Special Needs Trusts. Peter. What trust for Peter? 4/21/2015. Recent Developments and Case Studies

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1 Special Needs Trusts Recent Developments and Case Studies Robert B. Fleming Fleming & Curti, PLC Evelyn Kleinhans, CPA Camp Lowell CPAs, PLLC Peter Peter is 33, developmentally disabled and living with his parents. His father is disabled, and receiving SSD. Peter also receives Social Security; his monthly check is $850. His grandmother just died, leaving Peter a bequest of $100,000 outright. Peter s mother asks you what she should do now. You think he needs some sort of protective arrangement, but what? What trust for Peter? A. Self-settled special needs trust B. Third-party special needs trust C. Purely discretionary trust D. ABLE Act account (assuming enabling legislation is in place) Self settled special needs trust Third party special needs trust Purely discretionary trust ABLE Act account (assuming... 1

2 Peter s grandmother Suppose, in the same story, you were consulted by Peter s grandmother before her death. She wants to leave Peter the same $100,000, but wants to make sure it is done properly. What would you have recommended to Peter s grandmother? What should grandmother have established? A. Self-settled special needs trust B. Third-party special needs trust C. Purely discretionary trust D. ABLE Act account (assuming enabling legislation was in place) Self settled special needs trust Third party special needs trust Purely discretionary trust ABLE Act account (assuming... Peter s tax status As it turns out, what actually happened was that Peter s parents established a special needs trust for his benefit. It includes a payback provision, and was approved by the court in Peter s guardianship proceeding. It is irrevocable, and Peter s parents are trustees. What do you think is the income tax characterization of his trust? 2

3 What is the income tax status of Peter s self-settled SNT? A. Grantor trust but needs an EIN B. Grantor trust no EIN required C. Complex trust D. Simple trust Grantor trust but needs a... Grantor trust no EIN required Complex trust Simple trust What would be the tax status of the trust Peter s grandmother might have created? A. Grantor trust needs EIN B. Grantor trust no EIN required C. Complex trust D. Simple trust Grantor trust needs EIN Grantor trust no EIN required Complex trust Simple trust Diana s Existing SNT Diana, age 50, is wheelchair-bound, living in a nursing home. She has three children (who have long sponged off her) and a history of substance abuse. You are/represent trustee of a self-settled SNT for her, with $30,000 balance. Diana requests $5,500 for a Prada Python bag. Also $4,000 for a companion dog (a purebred Lowchen) 3

4 Diana s Bag: And matching clutch: What is Your Answer for Diana? A. You can have the purse, but not the clutch or dog B. You can have the dog, but not the Prada C. You can have it all D. You can have it all, plus I m going to set aside $10,000 for your funeral/burial plans You can have the purse,... You can have the dog, bu... You can have it all You can have it all, plus I.. Send Arthur to MIT? You are consulted by John, the trustee of a trust FBO Arthur. Arthur is blind and has Asperger Syndrome. Orphaned at 4 when he was a noverbal preschooler, his substantial inheritance was placed in a SNT, which prohibits payments for food or shelter. The remainder beneficiary is Autism Speaks. Arthur has made tremendous progress in overcoming his disabilities and at age 18 has now been offered a tuition scholarship to MIT. He has requested that the SNT pay for the dorm and meal plan while he attends MIT. Without this assistance Arthur will be unable to attend. 4

5 You advise the trustee to: A. Go ahead and pay the expenses B. Decant the trust to a purely discretionary trust C. Tell Arthur the SNT can t help with room and board D. Make distributions of $14,000 each year to an ABLE account E. Contact Autism Speaks to see if they will consent to modify the trust terms 20% 20% 20% 20% 20% Go ahead and pay the e... Decant the trust to a pur... Tell Arthur the SNT can t... Make distributions of $1... Contact Autism Speaks to... Bertha You have just become the trustee of an SNT for a confused and vulnerable woman, Bertha, who is suffering from dementia. One of the SNT s assets is a 50% interest in a limited partnership holding rental real estate. you discover that her beloved only child, John, the owner of the other 50% interest, has been stealing from her for some years by taking all the rental income from the partnership. Would you: A. Make a referral for criminal investigation of John B. Demand repayment from John, threatening criminal prosecution C. Document that Bertha made a gift and file a gift tax return D. Ignore the issue and collect Bertha s share going forward Make a referral for crimin.. Demand repayment from... Document that Bertha... Ignore the issue and coll... 5

