Estate Planning When a Spouse is Confronting Health Issues (Estate Planning for the Healthy Spouse)

When one spouse is a resident of a nursing facility or medical institution (the "institutionalized spouse"), but the other spouse continues to live in the community (the "community spouse"), the community spouse may take a number of steps to retain a maximum level of resources without jeopardizing the institutionalized spouse's Medicaid eligibility.1

Medicaid is a joint federal and state program created under Title XIX of the Social Security Act of 1965. It provides a source of funding for long-term care to those aged, blind and disabled individuals who qualify financially. 42 U.S.C. §1396 et seq.; N.J.A.C. 10:71-1 et seq. Eligibility for Medicaid is based upon financial need. For example, under the "Medicaid Only" program, an applicant's countable resources cannot exceed $2,000.00. N.J.A.C. 10:71-4.4.

Following the enactment of the Medicaid program, based upon concern over the widespread practice of purposeful asset divestiture, mostly by the wealthy, to obtain Medicaid eligibility, Congress enacted legislation to impose periods of ineligibility, or "penalty periods," in cases in which a Medicaid applicant divested himself of assets for less than fair market value in an attempt to render himself "needy." See Rainey v. Guardianship of Mackey, 773 So. 2d 118, 119 (Fla. Dist. Ct. App. 2000); In re John XX, 652 N.Y.S. 2d 329 (Sup. Ct. 1996), appeal denied, 659 N.Y.S. 2d 854 (1997). This legislation imposes a 36-month "look-back period," in which Medicaid officials will "look back" from the application date to analyze asset transfers by the applicant. Id. If a Medicaid applicant disposes of assets for less than fair market value within the 36-month look-back period, the applicant may be subject to a period of Medicaid ineligibility (a "penalty period"), based upon the value of the uncompensated transfer. 42 U.S.C. §1396(p).

By understanding the Medicaid rules and designing strategies consistent with those rules, the attorney can assist the community spouse in planning his or her estate when the spouse is confronting health issues.
A. Asset Titling — Deeds, Bank Accounts, And Life Insurance
Transfer Of The Institutionalized Spouse's Interest In The Principal Residence to the Community Spouse

The Medicaid transfer penalties do not apply to all uncompensated asset transfers. For example, under current Medicaid law, certain transfers of the Medicaid applicant's principal residence are "exempt" for purposes of determining Medicaid eligibility. One such exempt transfer of the applicant's principal residence for less than fair market value is a transfer to the Medicaid applicant's community spouse. Retitling a couple's jointly held home to the community spouse is a significant estate planning measure for the community spouse.

Among the benefits of transferring the applicant's interest in the home to the community spouse is that the home will escape the imposition of a "Medicaid lien" as mandated by the Medicaid estate recovery program. N.J.S.A. 30:4D-7.2 et seq.; 42 U.S.C. §1396p(b)(1)(B). Under the estate recovery program, the State of New Jersey is entitled to recover payments made on behalf of a Medicaid recipient through the imposition of liens on any real or personal property owned by the Medicaid recipient or in which the Medicaid recipient held legal title at the time of death. Id. New Jersey seeks recovery only from estates of deceased Medicaid recipients.

Thus, by engaging in Medicaid planning and transferring the institutionalized spouse's interest in the home to the community spouse, Medicaid will not penalize the transfer; moreover, Medicaid will be unable to impose a lien on the home because the institutionalized spouse will have no legal title to or legal interest in the home at the time of his or her death.

Other techniques involving the principal residence may assist in maximizing the resources of the community spouse. The community spouse-occupied principal residence is an exempt asset. N.J.A.C. 10:71-4.4. Consequently, prepayment of real estate taxes constitutes a valid spend-down. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.02[C] at 8-7 (Aspen 2003). In addition, because personal effects and household goods are excluded up to a total value of $2,000,2 N.J.A.C. 10:71-4.4, such goods may be purchased as part of a spend-down plan.

In fact, because the community spouse-occupied principal residence is an exempt asset, N.J.A.C. 10:71-4.4, resources may be converted from countable to excludable by selling the residence and purchasing a more expensive home. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.03[C] at 8-9 (Aspen 2003).
Retitling Of Bank Accounts And Life Insurance

If the community spouse has a life insurance policy, a retirement account (e.g., an IRA), or an annuity naming the institutionalized spouse as beneficiary, the beneficiary designation should be changed to a third party (for example, the couple's children). Otherwise, if the beneficiary is designated as the institutionalized spouse, the proceeds would be paid to the institutionalized spouse, who would become ineligible for Medicaid until those funds were expended for his or her nursing care.

Similarly, bank accounts should be retitled so that they are not in the name of the institutionalized spouse.
B. Changing The Will To Exclude The Disabled Spouse

If the community spouse has a Last Will and Testament naming the institutionalized spouse as beneficiary, and the will is not changed to name the children or other third parties as beneficiaries, the estate would be distributed to the institutionalized spouse, who would become ineligible for Medicaid util those funds were expended for his nursing care. For this reason, a revision to the community spouse's will is a necessary element of a Medicaid plan.

Of course, when changing the Last Will and Testament of the community spouse, the attorney must consider the impact that such a change would have on the elective share.

A successful strategy for addressing these two concepts is the execution of a new will in which the community spouse leaves the institutionalized spouse's elective share in a testamentary Special Needs Trust that will not affect his/her eligibility for Medicaid or other needs-based governmental programs.

Under the state elective share statute, N.J.S.A. 3B:8-1, et seq., the surviving spouse has a right to take one-third of the augmented estate of a deceased spouse. Because the statute also provides that half of anything placed in a trust for the surviving spouse counts against the elective share, if the community spouse puts two-thirds of his or her estate in a Special Needs Trust for the surviving spouse, the elective share is satisfied.

The testamentary elective share trust may be designed as a Special Needs Trust so that all distributions of principal are left to the sole discretion of the trustee and may be made only for products and services which supplement governmental benefits received by the disabled spouse.

