Posts Tagged ‘Social Security’

Changes in Social Security Claiming Strategies Arrive Next Month

MARCH 14, 2016 VOLUME 23 NUMBER 10

Our good friend Amos Goodall, a nationally-known elder law attorney in State College, Pennsylvania, wrote our newsletter for this week. Amos explains a particularly confusing and complicated issue.

The Social Security retirement program basically gives back, with some small interest, funds you and your employer have deposited into the system during your working career. There are several strategies which can increase your overall rate of return from the Social Security Administration. Recent changes to the law eliminate two of these, for folks who have not used them before April 29. One of the options ending is called “file and suspend”. The second is called “claim now; claim more later”. It is important to reiterate that the changes are not “grandfathered’, so claimants should consider whether to use these as soon as possible.

Social Security benefits are classically based on a wagearner’s history of compensation, using the highest thirty-five years of employment. The monthly benefit is based on the age of retirement factored into this average. A person who delays retirement until age 70 receives almost double the benefits of someone who files a claim early, at age 62. A chart showing the effect of delayed and early claims for retirement benefits may be found on the Social Security website.

Under current rules, if one member of a married couple has significantly higher earnings than the other, it is possible for the lower-earning of the two to get spousal benefits, which are set at up to half the higher wagearner’s amount. Thus, if on a particular couple’s earning’s record, one spouse had worked steadily in a profession and the other had interrupted her professional development to raise children, the spouse with higher earnings might qualify for $2,000/month benefits, while the other might be limited to $500, based on her earnings record. She may apply for spousal benefits and receive $1,000/month spousal benefits.

There are other situations where a claimant who has had little or no earnings may qualify for benefits based on someone else’s earning record; for example, persons who became disabled while children can qualify for benefits based on their parents’ earnings records. However, an element of these other benefits is that the parent has died or is drawing benefits himself or herself.

What if the higher wagearner is still working and wants to continue until age 70 to qualify for the higher benefit? Under current rules, a strategy called File and Suspend, the higher wagearner of a married couple can file a retirement claim at age 66 and then suspend the benefit. He or she will not be drawing social security, and delayed retirement credits will continue to accrue. Under current rules, if the higher wagearner’s claim has been suspended, the lower wagearner can still file a claim for spousal benefits.

Beginning April 29, if a couple has not already used this strategy, the right to do so will be lost. Under the new rules, with some limited exceptions, spouses and dependents cannot claim benefits if the primary worker has suspended his or her benefit.

One exception allows divorced spouses (who have not remarried) to file claims on their former spouse’s earnings record. Even if the former spouse suspends, the unremarried, divorced former spouse can still move forward with a claim for spousal benefits. This requires the couple to have been married at least ten years before the divorce.

A second strategy, called Claim Now; Claim More Later is also affected by the change. Under this strategy, if a spouse files only for spousal benefits, he or she may continue to work and obtain delayed retirement credits on his or her own earnings record. Then, at age 70, he can retire and obtain enhanced benefits due to a late retirement age. Under the changes effective April 29th, a claim filed is deemed to be requesting both spousal and direct benefits, so as to prevent this strategy.

Social Security benefits are complicated, and there are various retirement strategies available. This article covers only the general situation discussed, and there are other factors which may apply. If you think the old rules might apply, it is important to take action while you still can. Seek qualified professional advice as soon as possible, to beat the April 29 deadline.

Amos Goodall is a partner in the law firm of Goodall & Yurchak. He practices elder law and special needs planning; you can read more about Amos and his firm at the Goodall & Yurchak website, which contains links to a number of articles and resources you might find useful. Thanks, Amos!

Savings and Income at Death Indicate Retirement Shortfall

MAY 11, 2015 VOLUME 22 NUMBER 18

You’ve probably read and/or heard about concerns that Americans do not save enough money to get through their retirement. A recent report from the Employee Benefit Research Institute shows just how stark the situation is — by focusing on the actual savings held by people who died over a two-year period (2010-2012).

The Employee Benefit Research Institute (EBRI) is a non-partisan professional group, headquartered in Washington, D.C. Its members include a range of retirement-related companies and organizations. It is perhaps most famous for its annual “Retirement Confidence Survey,” which attempts to capsulize the level of confidence American workers have in their retirement situation (spoiler alert: about half of workers are “very confident” or “somewhat confident” that they have enough savings to be comfortable in retirement).

