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Life Insurance in the Estate Plan and Incapacity Planning Session 9 DePaul University CFP® Program.

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Presentation on theme: "Life Insurance in the Estate Plan and Incapacity Planning Session 9 DePaul University CFP® Program."— Presentation transcript:

1 Life Insurance in the Estate Plan and Incapacity Planning Session 9 DePaul University CFP® Program

2 Life Insurance and Estate Planning Objectives Financial protection for survivors by replacing the insureds lost income. Frank bought life insurance to help ensure that his survivors wouldn't suffer financially when he died. When Frank died and his paycheck stopped, his family had enough money to maintain their lifestyle and live comfortably for years. Replace wealth that is lost due to estate settlement expenses and taxes. Frank bought enough life insurance to cover the potential costs of settling his estate, including taxes, fees, and other debts. Charitable giving - estate enjoys tax deduction Using life insurance, Frank was able to leave a substantial and fully deductible gift to his favorite charity at death or before. DePaul University All rights reserved.2

3 Estate Planning and Risk Management A complete financial/estate plan must consider: income protection during the clients earning years future needs – income replacement, and protection of estate. Life insurance Disability insurance Long-term care insurance DePaul University All rights reserved.3

4 Life Insurance in the Estate Plan If, at death or within 3-years of death, an individual holds incidents of ownership in a life insurance policy under which s/he is the insured, the entire face value of the policy is included in the insureds gross estate. Incidents of ownership include: The right to name/change beneficiaries The right to assign ownership of the policy The right to policy loans from cash value The right to surrender the coverage DePaul University All rights reserved.4

5 Question 9-1 All of the following represent incidents of ownership in a life insurance policy except: A. The right to change the beneficiary from your spouse to your child. B. The right to assign ownership of your policy to an irrevocable life insurance trust (ILIT). C. The right to borrow from the policys cash savings account. D. The right to pay the premium. DePaul University All rights reserved.5

6 Term Life Insurance Term insurance pays policys face amount if insured dies during coverage period. Temporary protection Typically lowest cost when insured is young Premiums generally rise as insured ages 6DePaul University All rights reserved.

7 Convertible Term Life Insurance Convertible term life insurance allows changing a term policy to a permanent policy (such as whole-life or universal life) without penalties. Most term policies issued today are renewable and convertible, allowing the insured to adjust coverage needs to changing circumstances. Many young, healthy policyholders choose a convertible term insurance policy initially because of the low cost premiums and basic coverage. In the future, may policyholders may decide that a cash value policy is better suited to their financial plan. Conversion typically accomplished at attained age In some policies, owner may pay a lump sum to maintain the original issue age premium going forward. DePaul University All rights reserved.7

8 First-to-Die (Joint Life) Insurance First-to-die (joint life) covers >2 insureds, paying benefits at the first death. Benefits may be used for: Survivor income Survivor spouse Surviving business owners/partners Mortgage protection Funding business buy/sell agreements Covering consumer and other debt 8DePaul University All rights reserved.

9 Second-to-Die (Survivorship Life) Insurance Second-to-die (survivorship) life insurance covers two lives, paying benefits at the second death Typically used to provide funds to pay federal estate tax on death of second spouse May be term policy or permanent coverage Cost: Greater than on a single life, but Lower than with two individual policies Underwriting Typically less stringent than with individual policies May present insurance opportunity for insured in questionable health DePaul University All rights reserved.9

10 Question 9-2 Which of the following statements about second-to die life insurance is true? A. For a couple, it is typically used to pay federal estate taxes on the estate of the first spouse to die. B. It is seldom held in trust. C. An individual who would be denied coverage under an individual life insurance policy may be covered under a second-to-die policy. D. A second-to-die policy is typically more expensive than two policies on two spouses. DePaul University All rights reserved.10

11 Whole Life Insurance Whole life insurance provides protection at a level premium for the entire life of the insured. Policy typically endows (pays face value) at age 100 Types Straight whole life (ordinary life, continuous premium life) Premiums paid throughout insureds life Limited-pay whole life Premiums limited to specific number of years Examples 20-pay life Paid-up at age 65 Higher premiums than ordinary life because later (riskier) years must be prepaid 11DePaul University All rights reserved.