The amount of the estate above the elective share may be left outright to the children or other heirs.
C. Durable Power Of Attorney With Gift-Giving Power

A financial power of attorney is a legal instrument by which an individual (the "principal") authorizes another person(s) (the "attorney(s)-in-fact" or "agent(s)") to perform specific acts enumerated in the instrument on behalf of the principal See N.J.S.A. 46:2B-8.2; 2A C.J.S. Agency § 44; Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §13.03[1] at 13-5 (Matthew Bender 1999). An agent under a power of attorney is specifically authorized by New Jersey statute to conduct banking transactions on behalf of a principal. N.J.S.A. 46:2B-11.

Care must be taken by the attorney in the structuring and execution of a power of attorney instrument. In order to execute a power of attorney, the principal must possess the capacity to contract, or to understand the nature and the effect of the act of appointing an agent. See Mazart, G., New Jersey Elder Law Practice, §2 at 2-3 (New Jersey Institute for Continuing Legal Education 1999).

Because an ordinary power of attorney is only effective during the time that the principal is competent, it is void when the principal becomes incapacitated, rendering it ineffective as a tool for addressing disability. Consequently, New Jersey statutory law authorizes the use of a "durable" power of attorney, in which the instrument is not affected by the disability of the principal. N.J.S.A. 46:2B-8.2. A power of attorney is "durable" if it states: "This power of attorney shall not be affected by subsequent disability or incapacity of the principal;" or "This power of attorney shall become effective upon the disability or incapacity of the principal;" or similar words. Id.

When a power of attorney is durable, all action taken by the agent pursuant to that power during the principal's disability or incompetence has the same effect, and binds the principal as if the principal were competent. N.J.S.A. 46:2B-8.3. Thus, the durable power of attorney provides the principal with the opportunity to select his or her own agent to act in the event of incapacity, which is a favorable alternative to, and may avoid, resorting to the courts for such appointment in a guardianship or conservatorship proceeding. See J. Regan, R. Morgan and English, D., Tax, Estate & Financial Planning For The Elderly, §13.03[2] at 13-6 (Matthew Bender 1999).

Critical for purposes of Medicaid planning is the fact that a power of attorney cannot be construed as authorizing the attorney-in-fact to "gratuitously transfer property of the principal to the attorney-in-fact or to others except to the extent that the power of attorney expressly and specifically so authorizes." N.J.S.A. 46:2B-8.13a. Consequently, if the power of attorney is to be used to conduct Medicaid planning including gifting strategies on behalf of the institutionalized spouse, it must specifically include gifting powers.

While blanket gifting provisions, giving authorization generally to make gifts of the principal's property, allow the agent authority to conduct Medicaid planning, blanket gifting powers may also create problems. For example, such a provision could be used by an agent/child to make gifts favoring himself over the principal's other children. While such conduct could be considered contrary to the agent's fiduciary duty to avoid self-dealing, the blanket gifting provision could also be deemed to be a waiver of the agent's fiduciary duty to avoid self-dealing.

For these reasons, as well as the fact that blanket gifting provisions may trigger tax traps, it may be prudent to tailor gifting provisions (for example, to permit gifting, including to the agent, as long as the agent and siblings are treated equally; or to permit gifting to the agent only when prior approval for the transfer is given by the alternate agent).
D. Other Techniques
Divorce

Divorce from an institutionalized spouse may be troublesome concept, from a personal standpoint. In fact, a divorce consummated in the context of Medicaid planning is considered to be one of the more "extreme Medicaid planning strategies." H. Fliegelman and D. Fliegelman, Giving Guardians The Power To Do Medicaid Planning, 32 Wake Forest L. Rev. 341, 364 (Summer 1997). Nevertheless, it may be a prudent financial strategy for a community spouse.

If the court grants an equitable distribution to a community spouse, or recognizes a Qualified Domestic Relations Order ("QDRO") incident to a divorce, the resulting distribution to the community spouse may greatly exceed the Community Spouse Resource Allowance available to the community spouse absent a divorce.

The New Jersey Supreme Court was presented with a property settlement agreement entered into between the guardian/child of an incapacitated nursing home resident and the community spouse seeking to divorce him in In re L.M., 140 N.J. 480 (1995). There, the settlement agreement provided for the transfer of the ward's pension interest to the spouse. The Supreme Court recognized the agreement as, in whole or in part, an attempt at Medicaid planning. Id. at 489. Nevertheless, it held that the transfer, which was incorporated into a Qualified Domestic Relations Order ("QDRO"), successfully shielded the pension from Medicaid consideration. Id.
The Community Spouse Resource Allowance ("CSRA")

The Community Spouse Resource Allowance ("CSRA") is the amount of non-exempt resources (owned jointly or separately by either spouse) that the law permits the community spouse to retain without jeopardizing the Medicaid eligibility of the institutionalized spouse. Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §10.11[3] at 10-63 (Matthew Bender 1999).

In 2004, the community spouse is permitted to retain a maximum of $92,760 and a minimum of $18,552. The CSRA is computed as of the first day that the institutionalized spouse begins a 30-day or more period of institutionalization. Id. As of the date of computation, the community spouse is permitted to retain $18,552 (as of January 1, 2004) or half of the couple's resources, up to a maximum of $92,760 (as of January 1, 2004). If that amount is more than the actual resources in the community spouse's sole name, the difference will be recouped by a transfer from the institutionalized spouse.

In order to maximize the community spouse's resource allowance, a sound Medicaid plan will aim to transfer the couple's countable assets, with the exception of an amount equal to twice the CSRA ($185,520 in 2004). Then, after the spouse is institutionalized and the CSRA is calculated (ideally at $92,760), the remaining $92,760 will be spent down on nursing home care and other medical costs and preserved using various planning techniques.

