CAN A SPECIAL NEEDS TRUST BE THE BENEFICIARY OF AN IRA? (Part II)

In my last blog post, I addressed the issue of naming a Special Needs Trust (SNT) as beneficiary of a retirement account (e.g., 401k, IRA, qualified plan, etc.).  Normally, as explained in Part I of my prior post, the use of a “conduit trust” is not usually wise and the compulsory distributions to the disabled beneficiary can have a potentially disastrous loss of public benefits. 

A better choice is the use of an accumulation trust which is designed to receive the MRD (Minimum Required Distributions) from the tax deferred retirement account and then to retain them to be used or expended, from time to time, for special needs for the disabled beneficiary.  The most tax-wise way of using the IRA is to withdraw the balance over the life expectancy of the disabled beneficiary.  This slows the consumption of the IRA and also slows the income tax consequences to the accumulation trust.  One would think you could simply choose to use the beneficiary’s life expectancy under the “see through” (the Trust) IRS rules.  However, the see through rules require that all persons who might receive benefits from the trust must be natural persons and determinable as of the date of the death of the IRA owner, or no later than the “Beneficiary Determination Date.”  Thus, an accumulation trust must be drafted carefully to avoid naming a charity (for example) or the estate of the beneficiary as a final remainder beneficiary after the death of the disabled beneficiary, since neither a charity nor an “estate” is a natural person.  If natural persons only are properly named, the trust must eventually distribute outright to “now living person(s).”

The IRS rules require that the person among all named beneficiaries (i.e., the disabled beneficiary, along with all remainderpersons) with the shortest life expectancy (according to the IRS tables) is the “measuring life” to determine the “Applicable Distribution Period” (ADP), which basically means the number of years over which that the minimum required distributions are spread.

The IRS rules are complex when distributions are made to an accumulation trust, but it rarely is advisable to name the disabled child directly or a conduit trust when the source of funds is a tax deferred retirement account.  Funding of a Special Needs Trust accumulation trust via a tax deferred retirement accounts is a hazardous venture and requires very careful document provisions and coordination with IRA beneficiary designation forms.

Curtis J. Shacklett, Esq.
Barber & Bartz, P.C.
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: www.barberbartz.com

CAN A SPECIAL NEEDS TRUST BE THE BENEFICIARY OF AN IRA? (Part I)

The accumulated assets in many families often include some form of a retirement account, such as an IRA, 401-k, or qualified pension plan (herein IRA).  Designating a disabled child as the direct beneficiary of an IRA is not advised for several fairly obvious reasons.  First, the entitlement to the IRA account by the disabled child will normally cause an immediate loss of SSI and/or Medicaid benefits unless spent down immediately or withdrawn from the IRA (income taxes being withheld) and transferred into one form or another of a Medicaid Payback Trust [(d)(4)(A) or (d)(4)(C)].  Secondly, if the child is mentally disabled, the mere availability of the funds to the disabled child may result in his/her misspending the funds or being exploited by others.

To solve or avoid these problems, it is possible to name a trust to be the recipient or beneficiary of the IRA.  There are two basic types of trusts that are used in conjunction with the IRA.  One is called a “conduit” trust and the other is an “accumulation” trust.  A conduit trust is designed to receive the “Minimum Required Distribution” (MRD) from the IRA which are yearly distributions of a fraction of the balance in the IRA based upon the child’s remaining life expectancy.  When the trust receives the yearly distribution from the IRA, the Trustee immediately distributes the funds received to the disabled beneficiary.  A conduit trust avoids the risk of a disabled person using the IRA all at once if he/she were named directly as the beneficiary.  However, the annual MRD coming into and then out of the Trust to the disabled beneficiary may harm the receipt of public benefits received by the disabled person depending on whether or not the beneficiary was receiving SSI and/or Medicaid.  One solution to this problem is the use of an “accumulation” trust to receive and hold onto the MRD received by the Trust from the IRA without being required to make a distribution of the MRD to the disabled beneficiary.  Holding on to the MRD avoids disqualifying the disabled beneficiary from receipt of SSI or Medicaid but may have negative income tax consequences.  There are usually ways to avoid the more negative tax consequences with a carefully drafted accumulation trust.  The ins and outs of an accumulation trust will be addressed in my next blog post. 

