a review of special needs trusts and the alternatives
DESCRIPTION
A Review of Special Needs Trusts and the Alternatives. Gregory L. Kenyon Bradshaw, Fowler, Proctor & Fairgrave, P.C. Des Moines, IA 50309. Polk County Bar Association Summer CLE June 15, 2012. Methods of Payment for Long-Term Care. Private financial resources and income - PowerPoint PPT PresentationTRANSCRIPT
A Review ofSpecial Needs Trusts and the Alternatives
Polk County Bar AssociationSummer CLE
June 15, 2012
Gregory L. KenyonBradshaw, Fowler, Proctor & Fairgrave, P.C.
Des Moines, IA 50309
Methods of Paymentfor Long-Term Care
Three ways to pay for long-term care:
• Private financial resources and income
• Long-term care insurance• Governmental assistance
such as Medicaid (Title XIX)
Eligibility for Medicaid
• Age or disability
• Income and resources
Eligibility for Medicaid is based on:
Income and Resources
Income• Only the applicant’s income
is considered• For a married couple only the
income of the spouse seeking assistance is considered
Resources• Only countable
resources are considered
Noncountable Resources• Home• Auto• Household goods• Health aids• Prepaid burial• Life insurance -
limited to $1,500 death benefit• Assets used for self support
• Special Needs Trusts• Annuities
Noncountable Resources(continued)
Annuities which satisfy 441 IAC 75.23(9)
Special Needs Trusts under Iowa Code 633 C
Acquisition ofNoncountable Resources
It is acceptable to use countable resources such as cash to acquire noncountable resources.
Using Trusts in Long-Term Care Planning
Revocable Trust - no value for eligibility but may be of value for management of assets and other traditional trust purposes
Non-Revocable Trust - if established prior to the lookback period, only actual distributions from a trust will be counted
Testamentary Trusts
Only actual distributions count but in some settings, if discretion is given to the trustee, trust assets may count. See the recent case of Strojek v. Hardin County.
Discretionary Language Prevails Over Other
Standard
The legislature enacted 633A.4702 in 2004 in an effort to clarify the law following the decision in Strojek. This statute has yet to be interpreted by the appellate courts.
633A.4702 Discretionary language prevails over other standard.
In the absence of clear and convincing evidence to the contrary, language in a governing instrument granting a trustee discretion to make or withhold a distribution shall prevail over any language in the governing instrument indicating that the beneficiary may have a legally enforceable right to distributions or indicating a standard for payments or distributions.
OBRA 1993 Trusts
Special Needs Trusts Charitable Foundation Trusts Income Assignment Trusts (Miller Trusts)
COMMON CHARACTERISTICS
A “self-settled trust” must meet OBRA 1993 requirements in order for an individual to be eligible. On the death of the individual, any remaining portion of the trust must be paid to the payor’s state to reimburse it.
Special Needs Trusts
A Special Needs Trust may be established to cover those needs that would not exist except as a direct result of the beneficiary’s disability. It may not pay for ordinary needs, such as ordinary support and maintenance, education, and entertainment that would exist regardless of disability.
Special Needs Trusts (cont’d)
Use of Funds:• Expenses of trust
administration are limited to $10 per month, unless otherwise approved by the court
• Distributions are allowed for special needs that would not exist but for the disability
• Ordinary needs of food, shelter and clothing are NOT considered special needs
Special Needs Trusts (cont’d)
To qualify to establish a Special Needs Trust:• a person must be under 65
years of age• the person must be disabled• the trust must be
established for the benefit of the individual, by a parent, grandparent, legal guardian, or a court
Income Assignment Trusts(Miller Trusts) (cont’d)
Iowa law provides an upper limit for which a Miller Trust may be used. If a beneficiary of a Miller Trust has income which is equal to or greater than the statewide average for a nursing facility, the income is once again considered available for purposes of determining eligibility. Iowa Code Section 633C.3(2). The upper limit is $4,594 through June 30, 2012.
Income Assignment Trusts (Miller Trusts)
A Miller Trust is used to bring a Medicaid applicant’s income within the limit for Medicaid eligibility. During 2012, the monthly income must be between $2,094 and $4,594 per month. 2012 Dollar
Amounts
$2,094Income limit for Medicaid eligibility (per month)
Average statewide charge for a private pay resident of a nursing facility (per month)
$4,594
Eligible for a Miller Trust
Pooled Trust
• In Iowa this is essentially the same as a special needs trust for administration purposes
• A pooled trust can leave funds to a nonprofit entity at the death of the primary beneficiary
• As with a Miller trust and a special needs trust, the remainder in the trust must be payable to the state to reimburse it for Medicaid benefits
Charitable Foundation Trusts
A Charitable Foundation Trust operates like a Special Needs Trust. However, after death of the primary beneficiary, a foundation trust may allow distribution of principal, or income, or both, to the charitable entity.
