1. A Review of Special Needs Trusts and the Alternatives Polk County Bar Association Summer CLE June 15, 2012 Gregory L. Kenyon Bradshaw, Fowler, Proctor & Fairgrave, P.C. Des Moines, IA 50309

2. Methods of Payment for Long-Term Care Three ways to pay for long-term care: Private financial resources and income Long-term care insurance Governmental assistance such as Medicaid (Title XIX)

3. Eligibility for Medicaid Age or disability Income and resources Eligibility for Medicaid is based on:

4. Income and Resources Income Only the applicant’s income is considered For a married couple only the income of the spouse seeking assistance is considered Resources Only countable resources are considered

5. Noncountable Resources Home Auto Household goods Health aids Prepaid burial Life insurance - limited to $1,500 death benefit Assets used for self support Special Needs Trusts Annuities

6. Noncountable Resources (continued) l Annuities which satisfy 441 IAC 75.23(9) l Special Needs Trusts under Iowa Code 633 C

7. Acquisition of Noncountable Resources It is acceptable to use countable resources such as cash to acquire noncountable resources.

8. Using Trusts in Long-Term Care Planning Revocable Trust - no value for eligibility but may be of value for management of assets and other traditional trust purposes Non-Revocable Trust - if established prior to the lookback period, only actual distributions from a trust will be counted

9. Testamentary Trusts Only actual distributions count but in some settings, if discretion is given to the trustee, trust assets may count. See the recent case of Strojek v. Hardin County.

10. Discretionary Language Prevails Over Other Standard The legislature enacted 633A.4702 in 2004 in an effort to clarify the law following the decision in Strojek. This statute has yet to be interpreted by the appellate courts. 633A.4702 Discretionary language prevails over other standard. In the absence of clear and convincing evidence to the contrary, language in a governing instrument granting a trustee discretion to make or withhold a distribution shall prevail over any language in the governing instrument indicating that the beneficiary may have a legally enforceable right to distributions or indicating a standard for payments or distributions.

11. OBRA 1993 Trusts  Special Needs Trusts  Charitable Foundation Trusts  Income Assignment Trusts (Miller Trusts) COMMON CHARACTERISTICS A “self-settled trust” must meet OBRA 1993 requirements in order for an individual to be eligible. On the death of the individual, any remaining portion of the trust must be paid to the payor’s state to reimburse it.

12. Special Needs Trusts A Special Needs Trust may be established to cover those needs that would not exist except as a direct result of the beneficiary’s disability. It may not pay for ordinary needs, such as ordinary support and maintenance, education, and entertainment that would exist regardless of disability.

13. Special Needs Trusts (cont’d) Use of Funds: Expenses of trust administration are limited to $10 per month, unless otherwise approved by the court Distributions are allowed for special needs that would not exist but for the disability Ordinary needs of food, shelter and clothing are NOT considered special needs

14. Special Needs Trusts (cont’d) To qualify to establish a Special Needs Trust: a person must be under 65 years of age the person must be disabled the trust must be established for the benefit of the individual, by a parent, grandparent, legal guardian, or a court

15. Income Assignment Trusts (Miller Trusts) (cont’d) Iowa law provides an upper limit for which a Miller Trust may be used. If a beneficiary of a Miller Trust has income which is equal to or greater than the statewide average for a nursing facility, the income is once again considered available for purposes of determining eligibility. Iowa Code Section 633C.3(2). The upper limit is $4,594 through June 30, 2012.

16. Income Assignment Trusts (Miller Trusts) A Miller Trust is used to bring a Medicaid applicant’s income within the limit for Medicaid eligibility. During 2012, the monthly income must be between $2,094 and $4,594 per month. 2012 Dollar Amounts $2,094 Income limit for Medicaid eligibility (per month) Average statewide charge for a private pay resident of a nursing facility (per month) $4,594 Eligible for a Miller Trust

17. Pooled Trust In Iowa this is essentially the same as a special needs trust for administration purposes A pooled trust can leave funds to a nonprofit entity at the death of the primary beneficiary As with a Miller trust and a special needs trust, the remainder in the trust must be payable to the state to reimburse it for Medicaid benefits

