Sna Handbook For Trustees 2011


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Sna Handbook For Trustees 2011

  1. 1. Administering aSpecial Needs Trust A Handbook For Trustees (2011 Edition)
  2. 2. Administering a Special Needs Trust TABLE OF CONTENTSINTRODUCTION AND DEFINITION OF TERMS ................4 Pre-paid Burial/Funeral Arrangements .............. 11 Grantor .....................................................4 Tuition, Books, Tutoring................................ 11 Trustee .....................................................4 Travel and Entertainment ............................. 11 Beneficiary .................................................4 Household Furnishings and Furniture ................ 11 Disability ...................................................4 Television, Computers and Electronics .............. 11 Incapacity ..................................................4 Durable Medical Equipment ........................... 11 Revocable Trust ...........................................4 Care Management ...................................... 11 Irrevocable Trust ..........................................5 Therapy, Medications, Alternative Treatments ..... 12 Social Security Disability Insurance ....................5 Taxes ...................................................... 12 Supplemental Security Income .........................5 Legal, Guardianship and Trustee Fees ............... 12 Medicare ...................................................5 Medicaid....................................................5 LOANS, CREDIT, DEBIT AND GIFT CARDS .................. 12THE MOST IMPORTANT DISTINCTION.........................5 TRUST ADMINISTRATION AND ACCOUNTING .............. 12 “Self-Settled” Special Needs Trusts ....................5 Trustee’s Duties ......................................... 12 “Third-party” Special Needs Trusts ....................6 No self-dealing ..................................... 13 The “Sole Benefit” Trust .................................6 Impartiality ......................................... 13 Delegation .......................................... 13THE SECOND MOST IMPORTANT DISTINCTION ..............6 Investment ......................................... 13 SSDI/Medicare Recipients................................6 Bond ...................................................... 13 SSI/Medicaid Recipients .................................6 Titling Assets ............................................ 13 Veterans’ Benefits ........................................7 Accounting Requirements ............................. 14 Subsidized Housing .......................................7 Reporting to Social Security ........................... 14 Federal Subsidized Housing ........................7 Reporting to Medicaid .................................. 14 Section 8 ..............................................8 Reporting to the Court ................................. 15 Temporary Assistance for Needy Families (“TANF”) .8 Modification of Trust ................................... 15 Other Means-Tested Benefits Programs ................8 Wrapping up the Trust.................................. 15 INCOME TAXATION OF SPECIAL NEEDS TRUSTS ........... 15ELIGIBILITY RULES FOR MEANS-TESTED PROGRAMS .......8 “Grantor” Trusts ........................................ 15 Income......................................................8 Tax ID numbers .................................... 16 Assets ..................................................... 10 Filing tax returns .................................. 16 Deeming .................................................. 10 Non-Grantor Trusts ..................................... 16 Tax ID numbers .................................... 16“I WANT TO BUY A (PAY FOR) ...” .......................... 10 Filing tax returns .................................. 16 Home, Upkeep and Utilities ........................... 10 Qualified Disability Trust............................... 16 Clothing .................................................. 11 Seeking Professional Tax Advice ...................... 16 Phone, Cable, and Internet Services ................. 11 Vehicle, Insurance, Maintenance, Gas ............... 11 FOR FURTHER READING ..................................... 17 © Copyright, Special Needs Alliance
  3. 3. Administering a Special Needs Trust: A Handbook for TrusteesIntroduction and Definition of Terms inheritance, the minor child (through a guardian) or an adult child will be the grantor, even though he or she did not decide to establish the trust or sign any trust“Special Needs” trusts are complicated and can be hardto understand and administer. They are like other trusts many respects—the general rules of trust accounting,law and taxation apply—but unlike more familiar trusts TRUSTEE—the person who manages trust assets andin other respects. The very notion of “more familiar” administers the trust provisions. Once again, there maytypes of trusts will, for many, be amusing—most people be two (or more) trustees acting at the same time. Thehave no particular experience dealing with formal grantor(s) may also be the trustee(s) in some arrangements, and special needs trusts are often The trustee may be a professional trustee (such as aestablished for the benefit of individuals who would not bank trust department or a lawyer), or may be a familyotherwise expect to have experience with trust concepts. member or trusted adviser—though it may be difficult to qualify a non-professional to serve as trustee.The essential purpose of a special needs trust is usuallyto improve the quality of an individual’s life without BENEFICIARY—the person for whose benefit the trust isdisqualifying him or her from eligibility for public established. The beneficiary of a special needs trust willbenefits. Therefore, one of the central duties of the usually (but not always) be disabled. While a beneficiarytrustee of a special needs trust is to understand what may also act as trustee in some types of trusts, a specialpublic benefits programs might be available to the needs trust beneficiary will almost never be able to actbeneficiary and how receipt of income, or provision of as or shelter, might affect eligibility.Because there are numerous programs, DISABILITY—for most purposescompeting (and sometimes even involving special needs trusts,conflicting) eligibility rules, and at least “disability” refers to the standardtwo different types of special needs used to determine eligibility fortrusts to contend with, the entire area Social Security Disability Insuranceis fraught with opportunities to make or Supplemental Security Incomemistakes. Because the stakes are often benefits: the inability to perform anyso high—the public benefits programs substantial gainful employment.may well be providing all the necessitiesof life to the beneficiary—a good INCAPACITY (sometimesunderstanding of the rules and programs Incompetence)—although “incapacity”is critically important. and “incompetence” are not interchangeable, for our purposesBefore delving into a detailed discussion they may both refer to the inabilityof special needs trust principles, it might be useful to of a trustee to manage the trust, usually because ofdefine a few terms: mental limitations. Incapacity is usually important when applied to the trustee (rather than the beneficiary),GRANTOR (sometimes “Settlor” or “Trustor”)—the person since the trust will ordinarily provide a mechanism forwho establishes the trust and generally the person whose transition of power to a successor trustee if the originalassets fund the trust. There might be more than one trustee becomes unable to manage the trust. Incapacitygrantor for a given trust. The tax agency may define the of a beneficiary may sometimes be important as well.term differently than the public benefits agency. Special Not every disability will result in a finding of incapacity;needs trusts can make this term more confusing than it is possible for a special needs trust beneficiary toother types of trusts, since the true grantor for some be disabled, but not mentally incapacitated. Minorspurposes may not be the same as the person signing the are considered to be incapacitated as a matter of instrument. If, for example, a parent creates a The age of majority differs slightly from state to state,trust for the benefit of a child with a disability, and the though it is 18 in all but a handful of states.parent’s own money funds the trust, the parent is thegrantor. In another case, where a parent has established REVOCABLE TRUST—refers to any trust which is, by itsa special needs trust to handle settlement proceeds own terms, revocable and/or amendable, meaning ablefrom a personal injury lawsuit or improperly directed to be undone, or changed. Many trusts in common use 4
