Posts Tagged ‘AHCCCS’

Two Words (“The Individual”) Make a Big Difference

DECEMBER 12, 2016 VOLUME 23 NUMBER 46
Congress may be in a historic post-election lull, but the end of the year can sometimes see surprising, bipartisan progress. With passage by the U.S. Senate of the Special Needs Trust Fairness Act (a very small part of the 21st Century Cures Act) a significant change has been introduced into the world of special needs trusts. And it all comes down to the addition of two words: “the individual”. Let us explain.

Sometimes an individual with a disability will qualify for the Supplemental Security Income (SSI), Arizona Health Care Cost Containment System (AHCCCS) or Arizona Long Term Care System (ALTCS) programs, but not be able to receive benefits because their assets exceed the $2,000 limit generally applied for all of those programs. In that case, if the individual is under age 65, they might be able to establish a special needs trust and thereby qualify for benefits.

Actually, it’s not correct to say that they could establish a special needs trust. Until passage of the law last week, the special needs trust could only be established by the individual’s parent, grandparent or guardian — or by a court. A competent individual with a disability could not establish their own trust, and often had to go through a court proceeding (at considerable additional cost) before qualifying or re-qualifying for SSI or ALTCS.

The existing law (42 United States Code section 1396p(d)(4)(A)) said that such a trust could be established by “a parent, grandparent, legal guardian of the individual, or a court”. The Special Needs Trust Fairness Act amends that provision so that it permits establishment by “the individual, a parent, grandparent, legal guardian of the individual, or a court”.

The new law will become effective immediately upon President Obama’s signature, which is anticipated in the next few days. It will have no effect on existing trusts, since they will each have been established under the old law. It will, however, sweep away thousands of pages of qualifications, refinements and interpretations about whether a trust could be established by a parent who held a power of attorney, or whether an individual with a disability could file their own guardianship petition (or seek court approval of a trust in their own names).

This simple but powerful change was promoted by the Special Needs Alliance (two of the attorneys at Fleming & Curti, PLC, are members of that national group) and the National Academy of Elder Law Attorneys (all four of our attorneys are members). It has been a key component of legislative plans for the entire advocacy community. Its adoption is welcome news.

The change is just the latest in a series of incremental improvements in the eligibility rules for SSI, ALTCS/AHCCCS and other programs like public housing assistance. Among the changes: more logical (and consistent) treatment of special needs trust distributions among the different programs, creation of the ABLE Act (“Achieving a Better Life Experience” Act) program, allowing public benefits recipients to save more than the long-time $2,000 asset limitation for eligibility, and (partly as a result of the Affordable Care Act and its expanded Medicaid programs) increasing use of tax-based language in place of more peculiar Social Security Administration definitions.

One recent court case gives a good illustration of how this most recent change will benefit people with disabilities. A young South Dakota woman’s special needs trust, established by her parents (as required by the prior law), was invalidated largely because she had signed a power of attorney naming her parents as her agents. That, according to the Social Security interpretation, meant that they acted not as parents but as their daughter’s agents — making the trust defective. The new law should put an end to that type of game-playing.

There are still many individuals who will need a court to get involved to create a special needs trust. The new law, however, should make it easier — and considerably less expensive — to set up many special needs trusts.

Unreachable Joint Account Makes Applicant Ineligible for Medicaid

NOVEMBER 14, 2016 VOLUME 23 NUMBER 43
Paul (that’s not his real name) needed long-term care. His health and his mental capability had both declined, and he could no longer handle his personal affairs nor take care of himself.

Paul’s assets included a car (titled in his and his daughter’s names) and three Bank of America (its real name) bank accounts. Those assets put him over the $2,000 eligibility limit for Arizona’s version of the federal/state Medicaid program, the Arizona Long Term Care System (ALTCS).

One problem: Paul’s daughter had her name on the bank accounts and on the car. She had the car in her possession, in fact — and she refused to turn it over.

Before he became incapacitated Paul had signed a power of attorney naming his sister as his agent. She went to Bank of America to get control of Paul’s accounts so she could use the money to pay for his care — and ultimately get him eligible for ALTCS coverage. That’s when she learned about a Bank of America rule: both signers on a joint account are permitted access the account, but an agent under a power of attorney may not exercise that authority on behalf of one owner without the other’s consent.

In other words, Paul’s sister could not close the account, remove Paul’s daughter’s name from the account, or even withdraw money to pay for his care — unless his daughter signed a form letting her do that. And Paul’s daughter refused to sign.

Paul’s sister applied for ALTCS coverage on his behalf. Even though he had assets over the $2,000 limit, she argued that those assets were actually unavailable. ALTCS regulations permit applicants to become eligible when assets are unavailable, and Paul’s sister argued that the situation with Paul’s bank accounts was no different from real estate owned jointly with an uncooperative family member, for instance.

ALTCS disagreed. The agency determined that Paul could get access to his own account if his sister just initiated a court proceeding — a conservatorship of his estate. Consequently, ALTCS declined to grant him eligibility.

Paul appealed (through his sister, of course). The court considering the agreed with her, and ordered ALTCS to cover Paul’s care costs. ALTCS appealed from that decision.

The Arizona Court of Appeals last week issued its opinion in the case. It agreed with the ALTCS agency, ruling that Paul could have access to the account by having his sister initiate a conservatorship. As conservator, reasoned the appellate court, she could then withdraw money from the account for Paul’s care — and that made the whole account a countable, available resource. Paul’s ALTCS eligibility was denied.

The Court of Appeals acknowledged that there would be some cost and difficulty getting access to Paul’s money. That, though, was not enough to prevent counting the asset as available. “Any practical inconvenience or accessibility difficulties are not relevant to determining whether assets are to be counted,” ruled the judges. McGovern v. AHCCCS, November 8, 2016.

