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:
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.
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.
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.
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.
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).
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.
On December 14, 1999, President Clinton signed the Foster Care Independence Act of 1999. While most of the new federal legislation deals with foster care programs, it also changes the law and practice regarding so-called “Special Needs” trusts.
The Supplemental Security Income (SSI) program, administered by but separate from Social Security, helps guarantee a minimum income for disabled Americans. SSI provides a maximum of $512 per month (beginning in January, 2000) to disabled individuals who do not qualify for Social Security Disability Insurance. Because SSI is a welfare program, however, it requires that the recipient not have significant assets or income available from other sources.
Under prior law it was possible for most disabled persons to qualify for SSI fairly easily, however. For many years the SSI program did not impose a penalty on asset transfers by applicants; in other words, a disabled individual could satisfy the asset eligibility limitations by simply giving away most of his or her property.
In practice, this opportunity was usually exercised in one of two common ways—either the prospective SSI recipient gave assets to family members (who could be counted on to use the money for the original owner’s benefit), or the recipient established a trust for his or her own benefit and transferred the assets into that trust. These trusts—usually called “Special Needs” or “Supplemental Benefits” trusts—could be used to pay for the SSI recipient’s needs other than necessities. In other words, the trust could take care of everything but food, clothing and shelter, while SSI income could be used to pay for those items.
Because SSI recipients automatically qualify for Medicaid coverage, even a fairly wealthy disabled individual could secure medical care from the federal welfare system by use of a Special Needs trust or an outright gift of assets. The new law changes the rules permitting such a transfer. Beginning immediately, a gift of assets by an SSI applicant will disqualify the applicant from receiving benefits for a period of time based on the size of the gift. Transfers into most trusts will simply be ignored—if there is any circumstance in which the trust assets or income can be used for the benefit of the SSI applicant, it will be treated as an available resource (or income, as the case may be).
This does not end the usefulness of Special Needs Trusts, however. An exception in the new law expressly permits transfers of assets into such a trust—but only if the trust includes a provision reimbursing the government for any benefits received by the beneficiary upon the beneficiary’s death. Only trusts established after January 1, 2000, must include such “pay-back” provisions, so pre-existing trusts should not be affected by the new law.
In 1996, nursing home residents will be permitted to earn up to $1410 per month and still qualify for subsidized care through the Arizona Long Term Care System. That is the most significant of a collection of new eligibility and program numbers now available for next calendar year.
Some of the new numbers, and the significance of each:
Income Cap–the income eligibility cap for ALTCS will increase from 1995′s $1,374 to $1,410 per month. This figure is three times the maximum Supplemental Security Income (SSI) benefit available from the federal government; that benefit increases to $470 with January benefit checks.
The importance of the Income Cap has diminished in the past two years with the advent of “Miller” Trusts. Anyone with income in excess of the eligibility amount can be made eligible by the simple expedient of creating such a trust (but see the discussion below for those with even higher incomes).
Average Cost of Care–the calculation of the average cost of nursing home care in Pima, Maricopa and Pinal Counties increases to $2,651.42. Gifts made by ALTCS applicants within the three years before application must be divided by this figure to determine the number of months of ineligibility caused by the transfer. In addition, under current ALTCS rules, individuals with income over this amount will be unable to establish “Miller” Trusts to secure eligibility.
In counties outside the urban center of Arizona, the Average Cost of Care will increase to $2,530.67. Both new numbers are increases of more than $100 per month. Neither new number should be confused with the real cost of nursing home care in the community.
CSRD–both the maximum and minimum “Community Spouse Resource Deduction” will increase as well. Couples with less than $15,348 in available assets will be allowed to keep all their resources and still qualify for ALTCS eligibility. Couples with more than $76,740 will be permitted to keep only half of that (or $38,370). The bottom number is an increase of about $400; the cap reflects an increase of almost $2,000.
Other figures, including the Minimum Monthly Maintenance Needs Allowance of $1,254 and the Maximum Monthly Maintenance Needs Allowance of $1,919 will be updated on July 1.
1996 ALTCS Eligibility Figures
Income Cap $1,410
Asset Limitation* $2,000
Personal Needs Allowance $70.50/mo.
Minimum CSRD $15,348
Maximum CSRD $76,740
Minimum MMNA* $1,254
Maximum MMNA* $1,919
Average Cost of Care (Pima, Maricopa, Pinal) $2,651.42
Average Cost of Care (All other Counties) $2,530.67
Burial Limitation* $1,500
Lookback Period 36 months (Until 8/10/96 30 mos)
Lookback (Trusts) 60 months
As mentioned in previous Elder Law Issues, the Arizona White House Conference on Aging held in Phoenix last month dealt with issues facing the full White House Conference on Aging when it meets in May. Arizona’s delegation dealt with several issues expected to dominate the national aging agenda.
Financial Security
A person nearing age 65 in this last decade of the twentieth century has a life expectancy of 85. The life expectancy for the average adult at the end of the nineteenth century was 47. Improvements in health, disease control and lifestyles have made it possible for today’s elderly to expect much longer and more productive lives.
In 1950, the average Social Security benefit was $43.86. By the 1993, the average monthly benefit for workers was $656. For widows and widowers, the average benefit was $624 in 1993.
Although Social Security was originally intended as a supplement to private retirement sources rather than as the principal source of retirement income, the result has been the opposite. Half of today’s retirees receive no pension benefits other than Social Security, and of those with second pensions nearly 60% get less than $100 per month from those sources.
Nationally, Social Security benefits provide about 40% of retiree income. Accumulated assets provide 25%, earnings 18%, and private pensions just 14%. Americans have never been good savers, and sixty years of Social Security seem to have discouraged our already low rates of saving.
As annual federal spending nears $1.5 trillion in 1995, concern mounts about the rising share of the national budget dedicated to Social Security and other “entitlements.” Unless changes are made in the way we fund Social Security, the entire budget will be required just to make the payments on Social Security and the national debt by 2011.
Some changes have already begun. The usual retirement age will raise from 65 to 67 in three decades. Some taxes are now collected on Social Security benefits for the wealthiest recipients, with the proceeds going into the Social Security system. But further changes will be required to prevent bankruptcy of the fund by the year 2029.
Meanwhile, the poorest recipients of federal largesse remain at levels inadequate to provide even basic needs. Over 1.5 million persons age 65 and above qualify for Supplemental Security Income because they receive total income (from all sources) of $458 or less.
In an era of budget constraints and shortages, the need to redesign Social Security benefits and taxes seems inevitable. The obvious challenge will be to do so in a fashion that preserves the value of the program.
