Shikuma Law Offices, PLLC in Seattle Washington is dedicated to providing personalized estate planning counsel and asset protection planning at a reasonable price. We can also assist you with medicaid planning, probate, trust administration, VA pension benefits planning, charity planning, pet trusts and much more. See our services and practice areas for more deatils.

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Elder Counselor Newsletter Proposed Changes to the VA Pension Eligibility Rules

Introduction
On January 23, 2015, the Department of Veteran Affairs (hereinafter “VA”) issued proposed changes tothe regulations affecting VA Pension eligibility, a needs-based program.   In support of the proposed changes to the regulations, the VA points to the results of a 2012 Government Accountability Offices (GAO) report.   That report recommended changes in order to “maintain the integrity of VA’s needs-based benefit programs.”

The proposed changes come on the heels of two bills:  H.R. 2189 proposed by the House of Representatives; and S.944 proposed by the Senate.  Both bills were proposed in 2013 and no action has occurred with regard to them since late that same year.  The VA’s proposed changes are strikingly similar to the two proposed bills, which Congress failed to pass.

In this issue of the ElderCounselor™ we will review the proposed regulatory changes and discuss how they might affect wartime Veterans over the age of 65 and surviving spouses of wartime Veterans.

How the Law Currently Reads
VA Pension benefits are a major focus of the proposed changes.  These benefits are available to wartime Veterans (and their surviving spouses) who meet certain criteria.  Prior to September 1980, the Veteran must have served at least ninety (90) days of active duty with at least one day being during a wartime period (as set by Congress).  After 1980, the Veteran must have generally served at least twenty-four (24) months of active duty with at least one day being during a wartime period.   The Veteran must not have been dishonorably discharged.

There is a disability requirement for the VA Pension benefit, which is satisfied if the Veteran is sixty-five (65) years of age or older, or permanently and totally disabled.  If the Veteran or surviving spouse has additional medical needs then additional allowances may be awarded, like an aid and attendance allowance.

An applicant for VA Pension must also meet certain financial requirements. The current law reads that an applicant’s net worth must not be excessive, taking into consideration the applicant’s age, income and expenses, life expectancy, and rate of depletion of the applicant’s net worth .  The financial rules also require that household income must be less than the benefit the applicant is seeking; however, income may be reduced by out-of-pocket medical expenses.

Proposed Changes

Net Worth
The proposed changes include a bright-line limit on “net worth” that an applicant is allowed to have when qualifying for VA Pension.  The limit is the same as the maximum community spouse resource allowance (CSRA) for Medicaid purposes (currently $119,220).  This amount would increase annually at the same rate as the cost-of-living increase for Social Security benefits.  Income is also counted toward the net worth limit under the proposed rules.

Treatment of Income
The proposed rules would include income in the applicant’s net worth calculation.  In other words, if a Veteran has assets worth $117,000 and receives an income of $2,000 per month, the Veteran’s “net worth” is calculated at $117,000 + $24,000, which is well over the “net worth” limit allowed.

Determining Asset Amount
The proposed regulations define assets as, “fair market value of all property that an individual owns, including all real and personal property, unless excluded under paragraph (b) of this section, less the amount of mortgages or other encumbrances specific to the mortgaged or encumbered property.  VA will consider the terms of the recorded deed or other evidence of title to be proof of ownership of a particular asset.”

Asset Exclusions
A primary residence, whether or not the claimant resides there, is an excluded asset for calculating “net worth” and will continue to be so under the proposed regulations.  However, the proposed rules cap the “reasonable lot area” that the home sits on at 2 acres, a limit that does not exist under current law.

Transfer of Assets and Penalty Periods
The proposed regulations include the addition of penalty periods for assets that an individual transfers prior to applying for VA Pension.  Any “covered assets” (one that is used in calculating “net worth”) that are transferred will be subject to a penalty period. The penalty provisions are not limited to actual gifts, but also apply to the purchase of an annuity or a transfer to a trust (revocable or irrevocable).

The actual penalty period (the time period that the claimant will remain ineligible for the Pension benefit due to the transfer) may not be longer than ten (10) years.  The penalty period will be calculated by using the amount of the transfer over and above the “net worth” limit and dividing it by the maximum annual Pension rate.  This penalty period begins to run the month after the last transfer was made.

