Posts Tagged ‘Special Needs Trusts’

Mother’s Gifts to Children Create Dispute Over Special Needs Daughter

SEPTEMBER 21, 2015 VOLUME 22 NUMBER 34

What plans should you make when you have a child receiving Supplemental Security Income (SSI) or Medicaid benefits? Should you create a special needs trust? Disinherit that child so their benefits won’t be affected? Leave their “share” of your estate to another child or children instead?

We get asked this question regularly. Most of the time our answer is easy, and strongly delivered: create a special needs trust. Choose a trustworthy child to administer the trust, or maybe a professional trustee. Let the trustee act as your surrogate after your death — deciding how to use the trust’s money to best benefit your child.

Do not, whatever you do, leave your child’s inheritance to another child with instructions to take care of their sibling. Do not do that even if you completely trust that child. Do not do it even if you are prepared to write something that makes clear that they are not required to behave honorably — that you are not trying to create a de facto trust for your child with disabilities.

Why not? Because bad feelings will be generated. Litigation is likely to be involved. Your children, and their children, and your sons-in-law and daughters-in-law, can not be counted on to all agree about how they should behave — especially with you not around to exercise moral authority over them.

How do we know this? Because of Mary Jane. Let us explain.

Mary Jane had several children. We’re going to call them Robin, Randi, Rachel, William and Walter. Robin is developmentally disabled. In 1995, Walter died in a terrible accident. At the time, Mary Jane received a settlement from Walter’s death; she gave $51,000 of her settlement money to each of her children, except that she gave $102,000 to Randi and less than $1 to Robin.

Did Mary Jane intend to have Randi use the “extra” $51,000 share for Robin’s benefit? At the time she said not — there was explicitly no restriction on how Randi could use her gift. The family problem created by this uncertainty didn’t become active until almost two decades later.

After she made the gifts to her children, Mary Jane did her own estate planning. She created a special needs trust for Robin, naming William as trustee. An equal share of her estate was to go to the special needs trust upon her death. She also helped Robin sign a power of attorney, naming William as her agent after Mary Jane’s death. Then, in 2003, Mary Jane died.

After Mary Jane’s death, her third daughter (Rachel) began asking Randi what she had done with what she, Rachel, thought of as “Robin’s” $51,000 gift from back in 1995. Randi declined to tell her. Rachel then turned to William, insisting that he should make Randi answer her questions. He, in turn, also declined to act.

At this point, it’s worth reviewing the players. Robin was to receive an equal share of Mary Jane’s estate, though in a special needs trust. But Robin had not received an equal gift from the settlement of Mary Jane’s claim arising from Walter’s death. Instead, Randi had a double share. Meanwhile, William had been put in charge of Robin’s inheritance and also managed Robin’s own affairs. Rachel had no apparent standing or role in any of these arrangements.

Still, when Rachel did not get a satisfactory answer, she filed a lawsuit. She sued Randi (for not agreeing that half of her 1995 gift was really for Robin) and William (for not insisting that Randi account for that gift). She asked that the court make Randi account, and that the $51,000 (plus interest) should be held in trust for Robin’s benefit.

The trial judge dismissed Rachel’s lawsuit, finding that she had produced no evidence that the gift from Mary Jane was in trust at all. Rachel appealed.

The Wisconsin Court of Appeals upheld the dismissal. The appellate judges agreed that there was no evidence that Mary Jane had intended the “double” gift to Randi to be a trust for Robin. Dismissal of the lawsuit was proper. Robbins v. Foseid, September 3, 2015.

How does Mary Jane’s case establish the importance of actually creating a trust? After all, assuming that she did not intend to make Randi’s “double” gift a trust, the courts upheld her intentions, right?

Yes, but at a significant cost — both in legal fees and in family disharmony. Of course we don’t have enough information about her family to know if they generally got along well before the death of Walter and Mary Jane’s gifts to her children. If they did mostly get along, however, her failure to be clear about her intentions might be a significant part of the later decline in the relationship.

If, on the other hand, Mary Jane actually did intend the double gift to benefit Robin, those intentions are now completely dependent on Randi’s goodwill toward Robin. Maybe Randi will do exactly the right thing, but wouldn’t it have been more effective and better thinking for Mary Jane to have made the original gift into a special needs trust — probably just like the one she created a year later as part of her estate plan? And what happens now if Randi should die, leaving her estate to her husband, or her children, or her creditors?

Our basic point: when you are making plans for your child who has a disability, you should not count on everyone correctly guessing your intentions, or acting honorably, or even living long enough to carry out the tasks you are implicitly setting for them. Make your intentions explicit, and the lines of authority clear. Create a special needs trust.

