1. SPECIAL NEEDS TRUSTS Presented by Shirley B. Whitenack, Esq.
SCHENCK, PRICE, SMITH & KING, LLP
10 Washington Street
P.O. Box 905
Morristown, NJ 07963
FAX

2. TRUSTS FOR THE BENEFIT OF A DISABLED BENEFICIARY
Special Needs “Payback” Trust
U.S.C. §1396p(d)(4)(A)
Third Party Special Needs Trust
Also known as Supplemental Benefits Trust
Schenck, Price, Smith & King, LLP

3. Finding a Special Needs Attorney
Special Needs Alliance
Network of disability and public benefits attorneys.
Schenck, Price, Smith & King, LLP

4. GENERAL TRUST REQUIREMENTS
Supplement, not supplant, government benefits
Definition of “special need” or “supplemental benefit”
No definitive explanation
Schenck, Price, Smith & King, LLP

5. What is NOT a Special Need
Basic necessities of life
i.e., food, clothing, shelter, utilities
Incidental spending money (unearned income)
Gifts
Insurance on life of disabled beneficiary
Schenck, Price, Smith & King, LLP

6. Special Needs “Payback” Trust
Established with assets of disabled individual
Individual must be under 65 at time of the establishment and funding
Individual must be disabled as defined in Social Security Act
Schenck, Price, Smith & King, LLP

7. SOCIAL SECURITY ACT DEFINITION OF “DISABLED”
“unable to engage in any substantial, gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months”
Schenck, Price, Smith & King, LLP

8. DEFINITION OF DISABLED FOR CHILD UNDER 18
Child “suffers from any medically determinable physical or mental impairment of comparable severity” to adult
Schenck, Price, Smith & King, LLP

9. ADDITIONAL REQUIREMENTS OF PAYBACK TRUSTS
Trust may be established by
Parent or
Grandparent or
Legal Guardian or
Court
Schenck, Price, Smith & King, LLP

10. Schenck, Price, Smith & King, LLP
PAYBACK REQUIREMENTS
Medicaid agency entitled to reimbursement from any assets remaining in trust upon death of beneficiary or trust termination for other reasons
Schenck, Price, Smith & King, LLP

11. Schenck, Price, Smith & King, LLP
PAYBACK REQUIREMENTS
Reimbursement “dollar for dollar” up to amount paid by Medicaid on behalf of individual
Schenck, Price, Smith & King, LLP

12. Court-created Special Needs Trusts
If trust is created or authorized by court may retain oversight in following areas:
Accountings
Trustee’s commissions
Investments
Limitations on Purchases of Major Assets
Schenck, Price, Smith & King, LLP

13. Schenck, Price, Smith & King, LLP
GOVERNMENT BENEFITS
SSI
Medicaid
SSD
Medicare
Federally-Assisted Housing
Other Agency Supported Housing
Schenck, Price, Smith & King, LLP

14. Schenck, Price, Smith & King, LLP
LIENS
Medicaid
Arkansas HHS v. Ahlborn, 2006 U.S. Supreme Court decision
Medicare
State Department of Human Services
Workers Compensation
ERISA
Schenck, Price, Smith & King, LLP

15. Schenck, Price, Smith & King, LLP
IMPORTANT!
CHECK STATE REQUIREMENTS!
Schenck, Price, Smith & King, LLP

16. Schenck, Price, Smith & King, LLP
FUNDING ISSUES
Structured Settlements
Payments made directly to disabled beneficiary may render beneficiary ineligible to receive means-tested government benefits
Trust should be payee.
Payments should “pour over” into trust.
Schenck, Price, Smith & King, LLP

17. CHECKLIST FOR SELF-SETTLED SPECIAL NEEDS TRUST
1. Check for compliance with federal law.
Is the beneficiary under age 65?
Is the beneficiary “disabled?”
Is the trust created by the beneficiary’s parent, grandparent, guardian or by the court?
Does the trust contain a provision requiring repayment of the state Medicaid program upon termination of the trust?
Schenck, Price, Smith & King, LLP

18. CHECKLIST FOR SELF-SETTLED SPECIAL NEEDS TRUST
2. Check for compliance with state law.
3. Verify that statutory liens have been paid prior to the funding of the trust.
Schenck, Price, Smith & King, LLP

19. THIRD PARTY SUPPLENTAL BENEFITS TRUST
Living trust or
Testamentary trust created by will
Schenck, Price, Smith & King, LLP