The decision in Paul’s case simply fails to deal with the practical realities facing Paul and people in his circumstances. The opinion does not make clear how large the joint accounts might have been (except that they obviously exceed $2,000), but the practical reality is that a conservatorship proceeding might well cost thousands of dollars — and could cost even more if Paul’s daughter simply objected. She, after all, would have a higher priority for appointment as conservator than his sister, and her side of the story about the accounts is simply unmentioned in the appellate decision.

Even if Paul’s sister was appointed as conservator, that does not guarantee that she could get access to the accounts. Bank of America might well insist on getting the joint owners’ consent to close an account, or make other changes in the account structure. Paul’s daughter, when faced with the likelihood of losing the accounts, might actually close them out; she would not be hamstrung by the Bank of America rule about powers of attorney, after all.

And Paul’s vehicle? As joint owner, his daughter has absolute right to possess and use the vehicle. Getting it back for Paul, or forcing his daughter to buy out his interest, would almost certainly cost more than the value of the vehicle — and might not be successful even after significant expenditures.

The outcome is especially odd since ALTCS easily recognizes that joint ownership creates problems for other kinds of assets. Joint tenancy real estate, owned with a family member? No problem — eligibility can be granted (though it is described as “conditional” eligibility, requiring the ALTCS recipient to make efforts to sell their fractional interest). But bank accounts — even small accounts worth far less than a piece of real estate — are treated differently. Or at least the bank accounts in Paul’s case were treated differently.

Another irony: Paul had actually died before his case even got to the appellate level. The dispute was about whether ALTCS would have to pay for the care he had already received — and (though the opinion does not clarify this point) it is likely that his care facility is the one left without recourse, not his sister and not his daughter.

Good News: The IRS Simplifies Its Proposed ABLE Act Rules

NOVEMBER 23, 2015 VOLUME 22 NUMBER 43

The Achieving a Better Life Experience (ABLE) Act initially looked like it would provide important opportunities to people with disabilities. Although much work was left to the Internal Revenue Service, the Social Security Administration and individual states, advocates hoped that it might open up a simple choice for beneficiaries to save money, and enhance autonomy.

The IRS issued its proposed regulations last June, and those hopes appeared to be shaky. The proposed regulations required a lot of administrative oversight, and made it look like the cost of managing ABLE Act accounts might make them look unattractive to individuals, family members and even state governments.

This week the IRS reconsidered, and issued something it calls “interim guidance” on ABLE Act regulations. The proposed regulations will now be revised to focus on ease of administration, opening up possibilities for the future, once states have finalized their ABLE Act plans.

What changed? Three important things, listed below. In addition, the Social Security Administration (which also has to adopt ABLE Act regulations) has given an exciting hint about how it might interpret the Act — making the possibilities for positive impact even greater. Here are the new developments:

  1. Simplified reporting by ABLE Act custodians and state programs. The proposed regulations published in June would have required someone — presumably the ABLE Act account managers in each state — to review each distribution from an ABLE Act account to determine whether it was proper. Advocates were concerned that this would dramatically increase the cost of ABLE Act programs (perhaps to the point of crippling those programs), and slow down distributions for needed — and usually unquestioned — disability expenditures. The IRS heard that complaint, and has let us know that the final regulations will require the ABLE Act beneficiary to keep track and file appropriate tax returns. That’s excellent news for the usefulness of ABLE Act accounts.
  2. Detailed information about contributors no longer required. The original proposed regulations would have required any person making a contribution to an ABLE Act account to provide a Social Security number. The IRS’s concern: the possibility that excess contributions might be made in a given year, and earnings would need to be reported when the excess was returned. Instead, the new regulations will allow contributors to skip the Social Security number requirement so long as the state program has a mechanism to prevent excess contributions in the first place.
  3. No need to prove disability to the ABLE Act custodian. An ABLE Act account can only be opened for a person who has a disability. That will usually mean that the beneficiary is receiving Supplemental Security Income (SSI) or Social Security Disability (SSD) payments, but some beneficiaries will have to establish their eligibility by providing diagnosis information — and they will have to show that their disability began before age 26. The original regulations would have required the ABLE Act custodian to collect, review and maintain those medical records. After advocates pointed out that this was unnecessarily complicated and might sometimes even be dangerous, the IRS changed direction and decided to require that the person opening the ABLE Act account should simply be required to swear that the beneficiary qualifies, under penalty of perjury. The same record-keeping will be required, but records can stay with the beneficiary or family members instead of being held in a central office at a financial institution or state agency.
  4. Then there is the potentially excellent news from the Social Security Administration. While SSA’s proposed regulations have not been issued, there are hints that they will agree that ABLE Act distributions for housing-related expenses are not disqualifying for SSI purposes. That could mean terrific possibilities for family assistance with the cost of housing — a perennial problem for SSI recipients under current regulations. It’s too early to know for sure exactly how Social Security will decide this question, but it’s exciting news nonetheless.

Before we leave the topic, let’s review the ABLE Act itself. There is plenty of information available on the history of the Act, how it changed over time, and the financial compromises Congress made in passing the Act, but the real importance is how the Act will work as finally adopted. Here are some highlights:

  1. States can set up ABLE Act accounts, but are not required to do so. Arizona is moving more slowly than most other states, but is considering how to authorize an ABLE Act program. Advocates are hopeful that patience will be rewarded in the next legislative session, beginning in January, 2016.
  2. Persons with disabilities — and their families and concerned friends — can make a total of up to $14,000 in contributions to an account in a given year. The $14,000 maximum is as to the total of all contributions, not the contribution for each person. Still, that raises the possibility of about $1,000/month in assistance for a person receiving SSI and/or Medicaid (AHCCCS, in Arizona), or for significant savings by the person with a disability.
  3. Total contributions over the life of the ABLE Act account are capped, but at very high numbers (currently over $400,000 for Arizona). If the ABLE Act account grows to be more than $100,000 there are other problems, but that simply can’t be an issue for the next seven years or so.
  4. The ABLE Act account will ordinarily be managed by the person with a disability, not by donors, family members or others. There will be special procedures for beneficiaries who are minors or incapacitated, but those rules aren’t yet written.
  5. One big downside: whatever is left in the ABLE Act account at the beneficiary’s death will revert to the state, to the extent that Medicaid/AHCCCS benefits have been received. That will make the ABLE Act account unattractive in some situations, but not by any means in all cases.

