Posts Tagged ‘Supplemental Security Income’

When You Might Want to Open an ABLE Act Account

SEPTEMBER 13, 2016 VOLUME 23 NUMBER 34
Now that ABLE Act programs have been set up in several states, you might wonder if it’s time for you to set up an account for yourself or a family member with a disability. How can you figure out whether ABLE is right for you? We’ll try to help.

The Achieving a Better Life Experience Act (ABLE Act) was passed in 2014. It permitted people with disabilities to have a separate account, usable for disability-related expenses, that would not be counted as an available resource for Supplemental Security Income (SSI) or Medicaid eligibility purposes. States were encouraged to set up ABLE Act programs, and people with disabilities were permitted to open an account with any state — provided that the state permitted non-residents to participate.

So far, four states have opened their ABLE Act programs. One of those (Florida) permits only Florida residents to participate. The other three (in Ohio, Tennessee and Nebraska) are open to anyone who qualifies.

ABLE limitations

There are a number of concerns about ABLE Act accounts. First, no more than $14,000 per year can be put into an account. Second, any funds left in the account at the death of the participant — regardless of where the money originally came from — will be paid to the participant’s state’s Medicaid program. Those two limitations make ABLE Act accounts unattractive for most family members who might otherwise think of giving or leaving substantial assets to a loved one who happens to have a disability.

There is a lot of misunderstanding about one other item: are ABLE Act accounts like investment accounts, or more like checking accounts? In some cases they might look like one or the other, but thinking of ABLE Act accounts as terrific investment opportunities for people with disabilities is, well, just misguided. Earnings will be limited, expenses are likely to be somewhat higher than similar accounts for other purposes (like education accounts, on which the ABLE Act accounts were modeled), and any account that does grow to more than $100,000 will cause suspension of SSI benefits anyway. We believe that, in most cases, ABLE Act accounts will most resemble checking or savings accounts.

ABLE uses

That doesn’t mean that the ABLE Act won’t provide terrific opportunities, however. There are a number of situations in which we imagine the ABLE Act will be a great boon for beneficiaries. A sampling of the most likely beneficial circumstances for ABLE Act accounts:

  1. The capable beneficiary. Are you the person with a disability? If you could handle a savings account yourself, but have been unable to put anything away because of the $2,000 asset limit for SSI, then the ABLE Act was written for you. You can now save any money you don’t need from your SSI each month, and park it in an ABLE Act account. You can save for vehicle repairs (or a new vehicle), for tuition, or even for the property taxes on your home. There are more uses you can consider, and you probably see the possibilities.
  2. The housing shortfall. Do you (or a family member) get assistance with your housing expenses? And when you do, does that reduce your SSI benefit? If so, you might explore the ABLE Act account as a way to pass the housing assistance through a sieve that makes it perfectly permissible — and removes any reduction in your SSI payments. Your bottom line might be to increase your SSI benefit to the highest possible amount, while still getting assistance from family members with living expenses.
  3. The small inheritance, or personal injury settlement. If you have less than $14,000 coming to you from an unrestricted inheritance, or settlement of a personal injury lawsuit, you probably already know that it could interrupt your eligibility for SSI (and, perhaps, for AHCCCS, Arizona’s Medicaid program). ABLE makes it possible to take the proceeds — so long as they are less than $14,000 net — and have no negative effect on your benefits. Even slightly larger amounts can be handled this way, depending on timing, other expenses and the particulars of each situation. But one obvious way to increase the number somewhat: in addition to the $14,000 put into an ABLE Act account in any given year, an SSI recipient is permitted to have up to $2,000 in a regular bank account — provided that it’s the only account. So a person who has no assets at all can settle a $16,000 lawsuit without having any effect on SSI.
  4. The Special Needs Trust beneficiary. This one may not always be available (trust language can differ), but it might be a great option: the trustee of a special needs trust, who has been unable to give any money directly to the beneficiary, may now be able to put money into an ABLE Act account. That could give the beneficiary control over the funds, and the ability to pay at least some bills directly. The ABLE Act could give new flexibility to trustees of special needs trusts.