Because the CSRA is calculated based upon assets but not liabilities, if the couple's resources are less than twice the CSRA maximum, one technique aimed at maximizing the community spouse's CSRA involves the spouse obtaining a loan from his or her children in the amount of the couple's resources. After the CSRA is calculated, the loan can be immediately repaid from the institutionalized spouse's resources, i.e., the spend-down requirement. See id.
The Minimum Monthly Maintenance Needs Allowance ("MMMNA")

When a spouse is institutionalized, the Medicaid rules permit the community spouse to keep her own separate income titled in her sole name, plus one-half of the income in the couple's joint names. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.06[A][1] at 8-50 to 8-51 (Aspen 2003); Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §10.11[2] at 10-58 (Matthew Bender 1999). If that amount does not equal the minimum monthly maintenance needs allowance ("MMNA"), calculated at $1,515 until July 1, 2004, the community spouse may seek the shortfall from the income of the institutionalized spouse, pursuant to the "income first rule". Id.

If the income of the institutionalized spouse is insufficient to meet the shortfall, then the community spouse may seek to receive that amount of resources above the CSRA calculated to generate income necessary to meet the shortfall.
The Excess Shelter Allowance

The community spouse also has the right to an excess shelter allowance. Shelter expenses are defined as "rent or mortgage (including principal and interest), taxes and insurance, a utility standard for the individual's utility expenses, and in the case of a condominium or cooperative, the monthly required maintenance charge." N.J.A.C. 10:71-5.7(c)(1). If the cost of the community spouse's monthly shelter exceeds a specified amount ($454.50 through July 1, 2004), he or she is entitled to payment of that difference from the income of the institutionalized spouse.

The community spouse's total excess shelter allowance and MMNA cannot exceed a certain amount ($2,266.50 in 2003), except by resort to a fair hearing. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.06[A][1] at 8-50 to 8-51 (Aspen 2003). By Donald D. Vanarelli, Esq.

10 Costly Mistakes to Avoid in Helping Families with Special Needs

This article examines the unique planning requirements of families with children, grandchildren or other family members (such as parents) with special needs. There are many misconceptions in this area that result in costly mistakes in planning for these special needs beneficiaries. It is therefore incumbent upon us - the client's advisors - to ensure that clients understand all of their options.

COSTLY MISTAKE #1: Disinheriting the child.Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. Your clients may have been advised to disinherit their disabled child - the child who needs their help most - to protect that child's public benefits. But these benefits rarely provide more than basic needs. And this "solution" does not allow your clients to help their child(ren) after the client becomes incapacitated or is gone. When a child requires, or is likely to require, governmental assistance to meet his or her basic needs, parents, grandparents and others who love the child should consider establishing a Special Needs Trust.

Planning Tip: It is unnecessary and in fact poor planning to disinherit a special needs child. Clients with special needs beneficiaries should consider a Special Needs Trust to protect public benefits and care for the child during the client's incapacity or after the client's death.

COSTLY MISTAKE #2: Procrastination.Because none of us knows when we may die or become incapacitated, it is important that your clients plan for a beneficiary with special needs early, just as they should for other dependents such as minor children. However, unlike most other beneficiaries, a child with special needs may never be able to compensate for a failure to plan. A minor beneficiary without special needs can obtain more resources as he or she reaches adulthood and can work to meet essential needs, but a child with special needs may never have that ability.

Planning Tip: Parents, grandparents, or any other loved ones of a special needs child face unique planning challenges when it comes to that child. This is one area where the client simply cannot afford to wait to plan.

COSTLY MISTAKE #3: Failure to coordinate a planning team effort.It is critical that the advisor assisting with special needs planning include in the planning team: an attorney who is experienced in this planning area; a life insurance agent who can ensure that there will be enough money to maintain the benefits for the special needs child; a CPA who can advise on the Special Needs Trust's tax return; an investment advisor who can ensure that the trust fund's resources will last for the child's lifetime; and any other key advisors that may support the goals of the trust going forward.

Planning Tip: Special needs planning dictates that the client's advisors work together to ensure that there are sufficient trust assets to care for the child throughout his or her lifetime.

COSTLY MISTAKE #4: Ignoring the special needs when planning for the child's benefit.Planning that is not designed with the child's special needs in mind will probably render the child ineligible for essential government benefits. A properly designed Special Needs Trust promotes the special needs person's comfort and happiness without sacrificing eligibility.Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (for example, a specially equipped van), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment & appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses: the sorts of things your clients now provide to their child or other special needs beneficiary.

Planning Tip: When planning for a child with special needs, it is critical that the client utilize a Special Needs Trust as the vehicle to pass assets to that child. Otherwise, those assets may disqualify the child from public benefits and may be available to repay the state for the assistance provided.

COSTLY MISTAKE #5: Creating a "generic" special needs trust that doesn't fit.Even some "special needs trusts" are unnecessarily inflexible and generic. Although an attorney with some knowledge of the area can protect almost any trust from invalidating the child's public benefits, many trusts are not customized to the particular child's needs. Thus the child fails to receive the benefits that the parent provided when they were alive.Another frequent mistake occurs when the Special Needs Trust includes a "pay-back" provision rather than allowing the remainder of the trust to go to others upon the death of the special needs child. While these "pay-back" provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your clients hundreds of thousand of dollars, or more.

Planning Tip: A Special Needs Trust should be customized to meet the unique circumstances of the child and should be drafted by a lawyer familiar with this area of the law.

COSTLY MISTAKE #6: Failure to properly "fund" and maintain the plan.When planning for children with special needs, it is absolutely critical that there are sufficient assets available for the special needs beneficiary throughout his or her lifetime. In many instances, this requires utilization of a funding vehicle that can ensure liquidity when necessary. Oftentimes permanent life insurance is the perfect vehicle for this purpose, particularly if the clients are young and healthy such that insurance rates are low.Also, because this is an ever-changing area, it is also imperative that the clients revisit their plan frequently to ensure that it continues to meet the needs of the special needs beneficiary.

Planning Tip: Clients should consider permanent life insurance as the funding vehicle for special needs beneficiaries, particularly when the beneficiary is young given the often staggering costs anticipated over that beneficiary's lifetime.If the client may be subject to estate tax, consider having an Irrevocable Life Insurance Trust own and be the beneficiary of the policy, naming the Special Needs Trust as a beneficiary. Alternatively, in a non-taxable situation, consider naming the client's revocable trust as the beneficiary to help equalize inheritances if that is the client's objective.

