New Legislation Passed for Special Needs Trusts

Yesterday, President Obama signed the 21st Century Cures Act.  This includes a subsection known as the Special Needs Trust Fairness Act. Effective immediately, disabled persons with capacity can now establish and sign their own special needs trust. Previously, the law only allowed a parent, grandparent, guardian or court could establish a first party special needs trust. This added a great deal of unnecessary expense to the establishment of these trusts for disabled persons with capacity that did not have a living parent or grandparent, as the only way that a special needs trust could be established for them was through a court order.

* The information contained in this Blog is intended for general information and educational purposes only and does not constitute legal advice or an opinion of counsel.

Annual Special Needs Planning Meeting

Leslie and Sheri attended the 10th annual meeting of the Academy of Special Needs Planners, held in Tucson, Arizona, March 10-12. The
235-member Academy is the nation’s leading organization of special needs planning professionals. Members of the Academy devote a
significant part of their practices to working with individuals with special needs and their families to plan for the future and ensure that children with special needs receive ample financial protection.

The Academy’s annual meeting featured presentations by some of
the nation’s leading experts in special needs planning, who kept
attendees current on the latest regulatory changes and legal decisions
and shared strategies for better serving clients and their families in this fast-growing legal field.

Meeting sessions included “An Update on SSI Rules,” “Special Needs Trusts and Retirement Benefits,” “Recent Trends in Special Needs Planning,” “Identifying and Handling ‘Tricky Issues’ in SNT Administration,” as well as an “Ask the Experts” panel discussion.
Perhaps most importantly, the meeting afforded the chance for attendees to exchange planning ideas and strategies with fellow members working in special needs planning around the nation.

Estate Administration Video

Leslie Yarnes Sugai and Sheri Sudweeks were recently interviewed for a local real estate television program, Kapowich on Real Estate. In this episode, which is the second of a two part series, they discuss estate administration issues.
Topics covered include:
Discussion of what constitutes an estate administration, trust administration and probate. How long you should expect these processes to take and how they affect the sale of real estate.
The on-going administration of Special Needs trusts and how they are administered to bring additional benefits to persons with disabilities for their lifetimes. The ownership of real property by a special needs trust.
Discussion of Guardians of the person and estate of minor children and the limitations of the control of the assets when a trust is not utilized.
Understanding the term Private Professional Fiduciary and the role that they can play in the administration of an estate by court appointment in a contested matter or by the election of the person who creates the estate plan.
To view the program, click here.

* The information contained in this Blog is intended for general information and educational purposes only and does not constitute legal advice or an opinion of counsel.

Estate Planning Video

Leslie Yarnes Sugai and Sheri Sudweeks were recently interviewed for a local real estate television program, Kapowich on Real Estate. In this episode, which is the first of a two part series, they discuss estate and incapacity planning issues.
Topics covered include:
The documents that constitute an estate plan. Trusts, Wills, Advance Health Care Directives, and Powers of Attorneys. How estate planning affects the title to real estate.
Special Needs planning for persons with disabilities to enhance the lives and health of those who are dependent on public benefits.
The facts and myths behind Medi-Cal and Long Term Care Planning. Understanding what is meant by the home being an exempt asset, how the home is valued and recovery issues.
The difference between amending a trust and modifying a trust. In California the law allows for the modification of trusts by the Court, even those that are irrevocable under certain circumstances.

To view the program, click here.

* The information contained in this Blog is intended for general information and educational purposes only and does not constitute legal advice or an opinion of counsel.

What Can My Special Needs Trust Pay for Without Affecting My Disability Benefits?

Funds held in a properly drafted special needs trust will not affect a Supplemental Security Income (SSI) or Medi-Cal recipient’s benefits. But problems can develop when funds come out of a special needs trust. This leads to one of the most commonly asked questions about special needs trusts – what can the trust pay for?
This question is best answered by stating what a special needs trust for an SSI beneficiary should typically never do without first consulting a special needs planner: the trust should never give the beneficiary cash or a cash equivalent or pay for food or shelter.
The simplest part of this rule is the part dealing with cash. If an SSI beneficiary receives cash (or a cash equivalent like a gift card) from a trust (or anyone else for that matter), her benefit will be reduced by one dollar for each dollar received, up until the point that she loses SSI completely. This is a hard-and-fast rule and should be disregarded only after a serious conversation with an attorney.
The rules about food and shelter are a little more complicated. If a trust pays for a beneficiary’s food or shelter directly to a landlord, restaurant or store, the beneficiary could lose up to one-third of her SSI benefit. In addition, payment of bills for housing-related expenses like mortgage payments, real estate taxes, utilities and condo fees are considered payments for housing that cause a similar reduction in benefits. While a one-third reduction in benefits might be a small price to pay for guaranteed shelter and meals, if the beneficiary works or receives other income, the additional one-third reduction could cause the beneficiary to actually lose SSI, and accompanying Medicaid benefits, entirely.
Once you have taken cash, housing and food off the table, a special needs trust can typically pay for most other things a beneficiary might need to supplement her lifestyle. But because these rules are very complicated, it is best to always sit down with your attorney to discuss what you intend to do with your trust before making any payments to anyone.