There is more — lots more. But the new direction from the IRS is promising, and makes advocates for people with disabilities hopeful about the future of ABLE Act accounts. Stay tuned.

Income Taxation of the Self-Settled Special Needs Trust

MARCH 16, 2015 VOLUME 22 NUMBER 11

This time of year, we are often asked about income tax issues — especially when a trust is involved. It may take us several newsletters, but let’s see if we can’t demystify the income taxation of trusts. We will start with the type of trust we most often get asked about: self-settled special needs trusts.

We will ask you to imagine that you are the trustee of a special needs trust, set up for the benefit of your sister Allie. This trust was funded with proceeds from a lawsuit settlement. Allie is on AHCCCS (she lives in Arizona, where we renamed Medicaid “the Arizona Health Care Cost Containment System” or AHCCCS), and she receives Supplemental Security Income (SSI) benefits.

[Note: everything we explain here would be the same if Allie was your son, or your aunt, or your husband. It would also be true if the money in the trust came from the probate estate of your grandmother, who left Allie a share of her estate in cash (as opposed to in trust). It would be the same if the court established the trust for Allie, or her mother signed the trust, or if you signed the trust as Allie’s guardian. This advice will probably also be correct if Allie is receiving Social Security Disability Insurance payments — on her own account or on your father’s account — and/or Medicare instead of Medicaid/AHCCCS. If the trust does not include a provision that the Medicaid agency must be paid back upon Allie’s death, the answers we give here might be incorrect — wait until next week to read about that kind of special needs trust.]

Allie never actually signed the trust, but because she was once entitled to receive the trust’s assets outright it is treated (for most purposes) as if she did establish the trust herself. Even though the trust was created or approved by the court, or signed by Allie’s parents, or established by her guardian, it is almost universally referred to as a “self-settled” special needs trust. Those few practitioners who don’t use that term almost all prefer “first-party” special needs trust (though there may be differences regarding whether to hyphenate either descriptive title). We’re going to refer to it as a self-settled special needs trust.

Allie’s self-settled special needs trust has another descriptive name: it is also a “grantor” trust. That term really only has meaning for U.S. federal income tax purposes, but that’s a pretty important purpose and so the term is pervasive. Is it possible that Allie’s trust is not a grantor trust? Yes, barely. The key shorthand way to double-check: look for a provision that says Allie’s Medicaid expenses must be repaid with trust assets upon her death. If that language is in there, either the trust is a grantor trust or someone has created a really peculiar instrument. If that language is not in there, there’s actually a chance the trust is not a grantor trust — before going further with this analysis, go ask a qualified attorney or CPA whether the trust is a grantor trust.

Let’s assume we’ve gotten past this issue, and we can all agree that Allie’s trust is a grantor trust. What does that mean for income tax purposes? Two important things:

  1. Allie’s trust will never pay a separate income tax (well, at least not as long as she’s alive). The trust’s income will always be taxable on her personal, individual, non-trust tax return.
  2. Allie’s trust will also never need to file a separate income tax return. In fact, it will never be allowed to file a separate income tax return.

There is a lot of confusion about Allie’s special needs trust. Does it need to get its own taxpayer identification number (actually, the correct term is Employer Identification Number, or EIN)? No. Then why do accountants, bankers, brokers, even lawyers keep telling you that it does? Because they are wrong, that’s why. Many of them believe that any time a trust has a trustee who is not also a beneficiary the trust must get an EIN. That is not correct.

But just because Allie’s trust doesn’t need an EIN doesn’t mean that it can’t have one. You are permitted to get an EIN for Allie’s trust if you want to.

Let’s assume for a moment that you have not gotten an EIN. In that case, every bank and stockbroker (anyone who pays money to the trust, in fact) should be given Allie’s Social Security number for reporting purposes. The trust’s income will simply be included on Allie’s 1040 (her personal income tax return). Some trust expenses may be legitimate deductions from income, but the Internal Revenue Service effectively ignores Allie’s special needs trust.

That was easy, wasn’t it? Let’s make it just a little more difficult.

Maybe you did get an EIN for Allie’s trust. What kind of tax filings should you make in that case?

Armed with an EIN, you should give that number to banks, stockbrokers and anyone else who holds the trust’s money. The trust’s EIN should not be on Allie’s own bank account (where her SSI gets deposited), even though you might be both trustee and representative payee — and the two funds should not be mixed.

As trustee, you will need to file a fiduciary income tax return — the IRS form number is 1041. It will be easy to file, however. You simply type on the form (there’s no box for this — just type it in the middle of the “Income” section of the form): “This trust is a Grantor Trust under IRC sections 671-679. A statement of items taxable to the grantor is attached.” The exact language is not critical, but that is the sense of what you should tell the IRS. Then attach a summary statement of all items of income and deductible expenses the trust has handled (things paid directly out of Allie’s Social Security account should not be included here).

That’s it. No tax payment. No deductions on the fiduciary income tax return. You are supposed to issue a 1099 (not a K-1, if you are in to those characterizations) for the dividend and interest income received under the trust’s EIN. Those things then get listed on Allie’s personal income tax return (her 1040), and taxed as if they had come directly to Allie — even though they didn’t.

That was pretty easy, wasn’t it? Next week we’ll look at third-party special needs trusts. If you want to get a little preview, you might consider the year-old but still excellent analysis from the Special Needs Alliance about special needs trust taxation.