COSTLY MISTAKE #7: Choosing the wrong trustee.During your client's life, he or she can manage the trust. When the client is no longer able to serve as trustee, they can choose who will serve according to the instructions that they have provided. They may choose a team of advisors and/or a professional trustee. Whomever they choose, it is crucial that the trustee is financially savvy, well-organized, and, of course, ethical.

Planning Tip: The trustee of a Special Needs Trust should understand the client's objectives and be qualified to invest the assets in a manner most likely to meet those objectives.

COSTLY MISTAKE #8: Failing to invite contributions from others to the trust.A key benefit of creating a Special Needs Trust now is that the beneficiary's extended family and friends can make gifts to the trust or remember the trust as they plan their own estates. For example, these family members and friends can name the Special Needs Trust as the beneficiary of their own assets in their revocable trust or will, and they can also name the Special Needs Trust as a beneficiary of life insurance or retirement benefits.

Planning Tip: Creating a Special Needs Trust now allows others, such as grandparents and other family members, to name the trust as the beneficiary of their own estate planning.

COSTLY MISTAKE #9: Relying on siblings to use their money for the child with special needs' benefit.Your client may be relying on their other children to provide for their child with special needs from their own inheritances. This can be a temporary solution for a brief time, such as during a brief incapacity if their other children are financially secure and have money to spare. However, it is not a solution that will protect the child with special needs after your client has died or when siblings have their own expenses and financial priorities.What if the inheriting sibling divorces or loses a lawsuit? His or her spouse (or a judgment creditor) may be entitled to half of it and will likely not care for the child with special needs. What if the sibling dies or becomes incapacitated while the child with special needs is still living? Will his or her heirs care for the child with special needs as thoughtfully and completely as the sibling did?Siblings of a child with special needs often feel a great responsibility for that child and have felt so all of their lives. When your clients provide clear instructions and a helpful structure, they lessen the burden on all their children and support a loving and involved relationship among them.

Planning Tip: Relying on siblings to care for a special needs beneficiary is a short-term solution at best. A Special Needs Trust ensures that the assets are available for the special needs beneficiary (and not the former spouse or judgment creditor of the sibling) in a manner intended by the client.

COSTLY MISTAKE #10: Failing to protect the child with special needs from predators.An inheritance from parents who fund their child's special needs trust by will rather than by revocable living trust is in the public record. Predators are particularly attracted to vulnerable beneficiaries, such as the young and those with limited self-protective capacities. When you plan with trusts rather than a will, your client decides who has access to the information about their children's inheritance. This protects their special needs child and other family members, who may be serving as trustees, from predators.

Planning Tip: A Special Needs Trust created outside of a will ensures that information about the inheritance is not in the public record, protecting the special needs beneficiary from predators.
Conclusion Planning for special needs beneficiaries requires particular care and the participation of all of the client's wealth planning advisors. A properly drafted and funded Special Needs Trust can ensure that the beneficiary has sufficient assets to care for him or her, in a manner intended by the client, throughout the beneficiary's lifetime.

Leave Your IRA to a Special Needs Trust

In a private letter ruling recently, the IRS addressed the issue of transferring an inherited IRA into a Special Needs Trust. The law around taxation of inherited IRAs and the interaction with trusts has been unpredictable and fast-moving for several years now.
Fortunately, this private letter ruling indicates the direction the IRS is headed on two important questions:
First, the transfer to the SNT was not a taxable transfer for estate and gift tax purposes. That's great! It means that if a person with special needs inherits an IRA, we can still do some limited planning without immediate tax consequences.
Second, the trustee was able to stretch out the distributions from the IRA (and therefore stretch out the tax deferral benefits) over the life expectancy of the beneficiary. Another positive result.
Of course, the best result would have been achieved if the decedent had made the IRA payable to the SNT directly. That way, court costs, private letter ruling costs, anxiety, and a "pay back to the state" provision all could have been avoided.

Deficient Nursing Homes Listed

The federal Centers for Medicare & Medicaid Services (CMS) has released the complete list of U.S. nursing homes that have failed to meet safety and quality standards for care.
The list, which identifies 131 "Special Focus Facilities" that require additional oversight, follows the release in November 2007 of a list of 54 such facilities. At that time, CMS came under intense criticism for making public only a partial list of Special Focus Facilities while sharing the full list with three associations representing the nursing home industry. (See "Feds Publish List of 54 Poorest-Performing Nursing Homes.")

CMS created the Special Focus Facility initiative in 1998 in response to the number of facilities that were consistently providing poor quality of care. Those facilities were periodically instituting enough improvement so that they would pass one survey, only to fail the next for many of the same problems as before. Facilities with this compliance history rarely addressed underlying systemic problems that were giving rise to repeated cycles of serious deficiencies.
Serious deficiencies include such things as failing to give residents their medications in the correct dose at the correct time, not taking steps to prevent abuse or neglect, inappropriate use of restraints and failure to prevent or properly treat bed sores.

Once a facility is selected as a Special Focus Facility, state survey agencies are responsible for conducting twice the number of standard surveys and, according to CMS, will apply progressive enforcement until the nursing home either significantly improves and is no longer identified as a Special Focus Facility, is granted additional time due to promising developments, or is terminated from Medicare and/or Medicaid.

Angela Brice-Smith, Deputy Director the Survey and Certification Group at CMS, told the National Citizens' Coalition for Nursing Home Reform that the list will be updated on a quarterly basis, and that names of the Special Focus Facilities will be kept on the CMS Web site for six months indicating their status. CMS is working on a modification to its Nursing Home Compare site that will link users to the list from a Special Focus Facility's site. Brice-Smith said there are no plans to release the larger list of facilities whose names are provided to states as candidates for the Special Focus Facility status.

CMS seems to suddenly be on a crusade to identify suspect nursing homes. It recently released the names of thousands of nursing homes across the country that don't meet federal standards in rates of using patient restraints or preventing bedsores.

