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:
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.
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.
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.
MAY 30, 2011 VOLUME 18 NUMBER 19
Periodically we try to answer some of our readers’ frequent questions, which we enjoy receiving. Some more recent questions and our quick attempts at simple answers follow. Remember, please, that slight variations in fact patterns can lead to different answers; these are intended as illustrations and guidance, not as iron-clad answers to your legal concerns. Please consult your lawyer (and we’d be interested in taking on that role, if you live in Arizona and would like to call and make an appointment) before relying on this information.
Can I leave my IRA account to a third-party special needs trust for my daughter?
Yes, you can. It may not be the best answer, and it may raise a number of other issues and concerns, so please talk to your lawyer about your specific situation. But one of your choices is indeed to leave the IRA (or a retirement plan of any kind) to your daughter’s special needs trust.
If a significant portion of your wealth is tied up in an IRA, 401(k), 403(b) or other tax-deferred retirement plan, there is plenty of information out there about how important it is to name individual beneficiaries, how the plan ought to be divided upon your death into shares for each beneficiary, and how your beneficiaries should be encouraged to “stretch out” their withdrawals as long as possible. We agree with all of that — but if one of your beneficiaries has a disability, and particularly if she is receiving Supplemental Security Income, Medicaid or other means-based public benefits, it is also important to create a special needs trust for that beneficiary. There is no reason her share of your IRA can not be made payable to that special needs trust.
The notion of naming a trust as beneficiary of a retirement account is fairly novel. Not too many years ago it was absolutely to be avoided, and many investment advisers, accountants, lawyers and financial companies retain that anti-trust bias deeply embedded in their collective and corporate psyches. But the rules are different now, and it is much easier to name a trust as beneficiary. You just need good advice from someone who is familiar with those rules and can explain how they affect your retirement account in your family situation.
In general terms, the primary effect of naming a trust as beneficiary will usually be that the age of the oldest person who might ever receive benefits from the trust will be used to calculate the withdrawal rate. But let’s see if we can make the explanation clearer. Let’s assume that your daughter, Diana, is 47. You also have two sons, Steven (age 54) and Scott (age 43). You have named Diana’s special needs trust as beneficiary of 1/3 of your IRA. Sadly, you die this year (we don’t mean anything personal — we have to let you die some time in order to ever figure out the effect of your beneficiary designations).
Next year Steven will have to withdraw at least 1/29.6 of his share of your IRA (we figure that as about 3.38%). Scott has to withdraw at least 1/39.8 of his share (that looks like about 2.51%). Diana would have to withdraw at least 1/36 (2.78%) if she had been named as beneficiary outright, but she wasn’t. So how much will her special needs trust have to withdraw?
It depends on who is named as remainder beneficiary. If upon Diana’s death the remaining money in the special needs trust goes to Scott and Steven, then we use Steven’s age for the calculation and the trust will have to withdraw the same 3.38% that he had to withdraw from his share. If Diana’s trust goes instead to her two sons (ages 15 and 17) then Diana herself is the oldest beneficiary and we can use her age — and the withdrawal will be 2.78%.
Clear as mud? Yes, but you should have seen the rules before they were simplified in 2002. While the numbers are daunting, the current rules are actually pretty easy to figure out, and the ability to stretch out distributions from your IRA for another 36 years (or so) allows Diana’s share to continue to grow tax-deferred, despite the need to put her share in trust.
Want more information, or the numbers for your own children’s ages? Look at the IRS’s Publication 590. Appendix C is Table I, the Single Life Expectancy table to be used by IRA (and 401(k), 403(b) and other) beneficiaries.
Do alimony payments continue when someone goes on Medicaid long-term care assistance?
Short answer: yes. Now let’s parse the question a little bit more.
Assume husband and wife, married many years, were divorced five years ago. He was ordered to pay alimony of $1,000/month to her for the rest of her life. She has now gone into the nursing home, and has spent all of her own funds for her care. She has qualified for Arizona’s Long Term Care System (ALTCS — it’s Arizona’s version of the long-term care Medicaid program) payments toward her nursing home bills; she turns over her alimony payment and all but about $100/month of her Social Security, and ALTCS pays the balance of her nursing home bill.
If her ex-husband could legally stop paying the alimony payments, ALTCS would simply increase the payment to the nursing home by $1,000. She would be no worse off and he wouldn’t be subsidizing her nursing home care any more.