The new study, though, takes a different look at retirement savings. Rather than considering whether recent retirees and prospective retirees are confident about their savings, it looks at the savings remaining at the time of a retiree’s death. The results are unsettling. They are even more unsettling, in many regards, for younger retirees and those just approaching retirement.

According to the EBRI’s summary description of the research (in its April, 2015, “Notes”), almost one-quarter of those dying after age 85 left less than $10,000 in total assets — including the equity in their homes. Half of those had no assets at all. But among those who died between ages 50 and 65, the figures are much higher. About 45% of those younger decedents left assets of less than $10,000, and almost a third of that age group had no assets.

If you ignore home equity, the figures are even more stark. Almost 60% of those dying at ages 50-65 left non-home assets of less than $10,000, and about 43% of older decedents fit into that category.

The study also finds a large gap between married decedents and their unmarried counterparts. Both assets and family income were higher for married couples. Consider one example: for decedents dying between ages 50 and 65, what proportion died with non-home assets of less than $10,000? For those leaving a surviving spouse, 46% fit into that category of near-impoverishment. For single decedents in the same age group, over 75% left less than the $10,000 figure. And how did their older colleagues fare? Much better: about one-quarter of married decedents over age 85 left household assets of less than $10,000, while exactly half of single decedents in that age group left less than $10,000.

The study also addressed the importance of Social Security income for retirees in their last years of life. Across all of the categories, Social Security provided between half and three-quarters of all income — both for single individuals and married couples — at the time of death. Interestingly, that figure varies consistently by marital status (married couples have slightly lower percentages of their income from Social Security than their single counterparts in all age groups) but inconsistently by age. The oldest retirees actually were slightly less dependent on Social Security than their younger counterparts, with one exception: the lowest reliance on Social Security was among couples where one partner died between ages 65 and 74.

What were those income levels? Quite low. Here are some of the groupings, by age and marital status, with their average income:

  • Unmarried individuals dying after age 85 had average income of $25,086 at death. Married decedents had incomes much higher, at $50,125. In each case, the other members of their households (the single retirees might have had children or unmarried partners living with them, for instance) were within a few thousand dollars of the same figures.
  • Unmarried individuals dying at ages 75-84 had lower incomes than their slightly older counterparts, at $18,554. Married decedents had average income of $45,376 — much more than their single same-age counterparts, but about 10% less than their slightly older, married counterparts. Decedents in the 65-74 age group were almost indistinguishable from the 75-84 group.
  • Interestingly, single decedents aged 50-64 had the lowest average income of all (at $17,099), while their married counterparts had the highest income (at $61,100). That might be because some significant percentage of those recent- and near-retirees lived with spouses who were still actively working.
  • Generally speaking, the other household members living with decedents tended to have notably higher incomes at the younger ages, and equivalent or lower incomes than the decedents at older ages.

Altogether, the report is an interesting slice of retirement analysis. Its focus on how well things were working out (financially speaking) at the time of the average retiree’s death gives a more complete picture of America’s retirement health. And the numbers are fairly troubling — the bottom line is that between about a quarter and about a half of all retirement-age individuals die with few or no assets, and average incomes hover in the range of about $2,000/month or less.

Managing a Special Needs Trust — The Handbook

APRIL 13, 2015 VOLUME 22 NUMBER 14

Are you named as trustee of a special needs trust? Are you a trust beneficiary, wondering about how the trust should be administered? Or are you a parent or grandparent of an individual with a disability, wondering about what a special needs trust might actually look like in practice? Good news: there is a free resource that will help you understand these unusual trusts, and in some detail.

The Special Needs Alliance, a national organization of lawyers with extensive experience with special needs planning and special needs trust administration, has long maintained (and updated) its Handbook for Trustees (“Administering a Special Needs Trust”) online. There is even a Spanish language version. You can print out the Handbook, or order a printed copy from the Alliance.

(While you’re there, incidentally, you might want to check out the past editions of The Voice, the SNA’s periodic newsletter. There is a lot of really good information, with terrific detail and suggestions. This organization is very willing to share good ideas and explanations.)

