SPECIAL NEEDS TRUSTS

OVERVIEW OF PUBLIC BENEFIT PROGRAMS

PROGRAMS NOT BASED ON FINANCIAL NEED Social Security (Survivor’s, Retirement or Disability Benefits) SSD – Permanently and Totally Disabled Medicare

PROGRAMS THAT ARE NEEDS BASED Supplemental Security Income (SSI) 65, Blind or Totally and Permanently Disabled Assets $2,000 or less

SUPPLEMENTAL SECURITY INCOME Monthly cash payments to aged, blind or disabled Administered by Social Security Administration (SSA) Called Title XVI benefits

SSI QUALIFICATION Be aged, medically disabled or blind US Citizen or meet alien status criteria

SSI QUALIFICATION Disability – Inability or engage in “substantial gainful activity” (SGA) Physical or mental impairment that can be expected to last for continuous period of at least 12 months or result in death Earnings level

SSI Payments Maximum Benefit rate depends on Recipient’s living arrangements Marital status Whether recipient is elderly, disabled or blind Person living alone or with others in own household Federal SSI benefit $623 (living alone) Federal and NJ State combined $654.25

SSI QUALIFICATION Resources Countable or Non-countable

COUNTABLE RESOURCE INCOME Single - $2, Married - $3,000.00

COUNTABLE RESOURCES Cash (which is not the current month’s income) Income producing property, including real estate Stocks, bonds, investments Life Insurance with c.v. in excess or $1, Vehicle

Non-countable Resources Personal Residence Automobiles that are specially equipped or used for medical appointments Life Insurance with cash value of less that $1,500.00

INCOME Earned, Unearned or In-kind

UNEARNED INCOME Social Security benefits Annuities Alimony Child Support Dividends Interest Rents Royalties Prizes Awards Gifts Inheritance Distributions from Special Needs Trust

UNEARNED INCOME An SSI recipient may receive up to $20 per month of unearned income In excess of $20 per month reduces SSI benefit on dollar for dollar basis

EARNED INCOME Receipt of earned income over $65 per month (or $85 per month if no unearned income) will reduce SSI benefit dollar for dollar Formula for determining reduction if there is earned income Deduct the SSI General Exclusion of $20 (if no unearned income) Deduct $65 per month (earned income exclusion) Deduct one-half of the remaining earned income The balance is total countable earned income Deduct this form maximum SSI benefit Remaining balance is the reduced SSI benefit

IN-KIND INCOME SSI recipient is expected to pay for food and shelter Recipient of food or shelter from third party is “in-kind income” May reduce SSI benefits Regulations effective March 9, 2005 Clothing eliminated from definition of income or determination of ISM

TWO WAYS TO CALCULATE IN-KIND SUPPORT AND MAINTENANCE (ISM) One-third Reduction Rule Used in limited situations SSI recipient lives for full calendar month in household of another person who provided both food and shelter to him without charge SSI benefit amount reduced by one-third of federal benefit rate

Presumed Maximum Value Rate Used when SSI recipient has received food or shelter from outside source and one-third reduction rule doesn’t apply Example – Recipient lives in own home and received outside help for expenses SS presumes that maximum value of item is 1/3 of Federal benefit plus $20 SS does not apply both One-third Reduction Rule and PMV Rule in any one month No reduction if third party pay directly to vendor for items that are not food or shelter

SSI FOR CHILDREN Blind or disabled children may receive Under age 18, parents’ assets and income are deemed to the child

SOCIAL SECURITY DISABILITY INSURANCE (SSDI) Monthly cash benefits to disabled workers (and dependents) Eligibility not based on economic need Eligibility Requirements Sufficient quarters of covered employment Medically disabled If working, earn less than $900 per month ($1500 if blind) Family benefits available No asset limit No limit on unearned income or in-kind income SNT not necessary unless dual recipient

SOCIAL SECURITY DISABILITY INSURANCE (SSDI) Amount of benefit depends on PIA (Primary Insurance Amount) If SSDI recipient receives low monthly benefit, may also receive SSI Dual recipients

PROGRAMS THAT ARE NEEDS BASED Medicaid Federal/State partnership Based on SSI qualification Medicaid Qualification Income Test Asset Test

SPECIAL NEEDS TRUSTS

Special Needs Trusts Preservation of Public Benefits Types of available Trusts Failure to consider Medicaid

PRESERVATION OF PUBLIC BENEFITS Needs based benefits interrupted ~Gift ~Inheritance ~Litigation Proceeds

Supplemental Trust No direct receipt of funds by beneficiary May receive discretionary distributions Maintain benefit qualification

TYPES OF TRUSTS Beneficiary may not have right to revoke Beneficiary may not direct use of assets for support Funds not used for food or shelter

TYPES OF TRUSTS Self-settled Trusts Includes transfers made by spouse Five year lookback (if not d4A or d4C) Income only trust

