Actions Speak Louder Than Words

Shared with permission from www.naela.org

It’s time to start giving veterans and their families equal rights to plan for their loved ones.

By Patricia E. Kefalas Dudek, CAP

During this past Memorial Day weekend, I found it ironic to be working on materials in support of legislation to improve estate planning options for the families of United States armed services members that include children with permanent disabilities. Why ironic? Because in the middle of a weekend filled with ceremonies, parades, pomp and circumstance honoring our fallen service members, a simple and necessary improvement for these families remains on hold.

America’s Veterans Deserve the Same Estate Planning Choices Other Americans Enjoy
I refer to the fact that, unlike most citizens, service members are not permitted to roll their survivor benefits into a special needs trust for the benefit of their child with a disability. This means that the loved one with special needs must be the direct beneficiary of the benefits (annuity) the military member earned in service. The unfortunate result is that the loved one will likely lose eligibility for means-tested government benefits that are central to her or his survival and independence.

The benefit of the special needs trust is that it allows the individual with disabilities to have supplemental funds to pay for their living needs not covered by their government benefits, such as extra support services, equipment, clothing, co-payments, transportation, recreation, and the like. Because these funds are in the special needs trust, they do not disqualify the individual for government benefits.

There Is a Way to Fix This Inequity
On May 23, 2103, Sen. Kay Hagan (D-NC) introduced S.1076, the Disabled Military Child Protection Act of 2013, which provides for the payment of monthly annuities under the Survivor Benefit Plan to a special needs trust for a veteran’s child with a disability. Congressman Jim Moran (D-8th, VA) introduced the same bill in the U.S. House of Representatives on June 4, 2013. Many members of the National Academy of Elder Law Attorneys (NAELA) and the Special Needs Alliance lobbied for support of this legislation during a joint “Hill Day” event in April 2013. Sen. Kirsten Gillibrand (D-NY) added the Disabled Military Child Protection Act language to the markup package for the National Defense Authorization Act (NDAA) (S.1197). The Senate Armed Services Committee voted and approved the NDAA with the Disabled Military Child Protection Act language. This language was not included in the House version of the National Defense Authorization Act (H.R. 1960), so once the full Senate approves the bill and this provision, it will need to be addressed during the conference committee.

The legislation amends the rules for beneficiary payments of military annuities for deceased veterans to allow the annuity to go into a disabled child’s special needs trust. As appropriate, simple, and cost effective as this bill is, there will need to be bipartisan support for this bill to become law. Thus far, I am pleased to say that has been the case, but more cosponsors of the bills can help build momentum.

Take Action Now
Please contact your congressional representatives and urge their support of this legislation. Make sure that they understand that this one small action will speak volumes and allow military families to plan for their loved ones just like any other citizen of our great nation.

This legislation has broad support from many groups and coalitions such as NAELAAmerican Bar AssociationSpecial Needs Alliance, the Military CoalitionEaster SealsMilitary Officers Association of America (MOAA), and the Consortium for Citizens with Disabilities.

Read more about the Disabled Military Child Protection Act on the NAELA website.

If we are going to treat our veterans and their families differently than the rest of our citizens, I suggest they should be treated better. Our actions must be consistent with our words, so let’s make this happen!


About the Author
Patricia E. Kefalas Dudek, CAP, is a member of the NAELA Board of Directors. She is the principal of Patricia E. Kefalas Dudek & Associates, Farmington Hills, Mich., and the Past Chair of the Elder Law and Disability Rights Section of the State Bar of Michigan. Her practice concentrates in Elder Law, Medicaid, estate planning, estates/trust administration, probate, administrative law, and disability advocacy.

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New Guide Helps People With Mental Health Conditions Who Want to Work

Although a staggering number of individuals with mental health conditions do not work, competitive employment remains a goal for most, and most people with mental health conditions are able to work successfully if they receive the support they need. The Temple University Collaborative has written “A Practical Guide for People With Mental Health Conditions Who Want to Work” to help provide that support to people with mental health diagnoses who wish to return to successful careers.

The Guide offers encouragement and vital information on the importance of work, the availability of rehabilitation programs, the ins and outs of the Social Security Administration’s work incentives, the challenges of starting a new job and grappling with disclosure, and strategies for long-term success in the workplace. Designed for those with mental health conditions to use on their own or as part of a return-to-work group in community mental health centers, psychiatric rehabilitation programs, or peer-run agencies, the Guide aims to help people achieve economic self-sufficiency.