Because he is legally obligated to continue the alimony payments, however, ALTCS will continue to count them in its calculation of how much to pay to the nursing home. And if he went to court to argue “changed circumstances” and no continuing need to pay alimony, he might find that her attorney argues that the changed circumstances justify increasing the alimony payments so that she is not on ALTCS at all. Even if that didn’t happen, ALTCS might be inclined to view the proceeding as a sham just to get him out of paying the support payments. So it is far from certain that he would be better off by going back to the courts.
What about the reverse situation? Let’s imagine for a moment that it is the ex-husband who has gone into the nursing home. He has spent down all of his assets and applied for ALTCS. He receives $2,800/month in Social Security another $1,500 in private retirement; ALTCS says that he must turn over all but about $100/month of that income to the nursing home, and it will pick up the (small) difference.
Can he stop paying alimony? Well, no. The divorce court has ordered him to pay, and he needs to go back to argue “changed circumstances” as a way of getting out of having to make the payments. Will ALTCS, then, reduce his contribution requirement, recognizing that he is under a legal obligation to pay the alimony? Well, no. They say that his care comes first, and the entire income (minus his small personal needs allowance) has to go toward his care — and their payment to the nursing home will reflect that calculation.
What should he do? He needs to get legal help and get his support order modified. He should not simply ignore the outstanding alimony award.
Please note that “alimony” is not called that any more, and “divorce” is also an old-fashioned word. They are common in the vernacular, but the legal terms — at least in Arizona — are now “spousal maintenance” and “dissolution,” respectively. We know that, but we fear that it makes the explanation so much harder to read.
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.
Most people are familiar with modern concepts of child support. It can be awarded to the custodial parent in a divorce proceeding. The amount of support is usually calculated by reference to standardized computations promulgated by the courts. A support award usually includes an automatic assignment of wages to help ensure the payments get made. It ends when the child reaches age 18. Wait — that last one is not necessarily correct.
Most states (Arizona included) permit courts to order continued child support for an adult child with a serious mental or physical disability. The rules vary from state to state, but Arizona’s approach is not particularly unusual. If you are concerned about this issue because you know about an adult child with a disability living in another state, be sure to check that state’s laws before assuming the Arizona rules are identical.
In Arizona, child support can be awarded to an adult child with a disability if:
The child is severely disabled, either mentally or physically, and is “unable to live independently and be self-supporting,”
The disability began before the child turned eighteen, and
The court considers the financial resources and needs of the child and both parents, along with the effect of the disability on those needs.
[There are actually two circumstances in which child support can extend past age 18 under Arizona law. The court can also continue child support until age 19 if the child is still in high school.]
See Arizona Revised Statutes section 25-320(E) for the precise language of Arizona law. Note that the law does not require the parents to be divorced, separated or even pending divorce or separation. A court proceeding can be initiated solely for the purposes of establishing support requirements, and the resulting order can be directed against either or both parents — including against a parent with whom the adult child lives. Note also that the support request does not have to be filed before the child reaches age 18, though the disability itself must begin before that age.
A recent Arizona Court of Appeals case dealt with the issue of support for an adult disabled child. In Gersten v. Gersten, decided November 17, 2009, the appellate court dealt with a trial court decision denying support payments to the father of an adult child with a disability only because the father had not been appointed as his son’s guardian or conservator. The Court of Appeals directed that the matter be returned to the trial court, and the son’s interests considered either by having a guardian or conservator appointed or by joining him as an actual party to the divorce proceedings.
One common problem when support is ordered paid to an adult child with a disability (or to the parent with whom the child lives): the support will be treated as income for Supplemental Security Income (SSI) eligibility purposes. See, for example, the Social Security Administration’s POMS section SI 00830.420(C), which sets out the procedure an SSI eligibility worker must follow when assessing child support payments for an adult child with a disability.
That may mean that the support order reduces the beneficiary’s check by almost as much as the support order, and it might even result in elimination of SSI. That, in turn, might lead to the loss of Medicaid benefits paid for through the Arizona Health Care Cost Containment System (AHCCCS).
In some cases it might be possible to maintain eligibility for public benefits and still seek an award of support for the benefit of an adult child with a disability. A special needs trust for the benefit of the child support recipient can be set up (perhaps even by the court ordering the support) and the monthly payments assigned to the trust. The process is not always simple or straightforward, and an experienced attorney should be consulted.
Do you wonder what will happen if you are no longer able to live independently? Will you have to “go into a home?” Is a nursing home the only way to go, or are there other living situations that might allow more independence? What will happen to your spouse? And who will pay for all of this? Medicare? Medigap insurance? Your kids? Is long term care insurance the answer?
