New York Public Library, Science, Industry and Business Library Financial Planning & Medicaid Planning for Disabled Parents and Special Needs Beneficiaries Originally presented on April 14, 2018 Daniel Timins, Esq., CFP® dan@timinslaw.com 477 Madison Avenue, Suite 240 New York, NY 10022 (212) 683-3560

Disclaimer All information contained in these pages is for informational purposes only. It should not be considered legal advice. Please consult an attorney before taking any steps based on this information. The information provided herein is subject to change on an annual basis or more frequently. Any tax information provided herein is strictly incidental and not provided from a tax preparation professional. Any references to investment gains are based on past results, and are not a guarantee as to the future.

What are we talking about? What is SSI? What is Medicaid? Who does this effect? Types of Medicaid Trusts Investments Inside and Outside of Trusts

Why should I care? This is about $ MONEY $ Preserving family assets Protecting spouses and children Taking advantage of government programs

Entitlement v. Needs Based Government Programs Needs-Based Programs Financial Programs Social Security Social Security Disability Supplemental Security Income Health & Personal Care Programs Medicare *MAGI-Medicaid Medicaid

Entitlement v. Needs Based SSDI and MEDICARE: “Entitlement Programs” – you paid for it, you get it Separately withdrawn from your paycheck: 15.3% You pay half, your employer pays half 6.20% for Social Security, 1.45% for Medicare You must “pay in” for 40 working quarters during your life SSI and MEDICAID: “Needs Based Programs” (1) Must have the physical / mental need (2) “Means Tested”: must meet asset & income limits Comes out of your general income tax dollars You did not pay for it for 40+ quarters  RESTRICTIONS APPLY: That’s why we use Trusts (to minimize restrictions)

(some) Types of Social Security Social Security (Retirement) Social Security Disability Income Supplemental Security Income Who receives it? Retired & Ages 62 + Disabled (Ages < 65) Disabled How long have they paid Social Sec? 40+ Quarters < 40 Quarters (sometimes not at all) Examples Healthy retired grandparent Disabled person now older than 64 who was on SSDI Disabled long-time worker Disabled 19 year old with autism Disabled 68 year old who never worked 40 quarters The BIG Concept Disability NOT required Disability required AND worked 40+ quarters Disability required AND NOT worked 40+ quarters How much do you receive? Varies based on contributions Varies based on your needs Limits on Use? No – spend however you want Yes: Some MUST be spent on food & housing

Social Security Disability There are 2 types of Social Security Disability programs: SSDI: “Social Security Disability Income” SSI: “Supplemental Security Income”  These programs provide $ MONEY $ These are NOT Social Security Retirement SSDI eventually reverts to SS Retirement SSI does NOT (usually)

What is considered being “disabled”? It is the SYMPTOMS and PHYSICAL MANIFESTATIONS of an illness, injury or inherited deformity It is NOT the illness, injury or inherited deformity itself Social Security Administration defines these symptoms Someone who has Stage 4 Cancer who can ambulate but will die in 2 months may be less likely to qualify for Medicaid than someone with Multiple Sclerosis in need of a wheelchair who will live for 40 more years

SSI – “Limited” Disability Paid into SS for LESS than 40 quarters Max Benefit: $857 / month in 2018 Fed max is $750, NY max is $87 Benefit based on living arrangement & other income Limitations: Assets of only $2,000  Excess must be held in Supplemental Needs Trust Spending Requirements MUST spend some of the money on Food & Clothing  Automatic Medicaid eligibility

SSDI – “Full” Disability Paid into SS for 40 fiscal quarters Max Benefit: $2,788 in 2018 Benefit base on income history No limit on how much assets you have Income limits do apply: No limit on “passive” income You can still “earn” < $1,170 / month in income No government requirements how it must be spent TIP: If you are nearing 40 quarters, try to keep working before applying: SSDI has more freedom than SSI (20 of those quarters must be in past 10 years)

Medicare A HEALTH care program: 40 quarter qualification  you can qualify for Medicare 2 years after you are declared disabled (which takes 5 months) Parts PART A: Inpatient Hospital Care “Eligible” people pay during working years; pay up to $407 per month if “Ineligible” PART B: Supplemental Medical Insurance You pay $104.90 - $335.70 per month (directly withdrawn from you Social Security) PART C: Managed Care Cost varies by plan PART D: Prescription Drug Benefits $0-$50 per month; cost varies by plan; higher income consumers often pay more

What is Medicaid? Medicaid is: (1) a healthcare program (2) that assists low-income families or individuals (3) in paying for long-term medical and custodial care costs (4) a joint program, funded primarily by the federal government (5) and run at the state and county level (6) where coverage, exemptions and costs may vary.

