1. Risk Management in the Real World Using SPECIAL NEEDS TRUSTS Melanie B. Bradford, J.D. Alabama Family Trust, Executive Director

2. Why do you need to know about Special Needs Trusts? Your wealthy client has a child with a disability. Your wealthy client wants to provide for his/her parents if the client predeceases them. Your wealthy client mentions that he/she wants to provide for a disabled grandchild. Your wealthy client mentions that his/her child is disabled and is about to receive a legal settlement.

3. Family Goals Peace of Mind A plan in place to care for the physical needs of the disabled person A plan in place to provide for financial needs of the disabled person Creditor protection – protecting the disabled person from financial exploitation or spendthrift habits A plan in place to distribute any remaining assets after the death of the disabled person 3

4. Why do you need to know about Special Needs Trusts? Your wealthy client suddenly becomes disabled. Your wealthy client asks you about long term care options.

5. Alabama Medicaid: Why be Concerned about Nursing Home Care? 70% of Americans over the age of 65 will need long term care at some point in their lives. Alzheimer’s increased by 46.1% as a cause of death between 2000 and 2006. Every 70 seconds someone in America develops Alzheimer’s. By mid-century, someone will develop Alzheimer’s every 33 seconds. The average length of stay in a nursing home is 2.44 years. The average cost for a nursing home in Alabama is $6,400 per month.

6. Alabama Medicaid: Why be Concerned about Nursing Home Care? The odds are good that a person will need long term care in the future. It is not always possible to stay home due to medical conditions and physical limitations (of the patient and caregivers) If a senior stays in the nursing home for the average 2.5 years, the senior can expect to pay approximately $195,000.00 just for room and board (based on an average of $6500 per month). $390,000 for a couple. [Note: additional costs for private rooms, sitters, clothing, diapers, health needs such as hearing aids or dentures, etc. ]

7. Alabama Medicaid: Why be Concerned about Nursing Home Care? If the senior does not have long term care insurance and lives for a lengthy time, the assets the senior spent years accumulating may be consumed rapidly for a purpose the senior did not intend. The spouse at home may be at risk of impoverishment. The “good” child (or children) may be forced to pay for the senior’s needs out of the child’s limited resources.

9. When Should a Special Needs Trust be Considered? A special needs trust should be considered by grandparents, parents, or anyone wishing to give gifts or provide for a disabled individual. In divorces, a special needs trust may be used to hold the disabled individual’s share of the property division. Special needs trusts may be used to hold child support for a disabled child. A special needs trust should always be considered when a disabled person receives a legal settlement, inheritance, or gifts. A special needs trust should be considered to hold the “spend down” for an elderly person entering a nursing home.

10. What is a Special Needs Trust? A special needs trust is designed to protect assets. The assets are then used for the benefit of the disabled individual. The disabled individual receives any government benefits to which he/she qualifies. Trust assets are used to supplement the needs of the disabled individual. It is important to know that there are different types of special needs trusts. This type of trust is not “one size fits all.” CAUTION: It is not the standard trust often used in wills or living trusts which names a trustee and states the trustee can pay anything, within the trustee’s discretion, for “health, maintenance, or support.” This type of trust will cause the disabled individual to be ineligible for benefits or lose benefits

11. LEGAL SETTLEMENTS If the disabled person is receiving benefits such as SSI and Medicaid and receives a legal settlement, the settlement will cause the disabled person to lose his or her benefits. At the point of receiving such a settlement, a choice must be made. The disabled person may either spend the settlement and then reapply for benefits; or, the disabled person may (through court order or by a parent, grandparent or legal guardian) establish a Special Needs Trust which will hold the funds for the disabled person. Establishing a trust is usually the wisest course of action because it allows the settlement funds to be used over the lifetime of the disabled person; rather than encouraging the person to spend the money quickly in order to regain eligibility. Establishing a trust may be critical if the disabled person has serious healthcare needs and cannot afford to be without Medicaid healthcare benefits. 11

