INTRODUCTION TO SPECIAL NEEDS TRUSTS Nell Graham Sale, Esquire Miller Stratvert P.A. Tax Practitioners Institute Albuquerque, New Mexico September 28, 2005 Las Cruces, New Mexico September 30, 2005

SPECIAL NEEDS TRUSTS A mechanism for sheltering resources to benefit disabled family members.

SOCIAL SECURITY ADMINISTRATION DEFINITION OF DISABLED: Over the age of 65 Blind; or Unable to do any substantial gainful activity due to severe physical or mental impairments that will result in death or will continue for not less than one year.

HOW THE GOVERNMENT BENEFITS SYSTEM WORKS: The Basics

Comparison of Three Social Security Programs SSI SS SSDI Supplemental Security Income Social Security Social Security Disability Income Disability Retirement Cash + Medicaid Cash Cash + Medicare (After 2 years) No work history Work History Income Cap - $564/month in 2004 Income Cap - $11,640/yr in 2004, if under age 65 Income Cap - $810/month in 2004 Earned & unearned income Earned income Resource cap - $2000.00 No resource cap Minimum cash benefit Insurance Food and shelter Unrestricted State supplements Uniform in all states US citizens only All workers May also have SSDI May not have SSI or SSDI May also have SSI No dependent coverage Covers dependents

Comparison of Medicaid and Medicare Program: HealthCare Health Insurance Administered by: States Federal Eligibility: Must Qualify Entitlement Qualifications: Financial & Disability Age or Disability Covers: Skilled nursing care; Intermediate nursing care; Long Term care; Prescriptions Hospitalization; 100 days maximum rehabilitation; Prescriptions in 2006 Contribution: Reimbursement required Premiums and co-pay Estate Recovery: Yes No

REQUIREMENTS OF SPECIAL NEEDS TRUSTS: Written; Distributions discretionary by the trustee; Beneficiary not entitled to receive income or principal; Trustee prohibited from making any distributions that would jeopardize beneficiary’s eligibility for benefits; Disabled individual must be the sole beneficiary of the trust during her lifetime; and Irrevocable.

THIRD PARTY-SETTLED SPECIAL NEEDS TRUSTS Either an inter vivos trust or a testamentary trust; Irrevocable; Should be approved before funding; Can direct corpus at death of beneficiary to any remainder beneficiaries; Not described in federal statute.

SELF-SETTLED TRUSTS: TWO TYPES 42 U.S.C. § 1396p(d)(4)(A) “(d)(4)(A)” or “payback” trusts (called “reversionary trusts” by New Mexico Medicaid) Inter vivos, irrevocable; Only permissible Grantors: parent, grandparent, court or guardian; Disabled beneficiary must be younger than 65; Medicaid must be reimbursed at death of beneficiary.

SELF-SETTLED TRUSTS: TWO TYPES 42 U.S.C. § 1396p(d)(4)(C) “(d)(4)(C)” trust or “pooled” trust; Non-profit 501(c)(3) organization as trustee; Trustee manages the funds as part of a pooled trust for disabled persons; Must be irrevocable; Trust can be created by the beneficiary as well as by a parent, grandparent, court or guardian; Beneficiary may be any age; At the death of beneficiary, the non-profit organization may retain a portion of the trust fund or all.

TRUSTEES OF SPECIAL NEEDS TRUSTS: Trustee must understand which distributions would jeopardize benefits being received; SSI program requires periodic reporting for all SSI recipients; Trustee must respond promptly to any notices received from Social Security or Medicaid; Consider having co-trustees of Special Needs Trusts.

TAX ISSUES: Federal Gift Tax Federal Estate Tax Income Tax

CONCLUSION Maintaining eligibility for government programs for disabled family members often contradicts the efforts of family members to provide support and care for their loved ones. Special Needs Trusts provide the mechanism for sheltering resources to benefit disabled family members so that these contradictory efforts can be harmonized. A well managed support system, using Special Needs Trusts, can maximize the use of government-provided services while supporting the family’s care and enhancing the comfort and enjoyment of life for the disabled beneficiary.