1. Special Needs Trusts Prepared by: Tina Myers, CPA, MTax CIRCULAR 230 DISCLOSURE NOTICE: Any U.S. federal tax advice included in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding U.S. federal tax- related penalties or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein.

2. Agenda Disability & concerns Disability & concerns Public benefit eligibility Public benefit eligibility Types of SNTs Types of SNTs Grantor/Non-grantor trust status Grantor/Non-grantor trust status Qualified Disability trusts Qualified Disability trusts

3. Conditions that Can Cause Permanent Disability: A Partial list Agoraphobia Agoraphobia Alzheimer’s disease Alzheimer’s disease Amputations Amputations Bipolar disorders Bipolar disorders Caner (many types) Caner (many types) Cerebral palsy Cerebral palsy Congenital heart disease Congenital heart disease Cystic fibrosis Cystic fibrosis Downs syndrome Downs syndrome Emphysema Emphysema Fetal alcohol syndrome Fetal alcohol syndrome Fragile X syndrome Fragile X syndrome Hemophilia Hemophilia HIV HIV Huntington’s chorea Huntington’s chorea Kidney malfunction Kidney malfunction Lupus Lupus Multiple chemical sensitivity Multiple chemical sensitivity Muscular dystrophy Muscular dystrophy Obsessive-compulsive disorder Obsessive-compulsive disorder

4. Conditions that Can Cause Permanent Disability: A Partial list Organic Brain Syndrome (OBS) Organic Brain Syndrome (OBS) Parkinson’s disease Parkinson’s disease Phenylketonuria (PKU) Phenylketonuria (PKU) Severe autistic disorder Severe autistic disorder Sickle cell anemia Sickle cell anemia Spinal bfidia Spinal bfidia Tay-Sachs Syndrome Tay-Sachs Syndrome Thalassemia Thalassemia Traumatic spine damage Traumatic spine damage Turner’s syndrome Turner’s syndrome

5. Disability concerns Health care options Health care options Eligibility for Public benefits Eligibility for Public benefits

6. Health care options Private health care Private health care Medicare Medicare Medicaid Medicaid

7. Public benefits available Social Security Disability Insurance (SSDI) Social Security Disability Insurance (SSDI) Available to individuals with a disability who either have sufficient work history prior to becoming disabled or are entitled to receive benefits by virtue of being a dependent or survivor of a disabled, retired, or deceased worker. Available to individuals with a disability who either have sufficient work history prior to becoming disabled or are entitled to receive benefits by virtue of being a dependent or survivor of a disabled, retired, or deceased worker. No means testing for eligibility No means testing for eligibility

8. Public Benefits Available (con’t) Supplemental Security Income (SSI) Supplemental Security Income (SSI) Available to low-income individuals who are disabled, blind, elderly and have limited income and few assets. Available to low-income individuals who are disabled, blind, elderly and have limited income and few assets. Medicare Medicare Health care program funded by government Health care program funded by government Available to all those age 65 and over Available to all those age 65 and over

9. Public Benefits Available (con’t) Medicaid Medicaid Health care program funded by government Health care program funded by government Available to all those who meet financial eligibility requirements rather than being based on age Available to all those who meet financial eligibility requirements rather than being based on age Covers all necessary medical care. Covers all necessary medical care.

10. Purpose of a SNT The essential purpose of a SNT is to improve the quality of an individual’s life without disqualifying him or her from eligibility for public benefits.

11. SNT basic characteristics Trust document states that the beneficiary with a disability cannot direct the use of funds in the trust for his or her support or maintenance, and Trust document states that the beneficiary with a disability cannot direct the use of funds in the trust for his or her support or maintenance, and The trust document expressly states that the beneficiary with a disability cannot revoke or terminate the trust The trust document expressly states that the beneficiary with a disability cannot revoke or terminate the trust

12. Two Types of SNTs Self-Settled Trust Self-Settled Trust Third-party Trust Third-party Trust Pooled trusts Pooled trusts