In addition, the Guide spends considerable time walking readers through all stages of the hiring process. The authors are quick to point out that many typical interview questions are potentially illegal, such as asking about an applicant’s psychiatric history or use of prescription drugs. The Guide offers down-to-earth ways to answer these questions, along with lessons on writing resumes and cover letters.

To download the Guide from the Temple Collaborative on Community Inclusion for Individuals with Psychiatric Disabilities’ Web site, click here.

Understanding The Fiscal Cliff Legislation

man-cliff-illustrationLegislators were very busy New Year’s Eve and into the early morning hours of New Year’s Day to draft and ultimately pass legislation to avoid what was commonly referred to as “The Fiscal Cliff.” But what really happened? In summary, not much new was passed, but rather the legislation in large part made permanent the system of estate and income tax that has been in effect for the past two years. The new law did put off for two months some important spending cuts that must take place due to a process called “sequestration.” It is these additional cuts that could have a significant impact on our senior population and their loved ones.

The Bottom Line on What Was Passed
This newsletter provides a summary of the legislation that was passed and what remains to be decided. If you have questions or need additional information, please contact us directly.

Estate taxes. An estate tax is a federal tax (and in some states also includes a state tax) on the transfer of a deceased person’s assets to his heirs and beneficiaries, and can include prior transfers made to those heirs and beneficiaries. However, under federal law, there is a certain amount that can be transferred without incurring any tax liability. In 2010, every individual could transfer (gift) up to $5 million tax-free during life or at death to avoid paying estate taxes on that amount. This amount is called the “basic exclusion amount” and is adjusted for inflation (usually on an annual basis). In 2012 it was raised to $5.12 million per person.

This year’s new “fiscal cliff legislation” did not change how much an individual could transfer during life or at death to avoid paying federal estate taxes on that amount. And, on January 11, 2013, the IRS announced that the estate tax exclusion amount for individuals who die in 2013 is now $5.25 million, as the prior figure has now been adjusted for inflation.

What if no action had been taken with regard to estate taxes?
Without the new legislation, the $5.12 figure would have automatically reverted to $1 million per person, and the rate for most estates would have gone up to 55%. Instead, the only thing the new legislation changed was the gift and estate tax rate, which has gone up to a top rate of 40%, from a maximum of 35% in 2012.

Married couples.The new legislation did not change prior law that stated that spouses do not have to pay estate tax when they inherit from the other spouse. Rather, when the first spouse dies, the other spouse can inherit the entire estate and any estate tax due would be postponed until the second spouse dies. This is called the “marital deduction.” If the surviving spouse is not a U.S. citizen, then there are restrictions on how much can be passed to the surviving spouse tax-free. It is also important to remember that this type of tax benefit between spouses is not always automatic – any married couple who may be subject to estate tax should seek the advice of an attorney to make sure their estate plan is properly set up to take advantage of this particular tax incentive.

What about lifetime gifts? The current basic exclusion amount of $5.25 million per individual is an exclusion for both lifetime gifts and gifts at death. This is often referred to as the “unified credit” amount. For example, an individual could transfer assets of $2 million during their lifetime and an additional $3.25 million at death, and the total, $5.25 million, would not be subject to either gift or estate tax. However, if an individual transferred more than the $5.25 limit, that individual (or the heirs) will owe a tax of up to 40%.

The donor should report any gifts made during their lifetime to the IRS so a proper calculation can be made at the donor’s death. Using the above example, the $2 million lifetime gift would have been reported to the IRS even though no gift tax would be due. And, the IRS would then know that individual had $2.25 remaining to pass at death free of estate taxes.

There are additional gifting advantages available to married couples during their lifetime, and advice should be sought from an attorney versed in this area to determine what, if any, gifting incentives may be available.

Lifetime gifts that do not count toward the $5.25 million exclusion amount. There is an amount each year that can be transferred without counting toward the $5.25 exclusion amount. In 2013, that amount is $14,000 per year, per person (called an “annual exclusion amount”). For example, an individual can give three different people $14,000 in 2013, and it will not count toward the $5.25 lifetime exemption amount. Couples can double this amount and give $28,000 per person per year.

Planning Note: It is important to remember that any gift (unless designated as an exempt transfer under the federal and state Medicaid rules) will cause a penalty for Medicaid purposes. Individuals often believe that because they can transfer $14,000 per year per person under the tax rules, the same applies to Medicaid. The rules are very different for Medicaid, and a penalty will apply if that type of gift is made.