12 Universal Life Insurance Similar to whole life insurance but cost of insurance inside the UL policy is based on annually renewable term life insurance. Advantages include: premium flexibility adjustable death benefits. at the policy owner's request, subject to insurability. 12DePaul University All rights reserved.

13 Two Universal Life Insurance Policy Designs Most universal life insurance offered today reflects one of the two benefit designs below: Level death benefit (aka Option A) Death benefit constant unless cash value exceeds certain amounts Over certain cash value amounts, death benefit increased Increasing death benefit (aka Option B) Death benefit increases to correspond with increasing cash value 13DePaul University All rights reserved.

14 Increasing Death Benefit Universal Life Insurance Example Mike is covered for $200,000 under an increasing death benefit (Option B) universal life insurance policy. Its cash value has grown to $50,000. Death benefit grows by $50,000 to $250,000 total Thus, $250,000 will be included in Mikes gross estate if he holds incidents of ownership in the policy within 3 years of his death. 14DePaul University All rights reserved.

15 Suicide Clause If the insured commits suicide within the suicide period, only the aggregate premiums are paid to beneficiary If insured holds incidents of ownership, only the premium refund amount (not the death benefit) is included in the gross estate Suicide period typically 2 years Following suicide period, the death benefit is payable even if insured commits suicide 15DePaul University All rights reserved.

16 Question 9-3 Due to the recession, Bruno committed suicide 18 months after his $1MM life insurance policy was issued. He had paid $30,000 in premiums. Approximately what amount will be included in Brunos gross estate? A. $1,000,000 B. $970,000 C. $30,000 D. $-0- DePaul University All rights reserved.16

17 Accidental Death Benefit (Double Indemnity) The accidental death benefit rider pays double (if double indemnity) or triple, (if triple indemnity) if the insureds death accidental Assuming the insured holds incedents of ownership, the rider will double (or triple) the amount to be included in the gross estate DePaul University All rights reserved.17

18 Simultaneous Death The Uniform Simultaneous Death Act specifies that, if two or more people die within 120 hours of one another, and no will or other document provides for this situation explicitly, each is considered to have predeceased the other. The USDA, as adopted by various States, varies from jurisdiction to jurisdiction The statute creates a rebuttable presumption DePaul University All rights reserved.18

19 Simultaneous Death (continued) Linda is insured under a life insurance policy. Her husband, Alex, is its beneficiary. They are both killed in a plane crash, dying at or near the same time. If the policyholder named a secondary beneficiary in the policy, that person will receive the life insurance benefit. If no secondary beneficiary has been named, then it is assumed that she outlived Alex, and the benefit is inherited through Lindas estate. DePaul University All rights reserved.19

20 General Rules for Life Insurance Inclusion in Gross Estate Life insurance will be included in an individuals gross estate for federal estate tax purposes if: The decedent held incidents of ownership at death, or The insured transferred ownership of the policy within the three year period preceding death The policys death benefit is payable to the insureds estate Or the primary beneficiary predeceases the insured and no contingent beneficiary exists, making the estate the default beneficiary DePaul University All rights reserved.20

21 Policy Ownership by the Insured If it is reasonably certain that the insureds estate will not be taxable, the client owning the policy on his/her own life is not problematic. However, if federal estate tax is likely the client should consider alternative owners including: The spouse Policys interpolated terminal reserve is included in the spouses estate if he/she predeceases the insured Another family member Typically adult children Irrevocable Life Insurance Trust (ILIT) Generally the most appropriate choice DePaul University All rights reserved.21

