Special Needs TrustsSpecial Needs TrustsPrepared by:Prepared by:

Tina Myers, CPA, MTaxTina Myers, CPA, MTaxCIRCULAR 230 DISCLOSURE NOTICE:CIRCULAR 230 DISCLOSURE NOTICE:Any U.S. federal tax advice included in this communication (including any attachments) Any U.S. federal tax advice included in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding U.S. federal tax-related penalties or (ii) promoting, marketing or recommending avoiding U.S. federal tax-related penalties or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein.to another party any tax-related matter addressed herein.

AgendaAgenda

Disability & concernsDisability & concerns Public benefit eligibilityPublic benefit eligibility Types of SNTsTypes of SNTs Grantor/Non-grantor trust statusGrantor/Non-grantor trust status Qualified Disability trustsQualified Disability trusts

Conditions that Can Cause Conditions that Can Cause Permanent Disability: A Partial Permanent Disability: A Partial

listlist AgoraphobiaAgoraphobia Alzheimer’s diseaseAlzheimer’s disease AmputationsAmputations Bipolar disordersBipolar disorders Caner (many types)Caner (many types) Cerebral palsyCerebral palsy Congenital heart diseaseCongenital heart disease Cystic fibrosisCystic fibrosis Downs syndromeDowns syndrome EmphysemaEmphysema

Fetal alcohol syndromeFetal alcohol syndrome Fragile X syndromeFragile X syndrome HemophiliaHemophilia HIVHIV Huntington’s choreaHuntington’s chorea Kidney malfunctionKidney malfunction LupusLupus Multiple chemical Multiple chemical

sensitivitysensitivity Muscular dystrophyMuscular dystrophy Obsessive-compulsive Obsessive-compulsive

disorderdisorder

Conditions that Can Cause Conditions that Can Cause Permanent Disability: A Partial Permanent Disability: A Partial

listlist Organic Brain Organic Brain

Syndrome (OBS)Syndrome (OBS) Parkinson’s diseaseParkinson’s disease Phenylketonuria (PKU)Phenylketonuria (PKU) Severe autistic disorderSevere autistic disorder Sickle cell anemiaSickle cell anemia Spinal bfidiaSpinal bfidia Tay-Sachs SyndromeTay-Sachs Syndrome ThalassemiaThalassemia Traumatic spine Traumatic spine

damagedamage Turner’s syndromeTurner’s syndrome

Disability concernsDisability concerns

Health care optionsHealth care options Eligibility for Public benefitsEligibility for Public benefits

Health care optionsHealth care options

Private health carePrivate health care MedicareMedicare MedicaidMedicaid

Public benefits availablePublic benefits available

Social Security Disability Insurance Social Security Disability Insurance (SSDI)(SSDI) Available to individuals with a disability Available to individuals with a disability

who either have sufficient work history who either have sufficient work history prior to becoming disabled or are prior to becoming disabled or are entitled to receive benefits by virtue of entitled to receive benefits by virtue of being a dependent or survivor of a being a dependent or survivor of a disabled, retired, or deceased worker.disabled, retired, or deceased worker.

No means testing for eligibilityNo means testing for eligibility

Public Benefits Available Public Benefits Available (con’t)(con’t)

Supplemental Security Income (SSI)Supplemental Security Income (SSI) Available to low-income individuals who Available to low-income individuals who

are disabled, blind, elderly and have are disabled, blind, elderly and have limited income and few assets.limited income and few assets.

MedicareMedicare Health care program funded by Health care program funded by

governmentgovernment Available to all those age 65 and overAvailable to all those age 65 and over

Public Benefits Available Public Benefits Available (con’t)(con’t)

MedicaidMedicaid Health care program funded by Health care program funded by

governmentgovernment Available to all those who meet financial Available to all those who meet financial

eligibility requirements rather than eligibility requirements rather than being based on agebeing based on age

Covers all necessary medical care.Covers all necessary medical care.

Purpose of a SNTPurpose of a SNT

The essential purpose of a SNT is to The essential purpose of a SNT is to improve the quality of an individual’s improve the quality of an individual’s life life without disqualifying him or her without disqualifying him or her from eligibility for public benefitsfrom eligibility for public benefits..

