Fw: [voice] The Voice - Special Needs Alliance newsletter

August 10, 2010

Excellent information.

Ellen

Ellen Garber Bronfeld

egskb@...

[voice] The Voice - Special Needs Alliance newsletter

August 2010 - Vol 4, Issue 12

The Voice, the Official Newsletter of SNA

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The Voice is the e-mail newsletter of The Special Needs

Alliance. This installment was written by Special Needs Alliance member, Amy C.

O'Hara. Amy is an attorney with Littman Krooks LLP with offices in New York

City, White Plains, NY and Fishkill, NY. Most of her work involves helping

people with special needs planning (trusts, guardianships and government

entitlements), estate planning and administration (wills and trusts), elder law

issues (Medicaid and Medicare, Veterans' Benefits, guardianships).

Your Special Needs Trust Explained

A Special Needs Trust (SNT) is a discretionary trust

created for a person with a disability, referred to as the " beneficiary, " as a

way to supplement his public benefits and enhance his lifestyle. Public benefits

often include Supplemental Security Income (SSI), Medicaid, and Section 8

Housing. One of the many appealing aspects of a SNT is that the beneficiary does

not have direct access to the trust assets, which are, therefore, not countable

when establishing financial eligibility for public benefits.

SNT assets can be used to purchase a home for the

beneficiary, services that Medicaid does not cover (including special therapies,

wheelchairs, handicap accessible vans and mechanical beds), recreational and

cultural experiences and, for the most part, any services or items that would

enrich the beneficiary's life.

Several requirements must be met when establishing a

SNT. First, the trustee must be given absolute control over the distribution of

the trust assets. Neither the beneficiary nor anyone acting on his behalf can

demand distributions be made from the trust. Second, the beneficiary cannot have

authority to revoke or amend the trust; otherwise the trust assets would be

deemed an available resource to the beneficiary, and he would lose his public

benefits. Third, the trustee should not give cash outright to a beneficiary

receiving SSI, as this would cause an immediate dollar-for-dollar reduction or

loss of public benefits.

Generally speaking, there are three types of SNTs: (a) a

first party special needs trust; ( a pooled special needs trust; and © a

third party supplemental needs trust.

First Party Special Needs Trusts

A first party SNT is funded with assets owned by the

trust beneficiary. A first party SNT--also commonly referred to as a " self

settled " or " (d)(4)(A) " Trust--may be established to protect current or future

means-tested government benefits if an individual is about to receive a

settlement, inheritance or other monies that will bring his countable assets to

more than $2,000.

First party SNTs are most commonly required when an

individual with disabilities has received a settlement from a personal injury

action or an inheritance from a well-meaning person who did not understand that

such a gift could disqualify the beneficiary from important government aid.

Another common use for a first party SNT is for divorce alimony or property

division, or for child support payments when dealing with a child who has a

disability. Unless such funds are sheltered in a first party SNT or used to

purchase exempt resources, the beneficiary would lose his benefits and be

required to pay medical bills and many other expenses from the assets until

those assets have been spent down to $2,000.

When establishing a first party SNT, there are key

requirements that must be provided for in the trust agreement; otherwise, the

SNT may not protect the beneficiary's continued eligibility for public benefits.

Also, the beneficiary must be under 65 years of age at the time the SNT is

funded and must be disabled as defined in the Social Security Act.

Additionally, the law requires that the SNT must be for

the benefit of the individual with disabilities and that it be established by a

parent, grandparent, legal guardian of the individual's property, or the court.

The trust agreement must provide a Medicaid payback provision requiring the

state Medicaid agency to be reimbursed upon the death of the beneficiary.

Finally, the SNT must be irrevocable.

Pooled Trusts

A pooled SNT is also funded with assets that are owned

by the trust beneficiary. At times the settlement or inheritance the person

receives is small, and a first party SNT may not be the best solution,

especially if there is no parent, grandparent or legal guardian available to

establish the trust. If spending the funds for the individual's care or needs or

exempt resources is not a viable option, it may be more practical to place the

litigation proceeds or inheritance in a pooled special needs trust.