  4. 4. today are revocable, but special needs trusts are usually The Most Important Distinctionirrevocable, meaning permanent or irreversible.IRREVOCABLE TRUST—means any trust which was Two entirely different types of trusts are usually lumpedestablished as irrevocable (that is, no one reserved together as “special needs” trusts. The two trust typesthe power to revoke the trust) or which has become will be treated differently for tax purposes, for benefitirrevocable (for example, because of the death of the determinations, and for court involvement. For mostoriginal grantor). of the discussion that follows, it will be necessary to first distinguish between the two types of trusts. The distinction is further complicated by the fact that theSOCIAL SECURITY DISABILITY INSURANCE—sometimes grantor (the person establishing the trust, and thereferred to as SSDI or SSD, this benefit program is easiest way to distinguish between the two trust types)available to individuals with a disability who either is not always the person who actually signs the trusthave sufficient work history prior to becoming disabled document.or are entitled to receive benefits by virtue of beinga dependent or survivor of a disabled, retired, ordeceased insured worker. There is no “means” test “Self-Settled” Special Needs Trustsfor SSDI eligibility, and so special needs trusts may not Some trusts are established by the beneficiary (orbe necessary for some beneficiaries—they can qualify by someone acting on his or her behalf) with thefor entitlements like SSD and Medicare even though beneficiary’s funds for the purpose of retaining orthey receive income or have available resources. SSDI obtaining eligibility for public benefits—such a trust isbeneficiaries may also, however, qualify for SSI (see usually referred to as a “self-settled” special needsbelow) and/or Medicaid benefits, requiring protection of trust. The beneficiary might, for example, have receivedtheir assets and income to maintain eligibility. Of course, an outright inheritance, or won a lottery. By far thejust because a beneficiary’s benefits are not means- most common source of funds for “self-settled” specialtested, it does not follow that the beneficiary will not needs trusts, however, is proceeds from a lawsuit—oftenbenefit from the protection of a trust for other reasons. (but not always) a lawsuit over the injury that resulted in the disability. Another common scenario requiring aSUPPLEMENTAL SECURITY INCOME—better known by the person with a disability to establish a self-settled trustinitials “SSI,” this benefit program is available to low- is when they receive a direct inheritance from a well-income individuals who are disabled, blind or elderly and intentioned, but ill-advised relative.have limited income and few assets. SSI eligibility rulesform the basis for most other government program rules, A given trust may be treated as having beenand so they become the central focus for much special “established” by the beneficiary even if the beneficiaryneeds trust planning and administration. is completely unable to execute documents, and even if a court, family member, or lawyer representing theMEDICARE—one of the two principal health care programs beneficiary actually signed the trust documents. Theoperated and funded by government—in this case, the key test in determining whether a trust is self-settledfederal government. Medicare benefits are available to all is to determine whether the beneficiary had the rightthose age 65 and over (provided only that they would be to outright possession of the proceeds prior to the actentitled to receive Social Security benefits if they chose establishing the trust. If so, public benefits eligibilityto retire, whether or not they actually are retired) and rules will treat the beneficiary as having set up the trustthose under 65 who have been receiving SSDI for at least even though the actual implementation may have beentwo years. Medicare eligibility may forestall the need for undertaken by someone else acting on their behalf.or usefulness of a special needs trust. Medicare recipients Virtually all special needs trusts established with fundswithout substantial assets or income may find that they recovered in litigation or through a direct inheritancehave a difficult time paying for medications (which will be “self-settled” trusts.historically have not been covered by Medicare but beganto be partially covered in 2004) or long-term care (which Self-settled special needs trusts are different from third-remains largely outside Medicare’s list of benefits). party trusts in two important ways. First, self-settled trusts must include a provision directing the trustee,MEDICAID—the second major government-run health if the trust contains any funds upon the death of thecare program. Medicaid differs from Medicare in three beneficiary, to pay back anything the state Medicaidimportant ways: it is run by state governments (though program has paid for the beneficiary. Second, in manypartially funded by federal payments), it is available to states, the rules governing permissible distributions forthose who meet financial eligibility requirements rather self-settled special needs trusts are significantly morethan being based on the age of the recipient, and it restrictive than those controlling third-party specialcovers all necessary medical care (though it is easy to needs trusts.argue that Medicaid’s definition of “necessary” care istoo narrow). Because it is a “means-tested” health care Because Social Security law specifically describesprogram, its continued availability is often the central self-settled special needs trusts, these instrumentsfocus of special needs trust administration. Because are sometimes referred to by the statutory sectionMedicare covers such a small portion of long-term care authorizing transfers to such trusts and directing thatcosts, Medicaid eligibility becomes centrally important formany persons with disabilities. continued on page 6 5
  5. 5. continued from page 5 given to the trustee. A recipient of SSI and/or Medicaid, however, may need more restrictive language in the trust document and closer attention on the part of the assets will not be treated as available and countablefor SSI purposes. That statutory section is 42 U.S.C.§1396p(d)(4)(A), and so self-settled special needs trusts SSDI/Medicare Recipientsare sometimes called, simply, “d4A” trusts. Neither Social Security Disability Insurance benefits nor“Third-party” Special Needs Trusts Medicare are “means–tested.” Consequently, it may beThe second type of special needs trust is one established unnecessary to create a special needs trust for someoneby someone other than the person with disabilities who receives benefits only from those two programs. After(usually, but not always, a parent) with assets that never 24 months of SSDI eligibility, the beneficiary will qualifybelonged to the beneficiary. It is often used, for Medicare benefits as well, so it maywhen proper planning is done for a disabled be appropriate to provide special needsperson’s family, to hold an inheritance or provisions to get the SSDI recipientgift. Without planning, a well-meaning family through that two-year period, duringmember might simply leave an inheritance to which he or she may rely on Medicaidan individual with a disability. Even though for medical care. Restrictive specialit may be possible to set up a trust after needs trust language may actually workthe fact, the funds will have been legally against an SSDI beneficiary if it preventsavailable to the beneficiary. That means that distribution of cash to the beneficiaryany trust will probably be a “self-settled” in all circumstances; an SSDI recipientspecial needs trust, even though the funds will almost always benefit from broadcame from a third party. language giving more discretion to the trustee.Parents, grandparents and others with theforesight to leave funds in a third party Some SSDI/Medicare recipients may alsospecial needs trust will provide significantly receive SSI and/or Medicaid benefits.better benefits to the beneficiary who has a It may be critically important for thosedisability. This type of trust will not need to individuals to have strict special needsinclude a “payback” provision for Medicaid language controlling use of any assetsbenefits upon the beneficiary’s death. During or income that would otherwise bethe beneficiary’s life, the kinds of payments available. As the Medicare prescriptionthe trust can make will usually be more drug benefit evolves over the next fewgenerous and flexible. years, this concern may be somewhat lessened—but for the moment, itThe “Sole Benefit” Trust remains true that availability of the drug coverage provided by MedicaidAlthough there are two primary types of is critically important to manyspecial needs trusts, there is actually a third Medicare recipients.type that might be appropriate under certainunusual circumstances. Because Medicaid rules permit Even an SSDI/Medicare beneficiary who does not receiveapplicants to make unlimited gifts to or “for