Medicare Savings Programs: QMB, SLMB, QI, QDWI and Extra Help

FEBRUARY 9, 2015 VOLUME 22 NUMBER 6

Health care programs for the elderly, the poor and the disabled can be complicated and confusing. We frequently find that clients are unclear about the differences — in eligibility and in coverage — between Medicare and Medicaid, for instance. Add in the fact that Arizona calls its Medicaid program AHCCCS (the Arizona Health Care Cost Containment System) but also ALTCS (the Arizona Long Term Care System) for some parts of the program, and the confusion begins to climb. Let us try to confuse things just a little bit more before (we hope) introducing some clarity.

First, the key distinctions between the two biggest government health care programs:

  • Medicare is a federal program, with very little state involvement (other than what we’ll be detailing in a moment). Medicaid is a joint federal-state program, administered by the individual states but funded mostly by the federal government.
  • Medicare beneficiaries are over age 65 OR they are receiving Social Security Disability Insurance payments. In other words, it is intended to cover the elderly and the disabled. Medicaid beneficiaries, on the other hand, may or may not be elderly or disabled — but they must be poor (with the state’s definition of “poor” quite variable).
  • Medicare covers (to a greater or lesser extent) inpatient hospital care, outpatient doctors’ visits and medications. Medicaid covers all medical expenses, including long-term care costs (an item that Medicare covers to a very limited extent).
  • Assets and income are irrelevant to Medicare coverage (except, of course, that if you are able to work you can’t be “disabled” in order to qualify before age 65). Medicaid pays close attention to income (whether earned from wages or received from investments, by gifts or otherwise) and assets (though there are differences state-to-state).
  • Medicare beneficiaries frequently have to pay co-payments (a share of the cost of a doctor’s visit, for instance), deductibles (the first $XX of a year’s medical costs, with XX being highly variable) and premiums (a flat amount for Medicare Part B coverage, for instance). Other than fairly nominal copayments, Medicaid beneficiaries usually do not have to pay any significant share of their medical costs; once eligibility is established, Medicaid picks up the entire cost.

Obviously, a person over age 65 might also have limited resources and income. A person with a disability might, as well. And a Medicare beneficiary might need medical care not covered by the program — like nursing care, for instance. There are five little-known programs available to help people who qualify for Medicare but need help with their premiums, deductibles or co-payments:

  • The Qualified Medicare Beneficiary (QMB) Program. The most generous of the four is the QMB program. It pays Medicare Part A and Part B premiums, and all co-payments and deductibles. QMB recipients also automatically qualify for “extra help” with their Medicare Part D premiums. In order to qualify, the applicant must have income of less than the federal poverty level (in 2015, that figure for a single person living in the continental U.S. is $11,770/year, or $981/month — for a married couple it is $15,930/year or $1,328/month) plus $20. In other words, a single person with income of less than $1,001/month will qualify. In addition, in many states (not including Arizona, which does not have an asset limitation for QMB benefits) the QMB applicant must have assets of less than $7,280 (for a single person) or $10,930 (for a married couple). Not counted among the assets in states which impose an asset limitation: the applicant’s home, car, household contents and a few other items (they use the same exclusions applied to the Supplemental Security Income (SSI) program).
  • The Special Low-Income Medicare Beneficiary (SLMB) Program. SLMB applicants can have up to 120% of the federal poverty income figures (plus the $20 that is disregarded — in other words, up to $1,197/month for a single person or $1,613 for a married couple), but are held to the same asset levels as those in the QMB program. Upon qualifying, the SLMB applicant will have Medicare Part B premiums paid — that will amount to a $104.90 monthly benefit for most Medicare recipients. SLMB beneficiaries also get “extra help” with their Part D premiums.
  • Qualifying Individuals (QI). A small group of people who do not qualify for any other Medicaid program might get help with their Medicare Part B premiums, if their income is between the $1,197 limit for a single person under SLMB and $1,345 (representing 135% of the federal poverty level, plus that ubiquitous $20). A married couple may have up to $1,813/month. As with QMB and SLMB, if you qualify for QI you also automatically get “extra help” with your Part D premiums.
  • Qualified Disabled and Working Individuals (QDWI). This one requires a little more explanation. For someone who once received Social Security Disability payments but returned to work, QDWI can pay the Medicare Part A premium (that’s $426/month in 2015). Income limits are up to 200% of the federal poverty guidelines (plus that $20), or $1,982 for a single person or $2,675 for a married couple. The most important thing about QDWI, though, is how few people will qualify — Arizona’s AHCCCS program notes that almost every QDWI recipient would also be eligible for the much more generous “Freedom to Work” program.
  • “Extra Help.” Programs that help pay co-payments and deductibles for Medicare’s Part D (drug) coverage go under the friendly name “extra help.” Any QMB, SLMB, QI, or SSI recipient will also get “extra help.” In some cases the program might reduce co-payment amounts but not eliminate them.

These programs can be bewilderingly complex, but they mean real benefits to recipients. Eligibility or the amount of benefit may also change year-to-year, as the beneficiary’s income goes up or down.

Can a Special Needs Trust Pay Credit Card Bills? Security Deposit?

JANUARY 21, 2013 VOLUME 20 NUMBER 3
Administering a “special needs” trust can be a challenge. The rules often seem vague, and they occasionally shift. What may seem like a simple question might actually involve layers of complexity. Sometimes an expenditure might be permissible under the rules of, say, the Social Security Administration, but not acceptable to AHCCCS, the Arizona Medicaid agency — or vice versa. Trustees work in an environment of many constantly-moving parts.

Take two questions we have been asked lately:

I am trustee of a self-settled special needs trust for my sister. Can I pay her credit card bills?

Maybe (don’t you just love lawyers’ answers?). Let’s break the question down a little bit.