Changes to the income tax rules. This newsletter highlights the main points of the income tax rules that could directly affect seniors and their loved ones. For additional information on the alternative minimum tax or charitable gifting, please contact us directly.

In prior years, everyone enjoyed a 2% Social Security tax reduction as a stimulus measure. Under the 2013 legislation, this “tax holiday” was not extended; therefore, everyone will see a decrease in their net pay.

Ordinary income tax rates increase from 35% to 39.6% for singles earning more than $400,000 a year ($450,000 a year for married couples). All other ordinary income tax rates effective in 2012 were made permanent.

For those individuals earning over $200,000, and for married couples who earn over $250,000, there is a new Medicare 0.9% surtax on ordinary income and a new 3.8% surtax on investment income. These additional taxes were part of the 2010 health care legislation, much of which begins implementation in 2013.

The top capital gains and dividend rate increased to 20% for those earning more than $400,000 a year ($450,000 for married couples).

Additional Cuts Are on the Way
The current fiscal cliff legislation did not address the automatic spending cuts that were to take place on January 1, 2013. Instead, the automatic cuts, known as sequestration, were pushed back two months to March 1, 2013. Sequestration was one portion of the spending cuts included in the Budget Control Act, passed and signed in August 2011.

The Budget Control Act of 2011 allowed the president to raise the debt ceiling by $2.1 trillion, and it instituted two rounds of significant spending cuts. One round of cuts involved government programs like defense spending, education funding, the FBI and other government agencies that would receive automatic budget cuts relative to their scheduled growth over the next 10 years.

The second half of the spending cuts was supposed to be decided on by Congress through a Joint Select Committee on Deficit Reduction. This Committee (referred to as the “supercommittee”) was to come up with a list of cuts that would then be put to Congress for a full vote. If the committee couldn’t agree on the cuts, $1.2 trillion in further spending reductions over 10 years would be implemented starting Jan. 1, called the “sequester.” No cuts have yet been agreed upon, and the automatic spending reductions have been moved back to March 1, 2013, to allow Congress time to come to an agreement.

Programs like Medicare, Medicaid and Social Security have been the topic of discussion for the second portion of the spending cuts. We will continue to monitor and report on the progress of Congress as it pertains to these spending cuts and how they will impact our senior population and their families.

Conclusion
The fiscal cliff legislation is in place; however, there is more legislation to occur that could have a significant impact on those affected by programs like Medicare, Medicaid and Social Security. While many families may not be affected by the current estate and income tax rules, there are many who could have their life savings consumed by long term care costs. We help seniors and their families plan ahead to avoid a financial crisis, even if a health care crisis occurs. If you would like to learn more or if we can help someone you know, please give us a call.

The Benefits of Using Irrevocable Trusts in Long-Term Care Planning

People often wonder about the value of using irrevocable trusts in long-term care planning. Certainly gifting of assets can be done outright, not involving an irrevocable trust. Outright gifts have the advantages of being simple to do with minimal costs involved, including the cost of preparing and recording deeds and the cost of preparing and filing a gift tax return. Many financial institutions have their own documents they use for changing ownership of assets so there are typically no out-of-pocket costs for the transferor.

So, why complicate things with a trust? Why not just keep the planning as simple and inexpensive as possible? The short answer is that gift transaction costs are only part of what needs to be considered. Many important benefits that can result from gifting in trust are forfeited by outright gifting. These benefits are what give value to using irrevocable trusts in long-term care planning.

Prior to state implementation of the federal Deficit Reduction Act of 2005 (DRA) in recent years (with the exception of California), federal Medicaid law contained a bias against trusts: Most transfers of assets to trusts had a 5-year lookback period, whereas there was a 3-year lookback period for non-trust transfers. This different standard induced many clients to elect outright gifting in preference to gifting in trust. The DRA leveled the playing field by imposing a 5-year lookback period for ALL transfers. Removal of the bias against trusts shifted the discussion of elder law attorneys with clients to the real benefits of gifting in trust versus gifting outright.