* The information contained in this Blog is intended for general information and educational purposes only and does not constitute legal advice or an opinion of counsel.

Tax Tips for People with Special Needs and Their Families

April 15th is right around the corner, which means that it is time to file yet another personal income tax return. Although some people with disabilities may not have enough income to necessitate an income tax filing, most people will need to file a return based on their earned and unearned income. Beneficiaries and trustees of special needs trusts may have additional filing requirements. If you or a loved one think that you need to file a return, here are several tax tips to keep in mind that could save you time and money.
Not All Income Is Taxable
Although the rules about taxable income can be complicated, several provisions affecting people with disabilities are easy to understand. First, Supplemental Security Income (SSI) benefits are not considered taxable income. Second, if a beneficiary receives only Social Security Disability Insurance payments (SSDI), and no other income from any other source, then those SSDI benefits are probably not taxable either. Third, funds paid through a qualified Dependent Care Assistance Program are not included as taxable income, up to certain limits. Finally, Veterans Administration disability benefits do not count as taxable income for the beneficiary.
Special Deductions for People with Disabilities Are Available
For starters, taxpayers who have visual impairments may qualify for a higher standard deduction than the average taxpayer, depending on their level of impairment. All other taxpayers with disabilities who itemize their deductions may be able to take advantage of deductions for medical expenses, including deductions for special telephones for people with hearing impairments, wheelchairs and motorized scooters, guide dogs or other animals that aid people with disabilities, the cost of some schools that provide special education services for relieving mental or physical disabilities, and premiums on long-term care insurance, up to certain amounts. People with disabilities who require special goods or services in order to work may also be able to deduct these expenses as business expenses, provided the good or service has not already been counted as a medical expense.
Tax Credits Can Help People with Disabilities and Their Relatives
Several types of tax credits apply to people with disabilities. If you care for a child or other dependent person with disabilities, you may qualify for a child and dependent care tax credit for up to 35 percent of your expenses related to his or her care. People under 65 who have retired with a permanent disability can also claim a special tax credit that is also available to the elderly. Many people with disabilities who work and who do not have children who qualify for an Earned Income Tax Credit may still qualify for the credit themselves. If they obtain a tax refund due to an Earned Income Tax Credit, the refund will not count against the taxpayer for purposes of determining SSI or Medicaid eligibility. Also, parents of a child with disabilities may also be able to claim an Earned Income Tax Credit, depending on the family’s income.
Special Needs Trusts Have Special Rules
Tax season can be especially difficult for the trustees of special needs trusts because the tax rules for trusts vary greatly depending on the type of trust created. As a very general rule, income generated by a first-party special needs trust (a type of trust designed to hold a person with special needs’ own funds) is typically considered to be taxable income attributable to the trust beneficiary, regardless of whether the income is actually distributed from the trust. On the other hand, a third-party special needs trust established by a friend or relative for a person with special needs may generate taxable income for the grantor of the trust, the beneficiary of the trust, the trust itself, or all three at once, depending on the circumstances. Furthermore, in certain situations, trustees have to file income tax returns for the special needs trust itself, and other, more complicated forms pertaining to distributed income may have to be prepared for the beneficiary.
Because tax time often creates more problems than solutions, it is best to consult with your qualified special needs planner about these complicated questions, even if you or your family are already working with a good accountant.

* The information contained in this Blog is intended for general information and educational purposes only and does not constitute legal advice or an opinion of counsel.