First, have identified the trust as “self-settled.” That means the money once belonged to your sister (it might have been an inheritance, or a personal injury settlement, or her accumulated wealth before she became disabled). That also means the rules are somewhat more restrictive.

We will assume that the bills are for a credit card in her name alone. If the card belongs to someone else, the rules may be different. Not many special needs trust beneficiaries can qualify for a credit card; when they can, it can be a very useful way to get things paid for (as you will soon see).

The next question requires a look a the trust document itself. It might be that it prohibits payments like the one you would like to make. That would be uncommon, but not unheard of. We will assume that the trust does not expressly prohibit paying her credit card bills.

What benefits does your sister receive? Social Security Disability and Medicare? No problem. Supplemental Security Income (SSI) and AHCCCS (Medicaid)? Could be a problem.

Next we need to know what was charged to the credit card. Was it food or shelter? If it was used for meals at restaurants, or grocery shopping, or for utility bills, you probably do not want to pay the credit card bill from the trust. If you do (and assuming the trust permits it) then you will face a reduction of any SSI she receives, and possible loss of AHCCCS benefits.

Were the credit card bills for clothes, medical supplies, gasoline for her vehicle, even car repairs? There is probably no problem with paying the credit card statement. Even home repairs should be OK in most cases (just not rent, mortgage, utilities, etc. — and the rules might be different if anyone else lives with your sister).

As you can see, what started out as a simple question turns out to have a lot of complexity. You might want to talk with a lawyer about your sister could use the credit card. When it works, though, it can be quite a boon — it is an easy way to get gas into her car and clothes on her back.

Can my special needs trust pay the security deposit on my new apartment?

What an interesting question. We think the answer is probably “yes.”

Once again we need to look at the trust document itself. Was it funded with your own money (like a personal injury settlement), or was the trust set up by a relative or friend with their own money? Is there language prohibiting payment for anything related to your apartment?

Assuming no trust language prohibits the payment, we can turn to the effect such a payment would have on your benefits. Social Security Disability and Medicare? Once again, no problem. SSI and AHCCCS/Medicaid? Your benefits might be reduced, but the payment can probably be made.

The key question is whether a “security deposit” is “rent.” Arguably, it is not — it is advance payment for cleaning. A special needs trust — even a self-settled special needs trust — can pay for cleaning. Social Security’s rules treat payment of “rent” as what’s called “In-Kind Support and Maintenance (ISM).” This payment, we think, should not be characterized as ISM.

If it is not ISM, then it should have no effect on your SSI or your AHCCCS benefits. If it does, it might simply reduce your SSI payment (by the amount of the deposit, but capped at about $250). So long as you still get SSI it should not have any effect on your AHCCCS benefits.

Are these rules unnecessarily complicated? Yes. Does it sometimes end up costing more in legal fees to figure out what to do than it would to just pay the bills? Yes. Welcome to the complex world of special needs trust administration. Would it be possible to write simplified rules that allowed limited use of special needs trust funds while saving a bundle on administrative expenses? Yes — but please don’t hold your breath while waiting for them.

Not a Policy Wonk or Wannabe? Skip This Week’s Elder Law Issues

AUGUST 6, 2012 VOLUME 19 NUMBER 30
The Director of Arizona’s Medicaid program (AHCCCS – the Arizona Health Care Cost Containment System) testified last month before the United States Senate Special Committee on Aging, and his remarks caught our attention. Director Thomas Betlach was testifying about “dual eligibles” — people who are eligible for both Medicaid (AHCCCS) and Medicare. He particularly was talking about Arizona’s unusual approach, which utilizes managed care programs as the centerpiece for Medicaid recipients.

Mr. Betlach’s testimony is interesting, at least to people with a strong policy bent. You can read his remarks online and decide if that includes you. But we were not as focused on dual eligibles and managed care as we were on his description about the Arizona program as it actually operates.

For instance, Mr. Betlach reported that 72% of Arizona’s elderly and physically disabled (his term) Medicaid recipients are now receiving their care at home or in a community-based care setting — as distinguished from institutionalization in a nursing home or similar facility. For Medicaid recipients with a developmental disability, that figure increases to 98% — in other words, only two percent of Arizona’s Medicaid-subsidized patients with developmental disabilities are in long-term care institutional settings.

Whatever you may think about Arizona’s history of care for vulnerable patients (and we are not always big fans), that is pretty remarkable. Of course a significant percentage are receiving their care in assisted living facilities or adult care homes — not nursing homes, but not exactly home, either. Mr. Betlach’s testimony did not segregate out the numbers or percentages for those populations, but we are still impressed with the high percentage being cared for in settings other than nursing homes.

Another interesting element of Mr. Betlach’s testimony: the managed-care emphasis in Arizona’s AHCCCS program has helped increase the percentage of managed-care patients in Medicare, and has held down the costs of (among other things) prescription drugs and the long-term care costs themselves. And the savings at least arguably demonstrate better care: Arizona’s Medicare/Medicaid patients  have a one-third lower hospitalization rate and a 21% lower readmission rate after release from hospitalization.

Want to know more about AHCCCS, the Arizona Long Term Care System (ALTCS) and Home and Community Based Services (HCBS)? You might want to look at the AHCCCS reports page. From there you can link to reports prepared for the federal government, for the state legislature and other reports. One we found particularly interesting: a report to the federal government on HCBS care (the latest year available is calendar year 2010).

Haven’t yet satisfied your inner wonk? Try the population statistics maintained by AHCCCS on its members and trends. Our favorite: we did not realize that the number of AHCCCS/ALTCS patients with developmental disabilities (24,654) was so close to the number of members listed as “elderly” or “physically disabled” (27,941). The former category seems to be growing ever-so-slightly faster than the latter, and that surprised us as well.

