Structuring Special Needs Trusts for the Elderly and Disabled to Protect Public Benefits

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Structuring Special Needs Trusts for the Elderly and Disabled to Protect Public Benefits Administering First- and Third-Party Trusts; Addressing the Interplay Between SNTs, Guardianships and Conservatorships TUESDAY, APRIL 18, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Shirley B. Whitenack, Partner, Schenck Price Smith & King, Florham Park, N.J. Elizabeth L. Gray, Principal, McCandlish Lillard, Fairfax, Va. Kyla G. Kelim, Esq., Aging in Alabama, Fairhope, Ala. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Structuring Special Needs Trusts for the Elderly and Disabled to Protect Public Benefits Kyla G. Kelim, Esq. AGING IN ALABAMA Fairhope, AL 5

6 Special Needs Trust Overview Special needs trust is established pursuant to 42 U.S.C. Section 1396p(d)(4)(A) or (C) Authorized by Congress to protect the income and medical benefits of a disabled individual The trust must strictly comply with the law to protect the beneficiary There are several types of special needs trusts The law controls depending on circumstance and age 6

7 Types of Special Needs Trusts 1 st party trust 3 rd party trust Pooled Trust Supplemental Trust Support Trust 7

8 First party trust Most common type, and also known as self-settled, this trust is funded by the beneficiary s own funds or funds to which the beneficiary is entitled Must be established by a parent, grandparent, guardian or Court Now, after Special Needs Fairness Act, competent beneficiary may establish If incapacitated and no parent, grandparent, or guardian available, then you must request the Court to approve Medicaid and Social Security must also approve Commonly funded with personal injury settlements, inheritance 8

9 Third party trust Established with assets that do not belong to beneficiary No payback provision is required Must abide by same rules otherwise 9

10 Pooled trust Each state has one or more company that provides pooled trust services The trust is established through a more streamlined process and the trustee is really a co-trustee, at best, with the trust administrator Must use a pooled trust for those over 64 years of age Must have a payback provision 10

11 Supplemental vs. Support Trust Supplemental Trust supplements the beneficiary s lifestyle Can pay for cable, cell phone, furniture, electronics, vacation, car, car insurance, funeral arrangements, etc. Does not pay for support items like food, shelter, medical care 11

12 Interested parties in SNT Settlor Trustee Beneficiary Guardian Court Social Security Administration Medicaid Agency 12

13 PUBLIC BENEFITS CONSIDERATIONS Goal in most is not to lose means tested benefits SSI vs. SSDI Medicaid benefits Lookback period Penalty Termination of benefits Payback and estate recovery 13

14 SSI vs. SSDI SSDI is not means tested benefits Caution! Those on SSDI may qualify for substantial discounts or Medicaid waiver or nursing home and will lose it if assets, income, rise SSDI otherwise does not need 1 st party trust, use 3 rd party trust All SSI must have 1 st party trust All Medicaid must have 1 st party trust 14

15 Medicaid benefits Caution! Those on SSDI may qualify for substantial discounts or Medicaid waiver or nursing home and will lose it if assets, income, rise There are many many different types of Medicaid so important to find out if the beneficiary receives any of them Ex: caregivers at home, QMB, SNP, Sobra, CHIP 15

16 Five Year Lookback Period Deficit Reduction Act of 2005 imposed a 5 year lookback period (effective for most states 2/8/2006) Restrictions on transfers of assets Established penalty period for transfers for less than fair market value Penalty Period is UNLIMITED Changed beginning point of penalty period This will affect nursing home benefits/medicaid waiver SSI recipients not in need of those services will have 24 month benefit interruption 16

17 Penalty Period Will be imposed for transfers for less than fair market value after 2/8/2006 Will not start running until applicant otherwise qualifies for Medicaid benefits --in a covered long term care facility --spent down financially --income qualified UNLIMITED 17

18 How the penalty is calculated Penalty may be imposed for even minimal transfers The amount of the penalty is calculated by adding up the transferred amounts and dividing by the average cost of nursing home care in the area or state as determined by the jurisdiction Can vary wildly by state 18

19 Cost of long term care relating to Penalty Can vary by state: may affect placement: -- Mom transfers her home worth $100,000 to daughter in July She falls, hits her head, and enters a nursing home for long term care in July She spends her savings and is under $2000 and eligible in October, In Alabama, divisor is $5800, so penalty period ends March 2017 and in Florida, divisor is $8346 so penalty period is 12 months, she would be eligible in October, 2016 No long term care costs as little as $ in Alabama 19

20 Cost of long term care relating to Penalty If you said apply in August, 2016, you win!! Remember the 5 year lookback, if you wait to apply until August 2016, then the 5 years has run NO PENALTY If you apply in July of 2016, call your insurance carrier THE PROBLEM: Most nursing homes have your client sign a Medicaid application on admission and routinely file them 20

