1. Presents Taxation of First and Third Party SNTs With Vincent J. Russo, J.D., LL.M. CELA, CAP Sponsored by: Tuesday, March 25, 2014

2. What We Will Cover Understanding Special Needs Trusts Trust Taxation and the Grantor Trust Rules Taxation of First Party SNTs Third Party SNTs Tax Issues Tax Traps and Tips 2 Vincent J. Russo & Associates, P.C. ©2014

3. Special Needs Planning: Trusts Exempt Trusts Under OBRA 1993 First Party Special Needs Trusts D4a or Payback trust Pooled Trusts Asset and/or Income Third Party Special Needs Trusts Supplemental Needs 3 Vincent J. Russo & Associates, P.C. ©2014

4. First Party Special Needs Trust Vehicle to Manage Assets and Income for a Person with Special Needs Income and Assets Available for the Benefit of the Person with Special Needs Maximizes and Maintain Government Benefits SSI and Medicaid Pay Back to State for Medicaid on Termination of Trust 4 Vincent J. Russo & Associates, P.C. ©2014

5. Third Party Supplemental Needs Trust Vehicle to Manage Assets and Income for a Person with Special Needs Income and Assets Available for the Benefit of the Person with Special Needs Maximize and Maintain Government Benefits SSI and Medicaid No Pay Back to State for Medicaid 5 Vincent J. Russo & Associates, P.C. ©2014

6. Special Needs Trust: Tax Issues Income Tax Rates Trust versus Individual Qualifying for Grantor Trust Status As to Income and Principal Step Up in Basis Filing of Tax Returns Trust and Personal Tax Returns Who reports the Trust Income Vincent J. Russo & Associates, P.C. ©2014 6

7. 2014 Tax Bracket Tax RateSingleMarried-JointEstate or Trust 10% up to $9,075up to $18,150N/A 15% $9,076 -$18,151 up to $2,500 36,90073,800 25% $36,901 -$73,801 -$2,501 - 89,350148,8505,800 28%$89,351 -$148,851 -$5,801- 186,350226,8508,900 33%$186,351 -$226,851 -$8,901 - 405,100405,00012,150 35%405,101 - 406,750405,101 – 457,600 39.6%over $406,750over $457,600over $12,150 7 Vincent J. Russo & Associates, P.C. ©2014

8. 2013 Income Tax Traps Taxable IncomeSingleMarried- JointEstate or Trust $10,000$1,054$1,000$2,447 $20,000$2,554$2,108$6,278 $50,000$8,429$6,608$18,158 $100,000$21,293$16,858$37,958 $200,000$50,131$43,466$77,558 8 Vincent J. Russo & Associates, P.C. ©2014

9. Income Taxes: Trust Income Must be Reported on the Trust Income Tax Return (unless an exception is met) If Exception is met, All income may be reported on the grantor’s personal income tax return All or part of the income may be reported on the beneficiary’s personal income tax return All or part of the income may be reported on the trust income tax return 9 Vincent J. Russo & Associates, P.C. ©2014

10. Income Taxes: Examples of Grantor Trusts All First Party Special Needs Trust Revocable Third Party Special Needs Trusts Optional Third Party Irrevocable Special Needs Trust 10 Vincent J. Russo & Associates, P.C. ©2014

11. Income Taxes: Grantor Trust (Taints) Reversionary Interest in the Trust (IRC §673) Grantor may Exchange Property of Equivalent Value in Non-Fiduciary Capacity (IRC §675) Use Trust Income to Pay Premiums of Insurance on Life of Grantor or Grantor’s Spouse (IRC §677) 11 Vincent J. Russo & Associates, P.C. ©2014

12. Income Taxes: Grantor Trust (Taints) Power to Revoke (IRC §676) Do not use the Power to Revoke if a First Party Special Needs Trust (where the beneficiary is accessing or seeking to qualify for Supplemental Security Income and/or Medicaid) Income Payable by Grantor or Non-Adverse Party (trustee) to the grantor (IRC §677) Without the consent of an Adverse Party (Trustee) any person who has a substantial beneficial interest in the trust which would be adversely affected (IRC §672) 12 Vincent J. Russo & Associates, P.C. ©2014

13. Obtaining Grantor Trust Status Over Principal Important when Dealing with Appreciated Assets Will allow the Grantor to Maintain IRC § 121 exemption on sale of primary residence Ensures that individual capital gains tax rates apply when trust assets are sold For example, Sale of Stock and Bonds 13 Vincent J. Russo & Associates, P.C. ©2014