22 Estate Taxation of Life Insurance on Anothers Life For federal estate tax, the interpolated terminal reserve (approximate replacement value) is includible in the estate of an individual owning a life insurance policy under which another individual is insured. DePaul University All rights reserved.22

23 Owning a Policy on an Insured Spouse If one spouse dies owning a life insurance policy on the other, the amount included in the gross estate of the decedent/owner (NOT the insured) will be: For a term life policy, the unused premium For a cash value policy, the interpolated terminal reserve and the unused premium Similar to replacement value Insurance company provides figures DePaul University All rights reserved.23

24 Question 9-5 Laura dies owning a $1 million (face value) whole life policy on her husband, Scott. It has an interpolated terminal reserve of $160,000 and an unused premium of $11,000. Approximately what amount, if any, is included in Lauras gross estate? A. $-0- because the insured is still living. B. $1million C. $171,000 D. $160,000 DePaul University All rights reserved.24

25 Income Taxation of Death Benefits Under general rule, insurance death benefits are received income tax free by the beneficiary Exception for life insurance transferred for value Death benefit less premiums paid (basis) is taxable to the beneficiary Exception for corporate-owned life insurance Gain from death benefit may be subject to alternative minimum tax (AMT) DePaul University All rights reserved.25

26 Exceptions to Transfer for Value Rule Even where the policy is acquired for consideration, the death benefit remains income tax free under these exceptions to the rule: Policy is transferred to the insured Policy is transferred to a partner of the insured May occur with buy/sell agreements Policy is transferred to corporation in which insured is shareholder or officer DePaul University All rights reserved.26

27 The Irrevocable Life Insurance Trust (ILIT) Estate taxes on insurance proceeds may be avoided by creating a properly executed irrevocable life insurance trust ILIT. May include policies on one life or second-to die policies With a married couple, the second-to-die policy is popular due to the marital deduction taxes only due at the second death less costly than two separate policies. DePaul University All rights reserved.27

28 ILIT May Be Funded or Unfunded An ILIT may be funded Other income producing assets are transferred to the trust to generate money for the premium Income is taxed under grantor trust rules Transfer of assets triggers gift tax consequences Or, an ILIT may be unfunded The grantor makes gifts so trustee can pay the premiums Annual gift tax exposure Usually avoided using Crummey powers DePaul University All rights reserved.28

29 Paying the Premiums Although though the ILIT owns the policy, the grantor can still (and typically must) pay the premiums. The grantor can annual make gifts of cash to the trust, and the trustee can use this money to pay policy premiums. Even with Crummey powers, gifts in excess of $13,000/beneficiary power holder are taxable gifts. DePaul University All rights reserved.29

30 Giving Up Control If your trust purchases and owns the policy(s), the grantor typically has no right to change the beneficiary or borrow from/against the policy. The grantor names the beneficiaries of the trust and the trust/policy owner is the beneficiary of the proceeds. Because the ILIT is irrevocable, the grantor would typically not serve as trustee, eliminating any potential incedents of ownership. DePaul University All rights reserved.30

31 Transferring Current Policies A grantor can transfer ownership of a policy he owns to an ILIT in order to shield the proceeds from estate taxes. This is a taxable transfer. Grantors death within three years of transfer forces gross estate inclusion of proceeds. If the proceeds increase the value of the estate to more than $5.12 million tax will be due. DePaul University All rights reserved.31

32 Beneficiaries Can Still Enjoy Proceeds When the ILIT receives the death benefits from its policy(s) at the insured grantors death, thay are income and estate tax free. The trustee may: Distribute funds beneficiaries Use funds to provide estate liquidity Purchase assets from estate Usually no gain due to basis step-up Often trustee of ILIT is also executor of estate DePaul University All rights reserved.32