Pooled trusts are established and managed by nonprofit

organizations. The assets in the trust are pooled together for investment

purposes, but the nonprofit organization manages a sub account for the

beneficiary. A major difference between a first party SNT and a pooled trust is

that an individual with disabilities can establish the pooled trust sub account

himself. This is an attractive option for many beneficiaries who have no living

parents, grandparents, or a legal guardian of their property.

Third Party Supplemental Needs Trusts

A third party SNT is funded with assets that are owned

by parents, relatives or friends, but not assets owned by the trust beneficiary.

Third party SNTs are an ideal estate planning vehicle for parents and other

friends and relatives who want to leave an inheritance to an individual with

disabilities. Parents frequently say that their greatest worry is how their

child with disabilities will fare once they have passed away. Not only will a

third party SNT shelter an intended inheritance, it can be used during the

parents' lifetimes for ongoing expenses that are not covered by government

entitlements.

A significant attraction of the third party SNT is that,

unlike a first party SNT, when the beneficiary dies, there is no Medicaid

payback requirement. The person who created the third party SNT (often a parent)

chooses and has complete control over selection of the trust remainder

beneficiaries.

A third party SNT can either be testamentary (created

under a will) or inter vivos (created during lifetime). Additionally, an inter

vivos third party SNT can often be made revocable or provide an easy mechanism

for changes of trustee lineup or remainder beneficiaries if the parents want

flexibility to change the trust agreement in the future.

Thoughtful consideration should also be given to the

designation of the trustee of any SNT. For example, in situations where the

beneficiary's parents have large estates, sometimes it is recommended that the

parents not serve as trustees of an irrevocable SNT due to potential adverse tax

consequences.

In choosing a trustee, consider the potential trustee's

ability to (a) be sensitive to the beneficiary's disabilities, ( actively

monitor any services provided, © aggressively advocate for all entitlements,

and (d) prudently invest SNT funds. Because of the trustee's many roles,

consider appointing a professional corporate trustee, either to serve alone or

to serve jointly with a family member trustee.

Have you had your special needs trust reviewed lately?

Whether you are a trustee or a parent, it is a good idea

to have the SNT reviewed periodically (ideally, annually) with your special

needs planning attorney. Some of the questions that should be reviewed include:

1. Have there been any changes in the laws that affect

the SNT?

2. Do you need to make any changes to the trustees or

trust advisors? Perhaps a successor trustee is ill or recently passed away and

you need to designate a new successor trustee. Or perhaps you want to consider a

corporate trustee if you have not previously designated one.

3. Do you understand the tax ramifications? It is

important for you to understand how the income earned in the SNT is reported and

on what type of income tax return. Questions you want to review with your

attorney are whether your trust is a " grantor trust " for income tax purposes or

whether it is considered a " qualified disability trust. " Also, what are the gift

tax reporting implications, if any, when a third party makes a gift to the

trust?

4. Is the trustee making any distributions that would

cause the beneficiary to lose benefits? Constant monitoring and oversight must

be made regarding SNT distributions. For example, if the trust is paying housing

costs for the beneficiary, the beneficiary may suffer a reduction in his SSI

benefit.

5. Are the assets designated to pour into the SNT as

intended? Your last will and testament will not control the disposition of

certain assets, such as annuities, insurance policies, and retirement plans, if

you designate beneficiaries other than the SNT. Your attorney can help you check

and update your beneficiary designations on these assets to make certain that

they pass to the SNT at your death, if intended.

This overview and list of questions to be reviewed with

a special needs planning attorney demonstrates that SNTs are very complex and

require careful consideration and planning to ensure that the appropriate SNT

has been set up for the beneficiary. By understanding the terms and requirements

of the SNT chosen for the beneficiary, you will be in a better position to help

protect the beneficiary's benefits and quality of life.