Debit Card for Special Needs Trust Creates Eligibility Problem

AUGUST 3, 2015 VOLUME 22 NUMBER 28

As part of Pennsylvanian Sharon Edwards’ (not her real name) divorce settlement, she and her husband agreed to establishment of a special needs trust to hold some of the marital property she would receive. With the trust in place, Sharon would continue to qualify for Supplemental Security Income (SSI), and she would still qualify for Medicaid coverage of her medical needs.

At least that was the plan. It relied on federal law that permits SSI recipients under age 65 to transfer assets to a self-settled special needs trust. This kind of trust must have some specific provisions, including:

  • the trust can not be used for food and shelter costs (although that limitation is not absolute)
  • the beneficiary can not receive cash or items that could be redeemed for cash
  • the trust must pay out to the state Medicaid agency at the death of the beneficiary (at least to the extent of any Medicaid services the beneficiary has received)

That was how Sharon’s trust was constructed. Her father was the initial trustee, and her daughter was the backup trustee if her father became unavailable. The trust terms required a payback to the Pennsylvania Medicaid agency upon Sharon’s death. The terms of the trust prohibited the misuse of trust funds.

What went wrong? When Sharon’s father became ill, Sharon took over a debit card on the trust’s bank account. She used the card to pay doctor’s bills, and to pay her monthly telephone, insurance and electric bills. There was some evidence that she used the card for other (and impermissible) purposes, but ultimately the result was not dependent on whether Sharon herself used the card for other kinds of things.

With online and electronic banking so widespread, debit cards and automatic bill payment arrangements are commonplace. They might seem to be a reasonable approach to handling special needs trusts, too — but they are a dangerous option. The result of Sharon’s use of her trust’s debit card: the Social Security Administration ruled that she had improperly received SSI for over two years, and that she owed the agency $18,137.

Sharon appealed the Social Security Administration’s ruling, but the Federal District Court upheld the agency. Elias v. Colvin, Middle District of Pennsylvania, July 27, 2015. The decision is unsurprising, but it does give us a chance to examine its different elements.

What, precisely, did Sharon and her trust do wrong? Was it the very existence of the debit card, or the specific uses of the card, or the fact that Sharon held it for over two years? Could the problem be solved by tearing up the card, or returning it to the trustee, and stopping the challenged payments? Let’s review some of the principles.

Generally speaking, Sharon’s trustee could have directly paid her doctor’s bills (though most should have been covered by Medicaid, of course), and her telephone bills. Neither of those payments would have been an issue, even if the trust covered all the costs, and/or made monthly payments.

Sharon used the trust to pay for insurance, as well. It is unclear from the reported court decision whether that was auto insurance, health insurance, life insurance or homeowners (or renters) insurance. If her insurance bills were for her automobile, the trustee could have paid those bills without any problem. If health insurance, the same answer applies — except, again, it would be unclear why health insurance was required if she was covered by Medicaid. Life insurance payments would have been permissible, though if Sharon owned a life insurance policy it might have resulted in a loss of SSI and possibly Medicaid coverage. Homeowner’s insurance would be fine, provided that it was not required by the bank holding a mortgage on her home (that would make the homeowner’s insurance look like a housing cost).

Finally, Sharon’s use of the debit card resulted in the trust paying for her electricity. If the trustee had written checks directly to the electric company, that might have been permissible — but it might not, depending on state Medicaid rules and the language of the trust itself. If permissible, it would have resulted in a reduction in her SSI payments.

On balance, if the trustee had paid for everything Sharon admitted using her debit card for, the result should have been (at worst) a slight reduction in her SSI. So why was she found to be ineligible for SSI altogether?

The primary problem for Sharon was that she effectively had access to the entire trust. Even though she did not, she could have gone to the ATM and withdrawn every penny in the trust’s bank account. That fact made the trust an available resource, and its income counted as income to Sharon.

Does that mean that no special needs trust should ever have a debit card, or that no special needs trust beneficiary can ever have access to a debit card? No, it does not — but there are limitations on the use of debit cards that must be observed.

Sharon’s trustee could have had a debit card and arranged for payment of her bills (except, perhaps, for the electricity bill) using the debit card. That would not have caused problems for Sharon’s SSI eligibility.

Sharon herself could have had a debit card, provided that it did not permit her to withdraw funds from the trust’s main account. Her trustee could have set up a small account with Sharon’s SSI money and let her have a debit card on that account. Or her trustee could have arranged for a specialized debit card that could not be used for cash withdrawals or purchase of food or shelter items — one such card is available and marketed by True Link Financial, and we have used their services with excellent results.