Elders whose care is not covered by Medicare (and beware, Medicare covers only a limited period of “skilled” nursing care) have to look to Medicaid for help. Arizona has its own Medicaid program, the Arizona Long Term Care System (ALTCS). Unlike Medicare, which is available to elders above age 65, ALTCS applicants must qualify both medically and financially. The financial eligibility criteria are stringent and complex.
Victoria Blair, one of the partners at Fleming & Curti, PLC, offers a two hour program to address just these sorts of questions on Wednesday, January 27th and Thursday, January 28th. We will serve a continental breakfast and we promise to answer your questions about planning for (and paying for) long term care.
Both programs will include a discussion of the basics of ALTCS. Wednesday’s session will focus on our clients who are considering long term care options for themselves or a loved one. Thursday’s session will be a little more technical, and aimed at case managers, social workers and other professionals who want to better assist their clients. You are welcome to attend either session. There will be no charge for either program, but space is limited and reservations must be secured in advance.
Who should come to ALTCS School? Anyone who is thinking seriously about nursing home care, assisted living or in-home care, or is just curious about the options. Anyone who is contemplating purchasing a long term care insurance policy. Case managers and social workers are welcome (especially at Thursday’s session) and will leave with a clearer understanding and with answers to their questions about the system.
Ms. Blair will explain the medical and financial eligibility criteria for ALTCS. She will review what resources the “healthy” spouse can keep — a house, a car, money to live on — and strategies for “spend down.” She will review the penalties for making gifts (or selling assets for less than their value) to family members. And she will go over long term care insurance policies: what they cost, what they cover, and whether purchasing such a policy makes sense for you and your family.
To attend: contact Yvette in our office at (520) 622-0400 or by e-mailing our office. Please be sure to provide us with contact information and indicate whether you prefer to attend the client/layperson session on January 27th or the social worker/case manager/allied professional session on January 28th.
Revocable living trusts have become immensely popular for estate planning in the past few decades. Once used primarily for commercial endeavors (like railroads, steel manufacturing and the like) and management of the assets of only the wealthiest families, trusts have in recent years become commonplace. As a result, the law governing living trusts has evolved more quickly during that time period than in earlier centuries, and new laws have been adopted to clarify trust rules and direct administration of trusts. One major rewrite of trust law, the Uniform Trust Code, has been adopted in a handful of states—and both adopted and repealed in Arizona within the last year.
Several other states, including Kansas, adopted the Uniform Trust Code very quickly after it was proposed. Lawyers expected the new law to generate a flurry of litigation, as the courts interpret the effect of trust law changes. One of the first of those new court cases has been decided by the Kansas Supreme Court.
At issue was the trust established by Eula M. Somers, who died in 1956 (the Trust Code applies even to long-standing trusts). Ms. Somers directed that $100 per month should be paid to each of her two grandchildren, Susan Somers Smiley and Kent Somers, who were then 7 and 5, respectively. When both of them die, the trust is scheduled to terminate and the balance is to be distributed to the Shriners Hospitals for Children.
At Ms. Somers’ death the trust held $120,000. Because the monthly payouts were small, the trust grew to over $3.5 million by 2001.
The Uniform Trust Code permits income beneficiaries (like Ms. Somers’ grandchildren) and remainder beneficiaries (like Shriners Hospitals) to agree to terminate trusts in at least some circumstances. An agreement to terminate the trust may not, however, violate a “material” trust provision.
The grandchildren and the hospital agreed that if they could each receive $150,000 in cash the balance could go to Shriners Hospitals right away. Firstar Bank, the trustee, declined to go along with that agreement because it argued that Ms. Somers’ inclusion of a “spendthrift” clause—prohibiting her grandchildren from assigning any trust income—was a material provision.
The Kansas Supreme Court agreed, and declined to permit termination of the trust. It did, however, direct the trustee to distribute all but $500,000 of the trust’s assets to Shriners Hospital, reasoning that the remaining amount would be plenty to fund the grandchildren’s monthly payments. The court also ordered payment of the grandchildren’s attorneys’ fees of over $55,000. In the first court test of the Uniform Trust Code, as it turned out, not much changed in the law of trust administration. Estate of Somers, May 14, 2004.
Arizona’s legislature first adopted the Uniform Trust Code in 2003, but lawyers in this state almost immediately raised concerns about subtle changes in trust law that would have been brought to the state with the new Code. One of the most common complaints was that the Code might allow beneficiaries to join together to terminate trusts, thereby frustrating the intentions of the original creators of trusts and, in some cases, subjecting trust assets to claims of creditors and possibly even resulting in disadvantageous tax treatment.