Why You Should Not Create a Special Needs Trust

JANUARY 16, 2012 VOLUME 19 NUMBER 3
Let’s say you have a child with “special needs,” or a sister, brother, mother or other family member. You have not created a special needs trust as part of your own estate plan. Why not?

We know why not. We have heard pretty much all the explanations and excuses. Here are a few, and some thoughts we would like you to consider:

I don’t have enough money to need a special needs trust. Really? You don’t have $2,000? Because that’s all you have to leave to your child outside a special needs trust to mess with their SSI and Medicaid eligibility.

I can’t afford to pay for the special needs trust. We apologize that it can be expensive to get good legal help. But the cost of preparing a special needs trust for your child is likely to be way, way less than the cost of providing a couple month’s worth of care. That is what is likely to happen if you die without having created a special needs trust, since it will take several months of legal maneuvering to get an alternative plan in place. Even if there is no loss of benefits, the cost of fixing the problem after your death will be several times that of getting a good plan in place now.

I’ve already named my child as beneficiary on my life insurance/retirement account/annuity. Ah, yes — our favorite alternative to good planning. If your child is named directly as beneficiary, you may have avoided probate but complicated the eligibility picture. Their loss of benefits will occur immediately on your death, rather than waiting the month or two it would have taken to get the probate process underway. This just might be the worst plan of all.

It’ll all be found money to my kids. I’ll let them take care of it if I die. We have bad news for you: “if” is not the right word here. That aside, you should understand that a failure to plan means you are stuck with what’s called the law of “intestate succession.” That means (in Arizona — if you are not in Arizona you might want to look up your state’s law) that if you die without completing your estate plan, your spouse gets everything unless you have children who are not also your spouse’s children. If you are single, your kids get everything equally. If your child on public benefits gets an equal share of your estate, we will probably need to either (a) spend it all quickly or (b) put it into a “self-settled” special needs trust. That means more restrictions on what it can be used for, and a mandatory provision that the trust pays back their Medicaid costs when they die. All their Medicaid costs. Including anything Medicaid has provided before your death. Wouldn’t you like to avoid that result? It’s simple: just see us (or your lawyer if that’s not us) about a “third-party” special needs trust. The rules are so much more flexible if you plan in advance.

My child gets Social Security Disability (or Dependent Adult Child) Benefits and Medicare. Good argument. Because those programs are not sensitive to assets or income, your child might not need a special needs trust as much as a child who received Supplemental Security Income (SSI) and Medicaid (or AHCCCS or ALTCS, in Arizona). But keep these three things in mind:

  1. Even someone who gets most of their benefits from SSD and Medicare might qualify for some Medicaid benefits, like premium assistance and subsidies for deductibles and co-payments. Failure to set up a special needs trust might affect them, even if not as much as another person who receives, say, SSI and Medicaid.
  2. Even someone receiving Medicare will have some effect from having a higher income. Premium payments are already sensitive to income, and future changes in both Medicare and Social Security might result in reduced benefits for someone who has assets or income outside a special needs trust.
  3. If your child has a disability, it might be that a trust is needed in order to provide management of the inheritance you leave them. If they are unable to manage money themselves the alternative is a court-controlled conservatorship (or, in some states, guardianship). That can be expensive and constraining.

I’m young. We agree. And we agree that it’s not too likely that you will die in the next, say, five years (that’s about the useful life of your estate plan, though your special needs trust will probably be fine for longer than that). But “not too likely” is not the same as “it can’t happen.” You cut down your salt and calories because your doctor told you it’d be a good idea — even though your high blood pressure isn’t too likely to kill you in the next five years, either. We’re here to tell you that it’s time to address the need for a special needs trust.

I’m going to disinherit my child who receives public benefits and leave everything to his older brother. That will probably work. “Probably” is the key word here. Is his older brother married? Does he drive a car? Is he independently wealthy? These questions are important because leaving everything to your older child means you are subjecting the entire inheritance to his spouse, creditors, and whims. And have you thought out what will happen if he dies before his brother, leaving your entire inheritance to his wife or kids? Will they feel the same obligation to take care of your vulnerable child that he does?

I’ll get to it. Soon. OK — when?

I don’t like lawyers. We do understand this objection. Some days we’re not too fond of them, either. But they are in a long list of people we’d rather not have to deal with but do: doctors, auto mechanics, veternarians, pest control people, parking monitors. Some days we think the only other human being we really like is our barista. We understand, though, that if we avoid our doctor when we are sick the result will not be positive. Same for the auto mechanic when our car needs attention. Also for the vet and all the rest. In fact, the only one we probably could avoid altogether is the barista, and we refuse to stay away on principle.

Seriously — lawyers are like other professionals. We listen to your needs, desires and information, and we give you our best advice about what you should do (and how we can help). Most of us really like people. In fact, all of us at Fleming & Curti, PLC, really like people — it’s a job requirement. We want to help, and we have some specialized expertise that we can use to assist you. Give us a chance to show you that is true.

We also know a good barista.

Can My Brother’s Special Needs Trust Pay His Property Taxes?

DECEMBER 6, 2010 VOLUME 17 NUMBER 37
A client’s question:

My brother has a special needs trust, and I am the trustee. He lives in his condo and gets services from AHCCCS and ALTCS. Can the trust pay his property taxes?

Interesting question. The answer isn’t as easy or straightforward as it ought to be. Let’s start with the simple (but not completely accurate) answer, and then explain some of the limitations and qualifications.

Unless the trust language prohibits payment of property taxes (and sometimes the trust does prohibit such payments), they can be paid from the trust. There may be consequences he will have to deal with, and there may be some circumstances in which it is not permitted, but generally it can be done.