It’s also worth noting that Sharon was not given a chance to “fix” the problem by handing back her debit card. For a little more than two years, she had access to her special needs trust’s bank account — and that meant she was ineligible for SSI during that period. It did not mean that her trust was defective, or that she could never get on SSI again, but it did mean that simply giving back the card did not reverse the $18, 137 overpayment notice.

Management of special needs trusts is very complicated and often confusing. We strongly endorse the Special Needs Alliance‘s “Handbook for Trustees,” a very helpful resource for trustees and those interested in understanding how special needs trusts work. Best of all, the “Handbook” is priced right: it’s free.

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.

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.

Top Ten Reasons You Might Want a Trust, Rather Than Just a Will

JANUARY 26, 2015 VOLUME 22 NUMBER 4

Do you need a living trust? Even with an estate tax threshold of over $5 million (and double that, for most married couples)? That is the primary question posed by most of our estate planning clients.

For years the answer depended mostly on the size of your estate. Not that there were (or are now) any inherent estate tax benefits to having created a living trust, but it was easier to take advantage of the easy ways of minimizing taxes using a trust than otherwise. So most Arizona couples worth more than about $1 million were urged to establish a trust. Couples who hoped to be worth more than $1 million often took the step, too — on the chance that their assets might grow enough to create a possible estate tax liability.

Then the federal government started raising the tax level, ending up at $5 million and indexed for inflation (so that the threshold for 2015 is $5.43 million). They ultimately changed the rules for married couples, too, making it easier for a surviving spouse to use his or her deceased spouse’s exemption, effectively doubling the level at which estate taxes were a driving factor. The State of Arizona jumped into the act, too, by repealing its state estate tax altogether. That all means that for more than 99% of Arizona individuals (and couples), estate taxes are no longer an important reason to consider creating a trust.

Does that mean that no one needs a living trust any more? Not exactly.

First, let’s think about people who established a trust back when it was an important step — do they need to consider revoking their trusts now? No. There are almost no downsides to creating a trust, other than the cost and trouble of setting them up in the first instance. Even though it might be hard to justify setting up a trust now, the individual (or couple) who has already gone through that process should probably not undo their earlier work.

Should a person worth well less than $5 million ever create a trust? Yes — at least in some situations.

Let’s get right to the point: what are the top reasons you might want to create a trust? With thanks and a nod to our associate attorney Elizabeth N. Rollings, who created the original list, here are our offerings:

  • 10. You really, really hate the thought of probate. It’s not the monster you probably think it is, but that’s not to say it’s a lot of fun, or cost-free. We can try to persuade you that it’s not that important to avoid probate — or we can just help you avoid the process.
  • 9. You favor privacy. There’s not all that much public disclosure involved in the probate process, and most of what does need to be disclosed can just be shared with your heirs. But there are some things that get into the public record, like the text of your will and the names and addresses of the people to whom you have left money or property. Do you have unusual family dynamics, or a publicly recognizable name, business or assets? You might prefer to create a trust.
  • 8. You want to make it easier for your executor. We don’t actually use the term “executor” any more, but we know what you mean. It’s simply easier for a successor trustee to get control of your assets than it is for that same person when they are named as agent on a power of attorney. It’s also easier to arrange for an orderly transition as you are less able — from having your chosen administrator named as successor trustee to naming them as co-trustee, and dividing the job in a reasonable — and flexible — way.
  • 7. You have complicated assets. Most people don’t think their assets are complicated. “I just have Certificates of Deposit in the four Tucson banks that pay the highest interest rates,” you say. Oh, and then there are the government bonds. Plus a brokerage account at a national low-cost broker, and a rollover IRA. Did you remember to mention those almost-worthless oil and gas rights you just learned about from your grandfather’s estate? Complicated, complicated. Having a trust makes it much easier for someone to handle your assets for you — both after your death and while you are still alive but not functioning at the top of your game. Oh, and there may be income tax benefits to having your assets in the trust (though you — or your spouse — may have to die in order to get the tax benefits. So maybe we’ll soft-pedal those).
  • 6. You have complicated distribution plans. This one is related to the previous one, and — as with “complicated” assets — clients seldom think their plans are complicated. “I just want to leave everything equally to my three children,” you tell us. Oh, plus $10,000 to each grandchild, and a $100,000 gift to your church. Also, a list of personal property and who is to get it. And some thoughts about what should happen if, god forbid, one of your children should die before you. The more complicated your distribution scheme, the more you need to consider a trust. Why? Because your distribution will be more private, and it’s easier to adjust to changes in your future (should your church’s gift go up as your net worth expands, or down as you draw down your IRA?).
  • 5. You have real estate in more than one state. Probate, as we have said before, is not as difficult as you probably think. But if you have real estate in more than one state, we have to go through the process in each state. Some states are much more complicated and expensive than Arizona. So if you have your home in Arizona, a condo in California, a summer place in Wisconsin, and a timeshare in Virginia, you might want to think about a living trust. Even if you only have two of those, you might be a better candidate for a trust.
  • 4. You have professional children, or wealthy children. Your son is an architect, and your daughter is a physician. Why do they need their inheritances to be in trust? They don’t — but it’s an extra gift from you to put them in trust. You can help protect their inheritance from creditors, malpractice claims, even divorce proceedings. And you might be able to keep your assets out of their estates when they die, thereby reducing the amount of estate tax the grandchildren pay.
  • 3. You have minor children, or children (or grandchildren) under about age 25. Why 25? Recent research suggests that that’s about the age at which a child’s brain really matures, even though the legal system considers them mature at 18. Of course you get to choose the cut-off age, but we are urging people to think about 25-or-so for their planning. Even if your children are older, a share of your estate might go to grandchildren — and they could be younger than the cut-off age you choose.
  • 2. You have a family member who is just not good with money. Is your son (or, for that matter, his wife) a bit of a spendthrift? Is your youngest still trying “find” herself? You might want to provide some sort of management for that beneficiary’s share of your estate.
  • 1. You have a child or grandchild with a disability. Are they receiving public benefits like Supplemental Security Income (SSI) or Medicaid (in Arizona, AHCCCS)? You need to create a special needs trust for any share they will receive. Are they not on public benefits right now? You probably still want to consider a special needs trust, because you don’t know how things will change over time. The same rules apply for any person you plan to leave money to, including your long-time housekeeper’s son or the young woman who grew up with your kids and was treated like a member of the family. We just use “child or grandchild” because they are the most common recipients.