13. Self-Settled Trusts Established with the beneficiary’s own funds Established with the beneficiary’s own funds Most commonly funded by proceeds from a lawsuit or inheritance payable directly to the disabled beneficiary Most commonly funded by proceeds from a lawsuit or inheritance payable directly to the disabled beneficiary Trust includes provision directing trustee to pay back anything the state Medicaid program has paid for the beneficiary Trust includes provision directing trustee to pay back anything the state Medicaid program has paid for the beneficiary Rules governing permissible distributions are more restrictive than for third-party special needs trusts Rules governing permissible distributions are more restrictive than for third-party special needs trusts Often referred to as “d4A” trusts (statutory section 42 U.S.C. §1396p(d)(4)(A)) Often referred to as “d4A” trusts (statutory section 42 U.S.C. §1396p(d)(4)(A)) Also referred to as a first-party trust, payback special needs trust or litigation special needs trust Also referred to as a first-party trust, payback special needs trust or litigation special needs trust

14. Self-Settled Trust Additional Rules for Grantor trusts Trust may be established by parent, grandparent or the court, even though the disabled person is the grantor. Trust may be established by parent, grandparent or the court, even though the disabled person is the grantor. Repayment at death of beneficiary. Repayment at death of beneficiary. Sole benefit requirement Sole benefit requirement Must be irrevocable Must be irrevocable Beneficiary cannot be trustee or have power to remove the trustee Beneficiary cannot be trustee or have power to remove the trustee

15. Third-Party SNTs Established by someone other than the person with disabilities with assets never belonging to the beneficiary. Established by someone other than the person with disabilities with assets never belonging to the beneficiary. Does not require a “payback” provision for Medicaid benefits upon beneficiary’s death Does not require a “payback” provision for Medicaid benefits upon beneficiary’s death During beneficiaries life, kinds of payments the trust can make will be more generous and flexible. During beneficiaries life, kinds of payments the trust can make will be more generous and flexible. Could be created during lifetime or at death. Could be created during lifetime or at death.

16. Third-Party SNTs (con’t) Trust must be discretionary Trust must be discretionary There must be an independent trustee There must be an independent trustee Cannot be a general support and maintenance trust Cannot be a general support and maintenance trust Beneficiary cannot have control Beneficiary cannot have control

17. What public benefits can the beneficiary receive? SSDI/Medicare SSDI/Medicare SSI/Medicaid SSI/Medicaid Veterans benefits Veterans benefits Subsidized Housing Subsidized Housing Temporary Assistance for Needy Families (TANF) Temporary Assistance for Needy Families (TANF) Other means-tested benefit programs Other means-tested benefit programs

18. Questions to consider when establishing a SNT Are assets of the SNT includible in the beneficiary’s countable assets? Are assets of the SNT includible in the beneficiary’s countable assets? When assets are transferred to a SNT, is there a penalty period? When assets are transferred to a SNT, is there a penalty period? What distributions from the trust are considered countable income to the beneficiary or the beneficiary’s family? What distributions from the trust are considered countable income to the beneficiary or the beneficiary’s family? Can non-disabled, ineligible parents income and assets be deemed countable for the beneficiary’s eligibility? Can non-disabled, ineligible parents income and assets be deemed countable for the beneficiary’s eligibility?

19. How do trust distributions affect the beneficiary’s public benefit? A distribution of cash reduced dollar for dollar the beneficiary’s SSI payment. A distribution of cash reduced dollar for dollar the beneficiary’s SSI payment. A distribution that is “in-kind support and maintenance” (ISM) reduces the benefit by a lesser amount. A distribution that is “in-kind support and maintenance” (ISM) reduces the benefit by a lesser amount.

20. Things that a SNT can Pay for Without Worry Home upkeep & utilities Home upkeep & utilities Phone, cable & internet service Phone, cable & internet service Vehicle, insurance, maintenance & gas Vehicle, insurance, maintenance & gas Pre-paid Burial/funeral arrangements Pre-paid Burial/funeral arrangements Tuition, books, tutoring Tuition, books, tutoring Travel & Entertainment Travel & Entertainment Household furnishing & furniture Household furnishing & furniture Television, computers & electronics Television, computers & electronics Durable medical equipment Durable medical equipment Care management Care management Therapy, medications, alternative treatments Therapy, medications, alternative treatments Taxes Taxes Legal, guardianship and trustee fees Legal, guardianship and trustee fees Personal hygiene (haircuts, manicures) Personal hygiene (haircuts, manicures) Clothing Clothing