Key benefits of gifting in trust are:

  • Asset protection from future creditors of beneficiaries
  • Preservation of the Section 121 exclusion of capital gain upon sale of the settlors’ principal residence (the settlor is the trustmaker)
  • Preservation of step-up of basis upon death of the settlors
  • Ability to select whether the settlors or the beneficiaries of the trust will be taxable as to trust income
  • Ability to design who will receive the net distributable income generated in the trust
  • Ability to make assets in the trust noncountable in regard to the beneficiaries’ eligibility for means-based governmental benefits, such as Medicaid and Supplemental Security Income (SSI)
  • Ability to specify certain terms and incentives for beneficiaries’ use of trust assets
  • Ability to decide (through the settlors’ other estate planning documents) which beneficiaries will receive what share, if any, of remaining trust assets after the settlors die
  • Ability to determine who will receive any trust assets after the deaths of the initial beneficiaries
  • Possible avoidance of need to file a federal gift tax return due to asset transfer to the trust

We will briefly discuss each of these potential benefits in sequence. Each of these potential benefits depends on the specific language selected in the design and drafting the trust. None of them is automatic or inherent in every trust. Thoughtful planning and careful drafting is necessary to take advantage of the benefits available, thus it is important to understand how and why each benefit comes about. This article is just an introduction to these topics, not a specific drafting guide. We are available to discuss any of these issues in more detail.

Asset Protection from Future Creditors of Beneficiaries

A central benefit of gifting in trust is to protect the gifted assets from the creditors and predators of the beneficiaries. This is accomplished by means of a spendthrift provision – special provisions in the trust that make trust assets not subject to attachment, foreclosure, garnishment, or a laundry list of undesirable actions by the creditors of the beneficiaries.

Preservation of Section 121 Exclusion of Capital Gain on Sale of Principal Residence

Section 121 of the Internal Revenue Code (Tax Code) creates an exclusion from capital gains tax of up to $250,000 of capital gain in the taxpayer’s principal residence when it is sold if the taxpayer owned and lived in it at least two of the past five years before the sale (only one of the past five years if the homeowner had to move to a nursing home). If there are two qualifying co-owners, they can each exclude $250,000 of gain upon sale in such circumstances. This is a very valuable benefit that has been in the Tax Code since 1997. A trust can preserve this benefit if it is a “complete grantor trust” – a grantor trust as to both income and principal. On the other hand, a residence gifted outright to someone and then sold by the successor would need to qualify for the Section 121 exclusion based on the ownership of the donee to avoid capital gain in excess of the adjusted cost basis of the donor. Our senior population often has owned their home since the late 1940s, 1950s or 1960s, so a huge amount of appreciation in value has occurred since then.

Preservation of Step-Up of Basis

When an appreciated asset is included in a decedent’s taxable estate for federal estate tax purposes, it receives step-up (or down) of basis to the date of death value under Section 1014 of the Tax Code. Normally gifted assets pass to gift donees with “pass through basis”; that is, the donees receive the assets with the donor’s adjusted cost basis, rather than the date of gift value of the assets. If, however, something pulls the assets back into the taxable estate of the donor upon the donor’s death, the donee will own the asset at that point with the donor’s date of death value as his or her basis, rather than the donor’s original adjusted cost basis. For highly appreciated assets, such as the donor’s home or stocks that he or she owned for a long time, obtaining step-up of basis can be a huge benefit for minimizing or eliminating capital gains tax when the donee later sells the assets. This benefit of step-up in basis can easily be forfeited by outright gifting. However, a provision in an irrevocable trust that pulls the property back into the taxable estate of the settlor upon the death of the settlor can preserve step-up of basis for benefit of the donee. With the amount of assets that can pass free of federal estate tax being well beyond the value of most long-term care planning clients’ estates, estate inclusion and step-up of basis is generally a great benefit to design into the trust, without any actual tax liability. A Limited Power of Appointment retained by the settlor can accomplish this. Other provisions can also cause taxable estate inclusion.

Ability to Select Whether Trust Income is Taxable to Settlors or Beneficiaries

This brings us to the topic of “grantor trusts.” Grantor trusts are treated by the Tax Code as “owned” by the settlor (also called the grantor) for income tax purposes. As mentioned above, preservation of the Section 121 exclusion of capital gain upon the trustee’s sale of the settlor’s primary residence that was earlier funded into the trust requires that the trust be a “grantor trust” as to both income and principal. The creation and significance of grantor versus nongrantor trust status takes an entire seminar or article unto itself, so can only be touched upon lightly here. But the choice of whether a trust will be a grantor or nongrantor trust and how that will be accomplished are key design decisions. For example, it may be important that income generated in the trust not be taxed to the settlor. This requires nongrantor trust status, which necessitates that every trust provision that would cause grantor trust status be avoided in the drafting of the trust. In other examples, however, grantor trust status is important as a goal for tax reasons, or if the settlors are to receive income from the trust.