What will you learn from “Administering a Special Needs Trust”? A sampling of some of the most important elements:

  • Understand the difference between self-settled special needs trusts and third-party special needs trusts. You might well have that basic understanding already — the former are usually funded with personal injury settlements or unrestricted inheritances received by individuals with disabilities, and the latter are usually funded with family inheritances left, with proper planning, directly to the trust. But the Handbook will help you understand the significant differences in administration between the two types of trusts.
  • Figure out the Social Security Administration’s concept of “In-Kind Support and Maintenance.” What is ISM, and why do you care? It’s the counter-intuitive calculation that determines how much a recipient’s Supplemental Security Income (SSI) payment will be reduced if someone (a trust, a parent or a generous stranger) pays for the recipient’s food and/or shelter. The Handbook gives some examples to help you grasp this odd concept.
  • Learn how taxation of special needs trusts works. Spoiler alert: the self-settled special needs trust is always a “grantor” trust, and that means it is taxed exactly as if there was no trust at all. Third-party trusts are harder to generalize about. OK — that wasn’t much of a spoiler, since you now have to go read the Handbook to figure out what those terms mean.
  • Appreciate the differences (and they are legion) between beneficiaries who receive Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI) payments. Bonus: you can also learn how an SSI recipient might shift to SSDI payments upon the retirement or death of a parent.
  • Identify which payments will be treated as “housing” for SSI calculation purposes. Rent payments are easy. How about homeowners insurance? Homeowners Association payments? Garbage pickup? Internet, cable, newspaper?
  • One common special needs trust payment is for vehicle operation and maintenance. Can a trust pay for gas? Repairs? Insurance? Read the Handbook and find out. (Spoiler alert: yes.)
  • Get a brief description of trust administration rules. Can the trustee “invest” in their own business? Hire a professional care manager, or a financial planner?

The Special Needs Alliance’s Handbook is less than 20 pages long, so it is not the ultimate authority on special needs trust administration. It is an excellent introduction to the difficult questions, and it provides answers to many of the most common questions. There are also a number of other resources we regularly suggest:

Managing a Special Needs Trust: A Guide for Trustees (2012 Edition) by Jackins, Blank, Macy and Shulman.

Special People, Special Planning: Creating a Safe Legal Haven for Families with Special Needs by Hoyt and Pollock.

Special Needs Trusts: Protect Your Child’s Financial Future by Elias and Fuller.

Medicare Eligibility at 65: What You Need to Know

NOVEMBER 10, 2014 VOLUME 21 NUMBER 41

Almost ten thousand Americans turned 65 today. Almost all of them will be eligible for Medicare coverage. Those who are new to Medicare will need to make some decisions about whether to sign up for Part B, what to do about Part D, whether to choose Medicare Advantage or “traditional” Medicare, and whether to purchase a “Medigap” policy. Generally speaking, today’s new 65-year-olds have a seven-month period to make their decisions — starting three months ago and running through this month and the next three months.

If you are in that group, you might wonder where you can go to find information about your options. There are a few reliable, unbiased options out there, but our favorite by far is your local Area Agency on Aging. If you live in Tucson, that would be the Pima Council on Aging. If you’re planning on turning 65 in the next few months, or if you just did and you haven’t done anything about it yet, get on the phone and call the PCOA right now. They’ll probably suggest that you sign up for their monthly New to Medicare Workshop, held once a month at the PCOA offices. Go.

There are a number of common Medicare mistakes new 65-year-olds make. You can learn about your options, and how to avoid those mistakes. Some of the things to watch out for:

  • When you sign up for Medicare, you have the option of skipping Part B coverage. Very, very few new Medicare beneficiaries should skip that coverage — even if you feel that you just don’t need it (or can’t afford it) now. Generally, the only people who should skip Part B are those who have current employer-provided health coverage (including active-duty members of the military). Covered by COBRA, Tricare or other private insurance? Get Part B coverage. What happens if you don’t? Later, when you do sign up for Part B (and you almost certainly will), the premiums will be high enough to essentially recapture your “missed” contributions. And don’t assume that your existing coverage qualifies to avoid the increased premiums in the future — check with your Area Agency on Aging, Medicare and/or your employer.
  • You get coverage for medications one of two ways: either you sign up for a “Part D” plan or drug coverage is part of your Medicare Advantage plan. Make sure you sign up for Part D one way or the other. As with Part B, failure to sign up now just means your premiums will be higher later. Don’t think you need (or can afford) Part D coverage? Consider AARP’s suggestion: sign up for the cheapest plan available in your community, primarily so that you don’t pay a penalty later when you do need medication coverage.
  • Don’t think you qualify for Medicare because you haven’t worked for 40 quarters? Get more information. You might want to sign up for Part B and Part D coverage now. You might be better off getting Medicare coverage even if you have to pay a premium (it might, for example, be cheaper and better than your current coverage). You might qualify under a spouse’s work history. Check it out.
  • Still working at 65? You still qualify for Medicare. It’s not tied to your work status, and the eligibility age hasn’t increased to 66, as Social Security already has — and Social Security’s retirement age is headed to 67. But not Medicare.
  • Are you already receiving Social Security benefits? If you are on Social Security Disability, your Medicare card will automatically arrive in the mail after you’ve had two years of SSDI benefits. If you’re receiving Social Security retirement benefits (because you signed up for Social Security between ages 62 and 65), your card will arrive automatically three months before your 65th birthday. When you get that card, you have seven months to sign up for Part A and Part B, choose your plan and select drug coverage.