the sole any SSI or Medicaid benefits may be a good candidate forbenefit of” disabled children or spouses, some individuals special needs trust planning. Future developments in publicwith assets may choose to establish a special needs benefits programs, including housing, are uncertain, buttrust for a child or grandchild with disabilities in hopes constant budget pressure may well make benefits nowof securing eligibility for Medicaid for both themselves taken for granted completely or partially indexed to incomeas grantor and for the disabled beneficiary. A number of and/or assets in the future. Medical conditions also change,states are very restrictive in their interpretation of the of course, and some persons with disabilities living in the“sole benefit” requirement, so that such trusts are rarely community who presently receive adequate support fromseen. In many ways they look like a hybrid of the two Medicare may one day become dependent on Medicaid forother trust types; they may be taxed and treated as third- services not available under Medicare–like long term trusts, but require a payback provision like a self-settled trust (at least in some states). SSI/Medicaid RecipientsThe Second Most Important Distinction Most special needs trust beneficiaries are eligible forOnce the type of trust is determined, the next important (or seeking eligibility for) Supplemental Security Incomeissue is discerning the type of government program payments. In many states, receipt of SSI paymentsproviding benefits. Some programs (like SSDI and Medicare) automatically qualifies one for Medicaid eligibility. Manydo not impose financial eligibility requirements; a other government programs explicitly rely on SSI eligibilitybeneficiary receiving income and all his or her medical rules as well, so that SSI eligibility rules become the centralcare from those two programs might not need a special concern for those charged with administering specialneeds trust at all, or might benefit from more flexibility needs trusts. 6
  6. 6. Veterans’ Benefits There are two issues to consider when evaluating the role of special needs trusts and subsidized housing: the“Veterans’ benefits” is the term used to describe the initial eligibility for subsidized housing and the rentbenefits available to veterans, the surviving spouses, determination.children or parents of a deceased veteran, dependentsof disabled veterans, active duty military service Eligibility for subsidized housing depends on themembers, and members of the Reserves or National family’s annual income. Annual income includesGuard. These benefits are administered by the U.S. earned income, SSI, SSDI, pension, unemploymentDepartment of Veterans Affairs (“VA”). compensation, alimony, and child support, among other items. Annual income also includes unearned income, which is comprised, in part, of interest generated byThe benefits available to veterans include monetary assets. If the family has net family assets in excess ofcompensation (based on individual unemployability or $5,000, the annual income includes the greater of theat least ten-percent disability from a service-connected actual income derived from all net family assets or acondition), pension (if permanently and totally disabled percentage of the value of such assets based on theor over the age of 65 and have limited income and current passbook savings rate, as determined by worth), health care, vocational rehabilitation andemployment, education and training, home loans and Assets that are not included as income upon receiptlife insurance. Although the pension is available to low- are lump sums, such asincome veterans, it is important inheritances and insuranceto note that some income, such settlements for lossesas child’s SSI or wages earned by (although the income theydependent children, is excluded generate will be countable),when determining the veteran’s reimbursement for medicalannual income. Also keep in mind expenses, PASS set-asides,that a service-connected disability work training programs fundedpayment will not offset SSDI, but by HUD and the income of aany VA disability payment will live-in aide.offset SSI. In general, to qualify forThe benefits available to federal subsidized housing,dependents and survivors of the veteran include an individual’s countable income may not exceedDependency and Indemnity Compensation (“DIC”) and, eighty percent of the median income in the area to bein certain circumstances, home loans. considered “low income”, and the individual’s income may not exceed fifty percent of the median incomeTransferring a VA recipient’s assets into a special to be considered “very low income”. The resultneeds trust may not be fully effective. According to is a disparity in eligibility depending on where theVA interpretation, the assets of such a trust will be person resides within the county, state, and region ofcounted as part of the claimant’s net worth when the country.calculating an improved pension. It is important toremember that the VA may place a “freeze” on new There is no asset limit to be eligible for federalenrollees in order to manage the rapid influx of new subsidized housing, although as described above, ifveterans or older veterans who did not previously enroll countable assets are greater than $5,000, the interestfor services. Therefore, it is important to evaluate income generated will be counted towards eligibility.current and future need for VA services in order to If a person transfers an asset for less than its fairanticipate and plan for a situation where a person is market value, then HUD will treat the asset as if itotherwise eligible for VA benefits but, due to a freeze, were still owned by the individual for two years aftercannot receive services. Under a new law, attorneys the transfer. HUD will assume that the asset generatesmust become accredited with the VA to advise clients in income at the passbook rate and will include thatthis area. income in calculating the individual’s rent. Therefore, it is very likely that HUD will treat transfers to a special needs trust as a transfer for less than fairSubsidized Housing market value and, for the next two years, will include the interest generated by the special needs trust asFEDERAL SUBSIDIZED HOUSING income to the individual, either at the passbook rate orThe U.S. Department of Housing and Urban the actual earnings, whichever is greater.Development (“HUD”) provides opportunities to low-income individuals and families to rent property at Special Needs Trusts are excluded from family assetsa cost that is lower than the open market. This is and the income generated by the trust assets is notespecially important to those people who are expected included once the two-year penalty period has pay for their shelter costs (rent or mortgage, plus It is important to note that, similar to other programsutilities) with their insufficient SSI income. continued on page 8 7
  7. 7. continued from page 7 Because TANF is administered on a local level, the program and eligibility rules vary greatly from state tosuch as Medicaid and SSI, “regular” distributions from state. However, it is safe to assume that distributionsa special needs trust, even if made to a third-party directly made to the beneficiary of a special needsprovider, will be treated as countable income, even if trust, or to the beneficiary’s family if a minor, may beused for non-food and shelter items. considered income and will impact eligibility for TANF.The second issue relating to subsidized housing and a Other Means-Tested Benefits Programsspecial needs trust is determining the monthly rent.Generally, an individual/family’s rent will be thirtypercent of their adjusted gross income. Similar to State supplements to SSI and other governmenttreatment under the threshold eligibility rules, the special benefit programs, like vocational rehabilitationneeds trust and the income generated by trust assets are services, also play important roles in the lives of manyexcluded, but “regular” distributions made directly to the individuals with disabilities. Because the welter ofbeneficiary (as opposed to a third-party provider of goods eligibility programs is confusing and the reach of mostor services) will be considered as income. other programs is not as broad as those described in detail here, those other programs are not described in any depth. In analyzing the proper approach toSECTION 8 establishment or administration of a special needs trust, however, care should be taken to consider all theSection 8 is a voucher program that is administered by available program resources and restrictions on use ofHUD but managed by local trust funds mandated bypublic housing authorities those programs.