33 ILIT Example Robert and his wife Sally accumulated a small real estate empire throughout California, including a Lake Forest home ($4,000,000), a vacation home in Lake Tahoe ($2,120,000) and three rental properties in Hawaii (together worth $5,500,000). Roberts liquid assets were mostly spent by the end of his life, amounting to $150,000. Sally has died and Robert has not remarried. $6 million of the estate will be subject to the federal estate tax at a rate of 35% and Roberts and Sallys children, Peter and Ruth, will not have sufficient cash to cover the bill unless they sell off some of the properties. DePaul University All rights reserved.33

34 ILIT Example (continued) Robert establishes a qualifying ILIT, funding it with an insurance policy, and naming his children, Peter and Ruth, as remainder beneficiaries of the trust. Robert makes gifts to the trust covered by his $13,000 annual gift tax exclusion times the two beneficiaries, who each hold a Crummey power. The gifts are used to pay the policy premiums. When Robert dies, the proceeds of the life insurance policy are received by the trustee estate tax- free. The trustee then purchases one or more parcels from the estate. There is no (or little gain), the estate has cash and the children are beneficiaries of the trust which hold the transferred property. DePaul University All rights reserved.34

35 Question 9-6 Most irrevocable life insurance trusts: A. Name the grantor as trustee B. Are designed to keep life insurance proceeds out of the insured owners gross estate. C. Testamentary D. Asset free until death. DePaul University All rights reserved.35

36 Gifting Ones Policy Under the three rule, even gifts of life insurance to a spouse must be included in the donors gross estate if they are made within 3 years of death. Example: Sharon dies within two years of transferring ownership of a life insurance policy (under which she is the insured) to her husband, Jerry. The FACE VALUE of the policy must be included in Sharons gross estate. Offset by marital deduction if Jerry is the beneficiary Same result where policy is gifted but insurance company was not notified of the change in ownership. DePaul University All rights reserved.36

37 Business Buy-Sell Agreements Death or disability of a business owner or partner may jeopardize continuation of that business. Often the optimal plan is for the surviving partner(s) or shareholder(s) to buy the business interest of a deceased or disabled partner. Contractual agreement sets terms for both buyer(s) and seller(s) Purchase can be funded by Life insurance (common) Other assets DePaul University All rights reserved.37

38 Two Types of Buy-Sell Agreements Buy-sell agreements are typically designed as either: Cross purchase arrangements Individual owners purchase life insurance on one another Cumbersome with many owners/partners Entity (stock redemption) arrangements Entity owns life insurance on major shareholders (or partners) Typically, closely held corporation One policy per insured shareholder/partner DePaul University All rights reserved.38

39 Advantages to Buy-Sell Agreements Properly designed buy-sell agreements typically provide the following advantages: Higher probability that business will continue Ready market for business interests Liquidity for Disabled owners expenses Deceased owners estate tax and expenses Establishes value for decedents estate If reasonable DePaul University All rights reserved.39

40 Cross Purchase Buy-Sell Example Hugh, Sue, and Stu own Taco Swell, a chain of fast food restaurants recently appraised to be worth $3,000,000. Under a cross purchase arrangement, they would own life insurance as follows: Owner Insured Insured Hugh $500K on Sue $500K on Stu Sue $500K on Hugh $500K on Stu Stu $500K on Hugh $500K on Sue DePaul University All rights reserved.40

41 Stock Redemption (Entity Purchase) Buy-Sell Agreements Under a stock redemption (entity purchase) agreement, the business (typically a corporation) agrees to purchase a deceased (or disabled) owners interest(s) in the business. The business owns and is beneficiary of the life insurance policies funding the agreement May be best arrangement when > 3 owners DePaul University All rights reserved.41

42 Tax and Other Implications to Stock Redemption (Entity Purchase) Buy-Sell Agreements Premiums are not deductible to business Death benefits not taxable to business as beneficiary However, benefits may be exposed to corporate alternative minimum tax (AMT) Remaining owners receive increased business value No step up in basis to remaining owners Life insurance can be attached by business creditors Transfer for value exposure if policies sold to parties other than the insured DePaul University All rights reserved.42