14. Obtaining Grantor Trust Status Over Principal Grantor Trust Powers that give Grantor Trust Status with Respect to Principal Power to substitute assets of equivalent value or power to add charitable beneficiaries Powers within the Internal Revenue Code which cause Estate Tax Inclusion § 2036(a)(2) – testamentary power of appointment to change beneficiaries 14 Vincent J. Russo & Associates, P.C. ©2014

15. Income Taxes: Non-Grantor Trusts All Testamentary Trusts Qualified Disability Trust Optional Third Party Irrevocable Special Needs Trusts 15 Vincent J. Russo & Associates, P.C. ©2014

16. Income Taxes: Advantages of a Grantor Trust Income Tax Consequences stay with the Grantor Consider the Tax Bracket of the Grantor Single Individual reaches 39.6% at $406,750 for 2014 Trust reaches 39.6% bracket at $12,150 for 2014 Simpler Tax Filings Easier to Explain to the Client 16 Vincent J. Russo & Associates, P.C. ©2014

17. Income Taxes: Advantages of a Non-Grantor Trust Grantor does not have to come up with funds to pay tax on “phantom income” Spread out the income tax consequences Beneficiary who receives the income pays the income tax in beneficiary’s tax bracket Higher exemption amount as a “Qualified Disability Trust” 17 Vincent J. Russo & Associates, P.C. ©2014

18. Income Taxes: Disadvantages of a Non-Grantor Trust If not Careful, Higher Overall Taxes Beneficiary does not Understand that they need to come up with Income Tax Payments More Complicated Trustee needs to pay attention to calendar year-end distributions 18 Vincent J. Russo & Associates, P.C. ©2014

19. Income Taxes: What The Grantor Needs To Know Tax Impact on the Trust, the Grantor and Beneficiaries Filing of Income Tax Returns Trust Grantor Beneficiary Impact on Gift and Estate Taxes 19 Vincent J. Russo & Associates, P.C. ©2014

20. Income Taxes: What the Trustee Needs To Know Fiduciary Record Keeping Year End Income Tax Planning Sixty Five Day Rule Filing of Tax Returns Due April 15th (for Tax Years ended 12/31) Five-Month Extension Available Extension of time to file (not to pay) 20 Vincent J. Russo & Associates, P.C. ©2014

21. Federal Uniform Gift and Estate Tax System for 2014 $5,340,000 Federal Exemption which can be used either during Lifetime and/or at Death If during lifetime, offsets taxable gifts If at death, offsets estate tax on taxable estate (including prior taxable gifts) Note : taxable gifts are gifts in excess of the annual exclusion amount which has varied in years past (currently $14,000 in 2013-2014) 21 Vincent J. Russo & Associates, P.C. ©2014

22. Federal Estate Taxes Exemption Amount for 2014 Exemption amount: $5,340,000 for gift and estate taxes Tax Rate: 40% Basis for Income Tax Purposes Step-up in Basis State Estate Taxes 22 Vincent J. Russo & Associates, P.C. ©2014

23. Trusts in a Special Needs Practice First Party Special Needs Trust Pooled Trusts Third Party Special Needs Trust 23 Vincent J. Russo & Associates, P.C. ©2014

24. First Party Special Needs Trusts: Taxation Gift Taxation on Funding Incomplete Income Taxation on Income Generated Grantor Trust Estate Taxation on Demise of Beneficiary Included in the Estate 24 Vincent J. Russo & Associates, P.C. ©2014

25. First Party Special Needs Trusts: Gift Taxation Incomplete Gift IRC §2511 Treasury Regulations, Subchapter B, §§25.2511-1 and 25.2511-2 25 Vincent J. Russo & Associates, P.C. ©2014

26. First Party Special Needs Trusts: Income Taxation Who is the Grantor? The Beneficiary Revenue Ruling 83-25 Kiddie Tax Issue Who Pays the Income Tax? Grantor if Grantor Trust IRC §§ 671- 677 IRC §673 – Reversionary Interest 26 Vincent J. Russo & Associates, P.C. ©2014

27. First Party Special Needs Trusts: Estate Taxation Included in the Estate of the Grantor/Beneficiary IRC §2036(a)(1) TAM 9506004 Code §§2036 and 2038 27 Vincent J. Russo & Associates, P.C. ©2014

28. First Party Special Needs Trusts: Estate Taxation Consider: Valuation of Future Periodic Payments on Structured Settlements Three Methods of Valuation Commercial Annuity § 7520 Rate Willing Seller and Willing Buyer will pay for the future periodic payments 28 Vincent J. Russo & Associates, P.C. ©2014