To illustrate:  A married Veteran applies for VA Pension with an aid and attendance allowance.  The monthly benefit she is trying to qualify for is $2,120.  During the past 3 years, the Veteran contributed $10,000 to The Wounded Warriors Project, a nonprofit organization.  She also gave her only child $1,000 on each birthday the past 3 years.

As a result of the charitable contribution and the cash gifts to her child ($13,000 total in 3 years), this Veteran will be penalized for 6.13 months when she applies for VA Pension.  If this same Veteran was not married, the penalty would be 11.3 months.

Lookback Period
The lookback period for all transfers, is thirty-six (36) months immediately preceding the date of application for the VA Pension benefit?  There is a presumption that any transfer made during this thirty-six (36) month period of time was made for the purpose of qualifying for the VA Pension benefit.  As an exception to this presumption, the claimant must prove by clear and convincing evidence that the transfer was the result of fraud, misrepresentation or other bad act in the marketing or sale of a financial product.  Otherwise, the presumption is non-rebuttable.

In the example above, the Veteran, whose transfers had nothing to do with VA Pension eligibility, would not be able to rebut this presumption and would have to take the penalty imposed.

Medical Expense Deductions from Income
Medical expenses are those that are either medically necessary or improve a disabled individual’s functioning.  These medical expenses are deducted from income.  This becomes more complicated when the claimant is receiving home care or is in an independent or assisted living facility, as the proposed rules seek to limit the circumstances under which room and board expenses may be counted, as well as the amount paid.  There are very specific rules as to which services qualify as medical expenses and the claimant will have to be able to identify those in his/her application.

The proposed rules also limit the hourly amount that can be paid to a home health care provider.  The amount is based on a national average, rather than local costs for care.

Burden on Surviving Spouses
The surviving spouse of a wartime Veteran can make a claim for the Pension benefit if the Veteran meets the service criteria and the spouse meets the financial requirements.  However, the proposed rules put the surviving spouses at a disadvantage.  The proposed regulations allow surviving spouses little flexibility in planning due to the calculation method of the penalty period.  Where a married Veteran applying for VA Pension with an aid and attendance allowance could transfer $10,000 and incur a penalty period of 4.7 months, a surviving spouse transferring the same amount would incur a penalty period of 8.7 months.  As illustrated earlier, the gifting that many people do to benefit their children on birthdays, holidays or other reasons, charitable contributions or donations to places of worship will create a penalty period under these rules.

Negative Effects of the Proposed Regulations

Below are just a few of the potential negative effects of the proposed regulations if they pass as currently written.  We would be happy to speak to you further about additional harmful effects of the rules as written.

1. As mentioned above, surviving spouses will be penalized more harshly than Veterans for making transfers prior to applying for VA Pension – even if those transfers had nothing to do with qualifying for VA Pension.

2. Applicants in rural areas will be treated unfairly by the 2-acre limit on the reasonable lot area.  Currently, an applicant’s home and reasonable lot area that is immediately adjacent to the home is not counted for net worth purposes.

3. Transfers made prior to an application for VA Pension will be penalized regardless of the reason for the transfer.  Therefore, a cash birthday gift to a child, a contribution to a charity, or a donation to a place of worship will all be penalized if the Veteran or surviving spouse later applies for VA Pension.

4. Basic estate planning, like establishing and funding a revocable living trust, will be subject to a penalty if that same individual applies for VA Pension within 3 years.

Status of the Proposed Rule Changes and a Call to Action

The regulations proposed by the VA are currently up for public comment until March 24, 2015.  Until that deadline, the public is free to comment and the VA is required to respond to those comments before passing the regulations.  If you would like to comment on the proposed rules, please include this information in your response:  Subject: RIN 2900-AO73, Net Worth, Asset Transfers, and Income Exclusions for Needs-Based Benefits.  You can read the full text of the bill, a summary of the bill and you can post your comments online (see the blue “Comment Now” text in the top right corner) using this link: http://www.regulations.gov/#!documentDetail;D=VA-2015-VBA-0003-0001.

You may also consider reaching out to your local representatives in Congress to let them know about some of the negative effects of the proposed changes.