We’re confident that there are other ideas out there, and we even have a few ourselves. Another time perhaps we’ll try to compare the available ABLE Act accounts.

In the meantime, we have one other suggestion: if you have created a special needs trust for your child (or other person) with a disability, you might want to consider modifying it to explicitly permit the trustee to put money into an ABLE Act account. We’re happy — eager, in fact — to talk with our clients about this idea.

ABLE Act Update: Arizona Residents Could Have Access Next Month

DECEMBER 21, 2015 VOLUME 22 NUMBER 47

We’ve written before about the Achieving a Better Life Experience (ABLE) Act and the possibility that Arizona might get its own version adopted in the next legislative session. Now comes a pleasant surprise from Washington: Arizonans with disabilities won’t have to wait for our legislature to act.

Last week Congress passed a new budget, which the President promptly signed. One tidbit, buried deep in the new law, will eliminate the limitation that ABLE Act account holders may only sign up for accounts in their home state.

To be clear, all of the other limitations on ABLE Act accounts remain. Deposits into the accounts are still limited to $14,000 per year — a cumulative total, from all sources (including any savings contributed by the person with disabilities herself). There can still only be one account. The remaining account balance still will need to be paid over to state Medicaid program (AHCCCS, in Arizona) upon the death of the account holder. If the total account grows above $100,000, there will still be a suspension of Supplemental Security Income (SSI) benefits. But at least Arizona residents won’t have to wait for the in-state legislative process.

The new federal law will be effective January 1, 2016. Theoretically, any Arizonan with a disability could set up an ABLE Act account in another state the next business day. But that would require some state to be so far ahead of Arizona that they are already offering accounts. Where can you put your ABLE Act money starting January 2?

Keep it in your pocket. (OK — we’re speaking metaphorically here. Leave it where it is.) No state has a fully-functioning ABLE Account set up yet, so far as we know (and we’ve been paying attention). Several states — Virginia, West Virginia, Utah and Massachusetts were among the earliest — have adopted enabling legislation. In fact, almost two-thirds of the states have already passed ABLE bills. Notable among the holdouts: Arizona (along with Georgia, Idaho, Indiana, Mississippi, Oklahoma and Wyoming) has not even introduced a bill in the year since the new accounts were authorized.

But that doesn’t necessarily mean Arizona is not interested. There should be an ABLE Act bill in Arizona’s legislature as soon as the new session opens next month. There is considerable interest in adopting something, and it’s likely that there will be at least a study commission in place by mid-year. Arizona ABLE Act accounts are likely to be available in early-to-mid 2017.

Should you just wait? Maybe not. If a good account structure is set up in, say, Massachusetts (or Virginia, or Florida) in the next six months, it might be time to open an account. What’s the rush? The new account might give you a chance to get someone with a small bank balance eligible for SSI. It might allow an easy repository for excess earnings for an SSI recipient with a part-time job. It might be a good place for family members to make small contributions to encourage independence. In other words, it might be a good idea, and you might not want to wait.

There are still unanswered questions about ABLE Act accounts generally: will payments for rent or other housing expenses reduce the account-holder’s SSI payments? Will someone have to review proposed distributions before they are permitted? How will accounts work for minor children and adults who are incapacitated? What authority will parents or other family members have? Those questions were going to wait (in Arizona) for adoption of an Arizona-specific plan, and now the urgency has just stepped up. But new answers have not yet materialized.

On top of that, the change adds some other, newer, questions: will it be possible to move an account from one state to another, less-expensive or easier-to-manage, state? Will Arizona’s Medicaid program understand how to handle accounts in up to 50 other jurisdictions? Will there be competition among the states (or at least among the early-adopter states), like there is in 529 Plans? Will one or two big providers come to dominate the industry? How will states handle the payback requirement when the accounts may be in any state’s program? Our answer: we’ll see.

Another question, specific to Arizona: will the new ability to open out-of-state ABLE Act accounts take the wind out of Arizona’s sails, as it were? In other words, will Arizona’s legislature decide not to pursue the option of establishing a program, especially in the face of uncertainty about administrative costs and oversight?