SNT basic characteristicsSNT basic characteristics

Trust document states that the Trust document states that the beneficiary with a disability cannot beneficiary with a disability cannot direct the use of funds in the trust for direct the use of funds in the trust for his or her support or maintenance, his or her support or maintenance, andand

The trust document expressly states The trust document expressly states that the beneficiary with a disability that the beneficiary with a disability cannot revoke or terminate the trustcannot revoke or terminate the trust

Two Types of SNTsTwo Types of SNTs

Self-Settled TrustSelf-Settled Trust Third-party TrustThird-party Trust Pooled trustsPooled trusts

Self-Settled TrustsSelf-Settled Trusts

Established with the beneficiary’s own fundsEstablished with the beneficiary’s own funds Most commonly funded by proceeds from a lawsuit Most commonly funded by proceeds from a lawsuit

or inheritance payable directly to the disabled or inheritance payable directly to the disabled beneficiarybeneficiary

Trust includes provision directing trustee to pay Trust includes provision directing trustee to pay back anything the state Medicaid program has paid back anything the state Medicaid program has paid for the beneficiaryfor the beneficiary

Rules governing permissible distributions are more Rules governing permissible distributions are more restrictive than for third-party special needs trustsrestrictive than for third-party special needs trusts

Often referred to as “d4A” trusts (statutory section Often referred to as “d4A” trusts (statutory section 42 U.S.C. 42 U.S.C. §1396p(d)(4)(A))§1396p(d)(4)(A))

Also referred to as a first-party trust, payback Also referred to as a first-party trust, payback special needs trust or litigation special needs trustspecial needs trust or litigation special needs trust

Self-Settled TrustSelf-Settled TrustAdditional Rules for Grantor Additional Rules for Grantor

truststrusts Trust may be established by parent, Trust may be established by parent,

grandparent or the court, even though grandparent or the court, even though the disabled person is the grantor.the disabled person is the grantor.

Repayment at death of beneficiary.Repayment at death of beneficiary. Sole benefit requirementSole benefit requirement Must be irrevocableMust be irrevocable Beneficiary cannot be trustee or have Beneficiary cannot be trustee or have

power to remove the trusteepower to remove the trustee

Third-Party SNTsThird-Party SNTs

Established by someone other than the Established by someone other than the person with disabilities with assets never person with disabilities with assets never belonging to the beneficiary.belonging to the beneficiary.

Does not require a “payback” provision for Does not require a “payback” provision for Medicaid benefits upon beneficiary’s deathMedicaid benefits upon beneficiary’s death

During beneficiaries life, kinds of During beneficiaries life, kinds of payments the trust can make will be more payments the trust can make will be more generous and flexible.generous and flexible.

Could be created during lifetime or at Could be created during lifetime or at death.death.

Third-Party SNTs (con’t)Third-Party SNTs (con’t)

Trust must be discretionaryTrust must be discretionary There must be an independent There must be an independent

trusteetrustee Cannot be a general support and Cannot be a general support and

maintenance trustmaintenance trust Beneficiary cannot have controlBeneficiary cannot have control

What public benefits can the What public benefits can the beneficiary receive?beneficiary receive?

SSDI/MedicareSSDI/Medicare SSI/MedicaidSSI/Medicaid Veterans benefitsVeterans benefits Subsidized HousingSubsidized Housing Temporary Assistance for Needy Temporary Assistance for Needy

Families (TANF)Families (TANF) Other means-tested benefit programsOther means-tested benefit programs

Questions to consider when Questions to consider when establishing a SNTestablishing a SNT

Are assets of the SNT includible in the Are assets of the SNT includible in the beneficiary’s countable assets?beneficiary’s countable assets?

When assets are transferred to a SNT, is When assets are transferred to a SNT, is there a penalty period?there a penalty period?

What distributions from the trust are What distributions from the trust are considered countable income to the considered countable income to the beneficiary or the beneficiary’s family?beneficiary or the beneficiary’s family?

Can non-disabled, ineligible parents Can non-disabled, ineligible parents income and assets be deemed countable income and assets be deemed countable for the beneficiary’s eligibility?for the beneficiary’s eligibility?

How do trust distributions How do trust distributions affect the beneficiary’s public affect the beneficiary’s public

benefit?benefit? A distribution of cash reduced dollar A distribution of cash reduced dollar

for dollar the beneficiary’s SSI for dollar the beneficiary’s SSI payment.payment.

A distribution that is “in-kind support A distribution that is “in-kind support and maintenance” (ISM) reduces the and maintenance” (ISM) reduces the benefit by a lesser amount.benefit by a lesser amount.

Things that a SNT can Pay for Things that a SNT can Pay for Without WorryWithout Worry

Home upkeep & utilitiesHome upkeep & utilities Phone, cable & internet servicePhone, cable & internet service Vehicle, insurance, maintenance & gasVehicle, insurance, maintenance & gas Pre-paid Burial/funeral arrangementsPre-paid Burial/funeral arrangements Tuition, books, tutoringTuition, books, tutoring Travel & EntertainmentTravel & Entertainment Household furnishing & furnitureHousehold furnishing & furniture Television, computers & electronicsTelevision, computers & electronics Durable medical equipmentDurable medical equipment Care managementCare management Therapy, medications, alternative treatmentsTherapy, medications, alternative treatments TaxesTaxes Legal, guardianship and trustee feesLegal, guardianship and trustee fees Personal hygiene (haircuts, manicures)Personal hygiene (haircuts, manicures) ClothingClothing

What tax rules to SNTS What tax rules to SNTS follow?follow?

