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A Foundation in Special Needs Trusts

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Patrick Owens

on 22 August 2013

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Transcript of A Foundation in Special Needs Trusts

Special Needs Trusts:
A Basic Foundation

Purpose of a Special Needs Trust
The purpose of the SNT is to ensure that the beneficiary of the trust remains eligible for government entitlement benefits, while still provided with certain access to funds rightfully due to him / her.
The SNT allows the beneficiary to avoid recognizing income that would cause ineligibility for SSI and Medicaid benefits.

Two Types of Trusts
1) First Party Special Needs Trust

2) Third Party Special Needs Trust
Trustee Duties
The trustee has a legal, fiduciary duty to act in the best interests of the beneficiary;
Includes making sure to make payments directly to third party, so funds not included in SSI/Medicaid calculation;
Trustee cannot deal with or benefit from the Trust in any manner.
Follow the terms of the Trust;
Keep the Beneficiary Informed;
Protect Trust Property;
Keep Trust Property separate from other property (Separate accounts);
Use any special skills you possess for benefit of Beneficiary;
Pay taxes when they are due;
Maintain beneficiary's privacy.
Government Programs

The purpose of the SNT is to avoid placing assets in the hands of the beneficiary and thus be includable in eligibility calculations for government entitlement programs.
Patrick D. Owens
Di Monte & Lizak, LLC

The Basics
, the person providing assets, sets up the trust;

The grantor names a
to control the assets and make payments on behalf of:

The disabled
for whom the trust was created
Trust Creation
Created through a document called the trust agreement

The trust is funded by assets that are transferred to the trust either by the beneficiary or a third party

Once created, others can give to the SNT through gift or will
Third-Party SNT
Pooled Payback Trust
Stand Alone
First-Party SNT
In a first-party SNT, the Court or a representative of the beneficiary is the grantor and sets up the trust for the beneficiary's benefit. This relieves the beneficiary from ownership and allows them eligibility for government benefits.
In a first party trust, any remaining funds left in the trust at the beneficiary's death must be used to reimburse the state for medicaid expenses.

Within the category of first-party special needs trusts, there are two types:

A stand-alone trust, and

A pooled-payback trust
In a stand alone trust, the Court or a representative of the beneficiary sets up a trust for the beneficiary's benefit;

The Trustee, appointed by the grantor draws from those funds for the benefit of the grantor
A nonprofit agency typically acts as trustee
The trust funds are pooled together with other trusts, but a separate account is kept for the beneficiary
Allows for greater returns by keeping investment costs down
Pooled trusts are more popular for modest sized trusts
Pooled trusts contain setup fees, and yearly costs that are calculated as a percentage of the total value invested. So, there are cost considerations.
Pooled trusts typically will not hold real estate, so third-party trusts make more sense for real property
Upon death of beneficiary, any remaining funds in their account are paid to the state
When is a First-Party trust useful?
Beneficiary / grantor receives personal injury settlement or award

Beneficiary / grantor has retirement assets that could disqualify him or her

Beneficiary / grantor receives a divorce settlement

Beneficiary / grantor receives an inheritance
A third-party SNT exists where a family member or friend sets up and funds a trust for the benefit of a disabled loved one. This is the most common type of SNT.

Unlike in a first-party trust, at death the beneficiary may appoint remaining property left in the trust.
This is important, because there is no requirement that Medicaid be reimbursed.
The Trustee uses trust
to purchase goods or services for the beneficiary.
Almost any type of asset can be contributed to the trust;
Principal refers to the assets the trust was originally funded with;
Income is any funds generated by trust principal;
Income may be converted to principal.
Who Qualifies for a SNT?
Illinois Law
allows a SNT for a person with a mental or physical disability that substantially impairs the individual's ability to provide for his or her own care or custody and constitutes a substantial handicap.

When there is a substantial handicap, funds received on behalf of the beneficiary from the SNT are typically not considered income.

Therefore, the beneficiary's eligibility for SSI and/or medicaid is not effected.
How does it work?
The trustee pays funds
directly to the provider of goods or services
who sold to, or provided services for, the beneficiary.
The trustee has
complete discretion
can never be required
, under the trust agreement,
to make mandatory payments
Since the beneficiary cannot directly access the funds, the beneficiary is not treated as having those funds for purposes of SSI or Medicaid eligibility calculations.
What are the Benefits?
Protects family assets from seizure by the government as reimbursement for entitlement benefits;
The trustee has decision-making authority over spending of beneficiary's funds;
Keeps beneficiary from losing eligibility for SSI or Medicaid;
Trust ends when it is no longer needed.
Sample Third-Party Special Needs Trust Provision
Administration of Child’s Trust

The trustee shall administer the child’s trust as follows:

Payment of Income and Principal. During the life of the child the trustee may pay to the child or use for the child’s benefit as much of the income and principal as the trustee from time to time, in the trustee’s absolute discretion, considers advisable for the child’s supplemental welfare or best interests, taking into account the child’s income and resources known to the trustee (including without limitation any funds available for the child’s health, maintenance, or education under any federal, state, or local government program or under any private agency program). I do not intend that this trust provide for the child’s basic care, support, or education but that it supplement funds available for such purposes by providing benefits to the child that are not otherwise provided for (including, but not limited to, more extensive medical, dental, and other health care). Under no circumstance shall this trust be considered to be the property of or the “estate” of the child or be available to the child other than in the absolute discretion of the trustee. No payment shall be made that would be required to be paid to any governmental agency for any reason (other than taxes) or that would reduce any aid otherwise available for the child. Any income not so paid in each year shall be added to principal at the end of each year.

Entitlement Benefits
Entitlement benefits are not based on economic need so an individual may have any amount of resources and continue to receive benefits.
Social Security Disability Income
SSDI is a cash benefit paid to persons who have worked and paid int0 the Social Security Trust Fund for the number of quarters of coverage required to qualify for benefits.
Childhood Disability Benefits (CDB)
A child will qualify as a disabled adult child (DAC) if he or she (a) was disabled prior to the age of 22, (b) is continuously incapable of gainful activities and (c) is single. If the worker was fully insured under the Social Security Administration and he retires, dies or becomes disabled, his adult child may be eligible for 50% of his Social Security benefits. If the parent died, the DAC may be eligible for 75% of the parent’s Social Security benefit.
Medicare is a four-part federal health insurance program that provides basic coverage for persons age 65 and over, disabled persons under age 65 and persons of any age with end-stage renal disease. Medicare is not intended to pay for long term care. [Medicare is financed by payroll taxes paid by workers and their employers (1.45% of wages for each employer and employee plus an additional 0.9% starting in 2013 for wages above $200,000 for single filers and $250,000 for married filing jointly) along with premiums deducted from Social Security checks.]

Two years after the receipt of SSDI, an individual becomes eligible for Medicare (federal health insurance program).

Needs or Means-Tested Benefits

Supplemental Security Income
SSI is a cash assistance program that provides annual benefits to disabled adults and children with limited income and resources (very generally, less than $2,000 in cash assets with certain limited exceptions). Title XVI of the Social Security Act, 42 U.S.C. Sec. 1381, et. seq. authorizes a minimum level of income to individuals who are aged, blind or disabled and have limited income and resources.

Beneficiary can collect SSI and also benefits from another Social Security program simultaneously.

Medicaid is the state-run medical program that is federally funded and pays for medical assistance for certain low-income people. Some of the people covered by Medicaid are certain children, the aged, the blind, the disabled and others with limited financial means. Illinois requires a separate application with the Medicaid agency (separate from federal SSI) and uses its own Medicaid eligibility rules.
What can the trustee spend money on?
The trustee can spend trust funds on
non-countable resources:
Non-countable resources are those that are not included in the beneficiary's income for purposes of SSI or Medicaid benefits.
For a non-countable resource, the property's value is meaningless for SSI or Medicaid benefits eligibility.
Examples of non-countable resources.
A home of any value
A motor vehicle, regardless of value
Can be owned by parent, relative, beneficiary, or the trust.
Property used for self-support or in a trade (e.g. a hammer for a carpenter)
Start-up funding for a business
Life insurance policy (term, or whole with a surrender value less than $1,500)
Recreation or vacations
Out-of-pocket medical expenses
Anything that is not a
countable resource
What should Trustee be aware of and what risks should they avoid?
Countable resources
must be avoided
Anyone with more than $2,000 of countable resources will not be eligible for SSI.
If a trustee does give the beneficiary countable resources under $2,000 in any month, the SSI benefits will be reduced dollar-for-dollar by the same amount of the countable resources provided.
Examples of countable resources:
Checking / Savings accounts
Stocks and Bonds;
Real property, other than primary home;
Mortgage, rent, real estate taxes;
Utilities (heat, water, gas, etc.);
Homeowner's insurance;
IRA, 401(k), investment accounts;
Amounts expended for utilities.
Exceptions to the Rules: Food & Shelter
The trustee can pay for food and shelter.
However, any amount paid will reduce SSI benefits dollar-for-dollar.
The difference between food & shelter and countable resources is a cap.
Food & Shelter deductions from SSI are capped at 1/3 of SSI benefits + $20.
SSI benefits are currently $710 / month.
An example:

A SNT beneficiary really likes to eat out. Any amount paid for this food by the trust (trustee) would be deducted from his / her SSI benefit up to $257 (1/3 of $710, plus $20). But, any amount spent over $257 by the trust for eating out does not affect benefits.