43 Death-Activated Buy-Sell Agreement Example Red signed a buy-sell agreement before his death. His interest in the business was appraised at $1,000,000. His basis in the business is $100,000. When Red dies (assuming agreement remains in force), business (or partners) buy Reds interest from his estate for $1,000,000 Reds estate enjoys full step up in basis Avoids $900,000 capital gain $1,000,000 in Reds gross estate Possible estate tax exposure DePaul University All rights reserved.43

44 Transfer for Value Exposures with Buy-Sell Agreements If the business closes, eliminating the need for insurance policies on others, individuals can purchase the life insurance policies. If owners purchase (or exchange) policies, thus owning insurance on lives of others, transfer for value occurs Death benefits then taxable at ordinary rates If owners purchase policies on their own lives exception from transfer for value rules applies Death benefits remain nontaxable (income tax) DePaul University All rights reserved.44

45 Question 9-7 Jack and Mack, both married, own Jack and Macks Landscaping. They enter into a cross purchase buy/sell agreement funded with life insurance. How should their policies be owned? A. Jack owns on Macks life and vice versa. B. Jack and Macks Landscaping owns the policies on its two owners. C. Jack and Macks spouses own the policies respectively. D. The policies are not considered owned for purposes of the buy/sell agreement. DePaul University All rights reserved.45

46 Key Person (Key Employee) Life Insurance A business may own life insurance on the life of one or more key employees Business has insurable interest due to: Possible lost income on key persons death Possible increased expenses due to key persons death DePaul University All rights reserved.46

47 Estate Tax Implications of Key Person Life Insurance In a key person life insurance arrangement, the owner of the policy is the employer, who names itself beneficiary of the policys proceeds. Thus no amounts attributable to the policy covering the insured employee is includible in that employees gross estate. Proceeds will increase stockvalue. DePaul University All rights reserved.47

48 Incapacity Incapacity describes the inability to engage in legal matters (contracts, generally) due to lack of intellectual or physical ability. An incapacitated person may be legally incompetent. Minors lack capacity to contract This means that a contract is voidable by the minor – not by the other party DePaul University All rights reserved.48

49 Powers of Attorney Incapacity planning may be addressed through powers of attorney for property or for health care. A power of attorney is a written document under which an individual, known as the principal, empowers another adult, known as attorney-in-fact, holder of the power, or agent, to act on that principals behalf. DePaul University All rights reserved.49

50 Durable versus Nondurable Powers of Attorney A nondurable power of attorney becomes invalid upon the incapacity of the principal. Thus ineffective for incapacity planning A durable power of attorney survives the principals incapacity Principal must be competent when DPOA is executed Power holder called attorney-in-fact or agent DePaul University All rights reserved.50

51 Powers Terminate on Death Whether durable or nondurable, powers of attorney become invalid upon the death of the principal. At this point the executor (if one is named) takes over Often the same individual is named to both fiduciary offices. DePaul University All rights reserved.51

52 Question 9-8 The intent of making a power of attorney durable is to: A. Make it last beyond the death of the principal. B. Name successor attorneys-in-fact. C. Make it valid through the principals incapacity. D. Make it limited to financial matters only. DePaul University All rights reserved.52

53 Durable Power of Attorney for Health Care (DPOAHC) A durable power of attorney for health care (DPOAHC) empowers an attorney-in-fact to make a variety of health care decisions for a principal unable to make such decisions for him/herself. DPOAHC may be immediately effective but will only be honored if principal is unable to communicate his or her wishes DPOAHC generally a document separate from property/financial-related powers of attorney DePaul University All rights reserved.53

54 Durable Power of Attorney for Property The durable power of attorney for property can be designed to empower the attorney-in-fact immediately or only upon the incapacity of the principal (a springing power). Such powers typically enable the attorney-in-fact to: Buy, sell or lease the principals assets Collect debts on the principals behalf Sue on the principals behalf Operate the principals business DePaul University All rights reserved.54