BUT What is Medicaid?!!? Pays for health & Personal care Pays for care regarding ACTIVITIES OF DAILY LIVING (“ADLs”) Transferring (Walking) Bathing Dressing Eating Continence Toileting Pays health care providers “Payor of last result” Picks up Medicare deductibles and co-pays, but still must pay Medicare Part B

Medicaid v. medicare Medicaid Medicare Resource Limits Assets: $15,150 Income: $ 845 per month Spouse’s resources can limit / be limited for Medicaid Assets: $74,820 – $123,600 Income: $ 3,090 “Look Back” on transfers Home Care – 1 month Nursing Home – 5 years Exemptions permitted (Ex: trusts, retirement plans, spousal refusal, Medicaid promissory notes) No Resource Limits Spousal resources immaterial No need to transfer Exemptions unnecessary

Who are we talking about? Medicaid for the DISABLED – not people under Affordable Care Act Children born disabled (who will remain disabled) People who were not born disabled (who became disabled) People who are not disabled (who MAY become disabled) Can also be for people who are disabled and shall one day no longer be disabled, but this can be tricky. Medicaid & other programs may have to be paid back. “Pay back” begins at 55 years old… But MUST pay back all nursing home care at any age

Types of Medicaid trusts Supplemental Needs Trust 3rd Party Trusts “Inter Vivos” Trusts (created during life) Testamentary Trusts (created by a Will) 1st Party Trusts Medicaid Asset Trusts / “Income Only Trusts” Pooled Income Trusts

Medicaid trusts are always irrevocable!!!! There is no such thing as a “revocable” trust that is Medicaid-compliant You cannot change the trust You cannot be the Trustee You cannot withdraw the funds (except sometimes income) You cannot get cash in hand (except with MAPTs) The Government is saying “You want to qualify for a needs- based benefit, that’s fine…but you cannot maintain control of the funds and cannot change your mind” Irrevocable trusts have the WORST income tax treatment!

Income tax rates are very high for irrevocable trusts Individuals Irrevocable Trusts 10% < $9,525 < $2,550 12% $9,525 - $38,700 22% $38,700 – $82,500 24% $82,500 - $157,500 $2,550 - $9,150 32% $157,500 - $200,000 35% $200,000 - $500,000 $9,150 - $12,500 37% > $500,000 > $12,500

Investment challenges: Need income, but taxes are high If income from an irrevocable trust are distributed to a beneficiary, the funds are taxed at the “individual rates” instead of the “trust rates” PROBLEM: Many beneficiaries need access to benefits from trust money on an on-going basis (I.e. income generation)… …but the income tax rates are very high, and dilute distributions… AND, because income is not being given to a beneficiary, it is not taxed at the beneficiary’s income tax rate (One) SOLUTION: Invest in tax-efficient mutual funds, mutual funds that focus on paying out long- term capital gains, and invest in companies with low dividends

Medicaid trust comparisons SNT – 1st Party SNT – 3rd Party Income Only Trust Pooled Trust Who creates it? Bene, parent, grandparent, guardian, court NOT beneficiary Beneficiary(ies) Bene, Power of Atty What does it protect? Bene’s Assets & Income Donor’s Assets Bene’s Assets Bene’s Income Pre or Post Disability? Post disability Pre or Post disability Pre disability Who gives money to the trust? Beneficiary Not Beneficiary Transfers $ left-overs @ death? No Yes

SNTs: 1st Party v. 3rd Party 1st Party SNT The beneficiary’s money Any remaining money first goes to pay back the government Created with help of a parent, grandparent, guardian or court order Recently added to allow the beneficiary to create it themselves 3rd Party SNT A 3rd Party’s money – NEVER the beneficiary’s money Remaining money goes where creator decides Anyone can create for someone else Can be creates by a Will (a “testamentary trust”)

1st Party SNTs: Medicaid Recipient’s Money Creator Beneficiary, Parent, Grandparent, Guardian, Court Order Beneficiary 1. Medicaid Recipient 2. Medicaid Pay Back 3. Heirs / Next of Kin Trustee Anyone Except Bene / Medicaid Recipient

Supplemental Needs Trusts: 1st Party What Is It? A trust that holds beneficiary’s excess assets (but can hold assets from outside parties) Who Usually Uses Them? Currently disabled people who have too much money in their name to qualify for Medicaid Special Features, Facts & Functions? You can name your own trustee (unlike Pooled Income Trusts) Excess funds can be invested “Pay back” to Medicaid applies Requires acceptance by Human Resource Administration (they don’t like them)