Any of those sound like you? Let’s talk about whether a living trust is the right choice. Oh, and if you don’t live in Arizona — talk to your own lawyer, who might rearrange the order, drop some of these points altogether, and add others.

ABLE Act Passes — We’ll Tell You What It Means

DECEMBER 22, 2014 VOLUME 21 NUMBER 46

The Achieving a Better Life Experience Act passed the U.S. Senate last week, and President Obama signed it over that same weekend. But what does it mean for people with disabilities, and for their families? How will you be able to use the accounts authorized by the ABLE Act?

The ABLE Act is loosely connected to Section 529 of the Internal Revenue Code. You might recognize that number — the prior law created very popular accounts for prepaid tuition. There is lots of information about 529 Plans, including the popular “Saving for College” website. To better understand ABLE, it might make sense to first describe how 529 plans work.

529 Plans

There are dozens of 529 Plans available. Almost every state has adopted at least one 529 Plan (some states have more than one). They often look very much like mutual funds; you put your money into the account, it is managed by the administrator, and it grows along with the market (or the segment of the market utilized by your particular plan).

You can invest your money in a 529 Plan set up by a state other than yours, or where your prospective student lives. So you might live in Arizona, have a grandchild in Arkansas, decide to invest in Alaska’s plan (it happens to be administered by T Rowe Price), and ultimately use the account to pay for your grandchild’s education in Alabama (just to stay in the “A” states). Not every state’s plan allows out-of-state investments, but most do. There are also “Prepaid Tuition” plans available in many states; they are just what the name implies, though usually the funds can be used for other colleges when the time comes (though there may be incentives to keep the money, and the student, at the predetermined college).

You can set up a 529 Plan for, say, your child — and both sets of grandparents can set up separate accounts for the same student. The multiple plans for a given child can be from different states. The maximum asset limit is set in each plan; if you make more than a $14,000 contribution to a plan for a given student in one year, you may have to file a federal gift tax return (there’s a special rule if you contribute up to $70,000 in one year, but that’s going too deeply into 529 Plans for our purposes).

If you do set up a 529 Plan for a child or grandchild, and that prospective student dies, decides not to go to college, or gets a really good scholarship, you can change the beneficiary of your plan to another family member. You keep pretty impressive control over the plan — and yet it is not considered part of your estate for federal estate tax purposes.

Though you do not get any income tax deduction when you do set up a plan, any later withdrawals for qualified education expenses come out of the plan tax-free. That means that no one has to pay the income tax on the interest and investment income over the years the plan is in place. That’s one of the best parts of a 529 Plan.