Those are some of the basic rules (and things to watch out for). The program is complicated, though, and there is much uncovered here. There are special rules for people who are volunteering out of the country on their 65th birthday. There are new rules for same-sex spouses (expanding their coverage to match prior rules covering opposite-sex couples). There are issues of overlap between Affordable Care Act policies and Medicare. There are other benefits that help poor Medicare beneficiaries pay for their premiums, deductibles and co-payments. There is a high likelihood that one of the special rules has some effect on you, so get in touch with your Area Agency on Aging to find out more about your Medicare coverage.

State Court Does Not Control Social Security Payments

MAY 12, 2014 VOLUME 21 NUMBER 17

At Fleming & Curti, PLC, we do not handle divorce cases. From time to time, though, a divorce case raises the same kinds of issues that we see in the guardianship, conservatorship and probate cases we do handle.

A recent Arizona Court of Appeals decision is a case in point. It involves the divorce of a Navajo County, Arizona, couple, Donna and Edward. When the couple divorced in 2009, Donna was awarded custody of their four children. Edward was ordered to pay child support.

When Edward began collecting Social Security benefits on his own account, the children were entitled to receive $362 each per month. Social Security named Edward as “representative payee,” which meant that the children’s checks were made payable to him and he was required to account to the Social Security Administration each year.

Donna filed a petition with the divorce court to modify the support and visitation orders. She also alleged that Edward had been taking the children’s Social Security money and spending it as he saw fit — and that she should be the representative payee since she had sole custody of the children. At some point she apparently applied to Social Security to become the payee, and the payments were switched to her name. Still, she wanted Edward to account for — and return — the payments received for a nine month period starting right after the divorce.

The judge in the divorce court agreed, and entered a judgment against Edward (and in favor of Donna) for the amount of the payments he found to have been “misappropriated.” The judge also held Edward in contempt for failing or refusing to turn over the Social Security.

Edward appealed, and the Arizona Court of Appeals briefly reviewed the interrelationship of Social Security, state law and state courts. According to the appellate judges, Arizona state courts do not have any jurisdiction to review the management of Social Security payments made to a representative payee. The proper place to challenge Edward’s use (or possible misuse) of those funds was before the Social Security Administration itself. Peace v. Peace, May 8, 2014.

The Arizona appellate court, incidentally, was very candid in its assessment of the legal principles. It noted that some state courts (not in Arizona) have decided that they do have jurisdiction over Social Security representative payees, and others have held that state courts are preempted by federal law from intervening. The Arizona opinion specifically mentions a minority opinion in a 2013 Vermont case, LaMothe v. LeBlanc, which reviewed the holdings in several states — including Alaska, Maine, North Carolina, Ohio, Iowa and Tennessee.

What is the significance of the recent Arizona holding in probate court? An analogous situation arises frequently. Suppose that a parent with a disability receives Social Security benefits, and that his or her minor child is entitled to Social Security benefits. Now suppose that a grandparent or other family member has become guardian for the child, or that a professional fiduciary has become conservator to handle a personal injury settlement. Can the Arizona probate court order the parent to turn over Social Security payments, or to prove that they were expended for the child’s benefit, or even to relinquish authority as representative payee? The Peace decision would seem to say that none of those decisions are within the purview of the probate court — the guardian’s, conservator’s or custodial parent’s dispute is with Social Security, not the state courts.

Planning for Retirement: Does the Three-Legged Stool Work?