20. Schenck, Price, Smith & King, LLP
NO PAYBACK CLAUSE?
Generally, no payback provision required BUT
Check state regulations to make sure no payback is required.
Include specific dispositive provisions for final disposition of trust assets.
Schenck, Price, Smith & King, LLP

21. Schenck, Price, Smith & King, LLP
Estate Recovery
State regulations may provide for right of recovery of assets held in testamentary trust established by third party, including community spouse for benefit of surviving beneficiary spouse, where disabled beneficiary transferred assets to predeceased third party and those assets were used to fund the trust.
Schenck, Price, Smith & King, LLP

22. Schenck, Price, Smith & King, LLP
THIRD PARTY TRUST
Periodic additions can be made through lifetime giving or inheritances.
Rights of withdrawal (“Crummey” rights) should be incorporated in situations of lifetime giving.
Exclude disabled beneficiary from serving as Crummey beneficiary.
Schenck, Price, Smith & King, LLP

23. Schenck, Price, Smith & King, LLP
ADDITIONS TO TRUST
Unless payback trust is very small, discourage additional funding by third parties
Additions of beneficiary’s assets to third party trust may result in ineligibility for certain government benefits
Schenck, Price, Smith & King, LLP

24. Tax Treatment of Supplemental Benefits Trust
Unless it is an elective share trust requiring all income to be paid to surviving spouse, testamentary SBT will be taxed as a complex trust.
As distributions are made, whether from income or principal, the beneficiary will be taxed with his or her proportionate share of “Distributable Net Income” (“DNI”).
Schenck, Price, Smith & King, LLP

25. Tax Treatment of Supplemental Benefits Trust
If trust distributions do not equal “Net Accounting Income” or are less than DNI, trust will pay tax on accumulated income at the federal and state level.
Trust will also pay tax on short and long term capital gains.
If capital losses were not applied to other current year gains, the losses will be used to reduce accumulated income, if any.
Schenck, Price, Smith & King, LLP

26. Tax Treatment of Supplemental Benefits Trust
Elective share trust will be taxed as a “simple trust.”
Short and long term capital gains will be included in DNI and taxed to the trust unless otherwise distributed to the spouse.
Schenck, Price, Smith & King, LLP

27. Trust Administration Issues
Must consider resource and income limitations of means-tested benefits such as SSI and Medicaid
Schenck, Price, Smith & King, LLP

28. SSI Resource Limitations
Single beneficiary can have no more than $2,000 worth of “countable resources.”
Schenck, Price, Smith & King, LLP

29. Common SSI Excluded Resources
The home, if it is the beneficiary’s “principal place of residence.”
Household goods and personal effects (household furniture, furnishings and equipment commonly found in or about a home).
Vehicle
Life insurance owned by individual (and spouse, if any) if face value does not exceed $1,500.
Burial spaces and certain funds up to $1,500 for burial expenses.
Schenck, Price, Smith & King, LLP

30. Checklist for Evaluating SSI Resource Limitations
1. Determine whether the asset to be purchased is exempt from being counted by SSI.
2. If the asset is countable consider whether the $2,000 resource limitation will be excluded in light of the following:
A. Other countable resources owned by the beneficiary.
B. Other countable resources owned by parents of minor beneficiary if residing in same household
C. Other countable resources owned by spouse.
Schenck, Price, Smith & King, LLP

31. State Medicaid Resource Limitations
Consult with local attorney or check state Medicaid manual to determine state Medicaid resource limitations.
Certain types of resources are exempt.
Exempt resources can be no more restrictive than for SSI.
Schenck, Price, Smith & King, LLP

32. Common Medicaid Excluded Assets
Principal residence
Proceeds from sale of home or other real property used to purchase another home.
Household goods and personal effects
Vehicle
Life insurance if face value does not exceed $1,500.
Burial vaults, crypts and plots up to $1,500.
Burial contracts of a reasonable amount if irrevocable.
Schenck, Price, Smith & King, LLP

33. Deficit Reduction Act of 2005
Extends Medicaid's "look-back" period for all asset transfers from three to five years.
Changes the start of the penalty period for transferred assets from the date of transfer to the date when the individual transferring the assets enters a long-term care facility and would otherwise be eligible for Medicaid coverage.
Schenck, Price, Smith & King, LLP

34. Deficit Reduction Act of 2005
Prohibits States from "rounding down" fractional periods of ineligibility when determining ineligibility periods resulting from asset transfers.
Permits States to treat multiple transfers of assets as a single transfer and begin any penalty period on the earliest date that would apply to such transfers.
Schenck, Price, Smith & King, LLP