Supplemental Needs Trusts: 1st Party Best Way to Fund It? With YOUR money (since there is a pay-back provision, don’t want to fund it with other people’s money) Best Investments? Varies; if your family has set up a 3rd Party SNT then you may as well have the 1st Party SNT generate income You need income from somewhere, and the 1st Party SNT has a “pay back provision”, so might as well spend it during your life Focus on bonds (municipal bonds), other secure income

3rd Party SNTs: Non-Medicaid Recipient’s Money Creator Anyone Except Bene / Medicaid Recipient Beneficiary 1. Medicaid Recipient 2. Remainder to anyone else Trustee

Supplemental Needs Trusts: 3rd Party What Is It? An SNT created with OTHER people’s money ONLY This is why it is a 3rd party trust (I.e. a 3rd party’s money, not the Medicaid beneficiary’s) Who Usually Uses Them? Parents, grandparents, siblings, friends who want to help disabled beneficiaries Special Features, Facts & Functions? Can be created by anyone other than the beneficiary May be made by Will (“testamentary”) or stand-alone Trust (“inter vivios”) Left over money goes to the Creator’s choice of future beneficiaries, NO Medicaid pay-back

Supplemental Needs Trusts: 3rd Party Best Way to Fund It? ONLY other people’s money – because there is no pay-back 1st party money is disallowed Some liquidity, other assets that don’t generate large income taxes Best Investments? Again, varies; longer-term investments (stocks, stock mutual funds) are more important 3rd Party SNTs tend to have more money than 1st Party SNTs, since the donor was likely never disabled / earned more money Lack of “pay back provision” means there may be funds left-over that can be distributed upon beneficiary’s death

Income only trusts / “Medicaid asset protection trusts”: Medicaid Recipient’s Money Creator The Bene / Future Medicaid Recipient Beneficiary 1. Medicaid Recipient (income ONLY) 2. Creator’s choice of future Beneficiary Trustee Anyone Except Bene / Medicaid Recipient (typically their child)

“MAPTs” / Income Only trusts What Is It? A trust that ONLY allows income to be distributed (so it protects trust ASSETS) Who Usually Uses Them? Aging individuals who MAY get disabled OR people recently diagnosed with progressive illnesses Have modest assets who want to protect what they have Willing to accept Medicaid-level care in the future Special Features, Facts & Functions? Only income is distributable to Creator beneficiary Leaves remaining trust asset to children

“MAPTs” / Income Only trusts Best Way to Fund It? Primary Residence Asset protect with no need to distribute income Still gets step-up in basis at death Creator beneficiary still get favorable real estate tax exemptions (“STAR”) Using assets from which the Creator beneficiary only requires income Best Investments? If you need income, then have it invested heavily in income-producing assets The tax treatment for distributed funds is at the individual rate

Pooled income trust: Medicaid Recipient’s Money Creator Beneficiary, Bene’s POA Beneficiary 1. Medicaid Recipient 2. Not-For-Profit gets remainder Trustee Not-For-Profit agency

Pooled income trusts What Is It? Who Usually Uses Them? An SNT created by a Not For Profit [“NFP”] who is also the Trustee Accepts lump sums & Medicaid recipient’s “spend down” income Beneficiary (or POA) forward bills to NFP / NFP pays qualified bills Who Usually Uses Them? People on Medicaid with too much income to qualify (I.e high spend-downs) People of any age (but increasingly for the elderly) Special Features, Facts & Functions? NFP keeps remaining funds when the beneficiary dies  SO…spend this money BEFORE you spend

Pooled income trusts Best Way to Fund It? Best Investments? Deposit excess income to this trust, NOT assets, because the NFP receives left-over money Best Investments? NO CHOICE regarding investments – only excess income (cash) is in the trust

What does Work Retirement Plans Primary Residences The asset is excluded from Medicaid eligibility; only distributed income is included Primary Residences “Homecare” exemption “Well-spouse” exemption “Sibling co-owner” exemption (1 year) “Child care-giver exemption (2 years) Great asset to place in an Income Only Trust

What Does NOT Work Roth IRA Conversations do NOT avoid RMDs / 72t SEPP STILL have to take Required Minimum Distributions Commercial Annuities are HORRIBLE for Medicaid Planning (unless in IRAs) Large cash values in Life Insurance policies are also bad - $1,500 limit

Putting It All Together A Certified Financial PlannerTM is a trained financial professional required to meet certain Experience, Examination, Education and Ethical standards. They are trained in the financial planning process and bring together multiple components of your financial lives (Ex: estate planning, retirement planning, risk management, investment management, etc.)

Drafting Legal Documents See a lawyer who focuses on Estate Planning before drafting documents

Thank you!!! Daniel Timins, Esq., CFP® www.timinslaw.com 477 Madison Avenue, Suite 240 New York, NY 10022 (212) 683-3560 dan@timinslaw.com