21 Payback provision and estate recovery A first party or pooled trust must have payback provision to reimburse Medicaid at death The moment of death, the payback kicks in (if you are going to pay for funeral pay for it now!) After death, if Medicaid is owed anything, they will come after estate assets 21

22 Kyla G. Kelim, Esq. AGING IN ALABAMA 68 N. Bancroft Street P.O. Box 109 Fairhope, AL (855) ELD-RLAW 22

23 Special Needs Trusts: Drafting Considerations and Pitfalls to Avoid Presented by: Shirley B. Whitenack, Esq. Schenck, Price, Smith & King, LLP Florham Park, Paramus & Sparta, NJ

24 GENERAL TRUST REQUIREMENTS Supplement, not supplant, government benefits Schenck, Price, Smith & King, LLP 24

25 Self-Settled Special Needs Trust 42 U.S.C. 1396p(d)(4)(A) Established with assets of individual with disabilities Individual must be under 65 at time of the establishment and funding BUT SSA says payments from structured settlement beginning before age 65 and continuing thereafter are ok Individual must be disabled as defined in Social Security Act Schenck, Price, Smith & King, LLP 25

26 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 Schenck, Price, Smith & King, LLP 26

27 DEFINITION OF DISABLED FOR CHILD UNDER 18 Child suffers from any medically determinable physical or mental impairment of comparable severity to adult Schenck, Price, Smith & King, LLP 27

28 ADDITIONAL REQUIREMENTS OF PAYBACK TRUSTS Trust may be established by Parent or Grandparent or Legal guardian or Court or Competent individual with disabilities Schenck, Price, Smith & King, LLP 28

29 Self-Settled Special Needs Trust Certain regions require the trust of a competent beneficiary to be seeded. The parent or grandparent nominally funds the trust and then the assets of the beneficiary with disabilities are transferred to the trust. Schenck, Price, Smith & King, LLP 29

30 PAYBACK REQUIREMENTS Medicaid agency entitled to reimbursement from any assets remaining in trust upon death of beneficiary or trust termination for other reasons Reimbursement dollar for dollar up to amount paid by Medicaid on behalf of individual Irrevocable Schenck, Price, Smith & King, LLP 30

31 Court-created Special Needs Trusts If trust is created or authorized by court it may retain oversight in following areas: Accountings Trustee s commissions Investments Limitations on Purchases of Major Assets Schenck, Price, Smith & King, LLP 31

32 Trust Protector Ensures that trustee is acting properly May have power: to receive account statements to remove and replace trustee May include additional powers of trust protector Consider: Is trust protector a fiduciary? Compensation? Schenck, Price, Smith & King, LLP 32

33 Self-Settled Special Needs Trust Check state requirements for additional drafting provisions Schenck, Price, Smith & King, LLP 33

34 THIRD PARTY SPECIAL NEEDS Living trust or TRUST Testamentary trust created by will Revocable or Irrevocable Schenck, Price, Smith & King, LLP 34

35 THIRD PARTY SPECIAL NEEDS TRUST Trust provisions need not be as restrictive as those in self-settled special needs trusts Schenck, Price, Smith & King, LLP 35

36 Drafting Considerations for All SNTs Beneficiary cannot compel or control distributions Trustee has unfettered discretion Authorize trustee to make distributions that may reduce or eliminate public benefits Authorize trustee to amend trust to comply with current public benefits laws Schenck, Price, Smith & King, LLP 36

37 Drafting Considerations for All SNTs Grantor or Non-Grantor Trust? Trustee compensation Accountings Successor and Substitute Trustees Trustee Powers Ultimate Beneficiaries Schenck, Price, Smith & King, LLP 37

38 Special Needs Trusts Elizabeth Gray McCandlish Lillard

39 Trust Taxation Basics Grantor Trusts All items of income, deductions and credit are not taxed at the trust level, but are reported on the personal income tax return of the individual who is considered the "grantor" of the trust for income tax purposes. 39

40 Trust Taxation Basics, cont. Non-Grantor Trusts Distributions to or for the benefit of a non-grantor trust beneficiary carry out income in that beneficiary. Trust income that is not distributed to or expended on behalf of the beneficiary (retained income) in a given year (or by March 5th of the following year) is taxed to the trust. 40

41 Trust Taxation Basics, cont. Trust Tax Brackets 2016 The highest federal tax bracket of 39.6% is reached at taxable income on trusts in excess of $12,400. For a single taxpayer, the tax rate on taxable income of $12,400 is only 25%. The highest federal tax bracket of 39.6% does not apply to a single individual taxpayer until taxable income reaches over $415,

42 Trust Taxation Basics, cont. Exemption on non-grantor Trusts $100 [unless the trust requires all income be distributed annually in which case the exemption amount is $300, but SNTs should not have such a requirement]. Individual Exemption for 2016 is $4,050. The Trustee should file a Form 56 ( Notice Concerning Fiduciary Relationship ) with or before the first SNT tax return is filed. 42