Many of the underlying ABLE Act issues remain unchanged. The requirement that all assets in an ABLE Act account continue to make the accounts unattractive for any large family donations (hint: use a third-party special needs trust). Annual limitations on contributions make them useful for a much narrower field than they might be. And, of course, the requirement that the ABLE Act account holder must have been disabled before age 26 sharply limits the number of people with disabilities who might qualify. Some of those problems may actually be addressed in future congressional sessions.

This week’s expansion should speed up the ABLE Act process by quite a bit. We’re looking forward to seeing how it works out.

Income Taxation of the Third-Party Special Needs Trust

MARCH 23, 2015 VOLUME 22 NUMBER 12

Last week we wrote about how to handle income tax returns for self-settled special needs trusts. Our simple message: such trusts will always be “grantor trusts”, an income tax term that means they do not pay a separate tax or even file a separate return.

This week we’re going to try to explain third-party trust taxation. Unfortunately, the rules are not as straightforward or as simple. But that doesn’t mean you won’t understand them.

First, a quick definition of terms. A “third-party” special needs trust is one established by the person owning funds for the benefit of someone else — usually someone who is receiving public benefits. The usual purpose of such a trust is to allow the beneficiary to receive some assistance without forcing them to give up their Supplemental Security Income (SSI) or Medicaid (in Arizona, AHCCCS or ALTCS) benefits.

To figure out what to do about income taxes on the trust Jack set up, we need to consider a couple of questions:

  • Did Jack retain some levels of control over the trust while he’s still living?

If, for instance, Jack has the power to revoke the trust, or he stays as trustee, or even if he receives the trust’s assets back if Melanie dies before him, even this third-party trust may be a “grantor trust.” If it is, though, the grantor will be Jack — and he will probably pay any tax due on all of the trust’s taxable income. The trust will not need to have a separate EIN (tax number) and even if it does the actual income will usually be reported on Jack’s personal income tax return. None of the rest of this newsletter will be relevant to Jack’s income tax return.

What kinds of control might Jack have to trigger this treatment? There are volumes of suggestions and commentary written about that question, and it is impossible to answer without having spent some time reviewing the trust, its funding sources the IRS’s “grantor trust rules” and Jack’s intentions when he set it up. Some of the kinds of control might have been intentional, while others might surprise Jack (or even the lawyer who helped him draft the trust).

  • Does the trust treat principal and income differently?

Sometimes a trust might say that its income is available to the beneficiary, but not the principal (though this kind of arrangement is less common today than it was a few decades ago). In such a case the taxation of interest and dividends might be different from capital gains.

  • Does the trust require distribution of all income?

Some trusts mandate that the current beneficiary must be given all the trust’s income. That’s very rare in the case of special needs trusts (since the whole point is usually to prevent the beneficiary from having guaranteed income) but sometimes a trust might have been written before the beneficiary’s disability was known, and inappropriate provisions might still be included. If the trust does require distribution of income, it will be what the tax code calls a “simple” trust and will have some slight income tax benefit. But it also will probably need to be modified (if it can be) to eliminate the mandatory distribution language.

  • Has the trust made actual distributions for the benefit of the beneficiary?

It is a bit of an oversimplification, but usually trust distributions result in the beneficiary paying the tax due. That is true even though the distribution is not of income. Let us explain (but not before warning you that we are going to simplify the numbers and effect somewhat):

Assume for a moment that Jack’s trust for Melanie is not a grantor trust. It holds $250,000 of mutual fund investments, and last year the investments returned $20,000 of taxable income. During that year, the trustee paid $10,000 to Melanie’s school for activity fees (so that Melanie could participate in extracurricular activities, go on field trips, and have the services of a tutor). The trustee also received a $4,900 fee for the year.

Now it is time for the trust to file its federal income tax return (the Form 1041). The trust will report $20,000 of income, a $100 personal (trust) exemption, a $4,900 deduction for administrative expenses and a $10,000 deduction for distributions to Melanie. The trust will also send a form K-1 to Melanie showing the $10,000 distribution; she will be liable for the tax on the income. The trust’s taxable income: $5,000.