(“PHA”) or metropolitanhousing authorities (“MHA”).The tenant pays their rent, Eligibility Rulestypically thirty percent of for Means-their net adjusted income, to Tested Programsthe landlord. The PHA paysthe remaining balance due,which is called the voucher, As previously noted,to the landlord. The rent is the primary programbased on the market value for with financial eligibilitythe area and established by restrictions is SSI, thethe PHA according to payment Supplemental Securitystandards issued by HUD. Income program. Because the concepts are central to an understanding of other eligibility rules, and becauseWhile a family member generally cannot serve as a many other programs explicitly utilize SSI standards,Section 8 landlord, it is possible for a special needs trust the SSI rules become the most important ones to do so, even if the trustee is a family member. Although They are described here in a general way, with a fewthere are special rules applicable to a Section 8 landlord, notations where other programs (particularly long-termit can be a beneficial relationship. The trust beneficiary care Medicaid) differ from the SSI rules.would pay rent to the trustee (using the thirty percentof income rule) and the PHA would pay the remainder tothe trustee. IncomeIt is important to investigate how your local housing SSI eligibility requires limited income and assets. SSIauthority’s rules differ from the general rules listed rules have a simple way of distinguishing betweenabove. income and assets: Money received in a given month is income in that month, and any portion of that income remaining on the first day of the next month becomesTemporary Assistance for Needy an asset. SSI rules also distinguish between what isFamilies (“TANF”) “countable” or “excluded,” “regular” or “irregular,” and “unearned” or “earned” income. “Countable” income means that it is used to compute eligibilityTANF provides assistance and work opportunities to and benefit amount. “Excluded” means that it is notneedy families. TANF is administered locally by the counted. “Regular” means that it is received on astates, but is overseen by The Office of Family Assistance periodic basis, at least two or more times per quarter or(“OFA”), which is located in the United States Department in consecutive months, and “irregular” or “infrequent”of Health and Human Services, Administration for means that it is not periodic or predictable.Children and Families. TANF is a result of combining “Unearned” means that it is passively received, such astwo other programs: Aid to Families with Dependent SSDI benefits or bank account interest. “Earned” meansChildren (“AFDC”) and Job Opportunities and Basic Skills that work is performed in exchange for the income. AnTraining (“JOBS”). 8
  8. 8. SSI recipient is permitted to receive a small amount of of a special needs trust for John and the cash comes fromany kind of income ($20 per month) without reducing that trust.benefits. That amount is sometimes referred to as theSSI “disregard” amount. If, however, John’s mother does not give him the $50 directly, but instead purchases $30 worth of food and $20Each classification or grouping has a somewhat different worth of cigarettes each month, only the food will affectrule, and it is an understatement to call these income his SSI payment—reducing it by $10 ($30 minus the $20rules “confusing.” Any unearned income reduces the disregard). If she purchases $20 worth of food and $30SSI benefit by the amount of the income, so investment worth of cigarettes, there will be no effect at all—theincome or gifted money simply reduces the benefit food purchase is within the $20 monthly disregard amount.dollar for dollar, less the disregard. Earned income is Similarly, if she purchases $20 worth of cigarettes and $30treated more favorably, only reducing benefits by about worth of movie tickets, there will be no effect—providedhalf of the earnings. This is designed to encourage SSI that the movie tickets cannot be turned in for cashrecipients to return to the workforce. Keeping in mind (because if the movie tickets can be converted to cash,that disability is defined as “unable to perform any John could—even if he does not—convert the movie ticketssubstantial gainful activity,” it is easy to see that any into payment for food or shelter).significant amount of earned income will eventuallyimperil SSI eligibility and, since trust administration In other words, the effect of John’s mother’s paymentsdoes not usually involve earned income in any event, to him or for his benefit changes with the nature of herwe will not attempt to deal with those issues here. payments. Any cash she provides to him (over the $20 monthly amount ignored by SSI) reduces his SSI paymentSSI also has a concept of “in-kind support and directly. Direct purchase of items other than food ormaintenance” (ISM) that is central to much shelter does not affect his SSI, so long as the purchasedunderstanding of special needs trust administration. items cannot be converted to food or shelter. Finally, anyAny payment from a third party (including a trust) payment she makes for food or shelter reduces his SSIfor necessities of life—food or shelter (note that the check as well, but not as harshly as cash payments directlyfederal government deleted “clothing” from the list of to John.necessities in March 2005) to a third party provider ofgoods or services—will be treated as countable income, Now suppose that John’s mother decides to give up onalbeit subject to special rules for calculating its effect. trying to work around the strictures of SSI rules, and she simply pays his rent at an adult care facility that providesThe effect of receiving ISM on SSI benefits is different his meals. Assume that the facility costs her $1500 perfrom the receipt of cash distributions. Where as cash month, which she pays from her own pocket. Because ofpayments reduce the SSI payment dollar for dollar, the ISM rules, John’s SSI benefit will be reduced by onlyISM reduces the benefit by the lesser of the presumed $244.66 per month, and so his SSI check will be $429.34.maximum value of the items provided or an amount Critically important, however, John will still qualify forcalculated by dividing the maximum SSI benefit by three Medicaid benefits in most states because he receives someand adding the $20 disregard amount. amount of SSI. If the adult care home payment comes from a special needs trust for John’s benefit, the same resultFor 2011, the maximum federal SSI benefit for a single will occur, assuming that the room and board portion ofperson is $674. One-third of that amount is $224.66, the payment exceeds $674. Incidentally, the same resultand so the maximum reduction in benefits caused by ISM will also obtain if John’s mother simply takes him in and(no matter how high the value) is $244.66 per month. allows him to live and eat with her without charging himThe meaning of that confusing collection of information best illustrated using an example (CAUTION: somestates provide SSI supplemental payments that affect Now assume that John does have a work history beforethis calculation). becoming disabled, and that he qualifies to receive $460 per month from SSDI. Because he has been receiving SSDIConsider John, who is disabled as a result of his serious for more than two years, he also qualifies for Medicare.mental illness. He has no work history, and he does Because his countable income is less than $674, henot qualify for SSDI. He is an adult, living on his own. continues to receive $234 in SSI benefits ($20 of the SSDHe qualifies for the maximum federal SSI benefit of is disregarded), and qualifies for Medicaid as well (we$674; he lives in a state which does not provide an SSI will ignore the effect of the QMB and SLMB programs forsupplement. qualified, special low-income Medicare beneficiaries, and the Medicare Part B premium which would ordinarily beIf John’s mother gives him $50 cash per month (for withheld from his SSDI check). Now if John’s mother paysfood and cigarettes), he is required to report that as his rent at the adult care home, or takes him into her owncountable unearned income each month. Although home, he will lose his SSI altogether—since he is receivingSSI may take two or three months to accomplish the less than $244.66 per month from SSI, the effect of theadjustment, the program will eventually withhold $30 ISM rules will be to knock him off the program. Unless($50 minus the $20 disregard) from his benefit for each he separately qualifies for Medicaid, he will also lose hismonth in which his mother makes a cash gift to him. coverage under that program.The same result will obtain if John’s mother is trustee continued on page 10 9