Curtis J. Shacklett, Esq.
Barber & Bartz, P.C.
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: www.barberbartz.com

SOCIAL SECURITY WEATHER (POMS) REPORT: Partly Clear, Partly Cloudy

The SSA has issued a new POM section attempting to clarify the application of the “sole benefit” rule to first person trusts (Medicaid payback trusts established for the benefit of a disabled person receiving SSI and/or Medicaid benefits). 

In a prior post, I commented on SSA becoming very serious in its interpretation of the “sole benefit” rule.  This “rule” is, basically, an interpretation of the meaning of Congress’s use of the term “sole benefit,” found in the original 1993 enabling statute which authorized the creation of so-called “first party” special needs trusts [found at 42 USC §1396(p)(d)(4)(A) and (C)].  Congress has never defined “sole benefit,” and it is used in the (d)(4)(C) section of the statute.  Confusion [and in some cases, apparently, abuse (“Steffan Hobbs vs. Marsha Zenderman, [et al], Secretary of the Department of Human Services”)] has resulted in Trustees and parents using trust funds that sometimes benefit other persons or family members as much (or possibly more so) than the disabled person.  Thus, the SSA has tightened the interpretation of “sole benefit,” especially in the travel expense area.  Effective May 15, 2013, the newly issued POMS 1120.201(F)(b) and (c) read as follows:

“b. Exceptions to the sole benefit rule for third party payments

Consider the following disbursements or distributions to be for the sole benefit of the trust beneficiary:

·        Payments to a third party that result in the receipt of goods or services by the trust beneficiary;

·        Payment of third party travel expenses which are necessary in order for the trust beneficiary to obtain medical treatment; and

·        Payment of third party travel expenses to visit a trust beneficiary who resides in an institution, nursing home, or other long-term care facility (e.g., group homes and assisted living facilities) or other supported living arrangement in which a non-family member or entity is being paid to provide or oversee the individual’s living arrangement. The travel must be for the purpose of ensuring the safety and/or medical well-being of the individual.

c. Exceptions to the sole benefit rule for administrative expenses

The trust may also provide for reasonable compensation for a trustee(s) to manage the trust, as well as reasonable costs associated with investment, legal or other services rendered on behalf of the individual with regard to the trust. In defining what is reasonable compensation, consider the time and effort involved in providing the services involved, as well as the prevailing rate of compensation for similar services considering the size and complexity of the trust.

NOTE: You should not routinely question the reasonableness of a trustee’s compensation. However, you should consider whether compensation is being provided to a family member or if there is some other reason to question the reasonableness of the compensation.”  (Emphasis added.)

Part of the language in part “b” seems fairly clear.  However, we will have to assume that “medical” would include (for example) “dental,” or “mental health” since, for whatever reason, SSA did not define “medical” in this section, leaving the meaning of “medical” partly cloudy.

Section F.b. seems to severely limit travel expenses paid for the benefit of persons other than the disabled person.  Those limitations appear to be (presumably) for care givers to assist in travel expenses for the obtaining of medical treatment (however defined), or for persons to visit the disabled person to audit his/her caregiving. 

The sole benefit rule exception also includes expenditures or payments made to a third party for “goods or services” received by the disabled person.  Could the trust pay for the travel expenses of a family member or other caregiver to take the disabled beneficiary to Disney World or to Chicago to watch a Cubs game?  Sorry, it just became even cloudier—with no sun in the immediate forecast.

Curtis J. Shacklett, Esq.
Barber & Bartz, PC
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: http://www.barberbartz.com/

CAN A TRADITIONAL SUPPORT TRUST BE REFORMED INTO A SPECIAL NEEDS TRUST?