But what if the trustee also paid $15,000 for Melanie and her full-time attendant to spend a week at a famous theme park? As before, the trust will have a $5,000 deduction for the personal exemption plus administrative expenses, but distributions for Melanie’s benefit totaled $25,000 — and the remaining taxable income was only $15,000. The trust will report a $15,000 distribution of income to Melanie, and send her a K-1 with that figure. She will be liable for income taxes on the $15,000 and the trust will have no income tax liability at all.

We can come up with infinite variations on this story. Perhaps the trustee purchased a vehicle for Melanie, and had it titled in her name. Maybe there were payments for wages for that attendant. Each variation might change the precise nature of the deductions, reporting and taxation, but the bottom line will be (approximately) the same in each case. Distributions to Melanie or for her benefit will shift the taxation from the trust level to her individual return.

  • Is Melanie’s trust a “Qualified Disability Trust”?

Yes, it is. We slipped the controlling fact into our narrative quite a while back. Melanie receives SSI. The same would be true if she was receiving Social Security Disability Insurance (SSDI) payments. It could be true even if she was not receiving either benefit, but it probably would not be.

The effect of being a Qualified Disability Trust: instead of a $100 exemption (deduction) from trust income on the trust’s own tax return, the trust would get an exemption set at the current annual exemption amount for individuals. In 2015 that means the trust would get a $4,000 exemption — which could ultimately save the trust, or Melanie, the tax on that larger amount.

Some people resist understanding tax issues, thinking they are just too hard. We don’t agree. These concepts are manageable. We hope this helped.

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.

Special Needs Trust Defective Because Arbitrary Rules Not Followed

JULY 22, 2013 VOLUME 20 NUMBER 27

We often find ourselves reassuring clients that the law makes sense. It may not be obvious or intuitive, but we can usually explain why some legal principle developed the way it did, and why it would be a bad thing if it were otherwise — even if that might mean problems for a given case in which we are involved. Once in a while, though, the system is just arbitrary, foolish and misguided. What really hurts is when a judge declares that an arbitrary corner of the law should be that way because it is not arbitrary.

Case in point (literally): Sandi Dowling (not her real name), a 26-year-old woman living in South Dakota. Sandi was in a terrible auto accident in 2006, when she was 19. As a result of a traumatic brain injury suffered in that accident, Sandi qualified for Supplemental Security Income (SSI) and her state’s Medicaid program. She also filed a civil lawsuit, seeking to recover at least some of the costs of her care, pain, suffering and future lost income.

Sandi gave her parents a power of attorney so that they could handle her lawsuit and any other financial issues she might face. So far, there is nothing in Sandi’s story that would not be faced by thousands of other young people injured in an auto accident.

Then Sandi’s lawsuit was settled. She netted $429,259.41 from the settlement — a sum which would normally knock her off SSI and probably cost her Medicaid eligibility, as well. That amount, though large, was not enough to provide the care Sandi actually needed, however, and so it was important for her to continue to qualify for SSI and Medicaid.

Fortunately, there is a way to do that. A self-settled special needs trust can be set up for someone in Sandi’s circumstance, and the money transferred to it. The transfer is not disqualifying, and the contents of the trust are not counted as available for SSI or Medicaid eligibility purposes. But the trust has to be set up properly.

One key rule about such trusts: they must be established by a parent, grandparent, guardian or court. Fortunately, Sandi’s parents were both deeply involved in her life and her care; they could sign the trust documents, and they did. They established the trust and, using their power of attorney, transferred her settlement proceeds to the trust’s name.

Imagine their surprise when the Social Security Administration ruled that the trust disqualified Sandi from SSI benefits. The eligibility worker, relying on directives from the SSA central office, ruled that when her parents established Sandi’s trust they weren’t her parents — they were her agents under the power of attorney. Her SSI was cut off (and, presumably, her Medicaid eligibility as well) and she was ordered to repay Social Security the money she had received since her personal injury settlement arrived.