  9. 9. continued from page 9 “I Want to Buy a...” or “I Want to Pay for...”The income strictures are the same or similar for otherprograms, with one important exception. In some What do these complicated rules mean for expendituresstates, but not all, eligibility for community or long- from a special needs trust? In-kind purchases, meaningterm care Medicaid is also dependent on countable purchase of goods or services for the benefit of theincome. The income tests vary. In some, you can “spend beneficiary, only potentially affect the SSI benefit amount,down” excess income over the limit to become eligible. and not Medicaid benefits, although the Medicaid agencyIn others, if countable income exceeds the benefit may restrict expenditures for approved things. There are a“cap” (like SSI), you cannot become eligible at all. number of specific purchases that frequently recur:Some states also attempt to limit expenditures from Home, Upkeep and Utilitiesself-settled (and even third-party) special needstrusts, and can require amendments to the language Keep in mind that SSI’s in-kind support and maintenanceof those trusts in order to allow eligibility. While a (ISM) rules deal specifically with payments for “food andgood argument can be made that the Medicaid program shelter.” The Social Security Administration includes onlydoes not have that ability, as a practical matter, the these items as food and shelter:trustee of the special needs trust will have to eitherlitigate that issue or acquiesce in the Medicaid agency’s 1. Fooddemands. 2. Mortgage (including property insurance required by the mortgage holder)Assets 3. Real property taxes (less any tax rebate/credit) 4. RentThe limitation on assets for SSI eligibility may be 5. Heating fuelsomewhat easier to master, or at least to describe.A single person must have no more than $2,000 in 6. Gasavailable resources in order to qualify for SSI. Some 7. Electricitytypes of assets are not counted as available (called 8. Water“non-countable”), including the beneficiary’s home, 9. Sewerone automobile, household furnishings, prepaidburial amounts plus up to $1500 set aside for funeral 10. Garbage removalexpenses (or life insurance in that amount), tools ofthe beneficiary’s trade, and a handful of other, less The rules make special note of the fact that condominiumimportant items. Each of these categories of assets is assessments may in some cases be at least partialsubject to special rules and exceptions, so it is easy to payments for water, sewer, garbage removal and the like.become tangled in the asset eligibility structure. In other words, a payment for rent will implicate the ISM rules, as will monthly mortgage payments. TheDeeming outright purchase of a home, whether in the name of the beneficiary or the trust, will not cause loss of SSI (althoughThe SSI program considers portions of the income and it may reduce the beneficiary’s SSI benefit for the singleassets of non-disabled, ineligible parents of minor month in which the home is purchased). This brings updisabled children and of an ineligible spouse living another consideration. Purchase of a home in the trust’swith the SSI recipient as available, and countable for name will subject it to a Medicaid “payback” requirementeligibility purposes. This is called “deeming”. A certain on the death of the beneficiary, whereas purchase in theportion of the ineligible person’s income and assets name of the beneficiary may allow other planning thatis considered as necessary for his or her own living will avoid the home becoming part of the payback. Thisexpenses, and therefore is excluded. complicated interplay of trust rules, ISM definition, estate- recovery rules, and home ownership makes this area ofAs soon as a child reaches age 18, parental deeming no special needs trust administration particularly fraught withlonger occurs, even if the child continues to live in the difficulty.household. If spouses voluntarily separate and live indifferent households, then deeming from the separate However, the Medicaid state agency’s treatment ofspouse or parent also ends. However, in both instances, distributions from special needs trusts may differ fromif the separate person continues to provide support or the Social Security interpretation—especially when themaintenance to the SSI eligible individual, it will still beneficiary of a self-settled trust is eligible for Medicaidcount as income as described above unless a Court benefits. For example, contrary to putting the house in theorders it to be deposited directly into the trust. There individual’s name, a state may require that any purchaseis also a limited exception to all parental deeming for of a home by such a trust would result in title being helda severely disabled minor child returning home from an in the trust’s name, thereby ensuring that the state will atinstitution or whose condition would otherwise qualify least receive the proceeds from the sale of the residencethem for institutionalization, which is called a waiver. upon the death of the beneficiary. 10
  10. 10. Clothing Travel and EntertainmentUntil March 7, 2005, purchase of clothing by a trust was Once again, no limit except that there may be someconsidered as ISM for SSI, similar to shelter and food. concern about payment for hotels. When the beneficiarySince then, a clothing purchase for the beneficiary will still maintains a residence at home, the hotel stay andnot affect the benefit amount or eligibility, whether the restaurant may be considered “shelter” and “food”clothing in question is special garments related to the expenses. Some states may impose limitations ondisability or just ordinary street clothes and shoes. Not companion travel not found in federal law. These mightall state Medicaid regulations reflect this change. include not allowing recipients to have the special needs trust pay for more than one traveling companion, thePhone, Cable, and Internet Services companion must be necessary to provide care, and the companion may not be a person obligated to support the beneficiary such as a minor beneficiary’s parent. NoteOther than those utilities listed above, there is no that foreign travel can have two other adverse effects:federal limitation on utility payments. In other words, (1) airline tickets to foreign destinations, if refundable,the trust can pay for cable, telephone, high-speed will be treated as being convertible into food andinternet connection, newspaper, and other “utilities” shelter, and (2) if an SSI recipient is out of the countrynot on the list. for more than a month, he or she may lose eligibility until return. For those reasons, foreign travel, unlikeVehicle, Insurance, Maintenance, Gas domestic travel, usually must be limited in time.Purchase of a vehicle and maintenance Household Furnishings(including gas and insurance) is and Furniturepermitted under federal law. Notethat there is a mechanical difficulty in The trust can be used to purchaseproviding gasoline without providing appliances, furniture, fixtures andcash that could be converted to food the like. Before March 2005, thereor shelter. One technique which has was a theoretical concern in the SSIworked well has been to arrange for program that the value of householdthe beneficiary to have a gas-company furnishings might exceed an arbitrarycredit card. Because eligibility for such limit and affect the beneficiary’scards is easier to meet, and because eligibility; that value limit has nowthe cards cannot be used to purchase been removed.groceries, administration of the credit account is easierto set up and monitor, and the card can then be billed Television, Computers and Electronicsdirectly to the trust. There is no specific limitation on purchase of householdSome state Medicaid agencies put limitations on the televisions or other electronic devices, although undervalue, type, and title ownership of vehicles, such as only SSI rules the individual is only allowed to own “ordinaryallowing a vehicle valued at up to $5,000, handicapped- household goods” that are not kept for collectible valueequipped, or requiring a lien in favor of the payback and are used on a regular basis. The trust can alsotrust on the title. The SSI program does not specifically provide a computer for the beneficiary, plus softwarerequire or monitor such limitations. and upgrades.Pre-paid Burial/Funeral Arrangements Durable Medical EquipmentNothing in federal law prohibits or restricts use of There is no federal limitation on any medical relatedspecial needs trust funds for purchase of burial and equipment, but individual states may limit purchase offuneral arrangements during the beneficiary’s lifetime— some equipment as not being “necessary.” Problemexcept to the extent that the beneficiary has access to areas could be if the equipment could also be consideredthe funds used to pay for the arrangements, and thereby as recreational, such as a heated swimming pool neededsubject to the asset limitations affecting SSI recipients. for arthritic or other joint conditions.State Medicaid agencies may limit the value of the burialcontract. It is important to ask for an “irrevocable, pre- Care Managementpaid” funeral plan. No federal limitation, but many states attempt to limitTuition, Books, Tutoring payments for care or management if made to a family member or other relative, especially if there is anNo limit under either federal or state law. This is an obligation of support (e.g., parents of minor children).excellent use of special needs trust funds. continued on page 12 11