CharitableFoundation Trust
Death of Primary
Beneficiary
Principal
Interest
CharitableEntity
When to Use Annuitization• Annuity income will help meet monthly
needs but will not cause applicant to exceed income eligibility limit
• Community spouse income is low and there are considerable resources which may serve to render the institutional spouse ineligible, use of an annuity may allow them to obtain benefits and income without spending down for long-term care
• The community spouse can live on the cash flow generated by the annuities and other sources of income
Disadvantages of Annuitization
• Limited access and flexibility for potential emergency uses of the cash
Transfers of Resources
ELIGIBILITY
A transfer for less than fair market value will render the transferor ineligible for benefits for a period of time determined by dividing the fair market value of the resources transferred divided by the average statewide private pay rate for nursing facility services at the time of the application.
Transfers include not only the obvious sort of transfers, i.e. sales and gifts, but also such things as disclaimers, or failure of a surviving spouse to seek the elective share in an estate, or otherwise failing to seek an asset to which one is entitled. Iowa Code Section 249F.1(2), IAC 75.23(8)
Transfers of Resources (cont’d)
Transfers of Resources (cont’d)
RESPONSIBILITY
In addition to the eligibility issues above, Iowa has a “responsibility” rule which establishes a presumption that any transfer made for less than fair market value within sixty (60) months of seeking benefits, or becoming institutionalized, is made for purposes of obtaining benefits. The DHS is authorized to seek reimbursement from the recipient for any such transfers, for the full amount of the transfers. Iowa Code Section 249F(2)(a).
There are exceptions to the transfers of assets rules. The exceptions include transfers to:
• a spouse• a child who is blind or permanently and
totally disabled• a sibling who has an equity interest in a
home and who resided with the individual for at least one year
• a child who resided in the home with the individual for at least two years
• another for sole benefit of the transferor, or spouse, dependent or disabled child
Transfers of Resources (cont’d)
Sample WorksheetIncome Noncountabl
eResources
SS/Pension
OtherIncome
Countable
ResourcesInvestments
Cash
Real Estate
Life Insurance
IRA
Home
1 Car
Household Goods
Medical Equipment
Prepaid Burial
- - - - - - - - - - - - - -
Annuity (Medicaid Qualified)
Special Needs Trusts
Husband Wife
Husband’s Income (IS)
Wife’s Income (CS)
CountableResources
NoncountableResources
SS & Pension
$1500 This is less than income eligibilitylit of $2094, so income test is met
SS and pension
$900
Cash, investments, etc.
$150,000
Home, household goods, health equipment, auto, and prepaid burial accounts
----------Special Needs Trust
Annuities which satisfy Medicaidregulations
Minimum monthlyNeeds allowanceis $2841
Attribution: Dividecountable resources equally between ISand CS, so IS will be allocated $75,000
CS will also be allocated
$75,000
Shortfall betweenCS income and MMNA
Shortfall is:$2841 less $900=$1941
Eligibility will beGranted when IShas countableresources of $2000or less. Spend downof IS resources isnecessary
Husband’s Income (IS)
Wife’s Income (CS)
CountableResources
NoncountableResources
Diversion to CS $1500 .--->
Assuming other Eligibility tests are satisfied, DHS will divertincome from IS to CS up to shortfall
Shortfall remains
$1941 less diversion of $1500 leaves remainingshortfall of $441
Spenddown options:(1) Pay for care and living expenses, (2) pay off debt; (3) pay for services; (4) purchase non countable resources includingannuity which meets regulations; (5) considerspecial needs trust
Example of action:Assets allocated to IS are used to(1) pay off debt;(2) pay for care forseveral months(3) prepaid burial(4) $40,000 to annuity which provides income to CS The result reduces IS resources to $2,000
CS retains countableresources of
$75,000
CS retains resources of$75,000
Resulting in:
Debt paid off;Burial fundspurchased;annuity purchased for benefit of CS
CS – after annuity purchase CS income is increased by annuity am’t so shortfall is reduced and spousal diversion is adjusted
Discretionary Trust Decision Tree
Thank youfor your kind attention.
Gregory L. KenyonBradshaw, Fowler, Proctor & Fairgrave, P.C.
801 Grand Avenue, Suite 3700Des Moines, IA 50309
(515) [email protected]