6 When you prepare the FLP s income tax returns, would you: A. Allocate all of the net income to John (he received it) B. Report the income in accordance with the partnership agreement and claim a theft loss C. Report the income in accordance with the agreement and not claim a theft loss Allocate all of the net i... 33% 33% 33% Report the income in ac... Report the income in ac... Edward s House Edward was injured at birth. In settlement of his personal injury action, the court first authorized purchase of a residence in his name (his parents and younger brother live in the home and provide care for Edward). The remaining settlement was put into a selfsettled SNT, and you are the trustee. Parents are supposed to pay utilities and taxes on the home. They don t. Can you (trustee) pay for: A. All of Edward s real estate taxes B. All of the utilities necessary for Edward s care and comfort C. ¼ of taxes and utilities D. None of the taxes or utilities All of Edward s real estat... All of the utilities necessa.. ¼ of taxes and utilities None of the taxes or utili... 6

7 Janice Janice is beneficiary of a third-party SNT established by her grandfather; you are the trustee. Janice has recently been released from prison and wants help getting a car and a place to live. While she was in prison few distributions were made, and assets grew in value. When capital gains were incurred they were included in the trust s You now liquidate some trust investments to purchase the car and home; one result is a substantial capital gain. Can you allocate capital gains to Janice on her Schedule K-1? A. Yes, because you can choose to allocate to income under 643 B. Yes, because you distributed the gains to Janice C. No, because the trust has previously established a policy of paying tax on capital gains, and it would now be inconsistent D. You wouldn t even try; it s too risky and would confuse the beneficiary (and her lawyer) Yes, because you can ch... Yes, because you distrib... No, because the trust ha... You wouldn t even try; it... Susan Susan, age 60, settled a medical malpractice claim years ago. She tells you that she made arrangements for the money to be placed in a SNT, but in fact the proceeds were simply kept in her lawyer s client trust account. Over the years he has doled money out to her on request, and she has stayed on SSDI and Medicaid, with multiple hospitalizations. When she wanted to make gifts to her children, her lawyer simply wrote the checks from his client trust account to the children. There is about $200,000 left from the original $500,000 settlement. 7

8 Would you: A. Decline to get involved in this messy case B. Take the case, but insist that she immediately report the remaining funds and past use(s) C. Take the case, but move the funds to a SNT and see to proper administration going forward D. Recommend an action against the personal injury attorney Decline to get involved in... Take the case, but insist... Take the case, but move t.. Recommend an action ag... Iris s Personal Injury Settlement Iris s mother established an irrevocable SNT for her benefit, and transferred $1,000,000 (discounted value) of LLC interests to it. Worthy National Bank is trustee. Iris has now been injured in a minor auto collision. Her settlement (after costs and fees) will be $25,000. What should be done with those funds? Iris s Personal Injury Settlement A. Add it to Iris s existing SNT B. Establish a new, self-settled SNT for the settlement C. Transfer to pooled trust D. Utilize ABLE Act Add it to Iris s existing SNT Establish a new, self sett... Transfer to pooled trust Utilize ABLE Act 8

9 Tax Issues for Iris s Third-Party Trust A. Grantor trust to parents B. Required gift tax return C. Trust assets still in mother s estate D. Distributions FBO Iris will cause benefit reductions Grantor trust to parents Required gift tax return Trust assets still in mother.. Distributions FBO Iris wil... David s Grandmother David, a 40-year-old mentally ill man, receives SSI and Medicaid. His grandmother left a trust for him: - absolute discretion in trustee - for his health, welfare and support Do you want to try to modify the trust s terms? Modifying David s Trust A. No, leave it as is and rely on discretion language B. Yes, decant into 3 rd -party SNT C. Yes, but decant to self-settled SNT D. Seek Court reformation No, leave it as is and rely... Yes, decant into 3rd par.. Yes, but decant to self se... Seek Court reformation 9