Recent Case Allows Special Needs Trust After Death

A New York trial court recently approved a trustee's petition to reform his deceased father's trust in order to protect his disabled sister's Medicaid benefits. In Matter of Newman (2008 NY Slip Op 50127, Jan. 22, 2008).

When he died in 1988, William Newman established a trust in his will for his disabled daughter. The will required the trustee to use the trust income for the daughter's benefit and gave the trustee discretion to spend the trust principal for her support and maintenance. Mr. Newman's daughter lived on her own until 2006, when she moved into an adult care facility and qualified for Medicaid. In order to maintain her eligibility, her brother, the trustee, then petitioned the court to reform the trust to make it a Supplemental Needs Trust. The guardian ad litem opposed the petition, arguing that the trustee, who was also a remainderman, had a conflict of interest.
The court approved the petition, finding that the trust meets all of the statutory conditions for reformation. Specifically, the court determined: 1. that the beneficiary is disabled; 2. that the intent of the donor was to supplement her benefits; 3. that the trust prohibits the trustee from using the assets to jeopardize her benefits; and 4. that the beneficiary cannot compel distributions from the trust. Finally, the court dismissed the guardian ad litem's argument regarding the conflict of interest, calling the analysis "restrictive" and contrary to the intent of the donor.

Introduction to Special Needs Estate Planning

Special Needs Estate Planning focuses on the need to provide for the special needs of our loved ones with disabilities when we are no longer there to organize and advocate on their behalf. It is essential that we start planning now for the coordination of the legal, financial, and care components that will provide for the maintenance of the quality of life and dignity of the beneficiary of the plan.

Its all about maximizing opportunities and minimizing risks.

The four strategic steps are:
PLANNING - DRAFTING - FUNDING - ADMINISTRATION
Planning - It is important to carefully consider all the factors that impact the individual situation. It is critical to take the time to design a complete plan that takes into account the beneficiary's unique circumstances, and that fully explores all the options available to address his/her special needs. This advance planning could include a professional financial assessment, a public benefits profile, a distribution plan, and the exploring of housing options.

Planning the future of a child or adult with a disability is an enormous challenge. It requires specialized planning and where possible it is wise to incorporate the help of professionals such as financial planners or accountants, public benefits technicians, care coordinators, and yes, attorneys who specialize in this area. Its investing in drawing up the plans for the house before we start building. Remember the old adage, pay a little now (prevention), or pay a lot later (cure).

Drafting - Finding a competent attorney to put together the right documents. This can be difficult, as many are entering the field, but are not familiar with trust law, and public benefit or disability issues.

Funding - A great plan that is has no funds available is useless. It is important to determine accurately the financial need balanced against current resources. Initiating the right strategies now can help to accumulate and preserve funds over the grantor's lifetime.

Administration - This is arguably the most critical step as its 90% of the plan. This covers the execution of the plan. The key to successful administration is the distribution plan set out in the Special Needs Trust. The distribution plan is critical to getting the right people in place with the necessary funds to execute the care plan when you are no longer around to oversee caregivers and hold them accountable.

Another perspective on Special Needs Estate Planning is likening it to the proverbial three legged stool.

PEOPLE - PAPER - MONEY

People - Beneficiary, grantor, trustee, attorney, financial planner, health care providers

Paper - Special Needs Trust, Will, Letter of Intent, Power of Attorney, Medical Directives

Money - Savings, Life Insurance, Gifts from relatives, Retirement Benefits

The right people and the right paper can preserve, enhance and leverage the money. The right paper can preserve both.

None of the individual steps alone, will usually be enough, and some of these steps must be taken simultaneously. It may seem impossibly complicated now, but every journey starts with first steps.

Get information on the basics of good Special Needs Estate Planning
Start gathering the information for what will become a comprehensive future care plan
Find a competent attorney, draft, and put in place the 80% or Basic Plan
History and current statistics indicate we are chronic procrastinators, so it shouldn't be too long before we at the very least have the Basic Plan in place with signed, effective documents.

Reference: www.nami.org

Supplemental Needs Trusts

Supplemental Needs Trusts, also called a special needs trust, is a trust in the United States that is designed to provide benefits to, and protect the assets of, physically disabled or mentally disabled persons and still allow such persons to be qualified for and receive governmental health care benefits, especially long-term nursing care benefits, under the Medicaid welfare program. Supplemental or Special Needs Trusts are frequently used to receive an inheritance or personal injury litigation proceeds on behalf of a disabled person in order to allow the person to qualify for Medicaid benefits.

Medicaid law Background
Medicaid is the Federal program administered by the states which provides health care for those that can't afford it. See 42 U.S.C. § 1396 et seq. Federal law establishes certain mandatory requirements which each state must adopt in its local Medicaid program, and the states are also given options to elect certain other components in the health care plan which they may decide to provide. Accordingly, Medicaid does vary from state to state in certain aspects, but there are also mandatory Federal law provisions.

One significant governmental benefit which is available only through Medicaid is long-term nursing care which includes care for the physically disabled and the mentally disabled. Long-term nursing care can be extremely expensive. Medicaid is a welfare program. To qualify for Medicaid and its long-term nursing care benefits, the applicant must be “poor” and there is a limit to the countable assets which he or she can own. To qualify for Medicaid, the applicant must meet the asset guidelines for Supplemental Security Income (“SSI”). SSI allows a single applicant to own no more than $2,000 in countable assets and a married applicant to own no more than $3,000 in countable assets. Certain assets are specifically exempted and are not countable.