ABLE Accounts

The new ABLE Accounts will be similar to 529 Plans in a number of ways, but very different in others. In fact, the ABLE Act creates a new section, right after Section 529, of the tax code. It’s numbered as Section 529A, just to make the connection clearer. Here are some of the highlights of the new Section 529A:

  • A person with a disability can only have an ABLE Account if they were severely disabled by age 26. Why this limitation? It’s mostly about federal budgets; if every person with a disability could open an ABLE Account, the projected cost of the program would mushroom. What does it mean to have a disability before age 26? The easy answer is that someone who was receiving Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI, or SSD) benefits by that age qualifies. Others might qualify, but it will be harder to establish eligibility.
  • Each person with a disability can have just one ABLE Account, and it must be set up in the state where they live. If they move to another state, the account probably will not have to move. But that raises a fairness issue: if the state where the person with a disability resides just doesn’t offer an ABLE Account, he or she will not have the option available.
  • Contributions to an ABLE Account may not exceed $14,000 in a given year. That’s total contributions — if the person with a disability puts in, say, $5,000, then other family members may not contribute more than $9,000. That figure is indexed to the maximum annual gift tax exclusion amount (though gift taxes are mostly irrelevant to ABLE Accounts), so it should go up to $15,000 in a year or two.
  • The maximum size of an ABLE Account will be set by state law. Expect it to be in the range of several hundreds of thousands of dollars. But if the account grows to more than $100,000, the beneficiary will lose Supplemental Security Income (SSI) benefits — but not state Medicaid eligibility.
  • When the ABLE beneficiary dies, remaining assets in the account go to the state Medicaid program which provided benefits during life (after payment of other pending bills, and limited to the amount the Medicaid program actually paid for the beneficiary’s care).
  • If ABLE Account funds are used to pay for “qualified disability expenses,” there will be no income taxation on the interest or gain in value of the ABLE assets, and the expenditure will not be counted as income to the beneficiary. We don’t yet know exactly what “qualified disability expenses” will mean, as we’ll have to wait for the government to define the term. The law does say, though, that the categories for “qualified” expenditures will include “education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses”.

What does that mean for a given person with a disability (and for his or her family)? Who will be good candidates for ABLE Accounts, and who will not? Should you consider an ABLE Account as an alternative to a special needs trust? Those questions — and more — will be addressed in our newsletter next week. Stay tuned.

Tax Tips for Those Caring for a Child with Special Needs

MARCH 17, 2014 VOLUME 21 NUMBER 11

We last wrote about income tax issues associated with providing care and support for relatives two years ago — just before tax filing time. Since we’re just a month away from tax time 2014, it’s a good time to review and update.

What’s changed since our 2012 newsletter article on income tax issues? A couple things. But first, let’s take another look at the structure of the personal exemption and medical deductions.

You, as an individual taxpayer, get to claim a personal exemption of $3,900 for 2013 (the tax year you’ll be filing for next month). That means that, in addition to other deductions and tax rate calculations, the first $3,900 of income is tax-exempt. If you are married and filing as a couple, each spouse gets a single exemption.

You get another exemption for each person you can claim as a dependent. The easy ones: your minor children who live with you. In fact, you get to claim an exemption for your children until age 19 or (if they are in school) age 24. There are also rules governing when you claim an exemption for your minor (or student) children who do not live with you, but who depend on you for at least half of their support.

What if your child is over age 24 and still living with you? If they live with you at least half of the time, and you provide at least half of their support, you may still be able to claim an adult child as a dependent. In fact, that will be available for a parent, a sibling, a stepchild or foster child, or any descendant of any of those relatives.

There are actually two completely separate sets of rules about when you can claim a child or other relative as a dependent. The two categories are confusing because of their names: “qualifying child” and “qualifying relative.” A “child” for these purposes could be a parent or other relative (why would they make the terms easy to understand?), and a qualifying “relative” can be a child. So it’s hard to figure out exactly which category your child-or-other-relative fits into, but bear with us — there are some simple rules that will cover most of the situations.

Did your child (or other relative) live with you for at least half of 2013? Did you provide at least half of his or her support? If either of those questions can be answered “yes,” then you might well be able to claim them as a dependent and get that extra personal exemption on your tax return. Is your relative permanently and totally disabled? If so, then the exemption is probably available. The central question in most cases: did you provide at least half of your relative’s support?

A couple rules are still important to understand: your dependent can not also be someone else’s dependent — even their own. If they claim a personal exemption on their own tax return, you can not claim another one. You (and they) should figure out which exemption is more valuable as part of your analysis of whether you provide half of their support.

Note that for income tax purposes all sorts of relatives can be a “child.” Illogically, even your parents can qualify under the “qualifying child” exemption. While you’re reading about the tax terms, keep in mind that they might not make plain English-language sense.

In addition to the personal exemption, there are other tax benefits available to someone who is providing support and assistance for a family member with special needs or high medical costs. If you itemize your deductions, you can claim expenses for medical costs. Once again, be careful about assuming the tax code is using plain language — all sorts of things are possibly included as medical expenses.