35. Deficit Reduction Act of 2005
Establishes new rules for the treatment of annuities, including a requirement that the state be named as the remainder beneficiary.
Allows Continuing Care Retirement Communities to require residents to spend down their declared resources, including a resident’s entrance fee, before applying for Medicaid.
Schenck, Price, Smith & King, LLP

36. Deficit Reduction Act 0f 2005
Requires all states to apply the so-called “income-first” rule to community spouses who appeal for an increased resource allowance based on their need for more funds invested to meet their minimum income requirements.
Requires the purchase of a life estate to be included in the definition of "assets" unless the purchaser resides in the home for at least one year after the date of purchase.
Schenck, Price, Smith & King, LLP

37. Deficit Reduction Act of 2005
Mandates that funds loaned in exchange for a promissory note or mortgage be included among assets unless the repayment terms are actuarially sound; provide for equal payments and prohibits the cancellation of the balance upon the death of the lender.
Renders any individual with home equity above $500,000 ineligible for Medicaid nursing home benefits, although states may raise this threshold as high as $750,000.
Schenck, Price, Smith & King, LLP

38. Checklist for Evaluating Medicaid Asset Limitations
1. Determine whether the applicable state Medicaid program counts resources.
2. If resources are counted, determine whether the asset to be purchased is exempt from being counted by the state.
Schenck, Price, Smith & King, LLP

39. Checklist for Evaluating Medicaid Asset Limitations
3. If the asset is countable, consider whether the asset limitation for Medicaid benefits will be exceeded in light of the following:
A. Other countable assets owned by the beneficiary.
B. Other countable assets owned by parents of minor beneficiary if residing in same household
C. Other countable assets owned by spouse.
Schenck, Price, Smith & King, LLP

40. Schenck, Price, Smith & King, LLP
SSI Monthly Payments
SSI consists of monthly payments to beneficiary.
Base amount is called the “Federal Benefit Rate.”
$ in 2006
Changes every year according to cost of living
States sometimes increase base amount (adjusted each year).
Schenck, Price, Smith & King, LLP

41. Schenck, Price, Smith & King, LLP
SSI Income
Anything beneficiary can receive in cash or in kind that can be used to meet needs for food and shelter.
Income diminishes amount of SSI payment.
Schenck, Price, Smith & King, LLP

42. SSI Income Limitations
Earned Income
Wages, net earnings from self-employment, federal income tax refunds.
Excluded Earned Income
Food stamps, school lunches, energy assistance payments and certain educational grants and loans.
Schenck, Price, Smith & King, LLP

43. SSI Income Limitations
Unearned Income
All income that is not earned income.
Includes annuities, pensions, other periodic payments, alimony and support payments, dividends, interest, rents, death benefits, prizes and awards, gifts and inheritances, support and maintenance provided for beneficiary.
Schenck, Price, Smith & King, LLP

44. SSI Income Limitations
Payments from supplemental benefits trust TO beneficiary are unearned income.
Schenck, Price, Smith & King, LLP

45. SSI Income Limitations
Excluded unearned income
Portions of grants, scholarships or fellowships used to pay tuition or other educational expenses
1/3 of child support payments received by a minor
$20 per month.
After that, unearned income reduces SSI payment by 100 cents for every dollar of unearned income received.
Schenck, Price, Smith & King, LLP

46. SSI Income Limitations
In Kind Income
Any kind of food or shelter given to the beneficiary.
If SBT pays beneficiary’s rent or portion of cost of food, trust is providing in kind income.
Presumption that food or shelter provided is worth 1/3 of the SSI payment otherwise entitled to plus $20.00.
Beneficiary can rebut presumption by proving value of in kind income is less than presumed value.
Schenck, Price, Smith & King, LLP

47. Choosing Appropriate Trustee
Can post a bond or is already bonded.
Has knowledge of means-tested public benefits eligibility requirements such as SSI and Medicaid.
Understands applicable investment principles.
(Prudent Investor Act may apply).
Is sensitive to special needs beneficiary and family.
Schenck, Price, Smith & King, LLP

48. Schenck, Price, Smith & King, LLP
Home Ownership
Options include:
Trust owns house, rent is not charged.
Trust owns house, rent is charged.
Trust buys house and transfers house to beneficiary
Trust buys fractional interest in house, such as life estate.
Schenck, Price, Smith & King, LLP

49. MODIFYING IMPROPERLY DRAFTED SNT
May be able to modify or reform trust
Trustee may be able to transfer assets into another SNT without court approval
Schenck, Price, Smith & King, LLP