There are a number of questions that will affect the answer:

  • Is the trust a “self-settled” or “third-party” trust? In other words, was it set up to handle your brother’s money (perhaps from a personal injury settlement, for instance) or was it created by a family member and funded with their own money? If the former, the rules will probably be somewhat stricter. If the latter, there will be no problem with paying the taxes (again assuming the trust language permits it), though there may be some reduction in public benefits (especially Supplemental Security Income).
  • Does the trust own the condo? If not, does it belong to your brother, or to some other family member? It may be a little easier to pay the taxes if the trust owns the property. The most difficult problems will arise if title is in a third person’s name, with your brother not owning any interest.
  • Do other people live with him? If so (at least in Arizona) it may be a little more complicated, though it may not. In some situations the trust may only be able to pay a proportional share of the property taxes. In other words, if he has a roommate it might only be possible to pay half the property tax bill.
  • Is he on AHCCCS or ALTCS? If the former, the rules are likely to be a little bit easier. If the latter, the payments might be treated more strictly. (If your brother does not live in Arizona, this distinction will not make any sense — AHCCCS and ALTCS are the Arizona programs for Medicaid and the long-term care component of Medicaid, respectively. Other states not only do not use the same acronyms, they also do not necessarily make the same distinctions between programs). If your brother is on ALTCS but receiving most of his services from the mental health or developmental disabilities program, the ultimate answer may be different yet again.
  • Is he receiving Supplemental Security Income (SSI) payments? If so it is probably going to be much easier to pay the property taxes.

You can see that the question is getting more complex as we go along. It is an unfortunate reality of the public benefits arena — the rules are complicated and often draconian.

Let’s assume that we can get past the threshold question, and can determine that it is permissible to pay the property taxes on your brother’s condo. That immediately raises a couple of related questions:

  • What is the best way to do it? Two payments each year, or one payment? Most people pay their Arizona property taxes in two equal installments. One is due in October and the other in April. There is an alternative, however, and it is usually attractive for special needs trusts: you can make both halves of the tax payment at once, without interest, provided that you do so by December 31. In other words, no payment in October, a full payment in December, and then no payment in April. Why do it this way? Because paying the taxes might reduce your brother’s SSI payment for each month in which a payment is made — so it makes sense to have that only happen once a year.
  • What about other payments, like the homeowner’s association dues, and the insurance? Those two payments are treated differently than property taxes. First, though, look at the trust document. Does it permit payment of household expenses? If so, then public benefits rules do not prohibit payment of HOA and insurance bills — except that the HOA dues might be a problem to the extent that they include water, garbage pickup or other utilities, and the insurance may be a problem if it is required by a mortgage lender.
  • What about utilities? Does that mean they can’t be paid? Once again, look first at the trust document.  Assuming it permits these payments, you can then consider the public benefits rules. Generally speaking they may allow payment of utilities, but with a reduction in SSI payments. Some payments may be prohibited by ALTCS rules. The utilities that cause particular problems are water, gas, electricity, and garbage pickup. No problem for internet, telephone, newspaper delivery, and cable subscriptions.
  • What about home improvements and repairs? Generally speaking they are alright — though if there are others living with your brother there may be issues for some kinds of payments. Talk to us about the details (or, if your brother does not live in Arizona, consult with a lawyer familiar with special needs trusts in his state).

Exhausted? So are we. These rules are too complicated and the repercussions to serious — for that we are sorry. We can help navigate them for Arizona benefits recipients.

Where can I get more information? Good question. If you and your brother do not live in Arizona, you might want to talk with an attorney familiar with the area. Start with the Special Needs Alliance — it includes about 120 lawyers across the country, each of whom spends a considerable amount of time on special needs trusts and public benefits issues.

There is also a really good handbook available for trustees of special needs trusts. It is offered by the Special Needs Alliance, and the price is right — it is free and downloadable directly from the SNA website. If you prefer, you can get a beautifully printed version mailed to you. There are also a number of books on the topic — we favor one called “Managing a Special Needs Trust: A Guide for Trustees“.

Good luck. It isn’t always easy to be trustee of a special needs trust, and we appreciate that the challenges are sometimes legal, sometimes medical, sometimes familial.

How To Leave An IRA To A Child Who Has a Disability

SEPTEMBER 27, 2010 VOLUME 17 NUMBER 30
This is so confusing to clients, but it needn’t be. The rules are actually simpler than they seem. Stay with us, and we’ll walk you through it.

OK, here’s the set-up: You have three children, one of whom (the youngest) has a disability. We’ve decided to name her Cindy (sorry if we got that part wrong). Your estate plan is to leave everything equally to your three children, but you know that (1) Cindy can’t manage money, and (2) even if she could, leaving her money directly would knock her off of her public benefits. Just to make things more complicated, nearly half of your net worth is held in an IRA.

Before we roll up our sleeves, let us make a few observations about your situation:

  1. If instead of an IRA you have a 401k, a 403b, Keogh or other retirement plan, the rules are pretty much the same. They’re somewhat different if you have a Roth IRA; we may tackle that issue in a future newsletter.
  2. If Cindy’s disability entitles her to public benefits but she is able to manage money just fine then some of the trust issues might be different from what we describe here.
  3. We’ve decided that your estate (your combined estate, if you are married) is just under the estate tax limits, whatever they might be. That’s so we don’t have to complicate this explanation with an estate tax element. But the truth is, that wouldn’t complicate things all that much — we just don’t want to have to throw those oranges into our apple basket. Not today, anyway.

Ready? Here we go. We’ll start by asking you some questions:

First question: What benefits does Cindy get? Is she on Supplemental Security Income (SSI)? Does she also get Social Security benefits, either on her own work history or on yours? Is she receiving Medicare coverage? How about Medicaid (or, in Arizona, AHCCCS)? Does she also get a housing subsidy, benefits through the Division of Developmental Disabilities, or therapy and care from the school district?

