Estate Planning and Special Needs Trusts Presented by: Joshua L. Brothers Dussault Law Group (206)

Last Will and Testament (aka the “Will”) Most common estate planning document Controls distribution of “probate” assets at death Washington’s probate process Federal Estate tax considerations ($3,500,000 in 2009; none in 2010, $1,000,000 in 2011) – Living trusts and estate taxes – $2,000,000 WA State Estate tax Should I leave assets to an individual with disabilities? – Outright distribution – Disinherit the individual – “Testamentary” special needs trust

Roles of Individuals in a Will Executor: – Duties – Who to name? Guardian: – Duties – Who to name? – Should be consistent with any Court files Trustee: – Duties – Who to name? Advantages & disadvantages of using professionals

Probate vs. Non-Probate Assets Probate assets are assets held in the decedent’s name without a beneficiary designation that pass in accordance with the beneficiary’s will. Non-probate assets are those that pass by a written instrument or arrangement other than a will – Jointly owned property with right of survivorship (bank accounts and real property) – Pay on Death (POD) Account – Trust – Community Property – Individual Retirement Accounts (IRA) – 401(k) Plans – Life Insurance Review non-probate assets on a regular basis

Public Benefits Eligibility SSI/Medicaid – Disabled, blind, >65 – Disabled = no SGA ($980/month) – “Means tested” – Income – Earned ($2:$1) – Unearned ($1:$1) – ISM (up to 1/3) – Assets < $2000 (individual) – Exemptions include primary home (<$500k), vehicle, personal property, SNT SSDI/Medicare – Disabled, blind, >65 – Disabled = no SGA ($980/month) – “Entitlement program” – Available to individuals who have paid FICA taxes in the last 20 of 40 quarters prior to disability – Not “means tested” – Medicare available when: over 65 or meets SSA disability definition, 29 months post injury

SSI/SSA Benefit Coverage SSI – Cash benefit of up to $674 to be utilized for food and shelter expenses (as of 1/09). – Some States provide cash supplements to base SSI limit – “Gatekeeper” to Medicaid and other public benefit programs SSA – Cash benefit depending on amount paid into Social Security system – Received through earned credits of self, spouse, or parent

Medicaid/ Medicare Coverage Medicaid – Medical Assistance No premiums, co-pays or deductibles – Long-Term Care Personal care hours Assisted living, nursing homes, etc. Medicare – Hospital, doctor visits, prescription drugs Premiums, co-pays and deductibles – Minimal rehabilitation care, but no long-term care

What is a Trust? Separate legal entity Barrier between beneficiary and Trust assets Roles – Trustor or Settlor – Trustee – Beneficiary Basic Functions of a Trust – Safeguard assets – Financial Management – Distributions “Types” of Trusts are just restrictions on basic functions Can serve as an alternative to guardianship

What is a Special Needs Trust (SNT)? Purposes: – Financial management – Continued eligibility for “means” sensitive benefits (primarily SSI and Medicaid) Restriction on expenditures – “extra and supplemental needs” of the beneficiary – Needs not covered by SSI and Medicaid – Cannot pay for basic food (groceries) and shelter (rent and basic utilities) or primary medical services otherwise covered by benefits – Can be used to pay for vacations, clothes, entertainment, education, etc. – Trust restrictions must be observed. Must be “irrevocable” Sole benefit

Source of Funding Matters 2 sources of funding: – Assets of anyone but the beneficiary (3 rd Party SNT) – The beneficiary’s assets (Self-Settled SNT or (d)(4)(A) SNT) Source determines who can establish the SNT and the terms of the SNT Self-settled are any assets which the beneficiary or his/her guardianship is entitled to receive – Outright inheritances or gifts – Settlements/judgments – Social Security back payments

Self-Settled (d)(4)(A) SNT Beneficiary’s own assets Restrictions – Beneficiary must be disabled – Established by parents, grandparents, guardian, or court – Beneficiary must be under 65 years of age – Medicaid Reimbursement Court-ordered (d)(4)(A) SNT – Court reporting requirements – Bond or blocked accounts – Possible need for a professional Trustee (bifurcated duties?) “Grantor” Trust if drafted appropriately Alternative: (d)(4)(C) SNT – Pooled Trust – Retained Trust assets replaces Medicaid Reimbursement