If you would like more information or would like to discuss the impact of these changes on wartime Veterans and surviving spouses in more detail, please feel free to contact our office.

category: Elder Counselor (Newsletter)

Elder Counselor Newsletter THE ABLE ACT: A New Tool for the Special Needs Community

Late in 2014, the ABLE (“Achieving a Better Life Experience”) Act was signed into law.  The law is aimed at achieving a manner in which those with special needs can save money without losing needs based public benefits such as SSI or Medicaid . This is an important issue and, perhaps the greatest accomplishment of the Act is that it brings attention to this valuable community and addresses a serious struggle that they face.  The fact that the ABLE act had strong bi-partisan support is encouraging for the special needs community and those who serve it.

While an ABLE account does not replace other tools, like special needs trusts, it is a tool that adds an option for us in serving our clients with special needs.  In this issue of the ElderCounselor, we will discuss the new law, when it applies, its limitations and its uses.  We are hopeful this will give you a general understanding of the Act.

The ABLE Act Defined

The ABLE Act is a federal law that allows states to establish a savings program for persons with disabilities.  The program is modeled after the 529 savings accounts.  ABLE accounts may be used to accumulate savings, with certain restrictions, for use by a beneficiary with a disability.

An ABLE account may be established by any contributor (a parent, friend, family member or the person with a disability) for the benefit of an eligible beneficiary of any age so long as that person can establish they met the criteria prior to age 26. An eligible beneficiary is an individual who meets the standard for disability prior to turning the age of 26.  A recipient of SSI or SSDI satisfies this requirement while those who do not receive such benefits must be certified under the act.

Financial Limitations on the ABLE Act

While the ABLE Act has made strides in bringing to light the issue of saving for those with disabilities, there are limits to the Act.  For example, the Act imposes a limit as to the amount of savings that can be held in an ABLE account.

The first such limitation deals with the annual contribution amount, which may not exceed the annual gift-tax exclusion amount (currently $14,000).  In addition, ABLE accounts may only accumulate aggregate contributions up to the state’s limit on qualified tuition programs (i.e. 529 accounts), which ranges between $300,000 and $400,000.  And, finally, SSI exempts only the first $100,000 of an able account.  Therefore, if an individual receives SSI, his or her ABLE account may not exceed $100,000 and he/she may have other assets up to only $2,000.  Otherwise, the individual will become ineligible to continue receiving SSI, but can remain eligible for Medicaid.

Medicaid Payback

It is important to note that the ABLE account is a “Medicaid Payback” account.  This means that the Act requires a provision in the account that upon the death of the beneficiary of the account, Medicaid payments made on behalf of the beneficiary subsequent to the establishment of the ABLE account must be reimbursed with any remaining funds.  As a professional serving those with special needs, attention to the client’s priorities should be weighed carefully when determining the amount of savings to place in an ABLE account given this payback provision.  When a beneficiary of an ABLE account is receiving Medicaid, it is important to consider how much should be placed in the ABLE account to limit what may be recovered by Medicaid at the end of the beneficiary’s life.

Tax Benefits

ABLE accounts have tax benefits similar to 529 accounts.  Qualified distributions from the account are not counted as taxable to either the contributor or the beneficiary.  Qualified distributions include expenses paid for the benefit of the beneficiary related to:  education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses, and any other expenses approved by the Secretary of Treasury.

In addition, earnings on the ABLE account are not taxable to the contributor or to the beneficiary.  Contributions, however, are made from post-tax income.

Finally, assets in an ABLE account may be rolled over to another ABLE account for the benefit of another qualified individual who is a brother, sister, stepbrother, or stepsister of the beneficiary.

Uses of the ABLE Act

A person receiving needs-based government benefits often has a dilemma when it comes to saving, whether for education or for unexpected events, all while maintaining public benefits such as SSI.  In order to receive SSI, a person with a disability must have assets under $2,000. The ABLE Act makes saving possible…up to a point.  Now the individual can remain on SSI and save a modest amount in an ABLE account (up to $14,000 per year).

Persons with disabilities who are employed may want to utilize an ABLE account to save a portion of their income while remaining qualified for SSI.  In addition, families may want to contribute to an ABLE account for their loved ones with disabilities in smaller increments.  These same families may also desire to use other tools available such as Special Needs Trusts, which may be more flexible.

On the other hand, the ABLE account will not be useful for people who have become disabled due to an accident and who are receiving a judgment or settlement for a significant amount.  And, it doesn’t work for a person with special needs in receiving a large inheritance.  There are several other instances where an ABLE account is not the answer.