Types of Trusts Proper Drafting Proper Administration Support vs. discretionary

TYPES OF TRUSTS Income-Assignment Trusts Miller Trusts Not available any longer

TYPES OF TRUSTS Third Party Testamentary Self Settled Pooled

TYPES OF TRUSTS Third Party Trusts Funded with monies belonging to other individuals No payback provisions Trustee must be given discretion Beneficiary may not have control over funds May name residual beneficiary

TYPES OF TRUSTS Third Party Trusts Grandparents establish trust for disabled grandchild and funds with stock Grandparent is trustee. Children’s mother is successor trustee Funds used to purchase computer, computer training, vacation with paid companion

TYPES OF TRUSTS Testamentary Trust created under Last Will and Testament Creation of testamentary trust is not transfer for less than FMV Residual beneficiary permitted

POOLED TRUST (d)(4)(C) Pooled Trusts are authorized under OBRA-93 These trusts are funded with the assets of a disabled person The definition of “disability” is used

POOLED TRUST (d)(4)(C) Pooled Trust Requirements Pooled Trusts must be established and managed by a non-profit organization There must be a separate account for each beneficiary Funds are pooled for investment and management The account is solely for the benefit of the disabled individual The Trust must be established by a parent, grandparent, legal guardian, or court

POOLED TRUSTS (d)(4)(C) Advantages Corpus is not counted as an asset A person can be over 65 at the time of establishment of a Trust A disabled person can establish his own Trust The Community Trust already exists and does not have to be created The Community Trust requires only a joinder agreement

POOLED TRUSTS (d)(4)(C) Taxation The Grantor Trust rules apply to income tax The Trustee must track each sub- account Gift tax issues must be explored If there is a pooled income fund, the remainder interest may be tax deductible

POOLED TRUSTS (d)(4)(C) May pool assets for investing and management After Beneficiary’s death, amounts not retained by trust paid to state to reimburse Medicaid Most Trusts will retain funds

SUPPLEMENTAL NEEDS TRUSTS (d)(4)(A) Allows individual to retain funds while maintaining eligibility for public benefits programs Tort proceeds Divorce Settlement Workers Compensation

SUPPLEMENTAL NEEDS TRUST (d)(4)(A) Funds may be used to pay for items not provided by governmental programs Restrictions apply Inter Vivos Irrevocable

SUPPLEMENTAL NEEDS TRUST (d)(4)(A) Authorized under OBRA-93 For the benefit of disabled persons Person must be under 65 at the inception of the Trust Transfers to and from the Trust are not subject to the transfer of assets rules or the income and resource rules of Medicaid

SUPPLEMENTAL NEEDS TRUST (d)(4)(A) Trusts Established by: Parent Grandparent Legal guardian Court

SUPPLEMENTAL NEEDS TRUST (d)(4)(A) Distribution on Death The Trust must provide that on death the funds remaining in the Trust go first to reimburse Medicaid and then for the benefit of other beneficiaries

SUPPLEMENTAL NEEDS TRUST (d)(4)(A) Types of Payments OBRA-93 contains no express limitation on the amount or types of payments. Wise to limit payments to “in-kind” payments Does not reduce public assistance

SUPPLEMENTAL NEEDS TRUST (d)(4)(A) In-Kind Support In-kind support consists of goods or services from third parties Cannot include food or shelter Or anything that could be used to obtain food or shelter. If in-kind support includes food or shelter, there may be a reduction of up to 1/3 of the SSI benefit

CHOOSING A TRUSTEE Family members may be best qualified to determine special needs of the child May lack expertise regarding administration

CHOOSING A TRUSTEE Responsibility for proper investment of trust assets Accurate record keeping Ensuring that distributions will not disqualify from governmental benefits

CHOOSING A TRUSTEE Choose someone familiar with Prudent Investor Act Principal and Income Act Rules of SSI, Medicaid and other governmental programs

CHOOSING A TRUSTEE Unsophisticated trustee runs risk of exposure of liability Goals of trust may not be satisfied

CHOOSING A TRUSTEE Consider choosing a professional Bank Disability Organization Private Fiduciary Attorney

CHOOSING A TRUSTEE Consider choosing a professional Trust Advisory Committee (TAC) could be used to advise trustee as to needs TAC could be made up of family member, social worker, CPA, Attorney

CHOOSING A TRUSTEE Appoint co-trustees Family member and professional trustee

FUNDING THE TRUST Proper titling What to put in the trust

ADMINISTRATION OF TRUST Personally distributes goods or services directly to beneficiary Pay the provider directly and provider delivers goods or services Give beneficiary non-transferable and non-refundable right to obtain goods and services (voucher) No credit cards

TRUST DISTRIBUTION STANDARDS Discretionary Trust Not support Trust Trustee needs to understand the law before administration of trust

SUMMARY OF DISTRIBUTION RULES Determine benefit program No cash distributions (treated as income) Pay for services and exempt resources In-Kind maintenance and support (food and shelter) if trust allows it Don’t reduce SSI to $0