55 Powers of Attorney Transfer and Tax Functions Under a power of attorney, the attorney-in-fact may: Make gifts to members of the principals family to accomplish Estate equalization with spouse Maximization of annual gift tax exclusion(s) Create living trusts to benefit principal and principals family Transfer principals property to a previously established living trust Sign joint tax returns (with spouse) on principals behalf Exercise special powers if appointment DePaul University All rights reserved.55

56 General versus Limited Powers of Attorney General powers of attorney (durable or nondurable) authorize the attorney-in-fact to act on the principals behalf in all legal and financial matters Limited powers of attorney authorize the attorney-in-fact to perform only certain acts or control specified property Example: Trading authorization for a brokerage account is a limited power of attorney addressing that account only DePaul University All rights reserved.56

57 Springing Power of Attorney A springing power of attorney authorizes the agent to act on the principals behalf only if the principal becomes incompetent/ incapacitated. Possibly appropriate in circumstances the where principal wishes to maintain control as long as s/he is able Can be problematic if principal fails to communicate intent to agent or POA fails to identify what constitutes incapacity DePaul University All rights reserved.57

58 Question 9-9 What is the most likely reason why Elizabeth made her power of attorney a springing power? A. She wants to control her own affairs presuming she is able to do so. B. She wants the power of attorney only to activate upon her death. C. She wants her power of attorney to be revocable. D. All the above. DePaul University All rights reserved.58

59 Advance Medical Directives Living wills and durable powers of attorney for health care direct physicians and hospitals as to the medical choices of the principal and should be part of a clients estate plan. Living will addresses life-ending decisions only Example: Unplug the respirator Durable powers of attorney for health care grant broader powers Example: Surgical authorization for patient unable to communicate by speech or writing DePaul University All rights reserved.59

60 Guardianships/Conservatorships Guardians and conservators are persons appointed by the Court for a ward when the Court determines that one of the following circumstances exists: The ward is a minor (less than 18 years old) The ward is mentally ill, as evidenced by the opinion of a qualified physician The ward is mentally retarded, as certified by a qualified physician The ward, because of excessive drinking, gambling and the like, wastes or lessens his estate, commonly called a "spendthrift." DePaul University All rights reserved.60

61 Guardian/Conservator of the Person A second individual may be appointed to represent an incompetent (the ward). The guardian of the person is responsible for the wards daily well being and addresses such matters as the wards: Living situation Medical care Food and clothing Etc. DePaul University All rights reserved.61

62 Guardian/Conservator of the Estate The guardian of the estate is responsible for the wards financial well being and addresses such matters including: Pay the ward's debts Represent the ward in all lawsuits Control and manage the ward's property Invest the ward's funds Collect funds due the ward Support the ward and his family from the ward's funds Sell, lease or mortgage the ward's property, given Probate Court approval DePaul University All rights reserved.62

63 Question 9-10 The ultimate supervisory responsibility in conjunction with a guardianship/conservatorship rests with: A. The guardian B. The family of the ward C. The court D. The trustee DePaul University All rights reserved.63

64 Revocable Trusts for Incapacity Planning While most transferors select themselves as trustees of their own revocable living trusts, a successor trustee should be named to succeed the grantor as trustee in the event of incapacity The trust should set forth the criteria for determining incapacity Named successor should have a copy of the trust document Also, ideally, a current statement of accounts DePaul University All rights reserved.64

65 Revocable Trusts versus Powers of Attorney For incapacity planning, the living revocable trust has two advantages over the power of attorney: The trust continues beyond death Facilitates orderly post mortem transfer Probate avoided for property actually titled in the name of the trust Trusts are universally honored Acceptance of power of attorney documents may vary from State to State DePaul University All rights reserved.65

66 Medicaid Medicaid is a federally-funded, state-run program that provides medical assistance to individuals and families with limited assets and resources. Each state sets its own guidelines regarding eligibility and services. In most states Medicaid is not available to individuals owning >$2,000 in assets. Medicaid pays for: Health care costs, including doctor's visits Long-term care, including custodial care DePaul University All rights reserved.66