Third Party SNT Assets of anyone other than the beneficiary No (d)(4)(A) SNT restrictions – Anyone can establish – Beneficiary can be any age – No Medicaid reimbursement Complex Trusts Can be a Living or Testamentary Trust Common situations in which a Third Party SNT is created – Will and Estate Planning documents – Family or friends want to assist the beneficiary – Avoidance of multiple SNTs in wills Lack of judicial oversight Use of non-professional Trustees Control of assets after the beneficiary has passed away

Unexpected Disability or Income Does the Trust already exist? – In re Riddell Trust, 157 P.3d 888 (Wash. App. 2007), on converting Trusts into SNT Who’s assets are funding or will fund the Trust? Is the individual under 65? What family exists? Will Court intervention be necessary? Use of “TEDRA”?

SNT Administration Who is the Trustee? – Professional – Non-Professional – Bifurcated duties (investment/disbursement) Beneficiaries with Guardians – Person vs. Estate – Court appointed legal representative – Guardian stands in the shoes of the beneficiary

SNT Administration (Continued) Can be highly intensive trusts Understanding specific disabilities Understanding public benefit programs Family interactions Court supervision Annual Reports Bond or Blocked accounts Court accountings?

SNT Administration (Continued) Direct payments to vendors/service providers Cash to Beneficiary? Impact on SSI/Medicaid Use of credit cards and gift cards Trust Owned Home Charge rent? Sources of rent (SSI, SSA and HUD)

SNT Administration (Continued) Taxes Trust vs. Individual Taxes 3 rd Party SNT = Complex Trust Retained income taxed to the Trust Distributed income taxed to the Beneficiary Self-Settled SNT = Grantor Trust All income taxed to Beneficiary Payment of taxes by Trust WA’s flexible laws on Trust issues (“TEDRA”)

Developmental Disabilities Life Opportunities Trust (DDLOT) Also known as the Endowment Trust State-run Trust that is administered by the Arc Available only to individuals who are developmentally disabled as determined by DDD Can be self-settled or third party Administrative Fees & Costs – $600 enrollment fee – Tax return preparation and filing fee – Annual management fees for day-to-day management (greater of $75 or 2% of account balance with $750 cap) – Investment Board Fees (investment fees) – Trust Manager Fees (the Arc) – State Treasurer Fees

DDLOT Matching Funds Administrative fees currently being matched – Tax prep/filing fees Administrative fees previously matched, but now on hold – $600 enrollment fee – Annual management fee Match of Contributions (on hold!) – 25% state match of up to $31,000 ($7,750) – Contributions cannot be withdrawn in the same year they are deposited – Only $3,100 will be matched in a single year Vesting – Requires the accumulation of $25 per month for 3 consecutive years ($900 over three years) – Can be periodic payments or a lump sum – Can only spend “matched funds” after being vested Matching funds are not guaranteed and have run out – 2010 Legislative Session – Foundation Proportionate Distributions

DDLOT Investment Strategy Conservative Investment Strategy – 23% in fixed income (bond market fund) – 24% in cash equivalents (short-term investment or money market funds) – 14% in US Equities – 39% in Treasury Inflation Protection Securities (US inflation indexed bonds)

Distribution of DDLOT upon Death Self-settled Trust – Remaining matched funds stay with the DDLOT – Medicaid reimbursement – Trust Fund’s Remainder Account (optional) – Final Remainder Beneficiary or possibly others (guardian, parents, family, charity, etc.) Third Party Trust – Matched funds stay with the DDLOT – Trust Fund’s Remainder Account (optional) – Final Remainder Beneficiary (cannot be a donor or spouse of a donor)

DDLOT Advantages & Disadvantages Advantages Potential for matching funds Professional management if no family to assist No on-going attorney’s fees and costs for court reporting Disadvantages Loss of control – Timely distributions – Rejection of distribution requests – Investments – Immediate availability of funds – Terms of Trust (trustee, etc.) – Property Conservative investments Potential administrative fees and costs – about to find out! Risk Aversion?

Disclaimer & Notice This training and written materials are designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the presenters are not engaged in rendering legal, financial or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Please keep in mind all written materials and power point slides are the intellectual property of the Dussault Law Group. These materials may not be distributed without the express written consent of the authors.

Thank You! Joshua L. Brothers Dussault Law Group (206)