12. INHERITANCE: What Parents need to Know It is very important that parents understand the possible consequences of not having a proper estate plan when the parents have a disabled child. If the parents have a child that is receiving benefits, such as SSI and Medicaid, and the parents leave assets directly to the child through a Will or Living Trust, the child will be disqualified from receiving benefits until the inheritance is spent. This may cause the disabled child to quickly spend the money instead of using the funds wisely over the course of the child’s life. If the parents do not have a Will or Living Trust, the disabled child may receive assets from the parents under Alabama law. – For example: Mary Smith has two children, Jim and Sally. Sally is disabled and receives SSI and Medicaid. Mary dies without a Will. Her estate (assets at the time of her death) totals $400,000. Under Alabama law, Jim will receive $200,000 and Sally will receive $200,000. This inheritance will cause Sally to lose her SSI and Medicaid. She will not be eligible for these benefits until she spends the money within eligibility limits. 12

13. INHERITANCE: The Better Course of Action It would be better for Mary to have a Will or Living Trust stating that any portion of her estate for Sally should be held in a Special Needs Trust. This simple planning technique completely changes the outcome of our example. – Example: Mary Smith has two children, Jim and Sally. Sally is disabled and receives SSI and Medicaid. Her estate (assets at the time of her death) totals $400,000. Mary has a Will that states Jim receives one-half of her estate outright and Sally’s one-half share will be held in a Special Needs Trust for her benefit. In this example, Sally continues to receive her SSI and Medicaid because she did not receive the inheritance outright. Now, in our example, the Trustee, may use Sally’s inheritance for her additional needs for the remainder of her life. Upon Sally’s death, the Trustee will distribute the funds to Jim. By handling the situation in this manner, Mary is able to make sure that Sally is provided for during her lifetime; but, any remaining assets will stay in the family. Establishing a Special Needs Trusts is a critical element in estate planning for the disabled. 13

14. Government Benefits Change the Estate Planning Landscape SSI is a Social Security means-tested benefit program providing a monthly benefit (up to $733 for single individual and $1,100 for couple in 2015) to qualified individuals (aged 65 or older), blind or disabled individuals. Subject to certain exclusions, countable income cannot exceed the SSI benefit rate. The payment, according to federal law, is for the purpose of assisting with the costs of food and shelter. For SSI-linked Medicaid, countable resources for a single individual cannot exceed $2,000 ($3,000 for a couple both requiring long term care Medicaid). Medicaid also has income and countable resource limits.

15. Benefits the Disabled Individual May Receive 4. Alabama Medicaid – Alabama Medicaid provides health care for individuals that meet eligibility requirements. This may be the most important benefit the disabled individual receives. A person may qualify for Medicaid through SSI or through the institutionalized long term care (nursing home) program. A person that qualifies for SSI will automatically be eligible for Medicaid.

16. Alabama Medicaid Unlike SSI recipients, to receive long term care nursing home benefits, a person must meet general medical and financial criteria: The person must be a U.S. citizen; or, a qualified alien The person must live in Alabama and intend to stay in Alabama The person must meet medical criteria The person’s gross income must be at or below $2,199 (2015) The person’s countable resources must be at or below $2,000

17. ALABAMA FAMILY TRUST A valuable resource for Estate Planning 17

18. Two Types of Special Needs Trusts: Third-Party Special Needs Trusts First-Party Special Needs Trusts 18

19. Third Party Special Needs Trust A trust, whether established by Will or Living Trust, that directs the Trustee to use the money for Sally’s benefit, should cause Sally to lose her SSI and Medicaid. A trust established as a Special Needs Trust will not cause Sally to lose her SSI and Medicaid. The language the attorney uses for establishing the trust is extremely important in whether or not Sally retains her benefits. A trust established by someone other than the disabled person and funded with assets from someone other than the disabled person is called a third-party special needs trust. A proper third-party trust achieves the goal of providing for the disabled loved one without causing the person to lose eligibility for government benefits. At the disabled person’s death, any remaining assets go to the named beneficiaries. A third-party special needs trust is not subject to a Medicaid payback. 19

20. Excluded Resources: Third-Party Special Needs Trusts A third party special needs trust is established by someone with his or her funds for the benefit of a disabled person. Examples: grandparent establishing a SNT in his or her will for disabled grandchild; or, a child establishing a SNT in his or her will for her parents if the child dies prematurely. The assets in a third party special needs trust not considered available for eligibility purposes. THESE ASSETS HAVE NO MEDICAID PAY-BACK REQUIREMENT. Any assets remaining at the death of the disabled person go to other family members or whomever the person establishing the trust designates. Very useful for a person contemplating leaving an inheritance to a disabled person.