43 Trust Taxation Basics, cont. Exemptions for Qualified Disability Trusts (QDT): A qualified disability trust is a non-grantor trust and entitled to a Personal Exemption: (For 2016 = $4,050) 43

44 Trust Taxation Basics, cont. Personal Exemption Update for Qualified Disability Trusts Subject to Phaseout for All qualified disability trusts with modified AGI in excess of $250,000 are subject to a phase-out of the personal exemption deduction. A qualified disability trust allows the exemption if the trust s modified AGI is less than or equal to $259,

45 Income Taxation 3.8% Net Investment Income Tax Tax on certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts. Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying widow(er) with dependent child $250,000 45

46 Income Taxation 3.8% Net Investment Income Tax Will be imposed at a 3.8% rate and is designated as a Medicare contribution tax (the Medicare surtax). The Medicare surtax also applies to estates and trusts once the taxable income reaches the top marginal tax rate. Some SNTs will end up with income subject to this new tax. 46

47 Income Taxation 3.8% Net Investment Income Tax Individuals are subject to the new tax only if they receive passive income during a year in which their modified adjusted gross income (MAGI) exceeds a certain threshold. Modified Adjusted Gross Income for purposes of the Net Investment Income Tax: is adjusted gross income and tax-exempt interest income. 47

48 Income Taxation Self-Settled SNTs Grantor Trust Status Self-settled SNTs are considered grantor trusts under the Internal Revenue Code (IRC sections ). The beneficiary will pay the tax even if the income is accumulated. In self-settled SNTs, the grantor is the source of trust assets (even if the grantor named in the actual trust is the parent, grandparent, legal guardian or court). 48

49 Income Taxation Self-Settled SNTs Grantor Trust Status As a grantor trust, the self-settled SNT is ignored for income tax purposes and the grantor is treated as having received the income directly even though the trust receives the income. All income from the self-settled SNT will be taxed directly to the beneficiary. 49

50 Income Taxation Self-Settled SNTs Grantor Trust Status Grantor trusts only need to file an information fiduciary income tax return indicating that all items are reported on the grantor's personal income tax return. 50

51 Income Taxation Third-Party SNTs Grantor Trust revocable SNT will be treated as a Grantor Trust. Non-Grantor Trust - pays income tax at the trust level on any taxable income retained by the trust. If the trust makes a distribution to a beneficiary, such distribution will pass the taxable ordinary income (but generally not capital gains) to the beneficiary, to be taxed on the beneficiary's personal income tax return. The trustee must complete Form 1041 and issue a Schedule K-1 to the beneficiary, showing the amount and type of income from the trust to be included on his/her individual tax return. 51

52 Income Taxation Third-Party SNTs Qualified Disability Trusts Third-Party SNTS The qualified disability trust must satisfy certain statutory requirements under IRC section 1396p (2)(B)(iv): The trust must be irrevocable. The trust must be for the sole benefit of the beneficiary who is disabled. The trust itself cannot be a grantor trust (i.e., it must be a taxpaying entity). The beneficiary must be under the age of 65 at the time the trust is established and must have a disability determination from the Social Security Administration. 52

53 Income Taxation Third-Party SNTs Qualified Disability Trusts Third-Party SNTS A qualified disability trust is eligible for a deduction equal to the personal exemption in lieu of the $100 complex trust exemption. The personal exemption is $4,050 for the 2016 tax year. If the third-party SNT cannot meet the requirements of a qualified disability trust, then it will be taxed as a complex trust and receive a significantly lower exemption. 53

54 Gift Tax Issues Self-Settled SNTs A self-settled SNT that provides the beneficiary with a testamentary power of appointment over the property remaining in the SNT at the Beneficiary's death and after the pay-back is satisfied, does not result in a completed gift upon the funding of an irrevocable SNT with the Beneficiary's assets. This is true even if the beneficiary is not capable of exercising the power of appointment. The mere possession of the power is insufficient to preclude a completed gift upon funding. 54

55 Estate Tax Issues Self-Settled SNTs Present value" of remaining future guaranteed annuity payments to a selfsettled SNT is fully includable in the beneficiary's gross estate. Estate tax deduction for payback amount. Stepped-up" basis. 55

56 Estate Tax Issues Third Party SNTs 2016 federal estate tax on >$5,450,000 Irrevocable life insurance trust removes the value of the policy from the taxable estate of the insured person. Irrevocable life insurance trusts can be coordinated with SNTs. Drafters of irrevocable life insurance trusts often make a common error when the trust is intended to serve special needs beneficiaries: inclusion of so-called Crummey powers in the trust instrument!! 56

57 Different Terms Recognize Income for tax purposes is defined differently than Income for Social Security purposes. 57

58 Circular 230 Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the Tax relief, Unemployment Insurance Reauthorization, and Job Creation Act of The author, or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors. 58

59 Elizabeth L. Gray, Esq Random Hills Road, Suite 500 Fairfax, Virginia (703)