Trusts as Medicaid countable assets
A trust is a legal arrangement in which legal title to assets is held by a trustee under certain defined restrictions of a governing instrument (usually a will or a written trust agreement) for the benefit of another party known as the beneficiary. Trusts can be used as a vehicle to make assets available to a beneficiary but still significantly restrict them. Recognizing the gray area which trusts can provide concerning the ownership of assets, Federal Medicaid law places significant restrictions on the types of trusts which can be used to preserve assets of a beneficiary and still qualify the beneficiary for governmental benefits.
Prior to the enactment of the Omnibus Budget Reconciliation Act of 1993 (O.B.R.A), P.L. 103-66, it was possible to create a self-settled, discretionary trust for the benefit of the settlor and still allow the settlor to qualify for Medicaid’s long-term nursing care benefits. These trusts were called “special needs trusts” or “supplemental needs trusts” because restrictive language in the trust agreement allowed the trustee to pay only for the support needs of the settlor-beneficiary which the government did not pay. The trust was not for the unrestricted, general support of the beneficiary which is typical in normal estate plans. Special needs trusts were perceived by the United States Congress to be abusive and were effectively abolished by O.B.R.A.

In general, with limited exceptions, regardless of the purposes, provisions, or discretion contained in the trust, a self-settled trust which is created after August 11, 1993 will be treated as an available asset which can disqualify the settlor-beneficiary from Medicaid. 42 U.S.C. § 1396p(d)(2)(C). This means that generally a person cannot create his or her own trust, transfer his or her own assets into the trust, and still be qualified for Medicaid.

Medicaid exempt trusts
Since the effective date of O.B.R.A., only a limited number of trusts can now be used and still preserve an applicant’s Medicaid eligibility. One major distinction should be made when analyzing Medicaid trusts. Trusts created by the disabled beneficiary (or a third party with legal authority over the disabled beneficiary) with the disabled person’s own assets for the disabled person’s own benefit are classified as first-party, self-settled trusts. These types of trusts must be distinguished from trusts created by a third party for the benefit of a disabled individual with the third party’s own assets (such as a grandparent creating a trust for a grandchild). Legal restrictions generally exist for first-party, self-settled trusts which do not exist for third-party trusts.

First-party, self-settled trusts
Most self-settled trusts holding the disabled beneficiary’s own assets created after August 11, 1993 are countable resources for Medicaid. The Medicaid statute, however, provides for three specific types of trusts which can be funded with the applicant’s own assets and which will not disqualify the applicant from Medicaid. These trusts are called “D-4A Trusts” after the subsection of the law which authorizes them. They are also called “Federalized Special Needs Trusts” because the Federal Medicaid statute makes them available in every state.
Because of the requirement that the State be reimbursed for medical assistance, D-4A Special Needs Trusts may have limited utility when the goal is to pass assets of the disabled individual to family members. The main benefit of the D-4A Trusts is to provide a quality of life for the Medicaid beneficiary. Assets can be held in the trust and used to pay for the beneficiary’s special and supplemental needs which the government does not provide, while Medicaid pays the significant medical bills. If the medical assistance provided during life does not turn out to be costly, then upon the death of the beneficiary, there is a chance that assets may be preserved in the trust and pass to loved ones.

Disabled Individual’s Special Needs Trust
Under the provisions of 42 U.S.C. § 1396p(d)(4)(A), a Disabled Individual’s Trust will not be counted as a Medicaid asset even when it is funded with the applicant’s own assets. The requirements for the trust are that the individual must be under age 65 at the time the trust is created (and funded), and disabled under the Social Security definition. Further, the trust must be for the "sole benefit" of the disabled individual. The trust must be created by a parent, grandparent, guardian, or court. Upon the death of the individual, the State Medicaid agency must be reimbursed for the costs of the medical assistance which was provided by Medicaid during the disabled individual's lifetime. This is often called the “payback” provision.

It is important to note that the Disabled Individual’s Trust must be created by a parent, grandparent, guardian, or court. The statute does not allow the disabled individual to create his or her own trust, even if he or she is otherwise legally competent. Action by a third party is required in creating the trust. In this regard, these types of special needs trusts are often established by a court on behalf of a disabled person as a part of or ancillary to a serious personal injury lawsuit.

"Miller" Trust
A "Miller" Trust can be used to qualify a Medicaid applicant with income in excess of the eligibility limit (not imposed in all states) for long-term care assistance from Medicaid. Such a trust is not really a "special needs" trust at all, and is not funded with the beneficiary's assets. The Miller trust can be named as recipient of the individual's income, from a pension plan, Social Security, or other source. The Miller trust takes its name from the Colorado case of Miller v. Ibarra, 746 F. Supp. 19 (D. Colo. 1990), and is specifically sanctioned by 42 U.S.C. § 1396p(d)(4)(B). As with a self-settled special needs trust (referred to above as a "Disabled Individual’s Trust"), upon the death of the beneficiary, the State Medicaid agency must be paid back for its medical assistance from any remaining assets in the Miller trust. An older name for the Miller trust, still occasionally used, is “Utah Gap" trusts, reportedly coined by a Colorado advocate describing the gap between the income cap for eligibility and the actual cost of nursing home care as similar to the yawning chasm between mesas dotting the Southern Utah landscape. The Miller trust is only significant in those states which impose an income cap on Medicaid long-term care eligibility; ironically, Utah is not one of those states. Income caps are in place in about half of the states.

Charitable Pooled Income Special Needs Trust
A Charitable Pooled Income Special Needs Trust is authorized by 42 U.S.C. § 1396p(d)(4)(C). Again, the individual must be disabled under the Social Security definition. Unlike the other exempt trusts which can be administered by a private trustee who is an individual (such as a family member), the Pooled Income Trust is run by a nonprofit association, and a separate account is maintained for each individual beneficiary. All accounts are pooled for investment and management purposes. The trust (or more accurately, an account in the pooled trust) may be created by a parent, grandparent, guardian, or court, and it can also be created by the disabled individual himself. Upon the death of the disabled individual, the balance is either retained in the trust for the nonprofit association or paid back to the State Medicaid agency for its medical assistance.

In some states, a disabled individual over age 65 is entitled to transfer assets to a pooled trust and then be immediately eligible for Medicaid. In other states, the transfer must be made before the disabled individual attains the age of 66.