SNTs follow the same basic tax rules SNTs follow the same basic tax rules that all trusts followthat all trusts follow

SNT Trustee dutiesSNT Trustee duties

No self-dealingNo self-dealing ImpartialityImpartiality DelegationDelegation InvestmentInvestment BondBond Titling of AssetsTitling of Assets Accounting requirementsAccounting requirements Reporting to Social SecurityReporting to Social Security Reporting to MedicaidReporting to Medicaid Reporting to the CourtReporting to the Court Wrapping up the trustWrapping up the trust

Income taxation of SNTsIncome taxation of SNTs

Grantor trustsGrantor trusts Generally, a SNT will be a grantor trust if Generally, a SNT will be a grantor trust if

a family member is the trustee. If there a family member is the trustee. If there is an independent trustee, it may still be is an independent trustee, it may still be a grantor trust.a grantor trust.

May obtain a new EIN for the trust, or May obtain a new EIN for the trust, or use SSN of grantoruse SSN of grantor

Files an “informational” returnFiles an “informational” return

Income taxation of SNTs Income taxation of SNTs (con’t)(con’t)

Non-Grantor trustsNon-Grantor trusts Virtually all third-party, and some self-settled Virtually all third-party, and some self-settled

trust will be non-grantor trusts.trust will be non-grantor trusts. Subject to the compressed tax rates of trustsSubject to the compressed tax rates of trusts Will need its own EINWill need its own EIN Most likely will be classified as “complex”Most likely will be classified as “complex” Files a Form 1041 with a K-1 to the beneficiary Files a Form 1041 with a K-1 to the beneficiary

for distributionsfor distributions Can take deductions that would have otherwise Can take deductions that would have otherwise

been subject to 2% floor.been subject to 2% floor.

Income taxation of SNTs Income taxation of SNTs (con’t)(con’t)

Qualified Disability Trusts (QDisT)Qualified Disability Trusts (QDisT) Optional treatment as a QDisTOptional treatment as a QDisT Cannot be a grantor trustCannot be a grantor trust Since 2002, trusts qualifying under IRC Since 2002, trusts qualifying under IRC

Sec 642(b)(2)(C) are permitted to claim a Sec 642(b)(2)(C) are permitted to claim a personal exemptionpersonal exemption

Trust must be funded before beneficiary Trust must be funded before beneficiary turns age 65turns age 65

Beneficiaries must be receiving SSI or Beneficiaries must be receiving SSI or SSDISSDI

Employment of a CaregiverEmployment of a Caregiver

May be provided through an outside May be provided through an outside agencyagency

Or a caregiver not associated with an Or a caregiver not associated with an agency. agency. Will be treated as an employeeWill be treated as an employee Must withhold income and Must withhold income and

unemployment taxesunemployment taxes

Rules applicable to all SNTsRules applicable to all SNTs

There is a difference between There is a difference between “income” for tax purposes and “income” for tax purposes and “income” for purposes of SSI. “income” for purposes of SSI.

If a taxpayer is under age 24, “kiddie If a taxpayer is under age 24, “kiddie ax” applies.ax” applies.

Ohio Pooled TrustsOhio Pooled Trusts

Charities Pooled TrustCharities Pooled Trust Community Fund Management Community Fund Management

Foundation Pooled TrustsFoundation Pooled Trusts The Disability Foundation Pooled TrustsThe Disability Foundation Pooled Trusts McGivney Pooled Special Needs TrustMcGivney Pooled Special Needs Trust Secured Futures Pooled TrustSecured Futures Pooled Trust Securet TrustSecuret Trust

Trust Sample LanguageTrust Sample Language

The primary purpose of this trust shall be to provide for The primary purpose of this trust shall be to provide for _______’s special needs resulting from his/her disabilities.  In _______’s special needs resulting from his/her disabilities.  In the event such beneficiary is receiving government benefits the event such beneficiary is receiving government benefits based upon need or disability, from any local, state, or based upon need or disability, from any local, state, or federal government program, the trustee shall have the federal government program, the trustee shall have the discretion to supplement those government benefits. No discretion to supplement those government benefits. No disbursement shall be made for _____’s benefit that would disbursement shall be made for _____’s benefit that would permanently jeopardize eligibility for, or inappropriately permanently jeopardize eligibility for, or inappropriately limit the type of assistance available to him/her, if he/she is limit the type of assistance available to him/her, if he/she is receiving or intends to apply for local, state or federal receiving or intends to apply for local, state or federal benefit programs.  If _____ is not receiving government benefit programs.  If _____ is not receiving government benefits based upon need or disability, the Trustee shall benefits based upon need or disability, the Trustee shall have the absolute discretion to determine what have the absolute discretion to determine what disbursements shall be made from the trust for _____’s disbursements shall be made from the trust for _____’s benefit.benefit.