Note, also, that expenses for rent and mortgage affect SSI benefits, whereas the outright purchase of a home does not. Rent is calculated in the same manner as the above example.
1. Automobile/Van- Life’s Plan is first lien holder on all purchased vehicle titles paid out of the trust)
2. Accounting/ Professional Services
3. Acupuncture/Acupressure, Holistic Therapies, elective surgeries not covered by Medicaid
4. Alterations or mending to clothing, shoe repair
5. Appliances (TV, DVD player, WII, IPOD, Microwave, Stove refrigerator, washer/dryer including maintenance/repairs)
6. Assistive Technology
7. Bottled Water or water service
8. Bus pass/public transportation costs
9. Cable TV
10. Camera, film, reorder and tapes, development of film, photo albums, scrapbooks and supplies
11. Caregivers, Care Managers/Case Management Services
12. Clothing, coats, shoes
13. Clubs and club dues, membership (record clubs, book clubs, health clubs, service clubs, zoo, Advocacy Groups, museums)
14. Companion Services
15. Computer hardware, software, program, maintenance and internet service
16. Conferences and the travel costs
17. Courses, trainings or classes (academic or recreational) including the course supplies
18. Curtains, blinds, drapes, or paint for decorating room or home
19. Dental work not covered by Medicaid, including anesthesia
20. Down payment on home or security deposit on apartment (Non SSI recipients)
21. Dry cleaning /laundry services for the beneficiary
22. Fitness equipment, athletic gear
23. Funeral expenses- Prepaid during the life of the beneficiary ($5703) limit plus hardware item costs with the exception of irrevocable insurance policies)
24. Furniture, home furnishings and insurance
25. Gasoline, Maintenance and upkeep of automobile
26. Guardianship Services
27. Haircuts/Salon/ Hair stylists
28. Holiday Decorations, parties, dinner dances, holiday cards
29. Home alarm and/or monitoring/response system
30. Home improvements, repairs and maintenance (not covered by Medicaid). Including tools to perform home improvements, repairs and maintenance by homeowner
31. Home Purchase for the beneficiary (Deed must be in Beneficiary’s name, Beneficiary must reside in the home full time)
32. Home cleaning/maid services/lawn services/snow removal
33. Independent evaluations
34. Inexpensive Gift purchase ($50 limit/ $600 per year maximum) for immediate family members for birthdays, Xmas, Hanukkah, Kwanzaa, graduations, births, weddings, and anniversaries.
35. Insurance (automobile, home and/or rental insurance for possessions)
36. Insurance Co-Payments not covered by Medicaid
37. Legal Fees/Advocacy
38. Life Insurance (maximum value $1500)
39. Linens, towels, bedding, area rugs and household furnishings
40. Massage, facials and other similar spa services/treatments
41. Musical instruments (including lessons and music sheets)
42. Non-food grocery items (laundry soap, bleach, fabric softener, deodorant, dish soap, hand and body soap, personal hygiene products, paper towels, napkins, kleenex, toilet paper, and any household cleaning products)
43. Over the counter medications and supplies (including vitamins and herbs, etc)
44. Personal Assistance Services not covered by Medicaid
45. Pet and pet’s supplies including veterinary services
46. Phone service (Cell/ Home)
47. Physician specialists if not covered by Medicaid
48. Private counseling, psychotherapy, psychiatrist costs not covered by Medicaid
49. Repair services (appliances, automobile, bicycle, household, fitness equipment)
50. Snow removal /Landscaping/Lawn Service
51. Sporting goods/equipment/uniforms/team pictures/travel to games/tournaments
52. Stationary, stamps, cards, paper supplies etc.
53. Storage Units for beneficiary
54. Taxi cab/ Limo service
55. Therapy (Physical, Occupational, Speech), not covered by Medicaid
56. Testing for any purpose (vocational, medical, psychological)
57. Tickets to concerts, sporting events (for beneficiary and one companion)
58. Transportation, (automobile, motorcycle, bicycle, moped, gas, bus passes)
59. Utility bills (electric, heating)- Not for SSI beneficiaries
60. Vacation costs (including paying for personal assistance to accompany the beneficiary)

Examples of non-countable items (included in handout)
How to pay
Send money directly to third party
Give beneficiary a monthly allowance (if they don't receive SSI).
Have a third party take beneficiary shopping and reimburse the third party
Have the trust obtain a credit card and purchase items either in person or online. If online, have items shipped to beneficiary.
Allow beneficiary to obtain a credit card in their own name, but have bills shipped to trustee, and trustee pay bills directly.
Do not allow cash advances on the credit card, and don't allow debit cards.
Debit cards will be treated as cash and SSI benefits will be reduced.
Housing Expenses that likely aren't countable
Cable TV;
Premiums for personal property insurance;
Laundry and Cleaning Supplies;
Cleaning and Maintenance;
Staff salaries (e.g. support staff in residence);
Repairs to a home beneficiary owns;
Furniture and furnishings;
Capital improvements to beneficiary's home
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