1. Overview of Planning for Person with a Disability’s Assets
February 1, 2017
Presents
Overview of Planning for Person with a Disability’s Assets
With
Kevin Urbatsch

2. Special Needs Planning
Benefits of early planning for families with loved ones with special needs
What happens if there is insufficient planning or if a person with a disability has their own assets
Typically occurs with UTMA accounts or may be unintended inheritance, gift, child or spousal support payments, or litigation recovery
Planners need to know how to handle these assets

3. The Issue: First Party Assets
Why Are Assets an Issue?
Public Benefit Income/Resource Limitations:
Resource Issue: $2,000 per individual or $3,000 per couple
Income Issue: limited income allowed for SSI/Medicaid recipient
When Are Assets an Issue?
SSI/Medicaid recipient receives or already has cash or assets generally from gift, inheritance, spousal or child support, or litigation recovery
Individual wishes to qualify for SSI/Medicaid but has existing assets

4. Facts Needed To Do Planning
Type of Public Benefits?
Age of Person with a Disability?
Type of Disability?
Capacity?
Parent or Grandparent Alive, Well, and Willing to Help?
Amount of Assets At Issue?
Living Situation
Ability to Work

5. Available Planning Solutions
Do nothing;
Give the assets away;
Spend down assets;
Transfer to ABLE account;
Modify disqualifying trust to 3rd party SNT;
Place assets in a first party (d)(4)(A) SNT;
Join a Pooled SNT; or
Some combination of the above.

6. Effect of Doing Nothing
Loss of SSI
Month of receipt, assets will be counted as unearned or earned income
Next calendar month, if assets still in person’s name counted as a resource
Loss of Medicaid
Categorically Eligible
Own limited income and resource test

7. Effect of Giving Away Assets - SSI
Gift Penalty – But See Discussion Later
Ineligible for SSI for up to 36 months
42 U.S.C. §1382b(c).
Transferred amount ÷ SSI = ineligibility period
Example: SSI recipient ($700/month), receives $15,000 from his grandmother at her death. In the month after he receives it, he gives it to his brother. SSI Recipient is ineligible for SSI for 1 year and 11 months. (15,000 ÷ 700 = or, rounded down, 21 months).

8. Effect of Giving Away Assets: Medicaid Only
Depends on implementation of Deficit Reduction Act of (DRA)
Up to five years of ineligibility
California still has not implemented so 30-months of ineligibility for long term care

9. Spend Down of Assets – When to Consider
When the amount of assets is small or modest.
If a person with a disability is age 65 or over.
When the person with a disability owns a home.
When there are debts.

10. Spend Down of Assets: Buying Exempt Assets
Purchasing SSI Exempt Assets
Principal residence (20 CFR § );
Automobile (of any value) (20 CFR §§ (c));
Household items (20 CFR §§ (b), (a);
Personal effects (20 CFR §§ (b), (b));
Musical instruments (20 CFR §§ (b), (b));
Burial insurance (20 CFR §§ , (b)(8));
Irrevocable burial trusts; burial funds (20 CFR § , (b)(8);
Burial plots, vaults, and crypts (20 CFR § (a)); and
Life insurance policies with cash surrender value, if total values are less than $1500, plus all term life insurance (20 CFR § ).

11. Spend Down: Pay Debts Payment of debts Payment of legitimate debts
Family member debts more closely scrutinized

12. Spend Down of Assets: Prepay for Food and Shelter
For SSI, prepayment of food and shelter is authorized as long as it is for FMV
POMS SI (C)(3)(b):
SSI recipient transfers $30,000 cash to his sister based on contract that she would provide him with food and shelter for 5 years. The food and shelter for 5 years is worth $30,000 (5 years x $6,000 per year). ISM is not counted
; (SI D.).

13. Spend Down of Assets: Prepay for Services
SSI also allows for prepayment of services
POMS SI (C)(3)(c):
SSA determines the value of services provided to the transferor based on the FMV of the services (monthly or annually) and their frequency and duration under the agreement.
Example: In exchange for $9,000 cash, the individual contracts for yard maintenance services for 5 years. The maintenance company charges $150 per month ($1,800 per year). Five years of maintenance at $1,800 per year equals $9,000.