  11. 11. continued from page 11 card company, they are also not considered as income to the beneficiary at time of purchase. As long as theTherapy, Medications, Alternative beneficiary doesn’t sell the goods for cash, there is also the added advantage that the trust can pay back theTreatments credit card company without the payment counting asSame principle as durable medical equipment, above, so income, except for purchases that are considered aslong as the state does not regulate the treatment, there food or shelter. Food and shelter related purchases useis no federal limitation. the same ISM countable income rules (and particularly the countable income limits) described above.Taxes Use of a debit card by a beneficiary when purchasesNo federal limitation, but states may attempt to direct are made for payment through a trust-funded banktrust language on what taxes can be paid for, such as account is income to the beneficiary for the amounttaxes incurred as a result of trust assets or at the death accessed. The total amount in the account availableof the beneficiary. Since it is difficult to imagine an to be accessed could possibly be a countable resource.SSI or Medicaid beneficiary having significant non-trust Is a gift card purchased by a trust and provided to aincome, it is hard to see how this limitation is so much beneficiary considered to be a distribution of income, atroublesome as it is quarrelsome. line of credit to a vendor (similar to a credit card), or just access for in-kind purchase of goods or services onLegal, Guardianship and Trustee Fees behalf of a beneficiary by the trust? SSI rules are not yet clear on this point, and it is probable that differentAt least some states allow legal, guardianship, and Social Security and Medicaid offices will treat the use oftrustee fees to be paid from the trust, although some debit and gift cards differently until precise guidelinesfederal law indicates that payment of guardian’s fees are provided by the agencies. The safe approachor guardian’s attorney fees may is to use them in a very limitedreally benefit the guardian and not way; if they are to be used at all,the beneficiary. Payments for trust keep receipts for all special needsadministration expenses, including items, and be prepared for adversethe trust’s attorney’s fees, are clearly treatment.permissible under both federal andstate law, and are rarely limited beyondreasonableness standards. Trust Administration and AccountingLoans, Credit, Debit Actual administration of a specialand Gift Cards needs trust is in most respectsReceipt of a “loan” will not count similar to administration ofas income for the SSI or Medicaid any other trust. A trustee has aprograms, which means that a trust general obligation to account tocan make a loan of cash directly to a beneficiaries and other interestedbeneficiary. There are rules that must parties. Tax returns may need to bebe followed for loans to be valid and filed (though not always), and taxnon-countable. There must be an enforceable agreement filing requirements will be based on the tax rules, notat the time that the loan is made that the loan will be special needs trust rules. Some special needs trusts,paid back at some point, which usually means that it but by no means all, will be subject to court supervisionshould be in writing. The agreement to pay back cannot and based on a future contingency such as, “I only haveto pay it back if I win the lottery...” Finally, the loanmust be considered as “feasible,” meaning that there is a Trustee’s Dutiesreasonable expectation that the beneficiary will have themeans at some point to pay back the loan. As with general trust law requirements, the trustee of a special needs trust has an obligation not to self-deal,If a loan is forgiven, then it would count as income at that not to delegate the trustee’s duties impermissibly, nottime. Also, if the beneficiary still has the loaned amount to favor either income or remainder beneficiaries overin the following month, it will then count as a resource. one another, and to invest trust assets prudently. TheHowever, school loans are not countable as income or as a obligations of a trustee are well-discussed in severalresource so long as the funds are spent for tuition, room centuries of legal precedent, and cannot be takenand board, and other education-related expenses within lightly. Legal counsel (and professional investment,nine months of receipt. tax and accounting assistance) will be required in administration of almost every special needs trust.Since goods or services purchased with a credit card areactually a “loan” that must be paid back to the credit A few cardinal trust rules bear special mention: 12
  12. 12. NO SELF-DEALING a higher standard, but any trustee will be required to understand and implement prudent investment practices.As with other trusts, the trustee of a special needs trust Some courts will institute an investment policy thatis prohibited from self-dealing. That means no investment requires a percentage of assets to be held in fixed incomeof trust assets in the trustee’s business or assets, no investments and the remainder in securities (e.g., a 60/40mingling of trust and personal assets, no borrowing split is common).from the trust, no purchase of goods or services (bythe trust) from the trustee (other than, of course, trust Bondadministration services), and no sale of trust assets to thetrustee. The same strictures also apply to the trustee’s A trustee, especially one who administers a specialimmediate family members, and the existence of an needs trust supervised by a probate court, may need toappraisal, or the favorable terms of a transaction, do not be bonded. Bond is a type of insurance arrangementchange these rules. whereby the trustee pays a premium in order to guarantee that the trustee manages the trust and carries out hisIMPARTIALITY or her fiduciary duties correctly. The bond premium is an acceptable expense of the trust, and need not comeBecause the trust has both an “income” beneficiary (the out of the trustee’s own pocket. If the trustee fails toperson with disabilities) and a “remainder” beneficiary exercise his or her fiduciary duty and the trust loses money(the state, in the case of as a result, the insurancea Medicaid payback trust, company that issued theor the individuals who bond will compensate thewill receive assets when trust and take action tothe income beneficiary collect from the trustee.dies), the trustee has anecessarily divided loyalty.It is important to remain The bond premium dependsimpartial as between on multiple factors, includingthe trust’s beneficiaries. the credit history of theThus, investment in assets trustee and the value ofexclusively designed to the trust. Most corporatemaximize income at the trustees are exempt fromexpense of growth, or vice posting bond. Individualversa, may violate the trustee’s duty to the negatively trustees must “post bond”; that is, provide writtenaffected class of beneficiaries. Note that a trust may, documentation to the probate court that the individual isby its terms, make clear that the interests of one or the bonded. The bond is typically issued for a set period ofother class of beneficiaries should be paramount—though time, for example one year, and at the expiration of thesuch language will probably earn the disapproval of the time period, the trustee must pay an additional premiumMedicaid agency in any self-settled trust which must be or show the bond issuer that bond is no longer required bysubmitted to Medicaid for approval. the probate court.DELEGATION It is possible in most states, at least when the trust is supervised by a court, to ask the court for permission toGenerally speaking, a trustee may delegate functions but deposit the assets in a restricted or “blocked” accountmay not avoid liability by doing so. In other words, while with a financial institution rather than posting bond. Whilethe trustee may hire investment advisers, tax preparers this circumvents the issue of being bonded, the financialand the like, he or she will remain liable for any failures institution should require a certified copy of the court’sby such professionals. order authorizing the expenditure of funds prior to making a distribution from the special needs trust. This can resultSome states do limit the trustee’s liability. For example, in frequent in-person trips to the bank by the trustee,in states which have adopted the Uniform Prudent although it avoids the sometimes costly bond premium.Investor Act, delegating investment authority pursuant tothe Act will limit the trustee’s liability so that he or shewill only be required to carefully select and monitor the Titling Assetsinvestment adviser. The trust assets should not be titled in the beneficiary’s name except in limited circumstances, such as when it isINVESTMENT advantageous to title the home in the individual’s name. Typically, the trust assets should be titled in the name ofAny trustee should be familiar with the principles of the trustee. For example, if James Jones is the trusteeModern Portfolio Theory, with its emphasis on risk of the Lisa Martin Special Needs Trust, and that trust wastolerance and asset diversification. A trustee who holds signed on March 15, 2007, then the trust assets shouldhimself, herself, or itself out as having special expertisein investments or asset management will be held to continued on page 14 13