Ability to Design Who Will Receive Trust Income

Unlike an outright gift, by which the donor gives up the right to receive income generated by the transferred assets, an irrevocable trust can be designed so funding constitutes a completed gift for Medicaid purposes although the settlor reserves the right to receive income from the trust. This is an attractive option for some seniors, although it does result in an inherent downside for Medicaid planning purposes: Any income that the trustee has the power to distribute to the settlor will be counted for Medicaid eligibility purposes, even if the trustee decides not to actually distribute the income to settlor. Some seniors avoid trustee discretion by making distribution of all trust net income to them mandatory, rather than discretionary. In this case, the income would also be counted for Medicaid eligibility purposes as well. Others go the entirely opposite direction by prohibiting the trustee from distributing any income to the settlor, thereby ensuring that trust income will not be part of the settlor’s cost of care budget when the settlor is on Medicaid. There are several factors to weigh in such decision-making, but the key point for this discussion is that use of an irrevocable trust in Medicaid planning gives the client these design choices, whereas an outright gift does not.

Ability to Make Trust Assets Noncountable for Beneficiaries’ Medicaid or SSI

It is a sad fact that an outright gift or bequest from a donor, such as a parent, to a disabled donee can result in the donee becoming ineligible for means-based governmental benefits that he or she was eligible for before the gift or bequest, or soon would have become eligible for. In such situations, unless irrevocable trust planning is then done to establish a “self-settled special needs trust,” the gifted or bequeathed assets typically get consumed for the donee’s care and once they are gone, the donee goes onto the governmental benefits from which the gift or bequest disqualified him or her until consumed. One way of looking at this outcome is that the indirect recipient of the gift or bequest was the governmental benefit program from which the gift disqualified the disabled person for a period of time. This is generally considered poor planning.

Better planning is for the gift or bequest to be made in an irrevocable special needs trust for benefit of the disabled beneficiary, so the gift or bequest will be managed to enhance the living conditions of the disabled beneficiary by paying for things that the governmental benefits do not pay for. If a disabled person becomes entitled to an outright gift or bequest, or an outright gift or bequest recipient later becomes disabled, depending on the age of the disabled person, it may be possible to establish a “self-settled special needs trust” for the disabled beneficiary. Such trusts (funded with assets of the disabled person) must contain a provision stating that upon the death of the disabled beneficiary any remaining trust assets must pay back the state up to the full amount of Medicaid benefits received by the beneficiary, and only after the state is reimbursed may any excess pass to other beneficiaries such as other relatives. The payback provision requirement is Congress’s “quid pro quo” – the balancing deal that makes it fair for the disabled person’s otherwise disqualifying assets to be set aside in a Medicaid- and Supplemental Security Income-noncountable trust that is nonetheless able to be consumed by the trustee for benefit of the disabled person to supplement but not replace the governmental benefits.

Ability to Specify Terms and Incentives for Beneficiaries’ Use of Trust Assets

Many parents or grandparents desire to infuse their planning for their children or grandchildren with positive aspirations. Such goals may be as simple as that the gifts or bequests may only be used for the recipients’ education, to finance a career change or buy a home. Or the goals may be more serious, for example, establishing that the intended recipient will only become eligible to receive the gift or bequest if he or she participates in a drug or alcohol rehabilitation program or gives up some other behavior that the donor wants to create an incentive for the donee to abandon. Such planning goals of a client almost always indicate an irrevocable trust with beneficiary incentive provisions as the vehicle to implement the plan. This is completely compatible with asset protection planning for seniors at the same time.

Ability to Decide Which Beneficiaries Will Inherit Upon Settlor’s Death

The retained Limited Power of Appointment referred to above (sometimes called a Special Power of Appointment) preserves for the settlor the power to decide who within a designated class of recipients will receive the benefits of the trust, how much they will receive, and in what way they will receive it. The class of potential recipients can be as broad as everyone in the world except the settlor and his or her creditors, and the settlor’s estate and its creditors. Most often, however, the class of potential appointees consists of the settlor’s descendants, certain other relatives or in-laws, and/or certain charities. Such a Limited Power of Appointment (LPOA) can determine whether the trust is a grantor or nongrantor trust, as well, so the specific language of the LPOA must be crafted carefully with regard to the grantor trust rules of the Tax Code. As an aside, a power of appointment is sometimes referred to jokingly as a “power of disappointment” because it truly retains for the settlor or other power holder the power to disinherit someone who acts badly.