Two years of legal wrangling ensued, with the Social Security Administration insisting that it makes sense to rule that Sandi’s parents weren’t her parents when they signed the trust. An Administrative Law Judge did (graciously) rule that she did not have to repay the money she had received before the family received notice of the overpayment, but the denial of eligibility persisted.

Finally, in an attempt to resolve the impasse, Sandi and her parents turned to the local courts. They sought and obtained a court order approving the trust and amending it in some technical ways; the judge also ruled that the modification of the trust should date back to the original trust date (what is called “nunc pro tunc” in lawyer-talk). Problem solved, right?

Not at all. The Social Security Administration, continuing to apply its rules rather than the English language, ruled that the court had not “established” the trust, but only “approved” it. Two more years of legal wrangling ensued, with the Social Security Administration insisting that this interpretation of language also made sense.

Eventually Sandi and her parents exhausted their appeals through the Social Security Administration, and they finally turned to the Federal District Court in South Dakota. They filed an appeal of the final Social Security ruling, and argued that it was arbitrary and capricious of Social Security to insist that (a) Sandi’s parents weren’t her parents when they signed the trust and (b) the local court had not “established” the trust but only “approved” it. Finally, they thought, they were going to get a decision from someone who would apply some common sense rather than absurd rule interpretations.

There’s still no joy in Madison. District Judge Karen E. Schreier upheld the Social Security position, finding that its interpretation of the language of the federal statute was not arbitrary. In fact, she held, having clear rules is the opposite of arbitrary — never mind that the clear rules are silly. Draper v. Colvin, July 10, 2013.

What are the lessons to be learned from Sandi’s story, and why are we telling you about it? Normally we do not report on trial court decisions here — and even though this is an appeal from a Social Security ruling, it is the lowest level of the federal court review of that ruling. It might well be appealed; in the meantime, it should not be cited as precedent in other cases (and especially in other jurisdictions, like the Federal District Courts in Arizona). But it still gives us pause and an opportunity to point out several important principles:

  1. Creating (“establishing,” in the language of the federal statute) special needs trusts can be difficult to do correctly, and technical rules have to be followed.
  2. Though it may seem obvious that something ought to be done in an efficient, effective and legal way, sometimes the requirements are actually counter-intuitive, or are interpreted in a counter-intuitive way.
  3. The Social Security Administration (and, often, state Medicaid agencies) are always on the lookout for ways to challenge special needs trusts.
  4. Doing things wrong not only causes problems with government programs, but is hard to fix. Witness Sandi’s odyssey, with four years of litigation and multiple attempts to satisfy Social Security’s arcane rules — all the while with Sandi not qualifying for or receiving SSI until first the agency and then the courts work through their interpretations.
  5. Even when a fix is finally found, it likely will not relate back to the original date of the problem. Legal expertise is important early and throughout the administration of a special needs trust.
  6. Much of the court opinion in Sandi’s case deals with the language of the POMS — Social Security’s “Program Operations Manual System.” That’s where the worst language offenders live, and it is crucial for practitioners to be familiar with the structure, holdings and, yes, silliness built into the POMS.

“When in doubt about who’s to blame,” Craig Ferguson is reported to have said, “blame the English.” We aren’t sure he meant the language, but still it seems apt.

 

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Distinguishing Two Kinds of Special Needs Trusts

AUGUST 23, 2010 VOLUME 17 NUMBER 27
It really is unfortunate that we didn’t see this problem coming. Those of us who pioneered special needs trust planning back in the 1980s should have realized that we were setting up everyone (including ourselves) for confusion. We should have just given the two main kinds of special needs trusts different names. But we didn’t, and now we have to keep explaining.

There are two different kinds of special needs trusts, and the treatment and effect of any given trust will be very different depending on which kind of trust is involved in each case. Even that statement is misleading: there are actually about six or seven (depending on your definitions) kinds of special needs trusts — but they generally fall into one of two categories. Most (but not all) practitioners use the same language to describe the distinction: a given special needs trust is either a “self-settled” or a “third-party” trust.