This question arises with some regularity. Parents, grandparents, or other benefactors sometimes establish traditional support trusts for the benefit of a child/grandchild/etc. Sometimes when the trust was created the attorney/draftsman was not informed of the disabling condition of the beneficiary and, thus, did not know to prepare a Special Needs Trust ("SNT") in order to protect public benefits such as Medicaid and/or SSI ("Supplemental Security Income").

Unfortunately, on other occasions the attorney may not have known how to prepare a suitable special needs trust and instead prepared a more or less traditional support trust. In some cases, a traditional support trust established by a parent/grandparent or other "third party" may be suitable, even for a disabled person, if the trust is large enough to fully support the cost of care of the disabled person, or if the trust was established after August 10, 1993 (the effective date of OBRA – the Omnibus Budget Reconciliation Act), and the trust does not contain any compulsory distribution provisions.

In some cases, a traditional support trust works quite well for a non-disabled person until the beneficiary falls victim to an accident or disease resulting in a disabling condition triggering the need for Medicaid or other public benefits.

Sometimes a traditional support trust can be modified or reformed and changed from a support trust to a special needs trust. This may be accomplished in one of several ways. The document may contain a provision allowing the Trustee to convert the trust from a support trust to a special needs trust if any beneficiary is injured or otherwise would qualify for public benefits. Or the trust may authorize a Trustee Advisor or a Trust Protector to modify or amend the trust, thus converting it into an SNT. Finally, the Trustee may seek a reformation via judicial proceedings asking a judge to allow and order a modification of the trust based upon a change of condition of the beneficiary necessitating the creation of an SNT, or based upon an original error in drafting, or simply ignorance of new SNT options that have become available in more recent years.

Although it would be an overstatement to assume that any trust can be reformed, there is substantial precedent to allow a trust to be reformed under certain conditions. A careful review of the trust document and circumstances surrounding its creation (i.e., condition of the beneficiary) may lead to the conclusion that a successful reformation may be accomplished, thus preserving the trust assets for the long term benefit of the disabled beneficiary.

Curtis J. Shacklett, Esq.
Barber & Bartz, P.C.
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: www.barberbartz.com

USING FAMILY MEMBERS OR FRIENDS AS TRUSTEES OF SPECIAL NEEDS TRUSTS

A major issue in the establishment of a Special Needs Trust is the question of who will serve as Trustee. If an individual is appointed, then it is necessary to name one or more successors since individuals die, resign, or become incapacitated and cannot continue serving.

In addition to the risks of an individual no longer being able to serve, there is a potential risk of loss of trust value due to embezzlement or foolish investments by an unscrupulous or ignorant/naïve individual serving as Trustee.

Because of these and other risks, some parents choose a professional/corporate Trustee, such as a bank or trust company, to avoid any risk of such losses. Corporate Trustees have the expertise to handle investments and tax issues, while offering a personal relationship (via a trust officer) so as to serve the disabled beneficiary on an ongoing basis. A corporate Trustee will avoid the personal biases that sometimes "infect" family members or friends.

If an individual is serving as Trustee and he/she is also a remainder beneficiary of the Trust after the disabled person dies, there is a potential conflict of interest for that individual, since any distribution for the benefit of the disabled person may, or will, affect the amount left in the Trust passing to the remainder beneficiary. A corporate Trustee faces no such conflict, since they are never named as a beneficiary.

In summary, corporate Trustees don't die, embezzle, or have obvious conflicts of interest, as do individual Trustees. Some parents will appoint a corporate Trustee to avoid those risks but name a family member or friend, or other trusted person, to act as a "Trustee Advisor" to provide some special wisdom or advice to the corporate Trustee. The two working together can provide (1) safety in management of the Trust by the corporate Trustee, with (2) some extra individual oversight of the needs of the person by the Trustee Advisor.