For instance, if a doctor tells you that you should modify your home by, say, building a therapy pool or installing air conditioning, you might be able to deduct those costs. It may be necessary to figure out how much the improvements increase the value of your home and make appropriate adjustments — though that is not always required. Improvements to enhance accessibility, for instance, do not need to have an enhanced value calculation. This area is tricky: be sure you consult with your attorney or accountant before claiming a deduction for home improvement or modification.

Another medical deduction that is often overlooked: seminars and conventions where you learn more about care of your child with special needs. Do you go to the annual meeting of advocates for your child’s particular disability? If his or her doctor writes a letter indicating that you can learn better caretaking measures there, you may be able to deduct the cost of travel, registration and incidentals incurred at the seminar (but not food and hotel costs). Check with your tax preparer for details applicable to your particular situation.

Does your child benefit from acupuncture, chiropractic treatment or recognized religious healing? The costs may be deductible. Does your child have a guide dog or other assistance animal? Those costs are deductible — including procuring, training, veterinary bills, even food. How about legal bills for your child’s guardianship or other expenses? Sorry, probably not — unless they are necessary to authorize mental health care.

Back to our beginning question: what has changed since our 2012 article? Two important things, at least:

  1. The personal exemption, $3,700 in 2011 (that was the important figure in our 2012 article), is $3,900 for 2013. It will almost certainly go up again for 2014, which will mean a new number if we repeat this information next Spring.
  2. The deduction for medical expenses required your total deductions to be more than 7.5% of your income two years ago. That figure increased for current tax returns (for 2013): you now have to have deductions for more than 10% of your income in order to itemize at all.

What other income tax advice can we offer for taxpayers who take care of a child or other family member with special needs? There are a few things to look out for:

  • Supplemental Security Income (SSI) and VA Disability payments are not treated as income at all. That simplifies tax filing (and reduces taxes) for some special needs trust beneficiaries with income from their trusts that might otherwise be taxable.
  • You may be able to claim a credit for the cost of caretakers for your spouse or dependent if the expenses are necessary to allow you to work. Look at IRS form 2441 and ask your tax preparer for more details. Note that this is not a deduction subject to the 10% threshold — this is a tax credit.
  • If you do claim your child with special needs as a dependent in 2014 (that is, on the return you file next year), you will need to be sure to have him or her covered by health insurance — although Medicare or Medicaid will satisfy this requirement if he or she is on either program.
  • Is there a special needs trust in place? It will have specific tax consequences that you need to discuss with your tax preparer and/or your attorney.

Why Do I Need a Lawyer — Can’t I Write My Own Will?

OCTOBER 14, 2013 VOLUME 20 NUMBER 39

“My father hates, absolutely hates, lawyers,” a casual acquaintance tells us at a social gathering. “I know it’s a bad idea, but can’t he just write his own will?”

Let’s get the answer out of the way right up front: yes, he can. And there’s a very high likelihood he will do it just fine.

We can hear the faint and distant voices of thousands of other lawyers from across the country even as we write those words. “You wouldn’t do your own brain surgery, would you?” they ask. Or, more subtly: “go ahead, encourage everyone to write their own wills — lawyers’ children will go to much better colleges as a result.”

We’ll let that one sink in a moment.

Seriously: writing a will is not brain surgery. It doesn’t require anesthetic, and failure to do a good job doesn’t lead to instant death. For our money, there are much better comparisons. Would you build your own airplane (and then fly it)? Or maybe, more prosaically: are you comfortable doing your own business income taxes? In either of these two cases the project is detailed and complicated, and the negative results flowing from a mistake will not be immediately apparent. In both cases (and numerous others we might draw on) the possible negative repercussions could be far more costly than getting good professional help at the outset.

And yet thousands of people do build kit airplanes and fly them. Millions prepare their own tax returns. So can’t they prepare their own wills?

Yes, they can. There are forms and computer software to help. In our experience most people will do just fine with those kinds of assistance. The product may not be beautiful, but it can be perfectly functional.

Are we saying that you don’t need a lawyer to prepare a will? Absolutely not — there is simply no question that you are better off getting a lawyer’s advice about your estate planning. And the cost is amazingly inexpensive (it is easy to insist on that point after our visit last week to the dentist — her bill was more than we usually charge for estate planning consultations, and the visit was both shorter and more painful). Though you can prepare your own will, here are some of the reasons you should not:

  • We frequently see mistakes in do-it-yourself estate plans. We have seen wills that failed to name a personal representative (what used to be called an executor), and percentage divisions that didn’t add up to 100% of the estate, and attempts at legalese that probably reversed the writer’s actual intentions. We have seen innumerable wills that attempted to leave individual items to someone, even though beneficiary designations (which overrode the will) named someone else as recipient. We once probated a “will” written on the back of an envelope on the way to the airport — the writer, incidentally, didn’t die on that trip but five years later, with the envelope still the most recent signed document.
  • “Holographic” wills — handwritten, signed wills, which are very popular among the do-it-yourself crowd — are not valid in every state. Requirements vary. The result: a lot of self-prepared wills turn out not to be wills at all.
  • So far we have focused on wills — but should you be preparing a living trust? Do you need a Limited Liability Company established? Are there income tax considerations involved in your estate planning? Does your son need a special needs trust? How will you know, without talking with a lawyer? Well-written documents are important, but what your lawyer realizes (and you might not) is that the choice of document is often more important than the words and phrases in the document.
  • Similarly, it is usually not enough to just write a beautiful will (or trust, or power of attorney). Beneficiary designations, titles, and the relative values of your assets all are important considerations in your larger estate plan. And yes, the documents need to be well-written, too.
  • Your estate plan is not immutable. How long will your will, trust, power of attorney and beneficiary designations last? Well, they will “last” forever, or until you change them — but they will likely start being out-of-date within about five (perhaps as many as ten) years of being completed. So your self-help approach, leaving you slightly uncomfortable about whether you have done everything right, will need to be started all over in about five years.

We can go on, but perhaps our point has been made. You hire an attorney to handle your estate plan so that you can be sure the correct questions have been asked (and answered), not just to write elegant-but-wordy documents. What you get from your lawyer is, yes, good documents — but also an effective estate plan and more peace of mind.

A last word: many clients think it might save money if they prepare their own documents and then have a lawyer review them. That almost never works. The lawyer’s fees are largely based on collecting information, analyzing your situation and determining what ought to be done. Those steps have to be completed even if you prepare the documents yourself. And your lawyer probably will take longer to review your documents than to prepare her own, more familiar ones — and she will be less comfortable with the result, too. So the cost is likely to be the same or higher if you take homemade documents in for review.

Oh, and a last last word: when someone tells us that their father just hates lawyers, we have exactly the reaction you might imagine.

 

The Affordable Care Act and People with Disabilities

SEPTEMBER 30, 2013 VOLUME 20 NUMBER 37

The Affordable Care Act is upon us, or almost so. October 1, 2013, is usually listed as a key date for the ACA, and it is — but nothing actually changes on that date. Quite a few changes have become effective already. The changes receiving the most media attention — the availability of health care exchanges and individual insurance policies, and the related requirement that almost everyone get some sort of health insurance coverage — begin to kick in on January 1, 2014.

October 1 is important, though. That’s when the health exchanges are supposed to be available, even though customers won’t be able to secure policies for another few months after that date. That’s when we should have at least a partial answer to some of our questions, like how much ACA insurance will cost. Many, many other questions will still remain unanswered.

One question that we at Fleming & Curti think should be asked more often: what effect will the Affordable Care Act have on care of people with disabilities? Maybe the reason the question isn’t asked more often is that the answer is (as we look into our Magic 8-Ball): “Reply hazy – try again”.

There have been a few articles written about the relationship between the Affordable Care Act and patients with disabilities. The Obama Administration has a few suggestions about the benefits of the ACA for this population. The Special Needs Alliance (we love the SNA, and we are members) has written about the ACA, and individual SNA members have described the effect of the Supreme Court decision upholding the ACA, the ACA’s impact on people with special needs, and how the new health care exchanges may affect care for those with disabilities (among other topics). The National Academy of Elder Law Attorneys has provided a fair amount of information, too.

But what does it really mean? We can provide some highlights:

  • The ACA means the end of pre-existing conditions limitations. This might be a huge item. People with special needs have largely been frozen out of the health insurance market because they haven’t been able to get coverage. That should now change. People with cerebral palsy, mental illness, physical disabilities — all should be able to qualify for insurance. Coverage might be limited, or expensive, or both — but it should be available. That, of course, only works if almost everyone is insured — we will have to see how that plays out over the next few months.
  • Most patients with disabilities, frankly, will be unaffected. Most already qualify for Medicare or Medicaid — or both. They will not, in most cases, be moving to private insurance (though some undoubtedly will).
  • Family members, including caretaker family members, may suddenly qualify for health care coverage. That just might prove to be a surprisingly strong benefit for patients with disabilities.
  • Some beneficiaries of special needs trusts may be in a position to leave Medicaid plans in favor of private insurance. Some special needs trusts might even be modified to provide better benefits for the beneficiary (since continued eligibility for Medicaid might not be as important). This, of course, will depend on the size of an individual special needs trust, and the cost of insurance. But a significant number of patients may move from the public health system to private insurance coverage.

It is early still, but the ACA might be a real game-changer. We’ll keep monitoring policies as they roll out, and as the industry adapts to change.