Conclusion

Every tool has its use and the ABLE account is no exception.  Knowing when it is appropriate and knowing when another option might be more so is something we can assist with.  Please call us if you would like to learn more about this new law and how it might help your clients.  We are always happy to hear from you!

 

category: Elder Counselor (Newsletter)

Elder Counselor Newsletter Five Things that Elder Law Attorneys are Thankful For

This is the time of year we like to pause and reflect on that for which we are thankful.  In our personal lives, we often share these thoughts around the table at Thanksgiving.  In our professional life, the words “thank you” are not said often enough.  We would like to dedicate this issue of The ElderCounselor to say “thank you” for the people and things that make our lives more fulfilling. Here are five things we Elder Law attorneys are thankful for.

The Ability to Help Clients Plan Before a Crisis Happens

Elder Law attorneys care greatly for their senior clients and like to see things go smoothly for them, especially as difficult issues arise, such as finding and paying for long-term care.  Clients who understand the need to plan early are more likely to find a smooth path into these transitions.

While typical estate planning includes planning for incapacity during one’s lifetime as well as distribution of one’s assets upon their passing, Elder Law attorneys have an added focus of planning with long-term care in mind.  Often a traditional estate plan will have the same documents that an Elder Law attorney puts in place, like a Revocable Living Trust; a Pour-Over Will; a Durable Power of Attorney; a Health Care Power of Attorney; and a HIPAA Authorization.  However, the provisions within the documents vary significantly depending on the focus of the attorney drafting them.  Because one focus of the Elder Law attorney is to help  clients plan for the possibility of needing long-term care while protecting the home and other assets, our planning documents often include an irrevocable trust designed specifically for this purpose.  Other documents, like the Durable Power of Attorney, will include enhanced powers that allow the agent to engage in Medicaid and/or Veterans Administration (“VA”) pension planning.

Adding enhanced provisions to existing planning documents enables those trusted persons to pursue additional planning strategies if and when the time comes for the senior to utilize long-term care.  When the time comes for Medicaid planning or VA pension planning, it is imperative for the trustee and/or the agent to have the authority to take specific actions on behalf of the elderly person, like the authority to establish and fund an irrevocable trust, file a Medicaid application or prepare a VA pension application.  The grant of authority must be clearly stated within the documents yet these powers are not normally found in general estate-planning documents.

Having clients in our office long before they are in need of long-term care allows Elder Law attorneys to successfully and efficiently assist clients when they need it.  We are all thankful when we have such a client.

 

Other Professionals

An Elder Law attorney’s office is much more than a place where legal analysis is conducted or where legal documents are prepared.  It is also a place where seniors are heard, encouraged to express all of the issues they are facing, and where connections are made.

We are thankful to have ongoing relationships with other professionals that are compassionate about the elderly.  Our clients are much better off because of these other professionals.  For example, many times a Placement Specialist is needed to help a client find the best facility to meet their long-term care needs.  Sometimes a family needs a Care Manager for a variety of reasons including to act as an advocate or to oversee care provided to a loved one.  Professional Fiduciaries can be an amazing resource for families as they can alleviate stress from family members allowing family to just “be there” for the senior.  CPAs, Financial Advisors, other Estate Planning attorneys, Real Estate agents, Insurance agents and a plethora of other senior-centric professionals are invaluable to the Elder Law attorney devoted to their clients.

These relationships are not only personally fulfilling, but also allow us to comprehensively serve our clients.

 

Non-Profit Organizations

There are many non-profit organizations that are dedicated to making life better for the elderly and who support Elder Law attorneys and for that we are thankful. These organizations keep us up to date on the issues facing the elderly, give us a heads up on changes in the laws across the country and continue to provide new ideas on how to best serve our clientele.  The National Association of Elder Law Attorneys, the Alzheimer’s Association and the National Council on Aging are a few of the organizations that Elder Law attorneys can connect with to better serve our clients.   We are all in this together and working toward a common goal to serve seniors and their loved ones the best way possible.

 

Trustworthy and Committed Family Members

Although we occasionally serve an elderly client who has no family members or close friends, we are thankful when trustworthy and committed family members are available to the client.