67 Lookback Rules Impact Eligibility The Deficit Reduction Act of 2005 increased the Medicaid look-back period to 5-years. Thus, asset transfers for less than FMV within the 5-year period before an individual applies to Medicaid for long-term care assistance will reduce benefits. Example: Within the previous 5-years, Grandpa gifted $40,000 to various family members. If the average nursing home cost in Grandpas state is $4,000 per month, Grandpa is denied 10 months of Medicaid nursing home assistance. Had Grandpa gifted $400,000, he would be denied 100 months of Medicaid long-term care assistance. DePaul University All rights reserved.67

68 Medicaid Home Equity Eligibility Rules Any individual with home equity above $500,000 is now ineligible for Medicaid Exception where applicants spouse resides in the home or the home is occupied by a child under age 21, blind or disabled States may raise the threshold to up to $750,000. DePaul University All rights reserved.68

69 Medicaid Eligibility and Annuities If a Medicaid applicant has any interest in an annuity, the purchase of the annuity will be treated as an uncompensated transfer subject to a penalty period unless the state is named as the primary remainder beneficiary for at least the total amount of medical assistance paid for on behalf of the Medicaid applicant Or the state is named as the contingent remainder beneficiary after the community spouse or minor or disabled child. DePaul University All rights reserved.69

70 Medicaid and the Community Spouse Federal law does not require that a married couple impoverish themselves before one spouse may gain eligibility for Medicaid. Instead, the spouse of a Medicaid enrollee, called a community spouse, is entitled to a specific portion of the combined income and assets owned by the couple. Generally, a community spouse is entitled to half of the couples combined resources (up to a maximum), and at least a minimum amount of the combined monthly income. DePaul University All rights reserved.70

71 Question 9-11 Medicaid rules would be least likely to require that: A. The community spouse hold assets of no more than $2,000. B. The recipients assets and income fall below stated thresholds. C. Assets given away within five years of applying for Medicaid benefits may jeopardize such benefits. D. The recipient must be unable to complete certain ADLs in order to receive long-term care benefits. DePaul University All rights reserved.71

72 The Special Needs Trust A special needs trust (SNT) is a means to leave money to a disabled family member, without interfering with public benefits such as Medicaid or Social Security Disability benefits. The most common special needs trust is a family- type trust, set up by the parents. The parents fund the money for the trust, often by will, and sometimes using life insurance payable to the trust. In most cases, the disabled child/beneficiary has a discretionary life interest. After the beneficiarys death the remainder passes to other family members. DePaul University All rights reserved.72

73 Maintaining Benefit Eligibility The key to a family-type special needs trust is that the money CANNOT be used for housing, food, or clothing. Those are considered "basic needs" under SSI and Medicaid laws. If the disabled person is receiving free housing, food or clothing from a family member or a trust, government benefits will be reduced or eliminated. DePaul University All rights reserved.73

74 Appropriate Special Needs Trust Design The trust can be used to purchase a home, and perhaps rent it to the disabled person. The trust can pay for repairs, utilities and taxes for a home; it can purchase furnishings for the home. The SNT can pay for vacations, summer camp, or trips. It can buy bowling shoes or other sporting equipment. The SNT can pay medical costs not otherwise covered by Medicaid, such as vitamins. It can pay for funeral and burial costs. DePaul University All rights reserved.74

75 The Payback Trust A court-ordered trust, also called a Type A or Payback special needs trust, is appropriate where the disabled person has inherited money, or received a personal injury settlement. Because the disabled person owns the money, the trust is a grantor trust. The disabled person must be under 65 years old and meet the medical standards of Social Security disability. The trust must require that, at the disabled persons death, remaining assets will first reimburse the State for assistance it provided to the disabled beneficiary DePaul University All rights reserved.75

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