Less frequently discussed, but still a concern raised by the Code, is the possible effect on “special needs” trusts established for beneficiaries who receive public assistance from programs like Supplemental Security Income, Medicaid and AHCCCS/ALTCS (Arizona’s Medicaid programs). Because of the controversy, the legislature has repealed the Uniform Trust Code in Arizona; no plans are currently underway to revisit the new law, even with changes that might make it more palatable to its opponents.
It makes sense that someone seeking to qualify for public benefits would want to argue that they do not have assets available to them. Sometimes, however, an applicant will want to argue that more assets are available, as Charles Smith and his wife did—unsuccessfully.
Mr. Smith, an Arizona resident, was injured in a motorcycle accident in April, 2000. As a result he was hospitalized and ultimately moved to a nursing facility. A year after his injury his wife applied for coverage from the Arizona Long Term Care System (ALTCS), Arizona’s Medicaid program for long-term nursing care.
The ALTCS system calculated that Mr. and Mrs. Smith had assets of $108,421.98 on the date of the accident. That meant that Mr. Smith would not be eligible for ALTCS coverage until the total available assets reached $56,210.99—the so-called Community Spouse Resource Deduction (or CSRD).
Meanwhile, the driver of the car that struck Mr. Smith admitted fault for the accident. Unfortunately, he had no liability insurance. Mr. Smith, however, was covered by two uninsured / underinsured motorist policies, with total coverage of $125,000. Those policies paid out to the Smiths in July, August and December of 2000.
Mrs. Smith, on her husband’s behalf, argued that the insurance coverage should have been counted as an available resource as of the date of the accident. Because the CSRD (the amount the couple would be allowed to keep) is calculated based on the total available resources, inclusion of the insurance proceeds would mean that they would have been entitled to retain $87,000. That would have meant that Mr. Smith would have qualified for ALTCS coverage in February, 2001, rather than May of that year (as he ultimately did), resulting in reimbursement for three additional months of nursing facility bills—perhaps a $10,000 to $15,000 benefit.
Although a hearing officer agreed with Mrs. Smith, ALTCS did not, and the agency set enrollment in the program for the later date. A Maricopa County (Phoenix) trial judge reversed the agency and ruled in the Smiths’ favor.
The Arizona Court of Appeals, however, restored the ALTCS interpretation. The insurance proceeds weren’t actually available on the date of the accident, said the judges—as evidenced by the fact that it took nine months before the claims were finalized and payments received. ALTCS was right to calculate the Smiths’ assets at the lower number. Smith v. Arizona Long Term Care System, January 22, 2004.
Last week Elder Law Issues described how a “Special Needs” trust can be used to protect the beneficiary’s access to public benefits programs like Supplemental Security Income (SSI) and Medicaid (in Arizona, AHCCCS or ALTCS). There is one glaring problem with Special Needs trusts just now in Arizona, however—the Arizona Long Term Care System (ALTCS) has aggressively attacked the use of Special Needs trust planning.
It is important to clarify at the outset that ALTCS’ scrutiny of Special Needs trusts has been limited to those funded with personal injury settlements or other funds once belonging to the beneficiary. So far, at least, ALTCS seems to understand that trusts established by parents with their own money for the benefit of children with disabilities should not be challenged.
What are often called “self-settled” Special Needs trusts, though, have come under increasingly intense attack by the ALTCS administration. The government challenges range from demands that the trusts be amended each year, to insistence that the trustee predict exact expenditures for a year in advance, to registering objections to payments for the benefit of the trust’s beneficiary.
ALTCS takes the position that they are not constrained by the straightforward language of federal law on self-settled Special Needs trusts. Although the State will be entitled to receive most, if not all, of the trust assets on the death of the beneficiary, the administrators’ approach seems to be calculated to make the use of Special Needs trusts as unattractive as possible.
Although federal law clearly contemplates that personal injury settlement money, for example, could be used to purchase a home for the beneficiary or pay for caretakers in addition to the care provided through the Medicaid benefit, Arizona imposes severe limitations on both types of expenditures. The State’s demand for an annual budget and its insistence on no deviation without 45 days’ advance notice makes it difficult (if not impossible) to employ the flexibility necessary in administration of the care provided to most disabled beneficiaries.
The practical effect of Arizona’s assault on self-settled Special Needs trusts has been to substantially increase the cost of administration of such trusts and to reduce the benefit to beneficiaries. It would be incorrect to say that Special Needs trusts are no longer useful for Arizona residents, but the ALTCS position makes it imperative that any proposal to establish a Special Needs trust be reviewed by an experienced attorney.
Each year Social Security benefits are raised automatically to keep up with the increased cost of living. Benefit increases are pegged to standard measures of inflation, and take effect on January 1. Social Security figures, however, are not the only automatic increases affecting seniors and the disabled.