14. Plan for Achieving Self Support (PASS)
PASS allows SSI recipients to set aside earned income, unearned income, or resources, thereby exempting them from consideration by the SSA, which otherwise would result in lowering the monthly cash payment amount or ineligibility due to excess resources
A PASS can be an alternative to an SNT under the right set of facts, e.g., if an SSI recipient receives a modest inheritance of $20,000 and intends to use the assets to return to school. A PASS would shield the assets from being counted against the recipient
. 42 USC §§1382a(B)(4)(A)-(B), 1382b(a)(4); 20 CFR §§ ; POMS SI

15. Spend Down: Procedure
In order to preserve SSI, assets must be spent in the calendar month of receipt of the assets. It is not 30 days from the receipt of the assets.
See POMS SI (B)(2) and SI
Thus, if the SSI recipient received assets on September 28, he or she would have to spend the assets down to below $2,000 before the end of September 30th, only two days from receipt.

16. Disclaimer: Not effective
For SSI purposes, a disclaimer will be counted as a gift.
See POMS SI (E), which describes a period of ineligibility for an individual transferring assets that he or she constructively received (e.g., he or she refused an inheritance).

17. Gifting Inheritance, Litigation or Insurance Proceeds
An inheritance, litigation award, or insurance proceed is considered SSI "income" in the month of receipt. 20 CFR §§ (e)-(g).
In the month after receipt, if retained by the benefits recipient, the asset will be counted as an SSI "resource." 20 CFR §§ (d);
No asset can be both a "resource" and "income." POMS SI
There is no penalty for SSI when "income" is given away. See 42 USC §1382b(c)(1)(A); 20 CFR § (a)(4)
Thus, gift of these assets in the month of receipt should not penalize the benefits recipient.
However, according to a POMS provision, a transfer of income in the month it is received is considered a transfer of a resource if the income would have been considered a resource in the following month. POMS SI (B)(5). (Questionable Legality)
POMS SI (B)(2).

18. ABLE Account
An account designed for people with disabilities to hold assets and grow them income tax free without jeopardizing SSI or Medicaid eligibility
Designed off of the 529 Plan, it is located in IRC 529A

19. Mechanics of ABLE Account
Must be disabled prior to age 26
Contribution must be in cash
Limited to one annual gift exemption contribution per year (currently $14,000 year)
Only one ABLE account allowed per person
Growth in the account accrues with no income tax as long as distributions made for Qualified Disability Expenses
An Unpermitted Distribution will cause account to LOSE exempt status for SSI and Medicaid purposes and be subject to a 10% penalty for income tax purposes.
SSI eligibility suspended if account exceeds $100,000
Medicaid limit is equal to State 529 cap (typically around $200,000 to $600,000)

20. Useful Planning Strategies
When a child turn 18, can help eliminate spending money on unnecessary expenses just to reduce savings beneath the $2,000 threshold
Transfer of UTMA monies
Can be used to address the issue of staying below the $2,000 for SSI
Potential planning strategies around allowing distributions for housing related expenses (no ISM penalty)
Distribution from First Party SNTs to beneficiaries with capacity to provide them more independence

21. Modify Disqualifying Trust to Third Party SNT
When the settlor of an irrevocable trust leaves an inheritance that disqualifies a benefits recipient from needs-based public benefits, a viable option under appropriate circumstances is to petition the court to modify (or reform) the irrevocable trust to create a third party special needs trust (SNT)
Be cautious, the SSA is very strict on which type of trusts can be modified and which cannot

22. When to Consider Special Needs Trusts
Benefits
Assets are legally available for future needs
Assets can grow without interfering with public benefits
Burdens
Loss of control by person with a disability
Can be costly to establish and administer
This burden has been reduced by SNT Fairness Act

23. (d)(4)(A) SNT The (d)(4)(A) SNT has the following characteristics:
Grantor: Must be established by individual, parent, grandparent, legal guardian, or court
Beneficiary: The trust must be for the sole benefit of a disabled person who is under the age of 65.
Payback Provision: The trust must provide that on the death of the beneficiary, the trustee must repay Medicaid for all benefits received by the beneficiary during his or her lifetime to the extent that funds remain in the trust at the beneficiary's death.

24. Issue: Procedures to Establish (d)(4)(A) SNT
First Party SNTs are “safe-harbor” trusts, if requirements are not met, assets in trust will be countable against person with special needs and income generated inside trust will disqualify
The law allowing individual SNTs is 42 USC §1396p(d)(4)(A) that has multiple legal requirements – commonly called (d)(4)(A) SNT
Prior to passage of SNT Fairness Act - a parent, grandparent, legal guardian or court were only persons who could establish SNT, now individual can set up own (d)(4)(A) SNT
If parent or grandparent establishes, must use “Seed Trust” approach
Otherwise, court order needed to establish
Can be expensive to set up
May require court supervision