If the size of the Trust is too small to secure the services of a corporate Trustee, then either an individual Trustee must be name or a non-profit organization that offers "pooled trusts" may be a convenient option, since such organizations will normally accept very small trusts.

Curtis J. Shacklett, Esq.
Barber & Bartz, P.C.
525 S. Main St., Ste. 800
Tulsa, OK 74103-4511
Telephone: (918) 599-7755
Facsimile: (918) 599-7756
Email: cshacklett@barberbartz.com
Website: www.barberbartz.com

WILL AN INHERITANCE AFFECT SSI AND/OR MEDICAID?

This question arises frequently, and I often receive calls from parents of disabled children or professional Trustees as to the impact of an inheritance received from a grandparent or other relative, and whether or not that inheritance will affect “social security benefits.”

The short answer to this question is YES–if the disabled person is receiving either or both SSI and/or Medicaid.  Under both SSI and Medicaid rules, the disabled person cannot possess more than $2,000 in non-exempt resources.  (Exempt resources include things like clothing, household goods, personal effects, etc.) 

Thus, if a disabled individual inherited or received a gift of money or property that increased his/her bank account or list of assets/resources above $2,000 in value, the recipient would lose his/her SSI and Medicaid benefits unless the excess funds were immediately: (1) spent down below $2,000 for the benefit of the disabled person; (2) used to acquire exempt resources; (3) used to purchase a prepaid irrevocable burial contract up to $10,000; or (4) transferred into one form or another of a Medicaid pay-back trust [called a (d)(4)(A) trust, or a (d)(4)(C) trust, the later also known as “pooled” trust.]

If a disabled person is receiving SSDI (or “SSD”) which is an earned benefit program called “Social Security Disability Income,” an inheritance will not affect the continued receipt of that benefit.  SSDI is not a welfare program like SSI, and thus is not affected by receipt of an inheritance.  But if a person was receiving SSDI and Medicaid, he or she could still lose their Medicaid benefits unless one or more of the four strategies described above was implemented.

CONCLUSION:  A parent, guardian, or other caregiver should rarely discourage gifts be given to a disabled person from other family members, grandparents, etc., since there are ways to salvage these gifts via proper spend-down strategies or setting up a Medicaid payback trust, as described above. 

Curtis J. Shacklett, Esq.

Barber & Bartz

525 S. Main Street, Suite 800

Tulsa, Oklahoma  74103-4511

Telephone:  (918) 599-7755

Facsimile:   (918) 599-7756

E-mail:  cshacklett@barberbartz.com

CAN A TRUSTEE PURCHASE OR PAY FOR COLLECTIBLES, HOBBY ITEMS, OR PET-CARE EXPENSES FROM A FIRST PARTY [(d)(4)(A)] TRUST?

I occasionally receive inquiries from parents serving as Trustee, as well as from professional (corporate) Trustees, about the legitimacy of expending trust funds for various items that one might consider mere “toys.”

The Social Security rules (“POMS”) [also followed by the Oklahoma Department of Human Services (OKDHS)], require that all funds held in a First Party Trust [a (d)(4)(A) trust] must be used “solely for the benefit of” the disabled beneficiary.  This “sole benefit rule” continues to be a source of confusion and a trip-wire for the unaware.  There are a few specific examples in the POMS addressing such things as hobby expenses, pet acquisition costs, or expenditures for collectibles [e.g., baseball cards, doll collections, etc.]  Clearly, such things (including pets) may have a significant benefit to the disabled person in providing hours of companionship (e.g., pet animal), or entertainment (doll collection).  One would be hard-pressed to say such things are “medically necessary,” but that is not required in the POMS as to permitted expenditures.  If a flat-screen television (an item of entertainment) can be purchased for the beneficiary then why not other “items of entertainment,” e.g., doll collections, baseball cards, latch-hook rugs (my son’s preference), puzzles, crafts, pet expenses, etc.?