Many of the strategies we have available to us only work when a client has trusted people to assist in the strategy.  Many thanks go to adult children who are committed to their parents.  Spouses who are still devoted to your ill spouse after “how-many-ever” years of marriage are also greatly appreciated by Elder Law attorneys!  Without you our work would be much more difficult.  Without you, the strategies we employ would fail to work the way they are meant to work.  You are vital to the health and welfare of your elderly loved one.

It is often the family member who finds the Elder Law Attorney for the elderly client.  As technology changes, the older client sometimes has a difficult time finding the necessary resources.  We are very grateful to those family members who seek out an Elder Law attorney and bring us together.

 

Our Own Support System

Advocating for a senior can be stressful for a variety of reasons.  While it is one of the most fulfilling jobs we can think of, it brings with it concerns for our clients that can creep up at all hours of the night.  As with any professional whose heart is a big part of their service, our support systems are essential to our well-being.

Our support systems include our family members, professional colleagues, neighbors and our friends.  Without our supporters, we would be unable to continue doing what we love.

Happy Thanksgiving to all of you!  Enjoy your family and friends this holiday season.  If you have any clients or know of anyone who would benefit from the assistance of an Elder Law Attorney, please do not hesitate to contact us.  We are always happy to hear from you and your clients.  Happy holidays!

 

category: Elder Counselor (Newsletter)

Understanding Social Security Survivor Benefits

An earlier issue of The ElderCounselor addressed social security benefits generally and when to apply. In this issue, we will address the critical yet often-misunderstood topic of Social Security survivor benefits. This e-newsletter is based in part upon an article by Frank Rainaldi and William Rainaldi, first published in Trusts & Estates magazine and available on WealthManagement.com.

Survivors Benefits

According to the Social Security Administration, a surviving spouse may be eligible to receive the deceased spouse’s full retirement benefits at full retirement age (“FRA”).  For survivor benefits only, FRA is 66 for anyone born before 1957, and it increases two months every year until it reaches 67 for those persons born in 1962 or later. (For a regular retirement or spousal benefit, FRA is 66 for anyone born before 1955 and it increases two months every year until it reaches 67 in 1960.)  (E.g., see http://www.ssa.gov/pubs/EN-05-10084.pdf.)

Simply stated, survivors benefits are determined by looking first at the age of the deceased spouse, and then at the age of the surviving spouse.  In other words, we look at the amount of the benefit available to or being paid to the deceased spouse.  Then, we use the age of the surviving spouse to determine if benefits are paid early or at FRA; if the surviving spouse’s benefits are paid before 65, we must apply an actuarial reduction to the deceased spouse’s benefits.

It is important to note a key difference between survivor benefits and spousal benefits.  Spousal retirement benefits provide a maximum 50% of the other spouse’s primary insurance amount (PIA). Alternatively, survivors’ benefits are a maximum 100% of the deceased spouse’s retirement benefit.

Also, note the difference between the PIA and retirement benefit, which is critical when considering deferred retirement credits (DRCs).  DRCs can increase benefits by 8% per year when the worker elects to start collecting after FRA, up to a maximum increase of 32% for deferral to age 70. Note, however, that DRCs apply only for survivor benefits; DRCs do not increase the PIA and thus they aren’t applicable to spousal benefits. Therefore, if one spouse has the higher personal benefit and waits until age 70 to begin collecting, the full benefit with DRCs would be payable to the surviving spouse.

The Most Common Scenario – Both Spouses Reach FRA

The most common scenario is when death occurs after both spouses have reached their respective FRA.  In this case, the survivor benefit is simply the higher of the two benefits.  If one spouse is collecting $2,500 and the other is collecting $2,000, the surviving spouse’s benefit would be $2,500.  It actually does not matter which spouse dies, the survivor benefit is still $2,500.

For example, assume Mr. A has a personal benefit of $2,000, the amount he would receive at age 66.  If he elects to defer until age 69 he would get a 24% increase in his personal benefit to $2,480.

Now let’s say Mrs. A. never worked outside the home.  When Mr. A. is age 66, the spousal benefit would be 50 percent, or $1,000. Note, however, that the spousal benefit would still be $1,000 (not $1,240) when he is age 70 because the 24% increase does not apply to spousal benefits.  But DRCs do apply to survivor benefits.  So, when Mr. A. dies, Mrs. A. would get the full $2,480 as a survivor benefit.