Qualified Disability Trusts Can Offer Tax Savings

As tax season comes to a close, donors and trustees should be aware that in certain circumstances, a third-party special needs trust may be treated as a “qualified disability trust” for purposes of income taxation. Why should you care? Because a qualified disability trust is allowed to take a much higher personal exemption than a regular trust, resulting in lower income taxes for the trust. Many people, including inexperienced attorneys, are not necessarily familiar with how a special needs trust becomes a “qualified disability trust.”
A standard irrevocable trust that is not considered a “grantor trust” (meaning that the income is not included as a part of the donor’s personal income) must file an income tax return every year. Unfortunately, income tax treatment of trusts is very severe — most irrevocable trusts have only a $100 personal exemption (the amount of income exempt from taxation in a given year) and income in non-grantor trusts is taxed at the maximum 39.6 percent rate as soon as a trust has $12,150 in income. An individual taxpayer, on the other hand, has a personal exemption of $3,950 and her income is not taxed at the highest rate until she reaches several hundred thousand dollars in yearly income. Because the tax treatment of trusts often results in very high income tax penalties, the government allows certain trusts established for people with special needs to use the $3,950 personal exemption instead of the typical $100 trust exemption.
In order to qualify as a “qualified disability trust,” a trust must meet several important requirements. First, the trust cannot be a grantor trust, because grantor trusts, by their very nature, pass income along to individual taxpayers who can claim the full $3,950 personal exemption. Since so-called “first-party supplemental needs trusts” are almost always grantor trusts, a qualified disability trust will typically be “third-party trusts,” which are created and funded with funds that are not owned by a person with special needs.
Second, a qualified disability trust must be established for the sole benefit of a person under age 65 who meets the Social Security Administration’s definition of “disabled.” This means that the beneficiary of the trust is almost always going to be receiving either Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI). Of course, the devil is in the details when it comes to this second requirement because not all special needs trusts are for the sole benefit of a person with disabilities — sometimes there are multiple beneficiaries. Also, there are some cases where family members create so-called special needs trusts for people over age 65 that may allow that person to qualify for benefits like Medicaid but do not allow someone to obtain SSI.
What is the actual net result if a trust qualifies as a proper qualified disability trust? For trusts that have more than $12,150 in income (after taking the full $3,650 qualified disability exemption), the trust can save approximately $1,340 in taxes per year. Especially for smaller trusts with limited resources, this is a substantial savings.
Not all special needs trusts will qualify as qualified disability trusts for a variety of reasons. In fact, given a donor’s individual tax bracket, the amount being placed into trust, and the needs of the beneficiary, some planners will not create qualified disability trusts at all because the benefits of having a grantor trust outweigh the advantages of a qualified disability designation. To help you and your family make the choice that is right for you, contact your attorney with expertise in special needs planning.

* The information contained in this Blog is intended for general information and educational purposes only and does not constitute legal advice or an opinion of counsel.

Writing a Memorandum of Intent for Your Child With Special Needs

How can you ensure that your child will remain well cared for and secure once others assume the role of guardian or caregiver? While creating a financial plan and establishing a specialized trust are central to preparing for your child’s future, special needs planners also advise families to write down their intentions and expectations in a document referred to as a Memorandum of Intent, also known as a “Letter of Intent.” This document can be used to describe your child’s health care and therapeutic needs, identify lifestyle preferences and provide contact information for doctors, therapists and teachers. It also can be used to convey insights into your child’s personality and history that future caregivers might not easily gain on their own.

The Memorandum is not legally binding and, when directions conflict, those in wills, trusts and other legal documents take precedence. But for “non-legal” matters, it will serve as the primary source of information about your child, providing a roadmap for the courts, guardians, caregivers and others involved in your child’s life. That can be critical in easing your child’s transition, ensuring continuity of care and treatment, as well as appropriate decision making regarding living arrangements and other lifestyle choices.

Getting Specific

Exactly what should you include in the Memorandum of Intent? While the scope and nature of information will vary from one family to another, certain details should be included in any Memorandum. The document identifies individuals and organizations that should be contacted upon the parents’ death or incapacity, provides the child’s name and date of birth, lists doctors, therapists, schools and extracurricular programs, details medical and therapeutic treatments and explains preferences regarding education, religion and childrearing practices.

Given the complexity of providing a future caregiver with an immediate “feel” for your child, you may wish to use the Memorandum’s “Miscellaneous Instructions” section to offer more general information. This may include your child’s personal history, degree of independence or mobility, behavioral issues and need for assistive technologies. It also may cover hobbies, interests or unique personality traits. For example, if your child has a great sense of humor, is especially kind or shows a talent for painting, you might wish to share that information here. The section also can be used to describe your wishes regarding living arrangements, education and work or career goals. Finally, it may be used to identify the location of medical records and other important documents future caregivers will need to assure continuity of care.

Getting Started

While writing a Memorandum of Intent can be time-consuming and emotionally taxing, it’s very important not to postpone this task. Without such a document, future caregivers will lack a comprehensive, thoughtful record of your child’s history, needs, hopes and dreams. If possible, try to include your child in the process of creating the document so it truly will reflect his or her perspective. For example, you might ask about his favorite activities or foods or inquire about her dreams for social activities or future vacations. Once the Memorandum is complete, place the original in a secure location and distribute copies to others involved in your child’s life. Then, mark your calendar, setting aside time to revise the Memorandum at least once a year so it will continue to reflect your child’s current life stage and situation.

* The information contained in this Blog is intended for general information and educational purposes only and does not constitute legal advice or an opinion of counsel.