29. SNTs - Gift and Estate Taxes: PLR 9437034 Decedent Created an Irrevocable Trust Funded with Structured Settlement Proceeds with a Guaranteed Payment Special Needs Trust Created to be the Recipient of the Settlement Proceeds SNT Provisions For sole benefit of Decedent Testamentary Special Power of Appointment 29 Vincent J. Russo & Associates, P.C. ©2014

30. SNTs - Gift and Estate Taxes: PLR 9437034 Included in Estate for Estate Tax Purposes IRC §2038(a)(1) Decedent has the right at death to alter disposition of trust assets Incomplete Gift IRC Reg. §25.2511-2 Donor retained special power to change the enjoyment of the trust assets 30 Vincent J. Russo & Associates, P.C. ©2014

31. Income Tax Traps (Issue Awareness) Income Tax Brackets Kiddie Tax Estimated Tax Payments State Income Tax Return Requirements 31 Vincent J. Russo & Associates, P.C. ©2014

32. Pooled Trusts under OBRA Established by a Not for Profit Sub-Account for the Sole Benefit of a Person who is Disabled Pay Back to the State unless the Remaining Funds are held by the Trust or for the Benefit of the Charity 42 U.S.C. § 1396p (d)(4)(c) 32 Vincent J. Russo & Associates, P.C. ©2014

33. Pooled Trusts: Income Taxes No Definitive Authority Income Taxes Treas. Reg. §1.642(c)-5 Review the Master Pooled Trust and Joinder Agreement Income on Sub-Account reported as a: Grantor or Complex Trust Gift Taxes Incomplete gift on funding of the sub-account Estate Taxes Included in the Estate of the participant 33 Vincent J. Russo & Associates, P.C. ©2014

34. Inter Vivos Third Party Supplemental Needs Trusts Gift Taxation Complete or Incomplete Revocable or Irrevocable Trusts Income Taxation to Settlor, Trust, Beneficiary Grantor Trust or Complex Trust Estate Taxation Included or Not Included in the Estate 34 Vincent J. Russo & Associates, P.C. ©2014

35. Inter Vivos Third Party Supplemental Needs Trusts Grantor Trust for Income Tax purposes Power to Remove Trustee Discharge Obligation of Support Retention of Certain Administrative Powers 35 Vincent J. Russo & Associates, P.C. ©2014

36. Inter Vivos Third Party Supplemental Needs Trusts Income Taxation as a Complex Trust Retained Income Trust Distributed Income – Beneficiary Qualified Disability Trust Issues Distributable Net Income End of Year Distributions 36 Vincent J. Russo & Associates, P.C. ©2014

37. Inter Vivos Third Party Supplemental Needs Trust Tax Consequences Does the grantor have a taxable estate? When will the Trust be funded? Non – Taxable Estate Grantor Trust for Income Tax Purposes Incomplete Gift Included in Estate for Estate Tax Purposes Taxable Estate Income / Gift / Estate Tax Consequences 37 Vincent J. Russo & Associates, P.C. ©2014

38. Third Party Supplemental Needs Trusts: Taxes Gift Complete versus Incomplete Control by drafting trust provisions Income Grantor Trust Non-Grantor Trust Simple Trust or Complex Trust Conversion from Grantor Trust 38 Vincent J. Russo & Associates, P.C. ©2014

39. Third Party Supplemental Needs Trusts: Estate Taxes Included in Estate of Grantor Strings Attached Maintain Control or Beneficial Enjoyment Reversion Excluded from Estate of Grantor No Strings Attached No Control or Beneficial Enjoyment Retained 39 Vincent J. Russo & Associates, P.C. ©2014

40. Testamentary Third Party Supplemental Needs Trusts Gift Taxation Not subject to Gift Tax laws Income Taxation to Settlor, Trust, Beneficiary Complex Trust Estate Taxation Included in the Estate 40 Vincent J. Russo & Associates, P.C. ©2014

41. Qualified Disability Trust Increased Personal Exemption From $100 to $3,950 for 2014 Certain Requirements must be met: Must be a Disability Trust All Beneficiaries must be disabled Irrevocable Trust Sole Benefit of disabled beneficiary under age 65 Non-Grantor Trust for income tax purposes 41 Vincent J. Russo & Associates, P.C. ©2014

42. IRAs, SNTs and Medicaid IRAs Available versus Not Available Permanent Pay Status Required Minimum Distributions Annuities SNTs Trust Assets not available as to Medicaid 42 Vincent J. Russo & Associates, P.C. ©2014