Third-party trusts
Medicaid law governing trusts is designed to prevent disabled individuals qualifying for benefits while still retaining full control over their assets. A third party, however, is still free to plan with his own assets and either give them outright to a disabled individual or tie them up and restrict them in trust as he sees fit. Accordingly, trusts which are created by a third party with the third party’s own assets to benefit a beneficiary who is on Medicaid have their own separate rules and treatment.

Generally, a properly drafted third-party, discretionary trust is not countable as an asset available to the beneficiary receiving Supplemental Security Income (SSI) and/or Medicaid benefits. Such a trust must be created by a party other than the SSI/Medicaid beneficiary, must not receive any assets belonging to the beneficiary, and must be restricted (not accessible or available) to the beneficiary. The operative principle is whether the trust assets or income are available to the beneficiary. If appropriate trust language is used (and the appropriate language varies from state to state), Medicaid will not treat the resources in the trust as a countable resource. Typically, a third-party trust provides that the trustee is given unfettered discretion to distribute (or not to distribute) principal or income for the benefit of the disabled beneficiary. Often, the trustee is directed only to make distributions for the “supplemental” or “special” needs of the beneficiary or as long as the distributions do not disqualify the beneficiary from governmental benefits. Frequently the trustee will be specifically prohibited from making distributions which provide the beneficiary with food or shelter (the two disqualifying categories under SSI and Medicaid regulations). There is no requirement that the trustee be so restricted, however; it may be preferable in most cases to permit the trustee to make the decision to make distributions which reduce or even eliminate public benefits in cases where the availability of trust resources is more important than continued eligibility for SSI and Medicaid.

A third-party special needs trust should not be drafted as a general support trust or mandate distribution of current income to the beneficiary. In such a case, the trust can be deemed to be “available” and can disqualify the beneficiary from Medicaid. The Medicaid beneficiary should not be given any power to revoke the trust or direct the trustee to make distributions to the beneficiary. The trust can be revocable by the third-party settlor. This means that a parent can fund a trust for a disabled child with the parent’s assets and give it a test run, revoking it later and re-acquiring the assets if the parent decides that it is not serving its purpose. Finally, the third-party trust does not need to include a D-4 “payback” provision reimbursing the State for the medical assistance of the beneficiary upon the beneficiary’s death.

References
http://www.seniorlaw.com/snt.htm
http://www.nsnn.com/frequently.htm
http://www.elderlawanswers.com/elder_info/elder_article.asp?id=2742#6
http://www.wid.org/programs/access-to-assets/fact-sheets/special-needs-or-supplemental-needs-trusts

Estate Planning for Families with Special Needs Children

Families with special needs children must exercise extra care in making their estate plans. This is true whether their special needs child is still a minor or now an adult, and particularly so when the child is – or in the foreseeable future will be -- receiving needs-based public benefits such as SSI or Medicaid. While planning considerations for such a child will vary depending upon the child’s age, competency, and other family considerations, the goal is always the same: parents want their estates utilized to enhance and enrich the life of their special needs child while maintaining the child’s enrollment in essential public benefits programs. These goals can be met through the use of a properly prepared special needs trust.

The essence of all special needs estate planning is to ensure that the portion of the parents’ estate which passes to their special needs child at the time of their death is not considered an “available asset,” as defined by public benefit agencies. Parents must be mindful of both income and principal, as too much monthly income, as well as too much “cash,” can negatively impact their child’s future eligibility for benefits.

Purpose: Special needs planning works to preserve public benefits for the disabled child while supplementing and enhancing the quality of the child’s life. This type of planning is useful for many different purposes, including

lifetime money management for the benefit of the disabled child;
protecting the child’s eligibility for public benefits; and

ensuring a pool of funds available for future use in the event public funding should cease or be restricted.

Planning Options: The options available to families in making an estate plan for a special needs child who is receiving needs-based public benefits include the following:

Disinherit the child. This is the simplest option, but it does nothing to accomplish the essential purpose of enriching the life of the special needs child.
Give the estate to the brothers and sisters. At the parents’ death the entirety of the estate is distributed to the child’s siblings, with the understanding that they will “take care of” their disabled brother or sister. There are inherent risks with such an approach, including claims by the siblings’ creditors, bankruptcy, divorce, mismanagement of funds, etc. This may be appropriate when the child’s potential inheritance is modest.
Leave an inheritance to the disabled child. The outcome of this planning option will be the almost certain negative impact on the child’s continued eligibility for publicly funded benefits. At the least, benefits may be reduced. In the worst case scenario, the child may be rendered ineligible for SSI and Medicaid, and with this ineligibility for assisted housing, supported employment, vocational rehabilitation, group housing, job coaching, attendant personal care aides, and transportation assistance. The key benefit is Medicaid, as this program represents the child’s ability to access not only essential health care but many other public assistance programs.
Leave any inheritance in a Special Needs Trust. This last option will be preferred by most families in their efforts to provide and ensure a positive outcome for a special needs child. By using a properly drafted – and properly administered – Special Needs Trust, the child will continue to qualify for public assistance programs that would otherwise be unavailable to the child, especially the “means tested” programs that require the child to meet strict financial eligibility criteria. A Special Needs Trust works because the assets held in the trust are not “available” to the child. These types of trusts must be discretionary spendthrift trusts, with strict limits on the trustee’s ability to give money to the child. Under no circumstances can the special needs child force the trustee to make trust money available to the child. An additional benefit of the Special Needs Trust is that because the child is often unable to manage his or her own finances, the parents, in creating the trust, will appoint a trustee to act as the child’s money manager, and in so doing, ensure proper financial management after their death.

During Life or at Death? Families have the option of creating a Special Needs Trust at their death by incorporating a trust within a Last Will and Testament – this is called a “testamentary trust.”

The other option is for the parents to create a Special Needs Trust while alive -- not surprisingly, this is often referred to as a “living trust” (or inter vivos trust). The advantages of the living trust include:

the avoidance of a probate;

the creation of a trust to which other family members can make contributions, most usually the grandparents; and
an opportunity for a co-trustee to gain “hands on” experience in administrating the trust.