 Ability to Determine Successor Beneficiaries

A major concern in asset protection planning and estate planning in general is who will be the successor beneficiaries of anything a client leaves to someone. If the gift or bequest passes outright, the recipient has control through lifetime consumption of assets and income or through his or her estate plan, to determine who will receive anything that the initial recipient doesn’t use up. Of course, the recipient’s creditors or predators also may gain control over the assets and income gifted outright to the initial recipient. If the client would prefer to designate that only blood descendants, or descendants and their spouses, and/or certain charities will receive what is not consumed by the initial recipient, an irrevocable trust is a key instrument to create such a plan. This is true almost regardless of the initial size of the gift or bequest – if a modest amount of funds are left in trust, there may nevertheless be a remainder to pass to a successor beneficiary or even another successor beneficiary. This sounds like a “dynasty trust” and it actually is, even though it is of modest size. The point is that by use of an irrevocable trust, the client has the option to decide who the possible recipients will be, and even to grant limited powers of appointment to the named recipients in order to give them some control as well.

Analysis of Need to File a Federal Gift Tax Return for Year of Funding

A goal of many planners in design of irrevocable trusts is to make the initial trust-funding gift(s) “incomplete” for tax purposes. The purpose is generally to prevent the settlor from having to file a federal gift tax return for the year(s) of the funding transaction(s), assuming that the taxpayer makes no other “taxable gifts” in any such year.

There is a split of authority with the Internal Revenue Service concerning when transfers to an irrevocable trust are considered “complete,” thus requiring the filing of an income tax return. Normally there will not be any gift tax due (the current laws allow an individual to give away $5 million in assets during her lifetime without paying any tax on the gift) but it is important to follow the rules that do require filing a gift tax return, even if no tax is due. We are happy to assist with this analysis.

Conclusion

The above discussions demonstrate that use of irrevocable trusts in long-term care planning, as in other fields of estate planning, provides many opportunities to create great benefits beyond simply transferring assets. Some or most of these benefits may be achieved through the use of an irrevocable trust. If care is taken to include the desired provisions, an irrevocable trust can greatly enhance the value of the clients’ long-term care planning beyond what can be accomplished through outright gifting.

We are happy to assist seniors and their loved ones with considering whether an irrevocable trust may be appropriate for them. Please contact our office to schedule a time to discuss these issues further.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Beware the Remote or Contingent Beneficiary with Special Needs

You may not want to leave any of the money in your estate directly to a relative with special needs, but the fine print in your estate planning documents might cause a catastrophic distribution anyway.

You should be cautious about leaving an outright bequest of money or property to a person with special needs because the receipt of assets could compromise the individuals government benefits. If you want to leave funds in your estate for the benefit of a person with special needs, an attorney who focuses on special needs planning will help you to establish and fund a special needs trust that will hold your loved one’s inheritance for her benefit, while insuring that her government benefits stay intact. However, in many cases you may not want to leave any money for a relative with special needs, but your previous estate plan (possibly drawn up by a lawyer who doesn’t specialize in special needs planning) may have other ideas. Let’s take a look at how this might work.

Joanne has three adult children, Sarah, Emily and Doug. Sarah has two children, Emily has three children, and Doug has one child, a son with special needs who lives on his own and receives Supplemental Security Income and Medicaid. Joanne loves her grandchildren dearly but would like to leave her entire estate to her three children, with funds passing to a grandchild only if one of her children dies. Joanne visits a non-special needs planner who draws up a will stating that all of Joanne’s property shall pass “in equal shares to my children or, if a child is not living, then to his or her issue.” This will seems to fulfill Joanne’s wish and, at first glance, it doesn’t appear to cause any problems for her grandchild with special needs because Doug is going to receive the inheritance, not his son.

But first glances can be deceiving. If Doug dies before Joanne and she doesn’t change her will before her death, Doug’s son with special needs will inherit his father’s share of Joanne’s estate, and that inheritance will wreak havoc on his Supplemental Security Income and Medicaid benefits. A properly drafted estate plan will not rely on generic language and will address Doug’s son’s special needs by either creating a special needs trust to hold his potential share of the estate (even though it’s only a remote share) or by skipping Doug’s son altogether, if Joanne believes that this is appropriate. Doug may have already created a special needs trust for his son, in which case it is likely that Joanne could direct Doug’s share of her estate right into the trust in case he passes away before her.

