to die may be utilized at the surviving spouse s death. Page 17

18 IL estate taxes $565,603 Sample Estate Tax Planning A/B Plan for Illinois Married Couples in 2012 No Tax Planning Joint Tenancy $7,000,000 Wife $7,000,000 Husband s Death Wife s Death Tax Planning with Trusts Husband $3,500,000 (no IL or federal estate taxes) Family Trust $3,500,000 Wife $3,500,000 (no IL or federal estate taxes) Children $6,434,397 Children $7,000,000 Page 18 If the federal estate tax exemption were to revert to $1,000,000, as scheduled, after 2012, the estate tax savings from A/B planning could potentially be much more significant.

19 Sample Estate Tax Planning Disclaimer Alternative for Illinois Married Couples in 2012 No Disclaimer Disclaimer Husband $7,000,000 Wife $7,000,000 Husband $3,500,000 Wife $3,500,000 Husband s Death (Disclaimer; no IL or federal estate taxes) (no IL or federal estate taxes) IL estate taxes $565,603 Wife s Death Family Trust $3,500,000 Page 19 Children $6,434,397 Children $7,000,000 If the federal estate tax exemption were to revert to $1,000,000, as scheduled, after 2012, the estate tax savings from A/B planning could potentially be much more significant.

20 Irrevocable Insurance Trust Parent $ to pay premiums ILIT (owns life insurance) premiums death benefit Insurance Company withdrawal rights insurance proceeds [Spouse and] Children Benefits: Exclude insurance proceeds from your taxable estates, subject to 3-year rule. Provide liquidity to pay estate taxes generated by illiquid assets, such as real estate or a closely-held business interest. Ensure that proceeds not needed for taxes pass in accordance with your estate plan. Page 20

21 Primary Documents Will [Living Trust] Supplemental Needs Trust(s) Property Power of Attorney Health Care Power of Attorney [Irrevocable Insurance Trust] [Deed] Page 21

22 Guardianship for child with disability Of the person Of the estate Alternatives to guardianship Page 22

ESTATE PLANNING DICTIONARY

ESTATE PLANNING DICTIONARY Administrator For estates administered prior to April 1, 2012, the fiduciary appointed by the Probate Court to settle your estate if you die without a Will (intestate). Attorney-in-fact