What if the first spouse dies prior to age 62?  The benefit will be the deceased worker’s recalculated PIA, which is based on a different set of assumptions.  It uses the worker’s earnings for a “substitute year” and a different set of required Social Security credits for the applicable age.  This special PIA calculation can only help; it can’t hurt.  It only applies if it provides a higher PIA then the regular PIA calculation.

What if death occurs after age 62 but prior to FRA after taking early retirement benefits?  The benefit will be the deceased worker’s reduced retirement benefit.  This is one good reason not to retire early.  Note that there is a minimum benefit of 82.5% of the deceased worker’s PIA, not including any actuarial reduction in benefits.

Surviving Spouse Collects Early

If the surviving spouse elects to collect before her own FRA, as with other Social Security retirement benefits there is an actuarial reduction.  For a personal, spousal or divorced spouse’s benefit, one can start as early as age 62.  However, a surviving spouse can start collecting as early as age 60.  If the survivor benefit is at FRA or later, there is no actuarial reduction.

It’s important to note that the surviving spouse has additional options.  Suppose the surviving spouse is age 60 and not collecting any benefits. When the other spouse dies, she has the option of receiving her actuarially reduced personal benefit, then later switching to a full-unreduced survivor benefit at FRA.  This could limit the downside of collecting early.

To determine the monthly reduction amount, simply take 28.5% divided by the number of months between age 60 and the survivor FRA determined above.   The “Widow Limit” caps the survivor’s benefit at the larger of the benefit the deceased would have received if he or she were still alive, or 82.5% of the deceased PIA. This Widow Limit only comes into play if the deceased claimed benefits prior to his or her FRA. The following, from SocialSecurityTiming.com, graphically explains these options.

Examples

Suppose the surviving spouse started collecting a reduced personal benefit at 62, and her spouse dies when she is 64.  At that point, she has the option of continuing to collect her personal benefit for two more years and then switching to a full, unreduced survivor benefit at age 66.

Of course, the survivor cannot collect both benefits at the same time; the survivor must choose one or the other.  Only one switch is allowed.  If the surviving spouse is already collecting a personal benefit, she could not go from a personal benefit to a survivor benefit and then back to the personal benefit.

Understanding survivor benefits is especially important when there is a significant age difference between the two spouses.  When one spouse may outlive the other by a considerable margin, survivor benefits are a much more important than “file and suspend” or “spousal only.”  In that case, it is often a good idea to make sure that the spouse with the higher personal benefit defer until age 70, if possible.

Divorce

A former spouse who is age 60 or older (50-59 if disabled) can get benefits if the marriage lasted at least 10 years.  However, there is no age or length of marriage requirement if the former spouse is caring for her or his natural or adopted child who is younger than 16 or who is disabled and entitled to benefits based upon your work.  Benefits paid to a former spouse who meets age or disability requirement does not affect the benefits for other survivors based upon the worker’s record. However, the benefits paid to a former spouse who is caring for a minor or disabled child do affect other survivor benefits.

Remarriage

Generally, the survivor cannot get survivor’s benefits if he or she remarries before age 60. But remarriage after age 60 (or age 50 with a disability) will not prevent the survivor from getting benefit payments based on the former spouse’s benefits. And at age 62 or older, the survivor may get benefits based on the new spouse’s work, if those benefits would be higher.

Conclusion

Social Security survivor benefits offer a surviving spouse the opportunity to significantly increase her or his benefits based upon the benefits payable to the deceased spouse. Therefore, it’s important that seniors and their loved ones understand how to maximize those benefits. Accessing survivor benefits and understanding what is available is an important piece in helping seniors with their overall planning goals.  Please contact our office if you have any questions or if we can be of assistance to someone you know.

 

category: Elder Counselor (Newsletter)

Elder Counselor Newsletter Special Needs Trusts: The Current Law and Pending Legislation

Introduction

Individuals with special needs often face “quality of life” challenges compared to those without special needs.  Many times individuals with special needs require added expenses to meet those needs.  The added financial burden often leads individuals with special needs to depend on public benefits to help them meet those costs.   Unfortunately, public benefits often fail to meet all of the needs of a disabled individual.  However, the supplemental needs of those individuals (meaning needs not covered by public benefits) can be met by using funds held in a Special Needs Trust (SNT).