21. What tax rules to SNTS follow? SNTs follow the same basic tax rules that all trusts follow SNTs follow the same basic tax rules that all trusts follow

22. SNT Trustee duties No self-dealing No self-dealing Impartiality Impartiality Delegation Delegation Investment Investment Bond Bond Titling of Assets Titling of Assets Accounting requirements Accounting requirements Reporting to Social Security Reporting to Social Security Reporting to Medicaid Reporting to Medicaid Reporting to the Court Reporting to the Court Wrapping up the trust Wrapping up the trust

23. Income taxation of SNTs Grantor trusts Grantor trusts Generally, a SNT will be a grantor trust if a family member is the trustee. If there is an independent trustee, it may still be a grantor trust. Generally, a SNT will be a grantor trust if a family member is the trustee. If there is an independent trustee, it may still be a grantor trust. May obtain a new EIN for the trust, or use SSN of grantor May obtain a new EIN for the trust, or use SSN of grantor Files an “informational” return Files an “informational” return

24. Income taxation of SNTs (con’t) Non-Grantor trusts Non-Grantor trusts Virtually all third-party, and some self-settled trust will be non-grantor trusts. Virtually all third-party, and some self-settled trust will be non-grantor trusts. Subject to the compressed tax rates of trusts Subject to the compressed tax rates of trusts Will need its own EIN Will need its own EIN Most likely will be classified as “complex” Most likely will be classified as “complex” Files a Form 1041 with a K-1 to the beneficiary for distributions Files a Form 1041 with a K-1 to the beneficiary for distributions Can take deductions that would have otherwise been subject to 2% floor. Can take deductions that would have otherwise been subject to 2% floor.

25. Income taxation of SNTs (con’t) Qualified Disability Trusts (QDisT) Qualified Disability Trusts (QDisT) Optional treatment as a QDisT Optional treatment as a QDisT Cannot be a grantor trust Cannot be a grantor trust Since 2002, trusts qualifying under IRC Sec 642(b)(2)(C) are permitted to claim a personal exemption Since 2002, trusts qualifying under IRC Sec 642(b)(2)(C) are permitted to claim a personal exemption Trust must be funded before beneficiary turns age 65 Trust must be funded before beneficiary turns age 65 Beneficiaries must be receiving SSI or SSDI Beneficiaries must be receiving SSI or SSDI

26. Employment of a Caregiver May be provided through an outside agency May be provided through an outside agency Or a caregiver not associated with an agency. Or a caregiver not associated with an agency. Will be treated as an employee Will be treated as an employee Must withhold income and unemployment taxes Must withhold income and unemployment taxes

27. Rules applicable to all SNTs There is a difference between “income” for tax purposes and “income” for purposes of SSI. There is a difference between “income” for tax purposes and “income” for purposes of SSI. If a taxpayer is under age 24, “kiddie ax” applies. If a taxpayer is under age 24, “kiddie ax” applies.

28. Ohio Pooled Trusts Charities Pooled Trust Charities Pooled Trust Community Fund Management Foundation Pooled Trusts Community Fund Management Foundation Pooled Trusts The Disability Foundation Pooled Trusts The Disability Foundation Pooled Trusts McGivney Pooled Special Needs Trust McGivney Pooled Special Needs Trust Secured Futures Pooled Trust Secured Futures Pooled Trust Securet Trust Securet Trust

29. Trust Sample Language The primary purpose of this trust shall be to provide for _______’s special needs resulting from his/her disabilities. In the event such beneficiary is receiving government benefits based upon need or disability, from any local, state, or federal government program, the trustee shall have the discretion to supplement those government benefits. No disbursement shall be made for _____’s benefit that would permanently jeopardize eligibility for, or inappropriately limit the type of assistance available to him/her, if he/she is receiving or intends to apply for local, state or federal benefit programs. If _____ is not receiving government benefits based upon need or disability, the Trustee shall have the absolute discretion to determine what disbursements shall be made from the trust for _____’s benefit.