This question is important, because first we need to figure out whether her benefits will be affected by any trust you might set up for her. Here’s a surprise: it’s not enough to figure out what benefits she is on now, particularly if she was disabled before age 22. She might be eligible to receive benefits on your work history (or your spouse’s), and those benefits could go up when you retire and again when you die. Since your estate plan is all about what happens to your money when you die, the benefits Cindy gets then will be more important than the benefits she receives now.

Second question: How important is it to you to give your children the chance to “stretch-out” your IRA? We’re sorry — we didn’t explain what that means.

You already know that you have to withdraw money at a set pace, calculated based on your life expectancy, once you reach age 71 (we know — it’s really 70.5; it’s actually the year after you turn 70.5, so let’s just call it 71, okay?). You probably also realize that your beneficiaries get to use their own life expectancies after they inherit your IRA. Or at least they do most of the time.

If that is important to you, your beneficiary designation should make it easy for your children to use the longest stretch-out period possible. Since they are probably all different ages that means there is a benefit — maybe a slight one, but a benefit — to the youngest children to be able to use their own age rather than being stuck with an older sibling’s age.

Note: this assumes your children share your interest in stretching out the IRA withdrawals. Take the simple case, with Cindy not involved: if you make the other two children (let’s call them Amelia and Barbara) beneficiaries of the IRA, Barbara (the younger) will be able to take a little less out each year than Amelia is required to do. But if either of them decides to just withdraw all the money and use it for an extended European vacation, then they can choose to make a decision that is not tax-wise. If you want to prevent them from doing that, you have raised the complication factor — but it can be done. We’re just not going to try to explain it here. But we do — here.

Third question: Do you want to try to give Cindy some non-IRA assets rather than an interest in the IRA, just to make this simple? Let’s say you left your IRA to Amelia and Barbara, and increased Cindy’s share of the non-IRA assets to make the shares equal. Would that work?

Well, yes — but it’s not quite that easy. Say you leave $100,000 in an IRA to Amelia — is that worth $100,000 to her? No, because she will have to pay taxes on it when she takes it out. How much? It depends on her state, her marginal tax rate and how long she leaves it in the IRA, so it’s very hard to figure out the “real” value to Amelia. Plus we know that the real value of the same amount of IRA will be different for Barbara, making the calculation that much more difficult.

Maybe we can use a rule of thumb, though. Let’s guess that Amelia and Barbara will delay taking out their inherited IRA money as long as possible, and that when they do they’ll both be retired and not making a lot of income. Perhaps the “real” value (to them) of your IRA will be 65% to 80% of its balance when you die. Is that close enough for you to figure out what would be “fair” if you gave Cindy more cash and less IRA? We can’t tell you — this one is a judgment call for you.

Fourth question: Who will manage Cindy’s money after your death? Amelia, the banker (and classic first-born)? Barbara, who has some financial challenges of her own but has always been close to Cindy, and still lives in the same community with her? Your local bank? A family friend, or a professional you have worked with?

Enough questions for a moment. Let us tell you what we think, based on your answers.

First, you can create a trust and name it as beneficiary of your IRA. Don’t listen to your banker or your accountant if they tell you that you can not do that — they are reciting old rules that no longer apply.

But if you do name a trust as beneficiary, you are likely to force everyone to use a shorter stretch-out date — probably all three daughters will be stuck with Amelia’s life expectancy. If there are only a few years’ difference between the girls, that may not be a big deal. If this issue is important, then we probably can work around it — we can name Amelia and Barbara as beneficiaries directly, and a stand-alone “special needs” trust for Cindy’s benefit to receive her share of the IRA. If we do that, though, you have to make us a promise: you can’t let anyone else tell you to change your beneficiary designations after we get them set up. At least you have to promise not to make any changes until after you have met with us and gone back over the beneficiary form.

In fact, you will find that you have to help educate lots of folks about IRA beneficiary designations. Over time you will be told that you have a mistake in your designation, that you have unnecessarily caused tax increases for your daughters, that your lawyer obviously doesn’t know how to do this. We do, and we can help you respond to those bankers, accountants and others who tell you that you need to make changes. Keep us in the loop, please.

We also need to make sure you realize Cindy’s share can’t go to charity after her death. None of it. Even though the non-profit which provides a sheltered workshop for her would be the logical beneficiary of a share of “her” IRA portion, it mucks everything else up.

So how do we get Cindy’s portion of the IRA — and for that matter the rest of her inheritance — set up to benefit her without knocking her off of her SSI, Medicaid, AHCCCS and other government benefits? That’s what a special needs trust is all about.

We have important advice for you: Be careful as you look for information about special needs trusts, though: much of what you read will be about the rules (and limitations) on so-called “self-settled” special needs trusts, and Cindy’s trust will not be one of those. You will be establishing a “third-party” special needs trust, and the rules will be much different, and much more liberal. You can leave IRA and non-IRA assets in a special needs trust for Cindy’s benefit, and you will actually improve the quality of her life without jeopardizing the programs and benefits she receives.

We hope this helps sort through some of the finer points of IRA beneficiary designations. If you want more, we can recommend a really thorough article by our friend Ed Wilcenski, a New York lawyer. He wrote for Forbes.com, and he’s a smart guy who writes well.

Incidentally, we’d love to hear from you. Maybe you have a question about IRAs and special needs trusts, or you just want to tell us whether this helped you out. Maybe you want to quibble with some of our advice. We love to hear from readers.

We will not, however, undertake to represent you based on a simple e-mail or internet inquiry — we need much more information (starting with where you live — we don’t practice outside Arizona) before undertaking a lawyer/client relationship. We won’t be able to answer your specific questions about your own legal situation, either. What good are we, then? Well, we’ll try to demystify some of the general rules and answer general questions about these topics. Contact us if you’d like us to try, or simply Leave a Reply below. We’ll read your comments and let you know, even if we can’t help you with individual legal problems.

©2017 Fleming & Curti, PLC