 

 

 

Taxation of Pooled Special Needs Trusts

SEPTEMBER 23, 2013 VOLUME 20 NUMBER 36

We write a lot about taxation of trusts, and especially of special needs trusts. But there is one type of trust that we haven’t written much about, and we can’t find other explanations for. “Pooled” special needs trusts are a special kind of trust, and there is much confusion about how they should be treated for federal income tax purposes.

First, we don’t think there are a lot of other tax issues about pooled special needs trusts (other than income taxation, that is). They are seldom — perhaps never — large enough to raise gift tax issues or estate tax concerns. We can imagine an occasional parent wondering about the gift tax treatment of contributions to a pooled trust account, but only the wealthiest parents are going to need to worry about that, and they are probably getting an abundance of good tax advice from their lawyers and accountants.

So let’s just talk about income taxation of pooled special needs trusts. But first perhaps we need to define terms.

What is a pooled special needs trust?

Pooled trusts are just what the name suggests: a single trust consisting of money held for the benefit of a number of individuals. Usually those separate trust accounts are managed together but accounted for separately. In other words, your contribution to a pooled special needs trust will be used just for you (or for the other person you designate), not for other beneficiaries. But your money and theirs will be pooled into a single investment structure, so that your administrative costs will probably be lower and your earnings higher than they would be if you were on your own.

By convention pooled special needs accounts tend to be smaller. There is no reason that needs to be true, but it often is. People with substantial money to be set aside in a trust tend to want separate treatment, separate management and different structures. But that is not always true, so some pooled accounts are large.

Most pooled special needs trusts include only money that once belonged to the beneficiary — like personal injury lawsuit settlements, or inheritances from someone who never set up an appropriate trust, or even back payments from Social Security. Increasingly, though, parents (and others) wanting to set aside money for a child with a disability are looking at pooled trusts as a convenient and cost-effective alternative.

When money comes from personal injury settlements or unrestricted inheritances, the resultant pooled trust share is referred to as a “self-settled” or “first-party” pooled trust.  When the trust is set up by a parent or another person, the pooled trust share is called a “third-party” pooled trust. That’s important for income tax purposes.

Taxation of self-settled pooled trust accounts

If a person with a disability transfers funds to a trust for their own benefit (or someone else does it on their behalf), the trust share is called a “grantor” trust. That means that the self-settled share does not pay separate income taxes, or even file a return. The larger trust may have to file a return, but none of the income attributable to the self-settled share (and none of that share’s portion of deductible expenses) gets reported on a trust (or fiduciary) income tax return. For income tax purposes, the self-settled pooled special needs trust share simply doesn’t exist.

That doesn’t mean that there is no income tax. The beneficiary may still have to file an individual tax return, including any income and deductible expenses. Of course, the beneficiary may not have sufficient income — even with the trust’s income added in — to need to file a return, and the fact of the trust won’t change that.

Of course, the beneficiary only knows what he or she has to do if the trustee passes information along to them. So the federal government requires that the trustee give the beneficiary all the information they need to fill out their own tax return. But the trustee doesn’t file anything for the trust, except the brief statement that the trust is a grantor trust and is not filing a separate return.

Taxation of third-party pooled trust accounts

If someone else puts the money into a pooled trust account, that may (or may not) set up a requirement for separate tax filings. Often, the person contributing the money will be treated as the “grantor” and have to report the income and take the appropriate deductions — even if they are not benefiting from the trust. That decision is based on a complicated set of rules known as the “grantor trust” rules. Volumes have been written about the peculiar twists those rules may take, but let’s make the simple over-generalization that, during the lifetime of the donor, it is likely that the donor will be liable for the income tax on a third-party pooled special needs trust share.

If the third-party trust share is not a grantor trust, then the trustee will need to file a federal Form 1041 — the fiduciary income tax return — if the larger trust has more than $600 of income. That return will list all income and deductible expenses, and then may result in taxable income being assigned to the beneficiary — to the extent that the beneficiary receives assistance from the trust. Did the trust pay dental bills, or moving expenses? There may be an income tax consequence to the beneficiary (but only to the extent of taxable income received by the trust — not usually the full value of services or goods purchased by the trust).

Does a pooled special needs trust need an Employer Identification Number — an EIN?

Yes. always. It’s always fun to be able to give a simple and absolute answer. There is a lot of detail behind that simple answer, but the answer is always simple: yes.

We hope that helps. The follow-up questions can be bewilderingly complicated, but go ahead — we’ll see if we can give at least generalized answers. If you have specific legal questions based on your trust’s particular circumstances, you should ask your lawyer (or a lawyer) rather than posting your query online. But we’ll (gently) let you know if we think that’s the case based on your question.

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