  13. 13. continued from page 13 Reporting to Social Securitybe titled as follows: “James Jones, Trustee of the Lisa The simple term “income” has different meanings inMartin Special Needs Trust u/a/d March 15, 2007” trust accounting, tax preparation, and public benefits(“u/a/d” means “under agreement dated”). eligibility determinations. Trustees sometimes raise concerns that thorough trust accountings (to SSI,It is important that most assets not be held in James especially) may result in suspension of benefits, or thatJones’s or Lisa Martin’s name individually. If the tax return information may be used to terminate SSIassets are not titled properly, then the assets may be or other benefits. While such things undoubtedly docounted as a resource, or the interest earned counted occur, Social Security workers are increasingly likelyas income, by the agencies that administer means- to be relatively sophisticated about such distinctions,tested government benefits, which will frustrate the and willing to work through any problems. In a generalpurpose of the special needs trust, as well as contribute way, then, it is better to disclose more fully to Socialto confusion during tax preparation. Additionally, Security rather than withhold any information. Annualas discussed in further detail below, it may also be accountings of any self-settled trust naming an SSIimportant to request a separate Tax ID number for the recipient as beneficiary should be provided to Socialtrust as well as properly title the assets. Security. Any third-party trust which makes significant distributions for the benefit of an SSI recipient should probably be provided to Social Security, just to preventAccounting Requirements later problems that could have been headed off. If distributions disrupt eligibility, the problem is with theA trustee is required to provide adequate accounting distribution, not with the accounting.information to beneficiaries of the trust. Thatrequirement generally means annual accountings. While If the beneficiary receives only SSDI and not anythere is no specific form required for accountings if concurrent SSI, there is no point in providing accountingthe trust is not under court supervision, it is important information to Social Security, because SSDI benefitsto provide enough information that a reader could are not means-tested. If the trust is a third-party trust,determine the nature and amount of any payment or the trustee may not have any obligation to provideinvestment. For some trusts, a simple “check register” accounting information, though the beneficiary may (ifaccounting may be sufficient, the beneficiary receives SSIshowing interest income and and trust distributions invokethe names of payees, with dates the ISM rules) be required toand amounts. Any trust with do so.significant assets or diverseinvestments, however, should Although it no longer occursprovide a thorough accounting. as regularly, some Social Security eligibility workersRegular, complete accountings may misunderstand theare critical. A beneficiary is effect of special needs trustgenerally foreclosed from later expenditures or terms andraising objections to investments reduce or eliminate benefitsor expenditures if he or she improperly. When this doesreceived adequate disclosure occur, it should be possiblein the annual accounting at the to remedy the error, but thetime. In other words, thorough beneficiary may suffer foraccounting can limit the trustee’s months (or years) while thelater exposure to claims by system works out the problem.beneficiaries, and therefore Far better to head offbenefits the trustee. problems in advance, rather than have to spend substantialIn addition to the accounting requirements to the resources and time resolving them after the fact. Bebeneficiary, the trustee may be required to provide an aware that fees for a trustee’s time spent directlyannual or biennial accounting to the probate court. The dealing with Social Security on the beneficiary’s behalftrustee should use the county-specific forms available may be subject to approval by SSA.upon request from the court, and may also be requiredto provide the court with copies of bank statements Reporting to Medicaidand cancelled checks or receipts as evidence of trustdistributions and deposits. This requires the trustee If the beneficiary resides in a state where the receiptto be organized or be prepared to pay potentially of SSI results in the beneficiary also being automaticallysubstantial bank fees for duplicate account statements enrolled in Medicaid, then no separate accountingor cancelled checks. requirement need be made to the Medicaid agency. 14
  14. 14. However, if the individual is in a state where SSI and will obviously be necessary to determine the “payback”Medicaid are not interrelated, then it may be necessary amount upon the death of the beneficiary or terminationto account to both agencies. The Medicaid consumer (or of the trust. Because Medicaid’s historical experiencetheir guardian) is required to notify Medicaid of a change with these trusts is still slight, state agencies mayin resources or income within a set period of time, have difficulty providing a reliable and final figure. Theusually as short as ten days. This includes situations prudent trustee will request a written statement of thewhere the Medicaid consumer receives an inheritance amount due, including evidence showing how it wasor settlement and immediately transfers the funds to a calculated and a statement of authority to make thespecial needs trust. final determination. Once any payback issues have been addressed (and remember that most third-party specialThe trustee of a third-party special needs trust may needs trusts will have no requirement of repaymentnot have the same duty to account, but may choose to to the state), then termination of the trust will followprovide accounting information to Medicaid rather than the usual requirements of tax preparation and filing,risk later disqualification of the beneficiary, even though final accounting and distribution according to the trustMedicaid’s power to consider trust expenditures may be instrument. Remember, because Social Security requiressubject to challenge. that Medicaid reimbursement and certain tax liabilities must be squared away before the trustee may even pay for the beneficiary’s funeral, purchase during theReporting to the Court beneficiary’s lifetime of an irrevocable pre-paid funeral is critical.Many self-settled special needs trusts will be treatedin essentially the same fashion as a conservatorship or Income Taxation of Specialguardianship of the estate. This is so because, typically,the court was initially asked to authorize establishment Needs Trustsof the trust. Most courts expect any trust established by Special needs trusts, like other types of trusts, canthe court to remain under court supervision, including complicate income tax preparation. The first questionbonding, seeking authority to expend funds, and filing to be addressed is whether—for income tax purposes–theperiodic accountings. trust is a “grantor” trust or not. Tax rules defining “grantor” trusts are neither simple nor intuitive, butEven if the trust does not require court accounting, fortunately there are some easy rules of thumb to apply,some consideration should be given to seeking court and they will work for most special needs trusts.involvement. One great advantage of court supervisionof the trust is that each year’s accounting is then finalas to all items described in that accounting (provided, “Grantor” Trustsof course, that the appropriate notice has been given A “grantor” trust is treated for tax purposes as ato beneficiaries who might otherwise complain about transparent entity. In other words, the grantor of athe trust’s administration and other court procedural “grantor” trust is treated as having received the incomerequirements are followed). directly, even though the accounts are titled to the trust and all income shows up in the name of the trust.The Court may also have a set fee schedule thatgoverns the amount the trustee can be compensated for Generally speaking, a self-settled special needs trust willproviding trust administration services. be a grantor trust if a family member is the trustee. If the trust names an independent trustee it may still be aModification