SPECIAL SITUATIONS Providing housing Providing Transportation General Distribution Rules Distributions that benefit others Paying members of beneficiary’s family

HOUSING Home owned by d4A Trust must be paid over to Government after Beneficiary’s death Trust can pay all expenses or charge rent Trustee must decide how to treat other family members living in home (d4A Trust must be for sole benefit of Beneficiary) Beneficiary received equitable interest in month of purchase – reduction in SSI in that month If Trust pays other shelter or household expenses – reduction in SSI benefits

HOUSING “Countable” Housing expenses Mortgage (principal and interest) Rent Real Estate Taxes Electricity, Water, Sewer Homeowner’s Insurance Condominium Charges

HOUSING “Noncountable” Housing Expenses Telephone Cable Television Premiums for personal property insurance Paper products Laundry and cleaning supplies Staff salaries Repairs to recipient’s home Capital improvements

HOUSING Trust buys home and titles in Beneficiary’s name Trust renovates home purchased by Beneficiary Countable income in month received by Beneficiary Excluded resource unless law changes Trustee loses control (Beneficiary can sell, gift or mortgage house)

HOUSING Renovating home owned by another Usually for handicap accessibility Doctor’s prescription to help justify expense

HOUSING Can pay rent to third person Countable Income (ISM) Pay for non-countable expenses

PROVIDING TRANSPORTATION Not food or shelter Biggest issues is how to title vehicle Should not be owned by trust (exposes trust assets to liability claim) Can purchase and title in name of beneficiary or reliable care provider Can pay operating expenses (gas, maintenance, repairs, insurance)

PROVIDING TRANSPORTATION One automobile is excluded If used for transportation for the individual or member of household Under new regs, no limit on value

GENERAL DISTRIBUTION RULES Do not distribute cash Do not distribute food or shelter or anything convertible

GENERAL DISTRIBUTION RULES Personal property (stereo, computer, furniture) Memberships to library, swimming pool Subscriptions Bus Pass Medical Insurance Premiums

GENERAL DISTRIBUTION RULES Services of care providers Vacations (not food or shelter) Travel expenses for person to accompany and assist the beneficiary on a trip Entertainment Medical services Social services Personal services (like house keeper)

DISTRIBUTIONS THAT BENEFIT NON- BENEFICIARIES Example: Family of Beneficiary lives rent free in home owned or paid for by the Trust Trustee must analyze expenditure No bright line test

PAYMENTS TO FAMILY MEMBERS Family care provider may quit job or reduce work hours to provide care Would have to pay outside party or institutional placement

PAYMENTS TO FAMILY MEMBERS Suggest hourly basis Survey home health agencies for appropriate rate Payments are taxable income May provide health insurance, retirement plan and employee benefits

TERMINATION OF TRUST Death of lifetime beneficiary terminates trust Could continue to remainder beneficiaries Trustee remains in office for reasonable period

TERMINATION OF TRUST Pay final expenses of trust Final accounting to remainder beneficiaries Distribute remaining assets

TERMINATION OF TRUST Payment of expenses tricky if insufficient funds Pay debts Administrative costs Income taxes Estate taxes Beneficiary’s personal debts Funeral expenses Medicaid reimbursement Remainder Beneficiaries

TAX ISSUES Estate Tax Assets sometimes included in estate of beneficiary Self-settled trust usually included Third party trust Depends on how much control beneficiary has Normally not included

TAX ISSUES Income Tax Apply for employer identification number Use SS-4 Grantor third party trust self-settled trust Don’t use Beneficiary social security number

TAX ISSUES Income Tax Any income not distributed from non- grantor trust is taxed at trust rate Tax rate is 35% imposes at $9,750 Individuals top tax rate imposes at $326,450

TAX ISSUES Income Tax Income earned by grantor trust taxed at beneficiary’s tax rate Grantor trust treated as pass through entity

TAX ISSUES SSA crosschecks with IRS Trust earnings reported to IRS Income reported for tax purposes may not constitute income for SSI purposes Proactive approach suggested

TAX ISSUES Income Tax Reduction strategies Purchase tax-free investments Distribute income to beneficiary

FIVE PLANNING POINTERS FOR PARENTS WITH DISABLED CHILDREN

PLANNING POINTERS Buy enough life insurance Parent can’t be replaced Services will be necessary

PLANNING POINTERS Set up a trust Public Benefits will be jeopardized Management of Funds Disinheritance can pose problems Sibling can be sued, divorced, shirk responsibility, tax issues

PLANNING POINTERS Create a will and appoint a guardian Might make sense to put guardian in place while parent is living

PLANNING POINTERS Write down the care plan Parent’s wishes for care Group home, live on own, live with family member Disclose estate planning arrangements to family

FAILURE TO CONSIDER MEDICAID Beneficiary loses benefits Attorney exposure to malpractice claim Make sure all Medicaid and Medicare liens on settlement are satisfied before funding trust