Why is the distinction important? Because the rules surrounding the two kinds of trusts are very different. For example, a “self-settled” special needs trust:

  • Must include a provision repaying the state Medicaid agency for the cost of Title XIX (Medicaid) benefits received by the beneficiary upon the death of the beneficiary.
  • May have significant limitations on the kinds of payments the trustee can make; these limitations will vary significantly from state to state.
  • Will likely require some kind of annual accounting to the state Medicaid agency of trust expenditures.
  • May, if the rules are not followed precisely, result in the beneficiary being deemed to have access to trust assets and/or income, and thereby cost the beneficiary his or her Supplemental Security Income and Medicaid eligibility.
  • Will be taxed as if its contents still belonged to the beneficiary — in other words, as what the tax law calls a “grantor” trust.

By contrast, a “third-party” special needs trust usually:

  • May pay for food and shelter for the beneficiary — though such expenditures may result in a reduction in the beneficiary’s Supplemental Security Income payments for one or more months.
  • Can be distributed to other family members, or even charities, upon the death of the primary beneficiary.
  • May be terminated if the beneficiary improves and no longer requires Supplemental Security Income payments or Medicaid eligibility — with the remaining balance being distributed to the beneficiary.
  • Will not have to account (or at least not have to account so closely) to the state Medicaid agency in order to keep the beneficiary eligible.
  • Will be taxed on its own, and at a higher rate than a self-settled trust — though sometimes it will be taxed to the original grantor, and sometimes it will be entitled to slightly favorable treatment as a “Qualified Disability” trust (what is sometimes called a QDisT).

So what is the difference? It is actually easy to distinguish the two kinds of trusts, though even the names can make it seem more complicated. A self-settled trust is established with money or property that once belonged to the beneficiary. That might include a personal injury settlement, an inheritance, or just accumulated wealth. If the beneficiary had the legal right to the unrestrained use of the money — directly or though a conservator (or guardian of the estate) — then the trust is probably a self-settled trust.

It may be clearer to describe a third-party trust. If the money belonged to someone else, and that person established the trust for the benefit of the person with a disability, then the trust will be a third-party trust. Of course, it also has to qualify as a special needs trust; not all third-party trusts include language that is sufficient to gain such treatment (and there is a little variation by state in this regard, too).

So an inheritance might be a third-party special needs trust — if the person leaving the inheritance set it up in an appropriate manner. If not, and the inheritance was left outright to the beneficiary, then the trust set up by a court, conservator (or guardian of the estate) or family member will probably be a self-settled trust.

That leads to an important point: if the trust is established by a court, by a conservator or guardian, or even by the defendant in a personal injury action, it is still a self-settled trust for Social Security and Medicaid purposes. Each of those entities is acting on behalf of the beneficiary, and so their actions are interpreted as if the beneficiary himself (or herself) established the trust.

Since the rules governing these two kinds of trusts are so different, why didn’t we just use different names for them to start with? Good question. Some did: in some states and laws offices, self-settled special needs trusts are called “supplemental benefits” trusts. Unfortunately, the idea didn’t catch on, and sometimes the same term is used to describe third-party trusts instead. Oops.

We collectively apologize for the confusion. In the meantime, note that the literature about special needs trusts sometimes assumes that you know which kind is being described and discussed, and sometimes even mixes up the two types without clearly distinguishing. Pay close attention to anything you read about special needs trusts to make sure you’re getting the right information.

Want to know more? You might want to sign up for our upcoming “Special Needs Trust School” program. We are offering our next session (to live attendees only) on September 15, 2010. You can call Yvette at our offices (520-622-0400) to reserve a seat.

Fleming & Curti Offers Seminar For “Special Needs” Trustees

MARCH 1, 2004 VOLUME 11, NUMBER 35

When a recipient of Supplemental Security Income (SSI) or Medicaid benefits receives money, the benefits may be reduced or even terminated. That is why most parents of children with a disability should consider establishing a “special needs” trust to handle any inheritance or gifts. Making the decision to establish such a trust is not enough, though—the parents must carefully select a trustee, and the trustee must understand the unique problems associated with administering a special needs trust.