Revocable or Irrevocable? Tax considerations come into play in the decision to make the Special Needs Trust either revocable or irrevocable. Generally speaking, the family will make the trust revocable whenever:

the goals include maintaining maximum control over the trust; and
the family is not concerned with income tax considerations.
Correspondingly, the use of an irrevocable trust may be appropriate when the family is concerned with:

income tax considerations; and
if more than a million dollars will be going into the trust, possible federal estate and gift taxes.
Tax planning is beyond the scope of this article, so be sure to consult with your attorney, CPA or financial advisor if there are any special tax considerations in the creation of your Special Needs Trust.

Selecting Your Trustee: The Trustee will be responsible for administering your Special Needs Trust. So selecting your Trustee is one of the most important decisions your family will make in ensuring the long-term success of your Special Needs Trust. Given the natural pressures inherent in all families, someone in your family may consider the funds in the Special Needs Trust as “their” money, rather than the money of your special needs child. This can be a dangerous situation, especially as to your child’s continued eligibility for public benefits. In most families, it is best to consider selecting an independent, non-family member to serve as your Special Needs Trustee. The range of options includes:

a parent, sibling or another “distant” relative;
your attorney;
a Trust company or a financial institution;
a non-profit organization -- especially one with experience in special needs; or
co-Trustees, usually a family member acting with a trust company.

The selection of any of these potential Trustees has both advantages and disadvantages. You should closely counsel with your attorney or financial advisor before making your Trustee selection.

Conclusion: This brief summary is just the start of your enquiry as you begin your special needs estate plan. By working closely with your attorney, your CPA, and your financial planner, you will develop a much greater understanding of the options available to you and your family in making an appropriate estate plan for your special needs child. After making your wishes known and getting the appropriate documents in place, you will have taken crucial steps in assuring that this child will receive proper care when you are no longer able to provide that care yourself.

Reference: www.specialneedsalliance.com

Selection of the Trustee of a Special Needs Trust

There are obviously many important considerations to ponder when designing an estate plan for a beneficiary who has special needs. But the most important issue in the planning process is picking the person or persons who will be in charge of managing the special needs trust. This person is known as the "trustee" and he/she has the biggest impact on whether or not the purposes of the trust are actually carried out after you pass away. Pick the wrong person and the whole plan can come crashing down, to the severe detriment of your disabled loved one.

Ideally, you want to have a trustee that is relatively stable and financially savvy since that person may be in charge of investing a great deal of money for your loved one. The trustee should also have a good relationship with the disabled beneficiary. If the trustee interacts with the beneficiary on a regular basis then he/she will have a better understanding of the beneficiary's disability and therefore better able to make appropriate distributions from the trust funds.

A sibling of the beneficiary is often appointed as the trustee in most cases (in the event that the parents are unable to act). This arrangement is usually entirely appropriate. But you should keep in mind that most special needs trusts will indicate that any remaining trust funds will go to the beneficiary's siblings upon the death of the beneficiary. In other words, less scrupulous siblings who have been made the trustee of their sibling's trust may be motivated to withold neccesary distributions to the beneficiary since doing so would water down their future inheritance. This issue is not unprecedented, so it needs to be considered before a sibling is appointed as the trustee.

Finally, you need to have a trustee that is prudent enough to strictly follow the instructions and limitations outlined in the trust language. If the State catches wind of improper distributions from the trust (such as distributions that pays for things that the State is already covering) then there is a risk that the benefits will be cut off. Although this is a self-serving statement, you need a trustee who is wise enough to seek specialized legal guidance if the propriety of a particular distribution is questionable.

In short, you need to give long and serious thought as to who you will name as trustee of your special needs trust. The decision can make or break all of the careful special needs planning you have done.

Evaluating the Special Needs Estate Planning Attorney

Consider the attorney’s:
Education, Certifications and Memberships e.g. Special Needs Alliance (SNA); National Academy of Elder Law Attorneys (NAELA); American College of Trust & Estate Counsel (ACTEC); American Bar Association (ABA); and State Bar Associations
Time/experience in trust, estate, and disability practice
Community Involvement
Articles written (commitment to educating the consumer evident?)
Presentations made (especially to peers)
Educational programs recently attended with respect to trust and estate law and disability issues.
Is the attorney experienced in drafting Special Needs Trusts? Has he/she made it an area of focus in his/her practice?

Can he/she provide references, other professionals who would recommend his/her expertise in Special Needs Estate Planning?

What is the attorney’s commitment to completing a comprehensive assessment of your family’s unique "special needs," concerns and goals for your loved one with a disability?

Is the attorney up to date on any state-specific special rules the SSA (Social Security Administration, Medicaid, or the Department of Mental Health might have for key aspects of Special Needs Trusts? (Distribution terms, required accounting, reports, notices, remainder beneficiary etc.)

In the initial consultation, do you get an overall sense of the attorney’s understanding of and empathy for the unique challenges families face in caring for a loved one who is disabled?

Does an attorney’s high ratings in the qualifications listed above guarantee you a high quality SNT guide? Not necessarily

Do your research - find the best attorney you can and remember you are your loved one's most committed advocate. Keep informed and active throughout the process.

Special Needs Planning

One of the best parts of my practice is when I have the opportunity to assist parents of a child with special needs. A concern of all parents, (but especially parents of special needs children) is what will happen to their child/children if something happens to them (parents become disabled or die) and they are unable to care for their child/children.

A typical scenario for parents considering their estate planning is how to leave their estates to their children. When the children are still minors it is best to do so in a trust for the benefit of the child. Then (if the parents so choose) the trust assets may be distributed directly to the child at a time when the parents feel the child is an adult and will be responsible with the money.

Parents of children with special needs must consider other factors. A major difference is that the need for care may continue for the special needs child's entire life and will often incorporate social and government programs and benefits. These programs and benefits may become negatively effected or lost if the child is given money or directly inherits any money from the parents or other individuals. Thus it is very important that parents, grandparents, siblings, and other family and friends find alternatives for leaving gifts or their estates to children with special needs.

One very popular and very effective solution is to use a special needs trust which is specifically designed to address these unique issues and concerns.