About this Newsletter: We hope you find this newsletter

useful and informative, but it is not the same as legal counsel. A free

newsletter is ultimately worth everything it costs you; you rely on it at your

own risk. Good legal advice includes a review of all of the facts of your

situation, including many that may at first blush seem to you not to matter. The

plan it generates is sensitive to your goals and wishes while taking into

account a whole panoply of laws, rules and practices, many not published. That

is what The Special Needs Alliance is all about. Contact information for a

member in your state may be obtained by calling toll-free (877) 572-8472, or by

visiting the Special Needs Alliance online.

August 24, 2010

FYI

Ellen

Ellen Garber Bronfeld

egskb@...

[voice] The Voice - Special Needs Alliance newsletter

August 2010 - Vol 4, Issue 13

The Voice, the Official Newsletter of SNA

Quick Links

> How we help families

> How we help professionals

> Related topics

> More about us

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Capitol Connection

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The Voice is the e-mail newsletter of The Special Needs

Alliance. This installment was written by Amos Goodall of the State College,

Pennsylvania law firm Goodall & Yurchak, P.C. His practice emphasizes estate

planning and implementation for elders, persons with special needs and their

families. A member of the Special Needs Alliance and of the National Academy of

Elder Law Attorneys, Amos is also a Fellow of the American College of Trust and

Estate Counsel.

Crummey Doesn't Mean Lousy

How can families transfer and hold funds to be used to

help a child with special needs while avoiding gift taxes or a reduction in

their protection from estate taxes? How can parents provide a way for other

family members to do so as well?

Parents should consider creating " standalone " special

needs trusts for their children with disabilities. This is an excellent idea for

many reasons, including supplying an account for other relatives to contribute

to for the child's benefit. Without this, a well-meaning relative may simply

name the child with disabilities as a beneficiary on a life insurance policy or

in a will -- either jeopardizing the child's benefits or requiring the creation

of a much more restrictive kind of trust. Also, grandparents often want to

provide for all their grandchildren, and while a Section 529 education account

may be appropriate for a child going to college, a special needs trust may be

more appropriate for a child with disabilities

Gift and estate tax laws can complicate matters for

wealthy persons when funding a standalone trust. A contribution to a trust is a

gift subject to gift tax, like most other gifts. Most families are aware of the

annual exclusion from federal gift tax, which permits gifts of up to $13,000

(adjusted annually for inflation) per year from each person making a gift to

each recipient, without the gift counting against the $1 million limit on gifts

that can be made without payment of federal gift tax. Since married partners can

allocate their annual exclusion to their partners, grandparents can give $26,000

to each grandchild in a particular year without any gift tax consequences. Gifts

that exceed the annual exclusion will either be subject to a gift tax or will

reduce the donor's protection from state and federal estate taxes.

Unfortunately, this annual exclusion does not normally

apply to gifts to a trust. This is because the annual exclusion is available

only if the recipient has a " present interest " in the gifted property -- the

immediate right to use the property. Gifts in trust usually limit the use of the

property to a trustee's discretion or to distribution at a later time.

A number of years ago, attorneys devised a method of

making gifts to trusts qualify for the annual exclusion by including a special

withdrawal power in the trust, and this technique was recognized in a case

called Crummey v. Commissioner. As a result, trusts incorporating this

withdrawal power are known as " Crummey trusts " and the withdrawal powers are

called " Crummey powers. " These Crummey powers are often found in trusts that own

life insurance, sometimes called " life insurance trusts. "

How do Crummey trusts work? The donor (such as a parent)

creates a trust which contains a provision that allows the donee or beneficiary

to withdraw funds deposited into the trust for a period of time, typically 30

days from the date of notice to the beneficiary. At the end of the 30 day notice

period, if the beneficiary has not withdrawn the funds, the beneficiary loses

the right to do so. The IRS generally classifies gifts to Crummey trusts as

present interest transfers, therefore eligible for the annual exclusion. It may

not be surprising to learn that Crummey beneficiaries very rarely exercise their

power to withdraw the donated funds!