Understanding Special Needs Trusts

A Special Needs Trust is a trust that is established for an individual with special needs who is or may become dependent on public benefits.  The trust is specifically identified to meet certain supplemental needs and to enhance the quality of life for the beneficiary, the special needs person.  Most importantly, the SNT is created so as to not disqualify the beneficiary for the public benefits being received.  The trust, then, is a pool of money available for the benefit of the beneficiary in order to provide him or her with goods or services that public benefits do not provide.  For example, SNT funds may be used for in-home care services that would otherwise not be affordable to the beneficiary.  Should a person with special needs receive these funds outright and outside a properly created SNT, the individual may become ineligible for the public benefits and reinstatement of the benefits can be a difficult process.
There are two types of SNTs:  A third-party SNT and a first-party SNT.  A third-party SNT is one in which a loved one has assets that he or she would like to use to benefit the individual with special needs.  Whereas, a self-settled SNT is one in which the assets belongs to the individual with special needs.

A self-settled SNT is often used in the case of a litigation settlement.  One example involves an individual who was in a car accident and sued the “at fault” driver successfully.  By the time the lawsuit settlement was reached, the individual had been declared disabled.  Instead of the settlement funds being given outright to the person who is now disabled, the funds could be placed into a self-settled SNT for the benefit of that individual.  This allows the person with the disability to continue to receive benefits and have the settlement money available to him or her for supplemental purposes, increasing his or her quality of life.

Self-settled SNTs have been recognized by federal law since 1993 under 42 USC §1396p(d)(4)(A).   A self-settled SNT contains a mandatory payback provision, meaning that upon the death of the beneficiary, the State will be paid back from the remaining trust assets up to the amount of public benefits expended on behalf of the beneficiary during his or her lifetime.
Within a self-settled trust an individual trustee or corporate trustee is appointed to manage the funds in the trust.   Choosing the correct trustee is an important decision as the trustee will be responsible for managing and investing trust assets, and is responsible for following the guidelines regarding proper distributions from the trust.  Failing to do so could result in a loss of benefits for the trust beneficiary.

Problem with the Current Law

The law, as currently written, states that a first-party trust may only be established by the individual’s parent, grandparent or a court of competent jurisdiction.  It appears that the option for a competent individual to establish his or her own trust under 42 USC § 1396p (d)(4)(A) was a simple mistake by the writers of the law.  However, this minor mistake causes major financial losses to disabled individuals.  It requires those disabled individuals who have no parent or grandparent alive to establish the trust, to expend money on an attorney and court costs in order to ask for a court order establishing the trust.  The money to accomplish this is often such an impediment for these individuals, that they do not pursue it and end up either kicked off the public benefits or forgoing the supplemental monies they would otherwise have access to.

Pending Legislation

Currently there are two identical bills sitting in the House of Representatives and in the Senate which would create the option for competent individual who is disabled to establish his or her own trust under 42 USC § 1396p(d)(4)(A).  In May 2013, H.R. 2123 was introduced in the House and the next day it was referred to the House subcommittee on Health, where is currently sits.  A few months later in November 2013, S. 1672 was introduced in the Senate, was read twice and referred to the Committee on Finance.  The title of the identical bills is the “Special Needs Trust Fairness Act of 2013” and is described as “a bill to amend title XIX of the Social Security Act to empower individuals with disabilities to establish their own supplemental needs trusts.”

As advocates for individuals with special needs, it is important that we support this bill so that our clients have more choices for themselves with regards to establishing special needs trusts.  If you feel so inclined, please contact your Congressional representative and ask for the passage of these bills.  Encouragement from us of the importance of this bill to our clients is imperative to get the bill recognized and enacted.  Otherwise, it may get lost in the shuffle and our clients’ needs may not be adequately addressed.
Conclusion

A Special Needs Planning attorney is an essential advocate when preparing SNTs for individuals with special needs.  The attorney will be able to identify the type of SNT that would be helpful in the particular situation and will know how to properly construct it so as to prevent the person with special needs from being kicked off his or her benefits.  There are many roadblocks that can arise in the planning process and it is imperative that you have an attorney familiar with the many federal and state laws and regulations concerning public benefits and SNTs.

If you have a client with special needs who would benefit from the establishment of an SNT, please contact us.  We are committed to and passionate about assisting those with special needs and look forward to helping in any way we can.

category: Elder Counselor (Newsletter)