A Trust Protector Can Look Out for a Beneficiary’s Interests

One of the most important decisions a special needs trust’s settlor (the person who creates the trust and supplies the funds for the trust) makes is the choice of a trustee for the trust. A trustee typically manages the day-to-day operations of the trust, often making distributions to the trust’s beneficiary, investing the trust’s assets, and paying the trust’s bills. But how can the settlor make sure that the trustee will properly manage the trust when the settlor is no longer around to keep an eye on the trustee, especially if the trust’s beneficiary is not capable of supervising his own trustee? In many cases, a trust protector can ensure that a beneficiary is protected from trustee mismanagement.
Once she assumes office, a trustee serves in a “fiduciary capacity,” meaning that she is in a position of trust and confidence and has a legal duty to properly manage the trust’s assets while keeping in mind the best interests of the trust’s beneficiary. A fiduciary is held to a high standard of conduct, and she owes the trust’s beneficiary a strict duty of loyalty. However, in many cases involving special needs trusts, the beneficiary of the trust is unable to properly enforce this fiduciary duty because of his special needs. This is where a trust protector comes in.
A trust protector is a person chosen by the settlor who is responsible for monitoring the trustee’s actions. The trust protector’s duty is to the trust’s beneficiary as an additional pair of eyes, making sure that the trustee is properly performing her job. The trust protector typically has access to the trust’s accounts, and can compel a trustee to produce a summary of what she has done for the beneficiary. If a trust protector believes that the trustee is not properly performing her duties, he can usually fire the trustee. Depending on how the trust is drafted, the settlor can even give the trust protector the power to name a new trustee if the settlor has not done so himself in the trust document. (Most of the time, however, the trust protector must name an independent trustee as the new trustee, avoiding the scenario where the trust protector fires a trustee only to name himself as the new trustee).
Trust protectors may be useful in a variety of situations. Take the case of Jennifer and her son, Adam. Jennifer is elderly and would like to make sure that her son, who has special needs, is cared for at home for as long a possible when she is gone. So Jennifer decides to establish a special needs trust that will hold her home for Adam’s benefit, and she funds this trust with enough money to make sure that the property is well kept and that the bills are paid. However, Jennifer’s closest relative, her niece Margaret, does not want to serve as trustee of Adam’s trust because she does not want the added responsibility of managing a home. Jennifer decides to name John, a friend of hers who knows Adam and who runs a property management company, as the trustee instead. Although Jennifer trusts John, she decides to name Margaret as a trust protector to review his yearly accounts and make sure that he charges the proper amount for his services and is keeping the property in good shape.
Every special needs trust is different, and in many cases, especially when a settlor is serving as trustee, a trust may not initially need a trust protector. The best way to decide if your special needs trust should include one is to speak with your qualified special needs planner.

* The information contained in this Blog is intended for general information and educational purposes only and does not constitute legal advice or an opinion of counsel.

Should I Disinherit a Child with Special Needs?

Inexperienced or incompetent estate planning attorneys have a bad habit of telling parents of children with special needs to simply write their child out of their estate plan altogether in order to ensure that the child will qualify for government benefits if the parents pass away. While this approach might accomplish the goal of preserving government benefits, it is almost always the wrong way to help a child with special needs.

There are three main government benefits available to people with special needs – Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI) and Medi-Cal. A fourth benefit, Section 8 housing, is often available for people with disabilities who can’t work. One of these programs, SSDI, does not set any limits on a beneficiary’s unearned income or assets, so a family of a child with special needs could theoretically leave a full inheritance outright to a child who receives only SSDI with no impact on that benefit, although there are other reasons why this is a bad idea. The other three programs — SSI, Medi-Cal and Section 8 — are all means-tested programs with very strict income and asset limits, so the parents of a child who receives these benefits are rightly concerned about leaving money directly to the child because an inheritance could end access to any one of these vital programs. But simply writing a child out of an estate plan is not the right solution to this problem.

For one thing, SSI and SSDI provide small cash benefits that might not be nearly enough to support a person with special needs. In these cases, not leaving an inheritance to that child could severely limit his opportunities after the death of his parents. Secondly, government benefits are subject to the whims of Congress and the President, so benefits that fully provide for a child with special needs today could be eliminated or severely cut back in the future, at which point a child with no inheritance could be left destitute. Lastly, although SSI, Medi-Cal and Section 8 all have some form of asset limits, these can be avoided through appropriate special needs planning.

So instead of disinheriting a child with special needs, parents should almost always establish a special needs trust for that child’s benefit. When properly drafted by a qualified special needs planner, these trusts will hold a child’s inheritance so that it can be used to supplement her government assistance without causing the child to lose her benefits. Special needs trusts can also receive life insurance benefits and, in some cases, retirement funds, so that families without a lot of fully liquid resources can still provide for their children with special needs. These trusts also work well for SSDI beneficiaries or other people with special needs who may not receive any benefits at all, because they provide oversight of spending and protect the beneficiary from financial abuse.

* The information contained in this Blog is intended for general information and educational purposes only and does not constitute legal advice or an opinion of counsel.