21. First-Party Special Needs Trust If the disabled person receives a legal settlement, an inheritance, monetary gifts, or has a right to demand such assets, the trust must be a First Party Special Needs Trust. A First Party Special Needs Trust is established with the disabled person’s funds. A trustee administers the trust over the course of the disabled person’s life. However, upon the death of the disabled person, any remaining assets in the trust are subject to reimbursing Medicaid for benefits paid. This pay-back provision is a requirement of federal law to establish such a trust. 21

22. Methods of Establishing a Special Needs Trust In Alabama, if the disabled person is under the age of 65, a Special Needs Trust may be established and administered by a private trustee. The trust may also be established as a pooled trust. A private trustee may be a person that serves as a professional trustee; or, it may be a family member or friend. If a person is 65 or older, the Special Needs Trust must be established as a pooled Special Needs Trust. Note: there are requirements for who establishes the trust and strict requirements for the language contained in the trust. Get professional advice to create a special needs trust. 22

23. Excluded Resources: Pooled Self-Settled Special Needs Trusts The assets in a self-settled pooled special needs trust established under 32 U.S.C. §1396(d)(4)(c) are not considered available for eligibility purposes. This type of trust must be for a disabled person. The assets placed in the trust are assets that the disabled person would otherwise need to “spend- down.”

24. Advantages of Using a Pooled Trust over a Private Trustee A pooled trust is the only option for someone 65 years of age and older. It is dangerous to have a family member or friend serve as the Trustee because if the trust expenditures do not follow Social Security guidelines, the Trustee may cause the disabled person to lose his or her benefits. For example, if the Trustee gives money directly to the disabled person, the money will be considered income and the disabled person will lose his or her benefits when Social Security audits the trust. Having a Trustee that is up to date with Social Security guidelines is important for proper trust administration. A pooled trust will be comprised of a board that is up-to-date on Social Security and Medicaid regulations. Private Trustees often will not agree to take a trust if it is under a certain dollar amount (often trusts must be above $500,000 or $700,000). Pooled trusts will accept very small trusts. AFT will accept trusts as small as $1500.00. Private Trustees often charge high fees for managing the trust. Under federal law, pooled trusts must be non-profit corporations and, generally, charge fees that are very low in comparison to a private trustee. 24

25. What is Alabama Family Trust? Alabama Family Trust (AFT) is a non-profit 501(c)(3)pooled trust company that administers special needs trusts for people with disabilities. AFT was created by the Alabama legislature in 1994 as the entity designated to provide pooled trusts services compliant with federal and state law. AFT is able to shelter monies that otherwise would keep a disabled person from qualifying for SSI and Medicaid.

26. Alabama Family Trust A trust may be established as either a First-Party Trust or as a Third-Party Trust. – If Sally receives a legal settlement, the trust will be established as a First-Party Trust. This trust will be subject to Medicaid reimbursement. – If Mary’s Will states to establish a special needs trust for Sally, the trust will be established as a Third-Party Trust. This trust will not be subject to Medicaid reimbursement. A pooled trust gives the disabled person the advantage of oversight regarding asset management, federal law, and state law. A pooled trust gives the family peace of mind in knowing that the trust will be administered properly under federal and state law. Resources are not considered available for eligibility purposes. A trust with Alabama Family Trust may be established for any disabled person, regardless of age.

27. Examples of Items that can be Purchased Therapies not covered by Medicaid Education, including tuition, books and supplies Electronic equipment such as computers, television, video games Hobby supplies Telephone, cell phone service Cable service Clothing Personal hygiene products such as: shampoo, lotion, adult diapers Differential for private room in nursing home Magazines/Newspaper subscription Furniture Household goods: bedding, curtains 27

28. What happens when the Disabled Person Runs out of Money: Your Loved One may be eligible for funds from AFT’s charitable fund AFT has a charitable fund that can help beneficiaries that have depleted their trust accounts.