Beginning January 1, 2002, Social Security beneficiaries will see their monthly checks go up by 2.6%. Supplemental Security Income (SSI) recipients will also see a 2.6% increase, with the largest federal checks going up to $545 (some but not all states contribute an additional amount to SSI benefits).
That SSI increase will have an indirect effect on Arizona nursing home residents. The Arizona Long Term Care System (ALTCS), Arizona’s Medicaid program for long-term care subsidies, is available only to those with incomes less than three times the maximum SSI benefit.
As a result ALTCS recipients with more than $1635 in monthly income will need to take additional steps to qualify for assistance. In most cases that will mean establishing a “Miller” Trust, though it may be more complicated for some long-term care recipients. Some ALTCS patients who have already established Miller Trusts may no longer need them if income has failed to keep up with the automatic increases.
Participants in the federal Medicare program will also see some increases in program numbers. Perhaps most importantly (or at least most immediately apparent) will be an increase in the Part B premium paid by Medicare beneficiaries. That premium is usually deducted from Social Security benefits, which means that a portion of the cost of living increase will be withheld from checks automatically. The Part B premium is slated to increase from $50 to $54 per month.
Other Medicare numbers will also change, with most of the changes pegged at 2.5% over 2001 figures. Increased figures will include the deductible for hospital stays (rising to $812 per month), and the coinsurance amount for nursing home stays between the 21st and 100th day of the stay (rising to $101.50 per day).
Some state government figures have also increased. Arizona annually calculates the average cost of nursing home care for purposes of determining whether gifts made by ALTCS applicants should disqualify them from coverage. In most cases the value of a gift is divided by the state-calculated figure to determine a period of months of disqualification. Arizona’s calculation of the average cost of care increased, effective October 1, 2001, to $3,540.67. In other words, if an ALTCS applicant gave $35,406.00 to his children in 2001, he would be ineligible for ALTCS for 9 months (the ineligibility period is rounded down). The figure for counties other than Pima, Pinal and Maricopa is lower, at $3,290.17.
It can be a chore to keep track of the regular changes in benefits levels and rates. At Elder Law Issues we will try to keep you current; let us know if there are other benefits figures you have difficulty locating.
Last week Elder Law Issues reported on Arizona’s new “Beneficiary Deed” statute. A law passed by the Arizona legislature this year creates a new, simpler way to pass title to real property, without any requirement of probate and avoiding the cost of establishing a living trust.
A number of readers had questions about the new deed form. Questions included:
When can I sign a beneficiary deed?
Most laws take effect 90 days after the legislature adjourns. Adjournment is now scheduled for Thursday, May 10. If the legislature actually adjourns that day, the new law will be effective (and beneficiary deeds will become an available choice) on August 3, 2001.
Will the recipients under a beneficiary deed receive the benefit of stepped-up basis for income taxes?
Yes. To explain: when you inherit property from another, you usually do not have to pay income taxes on the increase in value of that property during the prior owner’s life. For purposes of calculating the income tax on capital gains, your “basis” in the property is said to have been “stepped up” to its value on the date of death of the person who left it to you. Beneficiary deeds will reach the same result.
How will beneficiary deeds affect ALTCS (Medicaid) recovery rights?
ALTCS is Arizona’s long-term care Medicaid program. When it provides benefits, the program has a claim against the recipient’s estate. Under current law that claim can only be collected in a probate proceeding. Since the beneficiary deed will avoid the probate process, ALTCS’ claim will not be levied against the property. This makes beneficiary deeds particularly attractive to ALTCS recipients and their families.
It is worth noting that a different law passed by the legislature this year may undo some of this benefit. “Non-probate transfers” (including beneficiary deeds, living trusts and joint tenancy bank accounts, but not real estate held as joint tenants) may now be challenged by creditors, including ALTCS.
Why would anyone want to create a living trust now?
Beneficiary deeds will be a valuable new estate planning tool, but will not replace other options. Perhaps most importantly, a beneficiary deed will not help a married couple take advantage of the maximum estate tax exemption if their combined estates exceed the taxable level (currently $675,000).
Trusts remain a more effective way to control property after death (for a disabled or spendthrift child, for example). Trusts can be used for real property outside Arizona. Another advantage for trusts: a single amendment can change your entire estate plan, rather than requiring new deeds and beneficiary designation changes on each individual asset.
For those who already have established living trusts, the beneficiary deed probably represents a step backward. For those now considering their options for the first time the beneficiary deed may be an attractive, low-cost choice for estate planning.