43. IRAs: Trust as Designated Beneficiary IRC Reg. §1.401(a)(9)-4, A-5) #1 - Trust must be valid under state law #2 - Trust must be irrevocable or will, by its terms, become irrevocable upon death of the participant # 3- The beneficiaries must be “identifiable... from the trust instrument” #4 - Certain documentation must be provided to “the plan administrator” by 10/31 of the year following the year of participant’s death #5 - All trust beneficiaries must be individuals 43 Vincent J. Russo & Associates, P.C. ©2014

44. Third Party Designation of SNT as IRA Beneficiary Bob’s child, Krista, is 35 years old and has CP Options Bob creates a Living Third Party SNT for Krista Bob creates a Revocable Trust with SNT for Krista Bob creates a Will with SNT for Krista Bob designates SNT as his IRA beneficiary 44 Vincent J. Russo & Associates, P.C. ©2014

45. IRAs and SNTs: PLR 200620025 Facts Taxpayer A, age 69 died Four sons surviving; Child B is disabled Sons are named beneficiaries of the inherited IRA event 45 Vincent J. Russo & Associates, P.C. ©2014

46. IRAs and SNTs: PLR 200620025 Strategy Separate Sub-IRAs Established for Each Child Make the Annual RMDs Court Authorized Establishment of First Party SNT with a Pay Back Provision and the Transfer of Child B’s Share of the IRA to the SNT 46 Vincent J. Russo & Associates, P.C. ©2014

47. IRAs and SNTs: PLR 200620025 Ruling SNT is a Grantor Trust Transfer of B’s Share of the IRA to SNT is not a Taxable Event Trustee may Calculate the Annual RMDs Based on Life Expectancy of Taxpayer B 47 Vincent J. Russo & Associates, P.C. ©2014

48. IRAs and SNTs: PLR 201116005 Beneficiary’s Father Died Owning two IRAs Benefitting Beneficiary and his Siblings. Beneficiary is Disabled and Medicaid Eligible. Beneficiary Proposed to Transfer his Share of the Inherited IRAs to a First Party Special Needs Trust in Order to Protect his Medicaid Benefits. 48 Vincent J. Russo & Associates, P.C. ©2014

49. IRAs and SNTs: PLR 201116005 IRS held that as a General Rule, if a Beneficiary Transfers an Inherited IRA, there is an Immediate Taxable Event However, in this case the Beneficiary’s Transfer of the IRA to the SNT would not be a Taxable Event The Transfer was not a Gift as it was made to a Grantor Trust. So essentially, the Beneficiary Transferred the IRA to Himself. 49 Vincent J. Russo & Associates, P.C. ©2014

50. IRAs and SNTs: PLR 201117042 IRA Owner Established an IRA. IRA Owner then Contracted Muscular Dystrophy and was deemed Disabled A Court Authorized the Creation of a SNT for IRA Owner The Court Ordered that Amount Equal to Balance in the IRA be Transferred to the SNT 50 Vincent J. Russo & Associates, P.C. ©2014

51. IRAs and SNTs: PLR 201117042 When the IRA Owner tried to Comply with the Court order, the IRA Provider Refused because an IRA cannot be set up in the Name of a Trust. The IRA provider Distributed the funds to a Non-IRA account and issued a 1099 as a Taxable Event. IRS Allowed the IRA Owner to Roll the Funds over to a New IRA. 51 Vincent J. Russo & Associates, P.C. ©2014

52. Irrevocable Life Insurance Trust with Supplemental Needs Crummey Powers Draft withdrawal provision so that the beneficiary with special needs does not have a withdrawal power Provide for the Donor to control who has a withdrawal power Provide for other beneficiaries with a withdrawal power 52 Vincent J. Russo & Associates, P.C. ©2014

53. Credit Shelter and Marital Trusts with Supplemental Needs Credit Shelter Trust Supplemental needs provisions as income and principal Marital Trust Supplemental needs provisions as to principal but not income if qualifying the trust for the marital deduction 53 Vincent J. Russo & Associates, P.C. ©2014

54. Drafting: Supplemental Needs Trust Provisions Drafting Supplemental Needs Provisions as a Contingency Plan In connection with minor trusts, descendant trusts, generation skipping trusts Can have trigger provisions as to Medicaid except for a beneficiary–spouse and if the Trust is inter-vivos 54 Vincent J. Russo & Associates, P.C. ©2014

55. In Summary Overview of Taxes in a Special Needs Practice Personal and Trust Income Taxes Gift and Estate Taxes IRAs and Special Needs Trusts Supplemental Needs Provisions in Various Trusts 55 Vincent J. Russo & Associates, P.C. ©2014

56. Support (866) 296-5509 support@specialneedsplanners.com 56 Vincent J. Russo & Associates, P.C. ©2014