29. Benefits of the Alabama Family Trust AFT can shelter the person’s spend-down and allow the person to retain eligibility for SSI and Medicaid; or, become eligible for SSI and Medicaid. The disabled person’s money can be used for his/her needs instead of spending down (or quickly wasting) the money. Family does not need to worry about the Social Security and Medicaid regulations because AFT will handle compliance issues.

30. Benefits of the Alabama Family Trust AFT will accept trusts as small as $1,500. The trust assets are pooled for investment purposes; yet, retain independent character. The fees are very reasonable in comparison with most private trustees. AFT does not charge maintenance fees for trusts with balances under $3,000. AFT has a charitable fund that can help beneficiaries when trust assets are depleted.

31. How does AFT work for my Loved One? Review and complete the documents establishing the trust. The forms are online at www.alabamafamilytrust.com. www.alabamafamilytrust.com We do not provide legal advice on whether you should create a trust; however, we will assist you in completing the forms. If you are creating a special needs trust in a Last Will and Testament or Revocable Living Trust for a disabled person, you need to consult a lawyer as we do not prepare Wills or Revocable Living Trusts.

32. AFT Fees $750.00............................Initial one-time cost to establish trust account Cost of preparing annual tax returns Annual administrative fee of 1.6% based on market value and charged each quarter as follows (but only to the extent there are earnings sufficient to pay such fees-not charged to principal): –.4%...................................March 31 –.4%...................................June 30 –.4%...................................September 30 –.4%...................................December 31 – AFT WILL NEVER TAKE THE ANNUAL ADMINISTRATIVE FEE FROM PRINCIPAL IN THE TRUST $450 maintenance fee; this fee is waived for any trust with a market value of $3,000 or less. $350.00............................Trust closure cost at death of beneficiary 32

33. How does AFT work for my Loved One? The Co-Trustee will submit a disbursement request to AFT for funds to be expended for the disabled person. Examples: – Co-Trustee sends disbursement statement requesting purchase of a new ipad for the beneficiary. AFT’s board approves the request and authorizes the purchase. – Co-Trustee sends disbursement statement and copy of nursing home bill and letter from Medicaid setting out a penalty period. AFT pays the nursing home bill directly to the nursing home. – Co-Trustee sends disbursement statement and copies of receipts for clothes purchased for disabled person. AFT reimburses the Co-Trustee for the funds spent on the clothing. – Co-Trustee sends invoice for lift chair to AFT. AFT pays the furniture store directly for the chair. TRUE LINK CARD – Controlled debit card. Co-Trustee sends invoice for lift chair to AFT. AFT programs card for the furniture store and sets the price of the chair and Co-Trustee can pay for the chair at the store. – Controlled card is necessary to protect eligibility for benefits. Allows Co-Trustees to make proper purchases more easily.

34. What happens when the Disabled Person Dies First-Party Trusts: Closing fees are deducted. 10% of any funds remaining are applied to the charitable fund to use for people that have exhausted their accounts. The remaining funds are used to reimburse Medicaid, to the extent possible, for services provided to the disabled person. Any monies remaining are distributed to the disabled person’s family or the people designated in the trust document to receive the assets.

35. What happens when the Disabled Person Dies Third-Party Trusts: Closing fees are deducted 10% of any funds remaining are applied to the charitable fund to use for people that have exhausted their accounts. Any monies remaining are distributed to the disabled person’s family or the people designated in the trust document to receive the assets.

36. Alabama Family Trust HUGE benefit for the disabled person and his or her family as it allows the trust assets to be used for the benefit of the person while the person also receives his or her benefits, such as SSI and Medicaid.

38. Disclaimer Alabama Family Trust does not provide legal advice. AFT can guide a family through our process; but, legal advice regarding estate planning and obtaining government benefits must be obtained from an attorney. This seminar is provided for educational purposes only and is not to be interpreted as legal advice 38

39. For more information, please contact: ALABAMA FAMILY TRUST 2820 Columbiana Road, Ste 103 Vestavia Hills, AL 35216 (205) 313 - 3915 www.alabamafamilytrust.com