18. Charitable Foundation Trusts A Charitable Foundation Trust operates like a Special Needs Trust. However, after death of the primary beneficiary, a foundation trust may allow distribution of principal, or income, or both, to the charitable entity. Charitable Foundation Trust Death of Primary Beneficiary Principal Interest Charitable Entity

19. When to Use Annuitization Annuity income will help meet monthly needs but will not cause applicant to exceed income eligibility limit Community spouse income is low and there are considerable resources which may serve to render the institutional spouse ineligible, use of an annuity may allow them to obtain benefits and income without spending down for long-term care The community spouse can live on the cash flow generated by the annuities and other sources of income

20. Disadvantages of Annuitization Limited access and flexibility for potential emergency uses of the cash

21. Transfers of Resources ELIGIBILITY A transfer for less than fair market value will render the transferor ineligible for benefits for a period of time determined by dividing the fair market value of the resources transferred divided by the average statewide private pay rate for nursing facility services at the time of the application.

22. Transfers include not only the obvious sort of transfers, i.e. sales and gifts, but also such things as disclaimers, or failure of a surviving spouse to seek the elective share in an estate, or otherwise failing to seek an asset to which one is entitled. Iowa Code Section 249F.1(2), IAC 75.23(8) Transfers of Resources (cont’d)

23. RESPONSIBILITY In addition to the eligibility issues above, Iowa has a “responsibility” rule which establishes a presumption that any transfer made for less than fair market value within sixty (60) months of seeking benefits, or becoming institutionalized, is made for purposes of obtaining benefits. The DHS is authorized to seek reimbursement from the recipient for any such transfers, for the full amount of the transfers. Iowa Code Section 249F(2)(a).

24. There are exceptions to the transfers of assets rules. The exceptions include transfers to: a spouse a child who is blind or permanently and totally disabled a sibling who has an equity interest in a home and who resided with the individual for at least one year a child who resided in the home with the individual for at least two years another for sole benefit of the transferor, or spouse, dependent or disabled child Transfers of Resources (cont’d)

25. Sample Worksheet IncomeNoncountable Resources SS/Pension Other Income Countable Resources Investments Cash Real Estate Life Insurance IRA Home 1 Car Household Goods Medical Equipment Prepaid Burial - - - - - - - Annuity (Medicaid Qualified) Special Needs Trusts HusbandWife

26. Husband’s Income (IS) Wife’s Income (CS) Countable Resources Noncountable Resources SS & Pension $1500 This is less than income eligibility lit of $2094, so income test is met SS and pension $900 Cash, investments, etc. $150,000 Home, household goods, health equipment, auto, and prepaid burial accounts ---------- Special Needs Trust Annuities which satisfy Medicaid regulations Minimum monthly Needs allowance is $2841 Attribution: Divide countable resources equally between IS and CS, so IS will be allocated $75,000 CS will also be allocated $75,000 Shortfall between CS income and MMNA Shortfall is: $2841 less $900=$1941 Eligibility will be Granted when IS has countable resources of $2000 or less. Spend down of IS resources is necessary

27. Husband’s Income (IS) Wife’s Income (CS) Countable Resources Noncountable Resources Diversion to CS $1500.---> Assuming other Eligibility tests are satisfied, DHS will divert income from IS to CS up to shortfall Shortfall remains $1941 less diversion of $1500 leaves remaining shortfall of $441 Spenddown options: (1) Pay for care and living expenses, (2) pay off debt; (3) pay for services; (4) purchase non countable resources including annuity which meets regulations; (5) consider special needs trust Example of action: Assets allocated to IS are used to (1) pay off debt; (2) pay for care for several months (3) prepaid burial (4) $40,000 to annuity which provides income to CS The result reduces IS resources to $2,000 CS retains countable resources of $75,000 CS retains resources of $75,000 Resulting in: Debt paid off; Burial funds purchased; annuity purchased for benefit of CS CS – after annuity purchase CS income is increased by annuity am’t so shortfall is reduced and spousal diversion is adjusted

28. Discretionary Trust Decision Tree

29. Thank you for your kind attention. Gregory L. Kenyon Bradshaw, Fowler, Proctor & Fairgrave, P.C. 801 Grand Avenue, Suite 3700 Des Moines, IA 50309 (515) 246-5829 kenyon.gregory@bradshawlaw.com