Actually, the POMS do provide some guidance as to what types of items are considered “household goods” or “personal property.”  Although the list of permitted and exempted items (exempt from being considered as part of the $2,000 limit on resources) is not spelled out in great detail, we are given the following definition and examples:

SI 01130.430 (“Household Goods, Personal Effects, and Other Personal Property”)

C.  Definition of Household goods and personal effects

1.  Household goods

Household goods are items of personal property, found in or near the home, the householder uses on a regular basis.  The householder needs household goods for maintenance, use, and occupancy of the premises as a home.

a.         Examples of household goods

• Furniture;
• Appliances;
• Electronic equipment, for instance computers and televisions;
• Carpets;
• Cooking and eating utensils; and
• Dishes.

b.         Items held because of their value or as an investment

Items that an individual acquires or holds because of their value or investment are not household goods, even if they otherwise meet the definition of household goods in SI 01130.430C.1.

2.  Personal Effects

Personal effects are items of personal property ordinarily worn or carried by the individual, or items that have an intimate relation to the individual.

a.  Examples of personal effects

Personal effects may consist of the following:

• Personal jewelry, including wedding and engagement rings;
• Personal care items and clothing;
• Pets, such as a cat, dog, hamster, horse, monkey, or snake;
• Educational or recreational items, such as books, musical instruments, or hobby materials; or
• Items of cultural or religious significance to an individual, such as ceremonial attire.

b.  Items required because of an individual’s physical or mental impairment

Items required because of an individual’s physical or mental impairment, such as prosthetic devices or wheelchairs, are also personal effects.

c.  Items held because of their value or investment

Items that an individual acquires or holds because of their value, or as an investment, are not personal effects; even if they otherwise meet the definition of personal effects in SI 01130.430C.2.

Section D of the referenced POMS, however, makes clear that not all items of personal property will be treated as exempt:

1.  Other personal property may be a countable resource

Property that an individual acquires or holds because of its value or as an investment:  is a countable resource and is not considered a household good or personal effect for the purposes of this exclusion.

 Examples of other personal property that would not be exempt are given in paragraph 2, of Section D:

• Gems;
• Jewelry that one does not wear or does not hold family significance;
• Animals for investment purposes, such as a horse or dog for breeding, for resale, or investment; and
• Collectibles.

Purchasing items by the Trustee of a “First Party Trust” may cause an “excess resource” problem if the purchased personal property would be classified as collectibles; for example, or items purchased for their value (jewelry), even if such items are purchased from the disabled persons own funds (e.g., funds from Social Security benefits or accumulated wages) to avoid a problem with expending funds from the First Party Trust.  Doing so may still result in the acquired items not being treated as exempt and, therefore, their value being a part of the resource cap of $2,000.00.

CONCLUSION:  The POMS authorize the acquisition of "pets" and "hobby materials." It would seem permissible, therefore, for a Trustee to expend trust funds (within some degree of reasonableness) to acquire or maintain these types of personal property.  Items viewed as "investments" or "collectibles" will likely create problems for the beneficiary, however.  Purchasing or receiving as gifts of non-excluded household goods or "other personal property" may result in a problems of excess resources, thus hindering continued receipt of SSI and/or Medicaid.

Purchasing of “other personal property” by the Trustee, and holding title in the Trust for the benefit of the disabled person may be permitted by state trust law, but a loss in value may expose the Trustee to a claim of breach of fiduciary duty to either the beneficiary or to the remainder persons (possibly including the state Medicaid agency).

Thus, avoiding the purchase by the Trustee or purchase from the disabled person’s own personal funds, of “other personal property” (items/non-exempt resources) should generally be avoided.

Curtis J. Shacklett, Esq.

Barber & Bartz, P.C.

525 S. Main St., Ste. 800

Tulsa, OK 74103-4511

Telephone:  (918) 599-7755

Facsimile:  (918) 599-7756

Email:  cshacklett@barberbartz.com

Website:  www.barberbartz.com