DECEMBER 16, 2013 VOLUME 20 NUMBER 47

For decades accountants, financial planners, lawyers and government workers have talked about Social Security and the “three-legged stool.” The metaphor had a simple attraction, especially when Social Security was a young program. The three legs? Social Security, private retirement programs and personal investments. You should have some of each, according to conventional wisdom.

The problem with the metaphor, of course, is that such a large portion of retirement-age Americans have just one leg, or maybe one strong leg and part of a second. According to the Social Security Administration, about half of retirees get more than half of their income from Social Security alone. In fact, Social Security makes up more than 90% of all income for about a quarter of elderly recipients.

Is the three-legged stool important? Maybe, but it was viewed as received wisdom as early as 1949. More modern metaphor development recognizes the predominance of Social Security in retirement planning by turning the three-legged stool into a pyramid.

According to this new view, Social Security can be seen as the broad base of the pyramid, with other sources of retirement income as higher levels. Actually, “income” may be the wrong word — better to think of retirement “resources.” The next tier of the Investment Company Institute’s pyramid, for example, is home ownership. And that analysis comes from an industry group interested primarily in encouraging individual investments in retirement accounts. The reality, though, is that ownership of the home is the second-most-common bedrock resource for retirees.

In addition, there seems to be a growing recognition on the part of near-retirees that they will need to build substantial resources for their impending retirements. Defined benefit retirement plans, once the mainstay of private pension arrangements, are shrinking as a percentage of available benefits. As a result, fewer and fewer retirees will be able to count on a pension-like retirement benefit, and more and more will come to rely on the contributions they have managed to make to their own Individual Retirement Accounts and 401(k) and 403(b) plans.

Still, the news about the private retirement plan level of the pyramid is not all bad. According to the Investment Company Institute analysis mentioned above, Americans have accumulated $20.9 trillion in assets earmarked for retirement (and that’s not counting Social Security). That investment has increased much faster than inflation or the number of potential retirees since 1975.

The private pension part of the retirement pyramid is broken out as two separate parts: employer-sponsored retirement plans (like defined-benefit plans, 401(k) and 403(b) plans) and individual plans (IRAs). The top level of the pyramid, narrow but important for those who have been able to build personal wealth, is described as “other assets.” One commentator suggests that perhaps we should include another level: part-time employment. That may sound cynical, but reflects the reality that many retirement-age adults will have to work at least part-time — a notion that was not contemplated in the original three-legged stool metaphor.

One other point about rethinking the metaphor: it inevitably leads to thinking about maximizing the Social Security level of the pyramid. And not just maximizing the individual retiree’s share, but consideration of how to maximize a married couple’s benefits when taken together. Today there is a cottage industry of websites and individual advisers reviewing retirement options and strategies for maximizing a couple’s (or an individual’s) Social Security benefits.

For the 10,000 Americans turning 62 each day, it is increasingly important to think about how to maximize Social Security (and total retirement resources), what tax consequences will flow from different strategies, and how to think about the difference between not working (“retirement”) and drawing benefits (“retirement”). It is a complicated and confusing area, but thoughtful planning (and information collection) can literally be rewarding.

 

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.

Posthumously Conceived Twins Denied Survivors Benefits

MAY 28, 2012 VOLUME 19 NUMBER 21
The United States Supreme Court doesn’t very often weigh in on Social Security rules, so when it does those of us in the elder and disability law community pay attention. Last week’s decision by the Court, interpreting Social Security regulations as applied to posthumously conceived children, addressed interesting questions of law, science and public policy.

Here are the bare facts: Robert and Karen Capato lived in Florida. Robert was being treated for esophageal cancer, and before chemotherapy and radiation treatment began the couple preserved a sample of Robert’s sperm. That way, Karen would be able to conceive another child (the couple had one child together already) by Robert even if his treatment left him infertile — or even if he died.

Robert Capato did die of cancer. Nine months after his death Karen became pregnant using his banked sperm. Eighteen months after Robert’s death she delivered twins.

Karen applied for Social Security survivors benefits for the twins. Citing Florida law on inheritance rights, the Social Security Administration denied the benefits (presumably the couple’s child conceived and born before Robert’s death qualified for benefits). The federal District Court agreed with Social Security, but the federal Court of Appeals reversed that decision and ruled in favor of Karen and the twins. The U.S. Supreme Court sided with Social Security, reversed the Court of Appeals and sent the entire case back for a final determination. Astrue v. Capato, May 21, 2012.