The one thing that you should never do is pretend that this isn’t going to happen to you. A good estate plan takes into account all possibilities, even those that seem remote. Keeping your fingers crossed and relying on a child to survive you and inherit your estate is not an effective estate planning strategy, despite the fact that the odds are in your favor. If you’ve prepared your estate plan with a non-special needs planner, there is a good chance that he or she might not have taken your relative with special needs into account when drafting the “remote or contingent beneficiary” provisions of your documents.

At Wiggen Law Group we can review your estate plan to make sure that your remote or contingent beneficiaries will not lose out in the future because of poor drafting in the past.  Call today to schedule an appointment.

Free Estate Planning for Same-Sex Couples

The story below broke my heart.  I’m saddened by the passage of Amendment One in North Carolina.  We should be seeking to protect all family units in our state, not further restrict the rights of some of our citizens.

No one should have to go through what this man went through when his partner passed away.  Unfortunately, since the law does not offer the same protections to unmarried couples, this is the reality for those couples who haven’t prepared a basic estate plan.

As our small way of helping, Wiggen Law Group is offering free estate planning for same-sex couples who call in the month of May.  We only ask that participants make a donation in the amount of their choosing to Equality NC or other similar organization.

Call (919) 680-0000 to schedule an appointment.

Does A Special Needs Trust Always Have to Pay the State When a Beneficiary Dies?

You may have heard that special needs trusts are required to reimburse the government for Medicaid expenses incurred by the trust’s beneficiary when she passes away, and, in some cases, this is true. But not all special needs trusts are required to contain this type of “payback” provision, so if you are worried that the trust funds will go to pay back the government, you may not have anything to fear.

If a parent, grandparent, family friend or any other interested person wants to set up a special needs trust for a person with special needs, they will typically create a “third-party” special needs trust. The trust is called a “third-party” trust because it is funded with assets that do not belong to the person with special needs. These trusts are commonly used by family members to set aside inheritances for, or to simply provide additional assistance to, a family member with special needs. If properly created and funded, the assets in a “third-party” trust will not count as the beneficiary’s funds if or when she applies for benefits like Supplemental Security Income (SSI) or Medicaid. Most importantly, a properly designed “third-party” special needs trust does not have to include a payback provision, meaning that the government has no right to the funds when the beneficiary dies.

On the other hand, if a person with special needs needs to place her own funds into trust, she has two main options – transfer the funds into a trust established for her benefit by a parent, grandparent or court called a”first-party” special needs trust (because the assets come from the person with special needs herself) or transfer the funds into a pooled disability trust that is run by a non-profit organization. In almost every case, these types of trusts must contain payback provisions in order for the beneficiary to avoid a loss of government benefits due to excess assets.

In many cases, a family member looking to fund special needs trust for a person with special needs will utilize a “third-party” special needs trust that doesn’t contain payback provisions and that provides enormous benefits to the person with special needs. Even if the trust does contain a payback provision, in some cases where the beneficiary exhausts all of the trust’s assets, there may still not be a government payback at all. In either case, your special needs planner can help you to determine which type of trust is right for your family.

The Family Advisor

This month’s newsletter focuses on our furry friends.  Do you know what happens to your pets after your death under state law?  If you are out of town and your pet needs emergency vet care, does your pet sitter have the authority to authorize treatment?  Who gets custody of Man (and Woman’s) Best Friend in the event of divorce?

Find out in this month’s issue of The Family Advisor.  Click here to read more.

Three Legal Documents Every Graduating Senior Needs to Ensure Parents Can Make Important Medical and Financial Decisions on their Child’s Behalf

Will your graduating senior be protected without 3 important legal documents?

As a local attorney, I can’t stress enough how timely (and critical!) this information is for your audience.  Many young adults in our area will soon be heading off to college or traveling abroad without the 3 key documents (Advance Health Care Directive, HIPAA Form and Financial Power of Attorney) they need for mom or dad to oversee their care if they become ill or seriously injured and unable to speak for themselves.

Excerpt from Estate Practice and Elder Law Community : (click for entire article) 

Special Needs Planning Issues Following Divorce

Divorce can be complicated, frustrating, disappointing, expensive, along with a whole range of other emotions, as anyone who has endured this type of proceeding can attest. As difficult as the issues can be in a divorce proceeding, can you imagine what happens when divorce involves a child with a disability?