Some special needs trusts are funded not with gifts or inheritances, but with the beneficiary’s own money. An SSI/Medicaid recipient might have received a settlement from a personal injury lawsuit, for instance, or a cash inheritance from a relative who did not plan carefully. The trustee of that kind of special needs trust must also understand the complicated rules governing public benefits and special needs trusts.

Parents, trustees and interested family members should know the limitations and requirements for special needs trusts, but there is little help in the community to provide them with the necessary information. Case managers, advocates and others working in the disability community may have tried unsuccessfully to locate resources to enhance their own understanding of the obligations and opportunities.

To help provide more information about special needs trusts, the law firm of Fleming & Curti, PLC, has scheduled its first-ever training session on administration of special needs trusts. The free two-hour seminar will be held on the morning of April 19, 2004, near the Fleming & Curti offices in downtown Tucson. Attendance will be limited by the space available, and reservations are required.

The session will address:

-Basic eligibility rules for SSI and Medicaid (in Arizona, AHCCCS / ALTCS).

-The key difference between special needs trusts established with the beneficiary’s own money and those set up by family members for inheritance purposes.

-Rules for trust administration, including accounting and tax requirements.

-Permissible trust expenditures and those which disrupt government benefits.

-Techniques for using special needs trusts to provide housing, food, and necessities of life for the trust beneficiary.

Parents and other family members considering establishment of a special needs trust, family members of individuals for whom a special needs trust has been set up, family and professional trustees and case managers should all consider attending. Reservations can be made by calling Bonnie at the Fleming & Curti office (520-622-0400).

Eligibility, Benefits Figures Increase With Cost of Living

OCTOBER 22, 2001 VOLUME 9, NUMBER 17

Each year Social Security benefits are raised automatically to keep up with the increased cost of living. Benefit increases are pegged to standard measures of inflation, and take effect on January 1. Social Security figures, however, are not the only automatic increases affecting seniors and the disabled.

Beginning January 1, 2002, Social Security beneficiaries will see their monthly checks go up by 2.6%. Supplemental Security Income (SSI) recipients will also see a 2.6% increase, with the largest federal checks going up to $545 (some but not all states contribute an additional amount to SSI benefits).

That SSI increase will have an indirect effect on Arizona nursing home residents. The Arizona Long Term Care System (ALTCS), Arizona’s Medicaid program for long-term care subsidies, is available only to those with incomes less than three times the maximum SSI benefit.

As a result ALTCS recipients with more than $1635 in monthly income will need to take additional steps to qualify for assistance. In most cases that will mean establishing a “Miller” Trust, though it may be more complicated for some long-term care recipients. Some ALTCS patients who have already established Miller Trusts may no longer need them if income has failed to keep up with the automatic increases.

Participants in the federal Medicare program will also see some increases in program numbers. Perhaps most importantly (or at least most immediately apparent) will be an increase in the Part B premium paid by Medicare beneficiaries. That premium is usually deducted from Social Security benefits, which means that a portion of the cost of living increase will be withheld from checks automatically. The Part B premium is slated to increase from $50 to $54 per month.

Other Medicare numbers will also change, with most of the changes pegged at 2.5% over 2001 figures. Increased figures will include the deductible for hospital stays (rising to $812 per month), and the coinsurance amount for nursing home stays between the 21st and 100th day of the stay (rising to $101.50 per day).

Some state government figures have also increased. Arizona annually calculates the average cost of nursing home care for purposes of determining whether gifts made by ALTCS applicants should disqualify them from coverage. In most cases the value of a gift is divided by the state-calculated figure to determine a period of months of disqualification. Arizona’s calculation of the average cost of care increased, effective October 1, 2001, to $3,540.67. In other words, if an ALTCS applicant gave $35,406.00 to his children in 2001, he would be ineligible for ALTCS for 9 months (the ineligibility period is rounded down). The figure for counties other than Pima, Pinal and Maricopa is lower, at $3,290.17.

It can be a chore to keep track of the regular changes in benefits levels and rates. At Elder Law Issues we will try to keep you current; let us know if there are other benefits figures you have difficulty locating.


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