25. Effect of SNT Fairness Act
Under prior law, adults with capacity who were disabled had to go to court to establish a (d)(4)(A) SNT
Needed a jurisdictional hook to obtain court approval
Some courts took advantage of situation and required bond, appointed counsel for person with disability (even though they had capacity) and expensive court accountings
SSA repeatedly challenged court established SNTs because of very minor technical defects

26. Effect of SNT Fairness Act
Now, an adult with capacity who is disabled can establish his or her own (d)(4)(A) SNT
Much simpler to set up SNT
Less expensive
Allows person with disability more say in terms
People who cannot take advantage of new law
Minors with special needs
Adults who lack capacity to execute a trust
These two groups till require a court order to establish (d)(4)(A) SNT

27. Pooled SNT
Grantor: Must be established and managed by a nonprofit association
Joinder: May be joined by the beneficiary, the beneficiary's parent, grandparent, or legal guardian or a court
Beneficiary: The beneficiary may be of any age, but must be disabled and the trust must maintain a separate account for the beneficiary
Trustee: The trustee must be the establishing nonprofit association or supervised by the nonprofit association.
Payback Provision: In most states, after the initial beneficiary's death, excess funds may remain in the pooled trust for other beneficiaries with disabilities; excess funds are subject to repayment only if they do not remain in the pooled trust.

28. Issue: Join (d)(4)(C) or Pooled Trust
42 USC §1396p(d)(4)(C) easier to join:
Person with Disability Can Join (if capacity)
Can be Done Quickly
Cost of Establishment May be Less
Ongoing Costs May be More

29. Which is Better: Pooled SNT or (d)(4)(A) SNT?
Depends
Age
Capacity
Establishment Procedure
Cost of Administration
Flexibility of Administration
Purchase Real Estate
Unique Disbursements

30. Child or Spousal Support
A (d)(4)(A) SNT might be considered in the following circumstances:
To hold an under-age-65 spouse's share of the marital assets for purposes of SSI and Medicaid asset rules;
To receive spousal support for an under-age-65 spouse for purposes of SSI and Medicaid income rules; and
To receive child support for purposes of SSI and Medicaid income rules

31. Hypotheticals
Client receives settlement of $1,000,000. Client is receiving SSI/Medicaid, is 25 years old, clearly has capacity, and has a parent alive and willing to assist.
Options:
Do Nothing
Establish own (d)(4)(A) under SNT Fairness Act
Under prior law, parent/grandparent “seed trust” SNT
Spend Down
Maximize ABLE account funding

32. Hypothetical
Parents doing estate plan, child has disabilities and will need SSI, Medicaid, and related services. Child’s grandparent established an UTMA account and have been funding it for years
Third party SNT for parents’ inheritance
UTMA account is child’s money and cannot be funded into third party SNT, options
Spend it down
Transfer UTMA to ABLE on 18th birthday
Establish (d)(4)(A) – child can do if capacity on 18th birthday if no capacity, may do “seed trust’ but need authority to fund it

33. Hypotheticals
Client receives settlement of $50,000. Client is receiving SSI/Medicaid, is 25 years old client, lacks capacity, and has a parent alive and willing to assist.
Cannot establish own (d)(4)(A) because lacks capacity
Can use “seed trust” procedure because lacks capacity to transfer assets into trust
Options:
Establish (d)(4)(A) or Pooled SNT through court procedure
See if court will allow funding of ABLE account
Spend down only through court approval

34. Hypotheticals
Last month, a 67 year old person with a disability received a $50,000 outright inheritance from his brother. He has capacity. He became disabled at age 28 from an automobile accidents. Wants to preserve SSI/Medicaid.
Issues:
He is over 65 so a (d)(4)(A) SNT will not work.
ABLE not available because disabled after age 26
Options are
Do Nothing
Spend Down
Pooled SNT

35. Hypotheticals
A 45 year old person with a disability received an inheritance of $100,000 in a discretionary spendthrift trust with a distribution standard of all income and principal for maintenance and support. He recently lost his SSI/Medicaid.
Option: This type of trust is a disqualifying third party SNT. This trust must be reformed (or modified). There are two alternatives:
Modify or reform trust into a third party SNT; or safer
Modify or reform trust into a (d)(4)(A) SNT.

36. Hypotheticals
A 22 year old with severe physical disabilities receives $20,000 from a life insurance policy on her aunt. She is on SSI/Medicaid. Considering going to school to obtain degree.
Options:
Maximize ABLE account
(d)(4)(A) SNT or Pooled SNT
PASS Program
Spend Down

37. Questions? Kevin Urbatsch
The Urbatsch Law Firm, P.C Buskirk Ave, Suite 300 Pleasant Hill, CA 94523
(415)

38. (866) 296-5509 support@specialneedsplanners.com
Contact Support
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