of Trust grantor trust if one of several specific provisions exists in the trust. A qualified accountant or lawyer should be ableAs explained above, a special needs trust must be to tell whether a given trust is a grantor trust at a glance.irrevocable in order for the trust to be considered an If it is, it remains a grantor trust for its entire life—or atexempt resource. However, that does not preclude least until the death of the grantor (when the trust maythe trust itself from permitting the trustee to amend either terminate or convert into a non-grantor trust as toor modify the trust in limited ways, particularly as it its new beneficiaries). Until the trust has been reviewedrelates to program eligibility for the beneficiary. This by an expert, assume that it is probably a grantor particularly important since we cannot predict futurechanges to the laws governing means-tested benefits. It is generally beneficial for a self-settled special needsThe courts may also be willing to modify or terminate a trust to be a grantor trust. This is true because the taxtrust whose purpose has been frustrated by law changes rates for non-grantor trusts are tightly compressed, andor other factors, such as the trust assets being valued at the highest marginal tax rate on income is reached verya nominal amount. quickly for trusts. The practical difference will be small if the trust actually makes distributions for the benefitWrapping up the Trust of the beneficiary in excess of its annual taxable income, but the proper tax reporting approach should still beIf the special needs trust is a self-settled trust with a followed.provision requiring repayment of Medicaid expenses, it continued on page 16 15
  15. 15. continued from page 15 increasingly likely to understand that “income” for tax purposes is different from “income” for public benefits eligibility purposes. Any tax liability incurred by theTAX ID NUMBERS individual beneficiary as a result of this imputation can be paid by the trust, though the trustee may not haveA grantor trust may, but need not, obtain an Employer the authority to prepare and sign the individual’s taxIdentification Number (an EIN). Some attorneys and choose to secure an EIN in each case, whileothers resist doing so—either approach is defensible. Administrative and other deductible expenses on anAlthough banks, brokerage houses and other financial individual tax return must reach 2% of the taxpayer’sinstitutions may insist that the trust requires its own income before being deducted at all. The same is notEIN, they are simply wrong. There is widespread true of a trust tax return, leading to a modest benefitconfusion about the necessity for an EIN for irrevocable to treatment as a non-grantor trust in some cases. Thistrusts, but a confident and well-informed trustee, benefit may not offset the compressed income tax ratesattorney or accountant should be able to convince the levied against non-grantor trusts, but each case will befinancial institution that no separate EIN is required. different. The difficulty in determining the proper—andInstead, the trustee can simply provide the financial the best—income tax treatment is made worse when oneinstitution with the grantor’s Social Security number. adds the confusing option of treatment as a “Qualified Disability Trust.”FILING TAX RETURNS Qualified Disability TrustA grantor trust ordinarily will not file a separate taxreturn. If a grantor trust has been assigned an EIN, Beginning in 2002, Congress allowed some non-grantorit may file an “informational” return. The return special needs trusts to receive a modest income taxcan include a paragraph indicating that the trust is a benefit. Trusts qualifying under Internal Revenue Codegrantor trust, that all income is being reported on the Section 642(b)(2)(C) receive a special benefit—theybeneficiary’s individual return, and that no substantive are permitted to claim a personal exemption oninformation will be included in the fiduciary income their federal income taxes. In 2011, for example, thetax return. Actually, completing the fiduciary income personal exemption is $3,650, which means that incometax return is not an option for a grantor trust, although up to that amount will not generate any tax liabilityagain there is much confusion on this point, even among at all. In fact, once the trust uses its exemption andsome professionals. calculates the remaining taxable income, it is usually passed through to the beneficiary—who gets to claim another $3,650 personal exemption.Non-Grantor Trusts Coupled with the greater flexibility available toVirtually all third-party, and some self-settled, special non-grantor trusts in deducting administrativeneeds trusts will be non-grantor trusts. Because income expenses, Qualified Disability Trust treatment may bewill not be treated as having been earned by the advantageous in some cases. Typically, the Qualifiedbeneficiary, a fiduciary income tax return (IRS form Disability Trust election will be attractive when there is1041) will be required. a fair amount of income on trust assets, and relatively few medical or other expenses incurred on behalf of theTAX ID NUMBERS beneficiary. Careful review with a qualified income tax professional is usually necessary to determine whetherA non-grantor trust will need to obtain its own EIN by to pursue Qualified Disability Trust treatment.filing a federal form SS-4. Nearly all third-party specialneeds trusts will be “complex” trusts—this designation Seeking Professional Tax Advicesimply means that the trust is not required to distributeall its income to the income beneficiary each year.Although the trust will be listed as “complex” on the It should be apparent from this brief discussion ofSS-4, it may in fact alternate between “complex” and taxation of special needs trusts that professional tax“simple” on each year’s 1041. preparation and advice are essential. Although most accountants are qualified to prepare fiduciary (trust) income tax returns, most do not have much experienceFILING TAX RETURNS in the field. A first question to ask a prospective accountant might be “How many 1041s do youThe non-grantor trust must file a 1041 each year. All typically prepare in a year?” Follow that with “Coulddistributions for the benefit of the beneficiary are you please explain the concept of Qualified Disabilityconclusively presumed to be of income first, so any Trusts to me?” and you will quickly locate any trulytrust expenditures in excess of deductions will result in proficient practitioner. You probably will not want toa Form K-1 showing income imputed to the beneficiary. automatically reject an accountant who cannot tell youThis should not cause particular concern, since Social about Qualified Disability Trusts immediately, unlessSecurity (and even Medicaid) eligibility workers are you are prepared to deal with an accountant in another 16
  16. 16. city—there are simply not very many accountants or taxpreparers who have ever had occasion to claim that statuson any fiduciary income tax return. As always, you canget some assistance in complicated special needs trustissues from the attorney who prepared the document, orthe attorney who advises you as trustee. Members of theSpecial Needs Alliance are usually among the very fewwho are familiar with these concepts, and your attorneymay have worked with an accountant in your area who isfamiliar with the special tax treatment of these trusts. For Further Reading There are a handful of books and articles, and a growing number of websites, available to aid trustees of special needs trusts. Among our favorites: Special Needs Trust Administration Manual: A Guide for Trustees, by Jackins, Blank, Macy and Shulman—this guide is among the best available. It was written by four Massachusetts lawyers, and is frankly focused on Massachusetts law and practice. Much of what the authors have to say, however, is applicable to special needs trusts in every state. Special People, Special Planning: Creating a Safe Legal Haven for Families with Special Needs, by Hoyt and Pollock—provides some general advice and direction, but is more conversational than detailed. This volume also tends to focus on the “why” more than the “how”, which is an important message but not as useful to someone who is already administering a special needs trust. Special Needs Trusts: Protect Your Child’s Financial Future, by Elias—this recent addition to the literature comes from Nolo Press, an organization that many lawyers find annoying at best. We disagree. This is a plain-language, straightforward explanation of special needs trusts from a lawyer who doesn’t even practice in the area (his previous books for Nolo Press include explanations of bankruptcy, trademark and other areas of law). 17
  17. 17. 6341 E. Brian Kent Drive Tucson, AZ 85710 Phone: 520.546.1005 Fax: 520-546-5119 SNA Toll Free Number: 1.877.572.8472w w w. s p e c i a l n e e d s a l l i a n c e . o r g