But what’s most interesting about the Supreme Court’s decision may be what it doesn’t decide. It does not rule that no child conceived and born after the death of the child’s father can ever receive Social Security benefits on that father’s work record. It does not bar careful planners from preserving future benefits for children born as a result of in vitro fertilization. Instead, it holds that the basic test is whether state law — usually the state law where the father dies — controls whether the posthumously conceived child is entitled to Social Security survivors benefits.

The Court unanimously ruled that Social Security is only available to survivors who are determined to be heirs of the deceased worker. In Florida, said the Justices, that would not include children conceived after the death of their father. Florida’s probate code expressly excludes after-conceived children, and Robert Capato’s will did not make reference to children who might be conceived after his death.

But does Florida law apply in this case? Probably — but the Justices left open the possibility that the trial judge could find otherwise after a new hearing. Interestingly, Karen Capato moved to New Jersey while pregnant with the twins, and she argued (unsuccessfully, so far) that New Jersey law should apply to the determination of paternity.

Can we infer the answers to some of the obvious questions you might ask? Perhaps — but not conclusively, of course.

If Florida changed its law to make posthumously conceived children entitled to intestate inheritance, would that change the result for the Capato twins? Probably not — but it should change the result for future Florida residents in similar circumstances.

If Robert Capato’s will had specifically mentioned the children he might have in the future, would that have changed the outcome? Hard to say, but tantalizingly interesting. Apparently, Robert and Karen specifically mentioned their intention to preserve sperm for future in vitro fertilization to the lawyer who prepared Robert’s will. Should he of she have included the unknown future children as beneficiary’s of Robert’s estate? Perhaps that would have changed the result.

What if Robert Capato had lived — and died — in Arizona? It’s not clear. Arizona’s probate code does not expressly define posthumously conceived children as either included or not included in the list of intestate heirs. No Arizona appellate case has decided the question, either (though there is at least one reported Arizona case involving the status of sperm intended to be preserved for possible future in vitro fertilization).

What about the laws of intestate succession in other states? Well, we’re not qualified or inclined to render legal opinions about other state laws. But we will note that the Supreme Court specifically pointed to the intestacy laws of several states as dealing with posthumously conceived children. Among the states with some treatment of the question (in addition to Florida) the Court included California, Colorado, Georgia, Idaho, Iowa, Louisiana, Minnesota, New York, North Dakota, South Carolina and South Dakota. There is no mention of New Jersey law — the law Karen Capato would like to apply to the twins’ claim.

Want to read the entire opinion — or even listen to the oral argument before the Supreme Court? Look to the excellent Oyez multimedia website maintained by the IIT Chicago-Kent College of Law.

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.

Principles of Self-Settled (“First Party”) Special Needs Trusts

SEPTEMBER 26, 2011 VOLUME 18 NUMBER 34
There is so much confusion about the difference between “self-settled” and “third-party” special needs trusts, that we want to try to explain and simplify some of the key concepts. Here are some of the most common questions (and misunderstandings):

What is the difference between “self-settled” and “third-party” special needs trusts?

This is one of the most perplexing concepts to explain to people, but it is also one of the most important. In general terms, there are two kinds of special needs trusts: “self-settled” and “third-party” trusts. Some people call the former “first-party.” Some make the distinction between “special needs” and “supplemental benefits” trusts. Some talk about “litigation” trusts. But most practitioners use the “self-settled” / “third-party” distinction, and so will we.

“Third-party” special needs trusts (the kind we’re not talking about here) are set up by one person (the third party — sorry about the illogical numbering) for the benefit of another (the first party) who is receiving benefits from the government (the second party in this scenario). Let’s make it simple: if you create a trust for your daughter (who has a developmental disability), and put your own money into the trust, that is a third-party trust. But if your daughter creates her own trust, to hold her money, that is a self-settled trust.

To make things more confusing, most self-settled trusts are not literally self-settled at all. You, for instance, might sign the trust document creating your daughter’s self-settled trust. A judge might authorize you to do so. Your daughter might not be involved at all — in fact, she could theoretically object and still be treated as if she had set up the trust. The key is this: was there a moment in time during which she had the right to receive the money in the trust outright? If so, it is probably a self-settled trust.

Most (but certainly not all) self-settled special needs trusts are set up to receive personal injury settlements or judgments arising from a lawsuit. That may be the easiest way to distinguish self-settled from third-party trusts: if the trust is the result of a personal injury or wrongful death lawsuit, it is almost certainly a self-settled trust.