This technique by itself is not necessarily useful to

parents of children with disabilities, since most agencies hold that a

" withdrawable " transfer is an available resource. In the year of gift, the

amount will be " available " ; afterwards, the child may be considered to have made

a gift by not exercising the withdrawal power. Thus, the Crummey case alone may

not solve the problem.

Fortunately, attorneys have devised a second technique

that can be useful for beneficiaries with special needs -- a trust which gives

the right of withdrawal to someone other than the beneficiary with disabilities

(even though the person with disabilities is the person the trust is really

designed to benefit). This technique was approved by the Tax Court in a case

known as Estate of Cristofani.

In Cristofani the donor created an irrevocable trust

naming her children as primary trust beneficiaries and minor grandchildren as

contingent beneficiaries. In an effort to multiply the allowable gift tax

exclusions, the trust gave both the children and the grandchildren Crummey

withdrawal rights. If children and grandchildren did not withdraw the funds, the

funds remained in the trust for the benefit of the children, only going to the

grandchildren if their parents did not survive the donor for 120 days. The

grandchildren's possibility of getting the trust property if their parents

didn't survive is called a " contingent remainder. " The IRS took the position

that the annual exclusion did not apply to the gifts which the grandchildren had

the right to withdraw, because all the grandchildren had was a " contingent

remainder, " but the Tax Court disagreed. The Tax Court held that the

grandchildren's withdrawal rights made the gifts qualify for the annual

exclusion, even though the trust really benefited their parents.

Thus, the court's decision in Cristofani suggests that a

trust could include a Crummey withdrawal right for a person other than the

beneficiary with a disability, which would cause the gift to qualify for the

annual exclusion without the gift being an available resource to the disabled

donee.

This planning strategy has some limits. The IRS believes

that trusts like the one in the Cristofani case give rise to a suspicion that

there is collusion between the parties, a secret agreement that the withdrawal

right will not be exercised. The IRS has indicated that it will consider

challenging arrangements where the withdrawal power resides in someone other

than a current beneficiary. In one opinion, the IRS said: " the Service will deny

exclusions for powers by individuals who either have no property in the trust

except for Crummey powers or hold only contingent remainder interests. " Even

though one more Tax Court case like Cristofani has been decided in favor of a

beneficiary, it would still be very aggressive planning to rely on that case and

Cristofani when the IRS has said it will continue to challenge such trusts.

Therefore, if avoiding the gift or estate taxes is

important, the Crummey withdrawal power should be limited to someone who will be

receiving at least some of the assets in the trust after the child with

disabilities passes on, and even then, the family will need to be prepared to

prove to the IRS that there are circumstances indicating that there was no

collusion between the donor and the holder of the Crummey withdrawal power. A

carefully planned trust with named remainder beneficiaries can theoretically

give withdrawal powers to these beneficiaries, so that grandparents and others

could make annual exclusion gifts into this trust-assuming that they will

ultimately be used for the benefit of the child with disabilities, without being

deemed an available resource and without interfering with a child's present

benefits. Alternatively, the trust could give a set amount -- preferably more

than 5% -- to other children, and those children would have the Crummey

withdrawal powers.

This is a specialized planning technique, and it should

only be attempted with the advice of an attorney who is well versed in both

special needs and tax law. However, it can allow parents and others to benefit a

child with special needs while reducing tax consequences.

Most people will not have to worry about federal gift or

estate taxes, so the complexities of a trust with Crummey powers can be avoided.

However, if these taxes are a part of your planning, a properly constructed

trust with Crummey powers can be advantageous. A knowledgeable special needs

attorney can help you make this decision.