This article focuses on one case study to illustrate how much more difficult the issues can be when a child with a disability is involved in the marital split, and how important it is to have someone knowledgeable in government benefits and special needs planning issues participate in the proceedings.

The Facts
Consider the following situation: Husband and wife divorced in 1996, when their child, who is disabled, was 4 years old. The husband was ordered to pay approximately $2,800 per month in child support (considered to be about three times an ordinary child support order based upon his assets and income) for the life of the child. While it is unusual to see lifetime child support payments, and the award was larger than is customary, the husband agreed to this primarily because of the guilt he felt around the divorce. He also knew that his daughter was disabled and would require as much help as possible.

Fourteen years later, in 2010, the daughter turns 18 years old. The husband has since remarried and had another child. He feels he can no longer continue to make child support payments at the current level, and in fact his current wife now assists him in making these payments each month.

The husband wishes to seek a modification of the child support award, and he hires the attorney that handled his divorce years earlier to file the court papers seeking a downward modification of child support payments. The theory behind seeking this downward modification of child support payments is twofold. First, the husband would like to argue that since his daughter has just turned age 18, she can now qualify for Supplemental Security Income (SSI) benefits. Second, his daughter could receive services through a Medicaid waiver program, but her income from the child support payment could prevent her from qualifying. Therefore, the husband would like to know if establishing a court-ordered special needs trust to receive the child support payments would protect the child support payments from being counted as income to the daughter.

Can the Daughter Qualify for SSI?
During the course of the proceedings, the wife appears to be the only person testifying as to the question of whether her daughter can qualify for SSI benefits and the utility of creating a special needs trust for her daughter. According to the wife, her daughter cannot qualify for SSI benefits due to the so-called deeming rules, pursuant to which a parent’s income and assets are deemed to be available to the child for purposes of determining the child’s eligibility for SSI benefits. The husband argues that the wife should apply for SSI for their daughter, but she refuses to do so, citing the deeming rules as an obstacle to her daughter’s eligibility, and arguing that her own work income and $400,000 in assets will result in a denial of eligibility.

Without expert testimony, the court may have determined that the daughter was not eligible for SSI benefits, based solely on the testimony of the wife, who had apparently “done her own research on the issue.” In fact, the deeming rules stop when a person turns age 18 under CFR Sections 416.1165 and 416.1851, and their daughter could qualify for an SSI benefit of up to $674, plus any additional state supplement. With this testimony now on the record, the husband is able to argue, credibly, that his daughter is entitled to a monthly SSI benefit of $761 and, if she were to avail herself of this benefit, then this increased income should be taken into account by the court in evaluating husband’s request for a downward modification of the original child support payment.

Can a d4A Trust Hold the Daughter’s Income?
The second major issue in this case pertained to the daughter’s income surplus for Medicaid purposes. As a Medicaid recipient, daughter’s income (solely in the form of child support payments she received from her father) could have prevented her from receiving Medicaid benefits as an adult. The husband wanted the court to order the creation of a self-settled special needs trust under 42 USC Section 1396p(d)(4)(A) (often referred to as a “d4a trust”), and have the child support payments irrevocably assigned into the newly established trust, thereby eliminating any surplus income.

Unfortunately, the husband and wife could not agree on the establishment of a d4A trust. The wife questioned whether such a trust could legitimately receive child support payments. She also testified that she may move to a different state to be with family, and that such a move would require a payback to the first state, reducing available trust funds that would be needed to care for her daughter. What the wife didn’t realize was that under the Social Security Program Operations Manual System (POMS) Section SI 01120.200G(1)(d), an irrevocable assignment of child support payments (i.e., as a result of a court order), is not income for SSI purposes, and therefore would not count for purposes of determining daughter’s SSI or Medicaid eligibility, or the amount to be received under either program.

In addition, there is no such requirement for payback when a Medicaid recipient and d4a trust beneficiary moves from one state to another, a point that was made through expert testimony. The only time payback to any state would be required is when the disabled daughter dies.

The Lesson Learned
The issues in the case study above make it clear that when a child with a disability becomes part of a divorce proceeding, difficult issues arise that warrant the expertise of elder law and special needs planning attorneys. Matrimonial or family law attorneys will very likely not possess the expertise needed to address these issues.

Please contact us if you would like additional information on any of the topics addressed in this newsletter or if you would like to discuss a specific issue.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.

Please feel free to call Wiggen Law Group at 919-680-0000 if you have any questions about this or any matters relating to elder law or special needs planning.