The second most common circumstance in which a self-settled trust might be created is when a family member leaves money or property outright to an heir who has a disability. Because the recipient had a right to receive the money (or property) outright for at least a moment in time, that kind of trust will usually be a self-settled trust, as well — even though arising from an inheritance.

What difference does it make whether a trust is self-settled or third-party?

All the difference in the world. The former type of trust must have a “payback” provision, returning up to the full value of the trust to any state which provided Medicaid benefits upon the death of the beneficiary (or, in most states, upon the termination of the trust). Third-party trusts do not need to have a payback provision, and it is almost always a blunder to include one.

There are other differences: the self-settled trust will be scrutinized much more closely for types of expenditures (in most states — your experience may vary on this one). Third-party trusts usually fly largely under the radar of public benefits agencies. Self-settled trusts are usually supervised by a court (again, state experience may vary widely); third-party trusts almost never are court-supervised. In Arizona, any self-settled special needs trust must include very restrictive language about how it can be used; third-party trusts need not include that language. In general, if you had a disability or were a trustee you would much rather have your trust be third-party than self-settled.

Who is the “grantor” of a self-settled special needs trust?

This is a particularly fun question. There are at least three different concepts involved here, and they have different language. Everyone — including seasoned practitioners — tends to use the terms interchangeably and the result can be confusing.

Trust law recognizes that someone has to have set up a trust. In trust law that person is usually called the “settlor.” Sometimes you see “trust creator” or some similar language — but the sense is the same. The settlor is the person who said “I hereby create a trust.” Usually they say it in writing, but that is not actually required — or at least not in Arizona. But we digress.

Federal income tax law introduces a different kind of person — the “grantor.” The settlor might not be the grantor. There might be one, two or dozens of grantors for a given trust. But usually, the grantor is the person whose money was transferred into the trust. In the case of a self-settled special needs trust, that will always be the beneficiary — the person with a disability whose public benefits are being protected by establishment of the trust.

Along comes public benefits law and invents another role: the trust “establishor,” if you will. Federal law says every self-settled special needs trust must be “established” by one of the following: the beneficiary’s parent, grandparent, or guardian — or by the court. Notice anyone missing from that list? You’re right — the beneficiary isn’t on the list.

So in many self-settled special needs trusts, there are three different people with three different roles:

  1. The grantor, who is also the beneficiary, who did not sign the trust document
  2. The establishor, who might be a judge and might not sign the document at all, and
  3. The settlor, who signed the trust document — perhaps at the judge’s direction.

Can there be more than one grantor in a self-settled special needs trust?

Technically, yes — but only technically. Some states (not including Arizona, happily) require that the establishor of a self-settled special needs trust put some money or property into a trust in order for it to exist. In those states a parent might sign a special needs trust, and staple a $10 bill to the trust to show that it has been legally created. That makes the parent a grantor for tax purposes — as to the $10 investment. The rest of the money comes from the beneficiary’s personal injury settlement (or inheritance, or savings), which makes the beneficiary the grantor for the bulk of the trust’s assets. So technically the parent and the beneficiary are both grantors. Sound like an absurd distinction? It is.

Does a self-settled special needs trust need a new tax identification number?

No. At least, not usually. The beneficiary’s Social Security number will suffice just fine. Some banks, brokerage houses and accountants may argue otherwise, but there is a special IRS rule for such trusts, even though the grantor/beneficiary is not the trustee. But because the trustee is not the beneficiary, it is permissible for the trust to get a separate number — it is called, incidentally, an Employers Identification Number (or EIN), even if the trust does not have any employees.

What can a self-settled special needs trust pay for?

Ah, that is a great question — and very difficult to answer. It depends on so many factors. One must look at the trust instrument itself, at state law governing self-settled special needs trusts and at the appropriate Social Security and Medicaid rules. Sometimes there are things that the trust could pay for that it should not. Sometimes there are things that the trust ought to be able to pay for, but that it can’t — even though everyone might agree that they would benefit the beneficiary. You might look at the Special Needs Alliance’s “Handbook for Trustees” for better guidance, but at some point you are just going to need to talk to an experienced and capable lawyer. The Special Needs Alliance might be able to help you there, too.

We hope that helps explain what a self-settled special needs trust is. Next week we plan on telling you about third-party trusts, and some of the rules governing them.

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