Reasons to set up a Third Party Supplemental Needs Trust as an Accumulation IRA Stretch Trust

In a previous post, I described the Reasons to Set up a 3rd Party Supplemental Needs Trust as an Irrevocable Life Insurance Trust.  The same Third Party Supplemental Needs Trust can also be set up as an IRA Stretch Trust. 

 If a Special Needs person is named as beneficiary of an IRA, 401k, 403b or any other asset, that could ruin their ability to qualify as for SSI and Medicaid.  However, paying retirement money to a traditional Third Party Supplemental Needs Trust can cause income tax problems.  Accordingly, we usually recommend that the Supplemental Needs Trust be created with provisions that allow a slow withdrawal of the retirement account over the lifetime of the beneficiary into a trust for the following reasons:

• A traditional Third Party Supplemental Needs Trust can be named as a beneficiary of a retirement account, however, that is usually very tax inefficient from an income tax perspective as the IRS will require the retirement money to be paid to the trust within 5 years, and it will be taxed and the very high trust rates.  
• To minimize income tax consequences, the trust should be designed as a modified IRA Stretch Trust.
• An IRA Stretch Trust requires the Trustee to withdraw a certain amount each year from the retirement accounts which name the trust as the beneficiary.  The amount the Trustee is required to withdraw from the retirement account into the Supplemental Needs Trust is known as the Required Minimum Distribution (RMD) Amount.  The Required Minimum Distribution Amount is a based upon a formula set by the IRS that is tied to the life expectancy of the beneficiary of the trust (the Special Needs person). 
• By taking out only the RMD each year, the IRA can continue to grow tax deferred. After the trustee withdraws the RMD from the retirement account into the Third Party Supplemental Needs Trust, the trustee may leave the money in the trust or distribute it to the Special Needs person subject to the normal limits of Special Needs Trusts.  
• PLANNING NOTE: This should never be set up as a Conduit Stretch Trust as that will ruin the benefits of the Special Needs Person.  A Conduit Stretch Trust requires the RMD be distributed to the beneficiary every year.
• PLANNING NOTE: In order to establish the Special Needs Person's life as a measuring life for IRS tax purposes, and have the Third Party Supplemental Needs Trust be treated as an Accumulation Trust, upon the death of the Special Needs Person, the balance of the trust and the retirement money can ONLY be paid to a person who is younger than the Special Needs Person.  
• PLANNING NOTE: If you think that the client may wish to benefit an older sibling of Special Needs Person, consider making that older sibling the measuring life.

One downside to naming a properly designed Third Party Special Needs Trust with accumulation provisions as the beneficiary of a retirement account is that the income tax rates for trusts is higher than that of an individual.  However, if you wish to engage in special needs trust planning and provide a special needs person access to money from a retirement account, this appears to be one of the most tax efficient ways of doing so while also preserving the the government benefits of the special needs person.  

It should be noted that when doing Special Needs Trust Planning, sometimes, if parents have more than one child, they will name name a non Special Needs child as beneficiary of retirement money and a trust for the Special Needs Child as beneficiary of other assets. This is a completely viable alternate type of plan, but care should be considered regarding what happens if that other child predeceases the parents.

Reasons to set up a 3rd Party Supplemental Needs Trust as an Irrevocable Life Insurance Trust

Recently, I wrote a post explaining the differences between a First Party Special Needs Trust and a Third Party Supplemental Needs Trust.  As you are aware, the goal of a Special Needs Trust or a Supplemental Needs Trust is to provide financial resources to a Special Needs Person in a way that will not cause them to lose their government benefits, like Medicaid. Today, I wanted to explore the benefits of a Third Party Supplemental Needs Trusts in more depth.

A Third Party Supplemental Needs Trust can be created under a Will or it can be created as a stand alone trust by the parent or grandparent.  We usually recommend that it be created as a stand alone Irrevocable Life Insurance Trust for the following reasons:

• Money/Insurance held by the Third Party Supplemental Needs Trust will pass free of estate tax and inheritance tax.  However this may not be a concern for federal estate taxes if your assets are below the current threshold of $11.2 million.  (Remember, the federal estate tax gets reduced to $5 million dollars, indexed for inflation, in 2026.)  
• Other relatives who wish to benefit the special needs child can name the stand alone trust as a beneficiary under their Will or as beneficiary of a life insurance policy. This is important because otherwise each parent, grandparent, aunt, uncle and sibling that may want to benefit the special needs person would have to set up their own special needs trust, creating complexity and extra costs.
• We frequently recommend that parents of a Special Needs child purchase a permanent life insurance policy to guarantee money will be there for the Special Needs Child as other assets may dissipate. 
• A Third Party Supplemental Needs Trust and Life Insurance Trusts are protected from creditors of both the parents and child.
• Creating a stand alone trust during your lifetime generally avoids the need to get the Court involved.  This can come up in various different ways:
• Every time the trustee of a Trust created under a Will changes, it requires Court permission.  This is not true of a trust that is created as a stand alone trust.  A change of trustee of a stand alone Third Party Supplemental Needs Trust or Life Insurance Trust can be accomplished very easily and usually without having to go to Court if the documents are drafted properly.
• If the trust needs to be modified or moved to another jurisdiction, the document can provide mechanisms for these changes without getting Court permission.  A frequent reason to move a trust is to get better protection or lower the income tax consequences.
• The beneficiary of a stand alone trust has access to funds more quickly than if it were to go through an estate administration under a Will. (Probate can take months or even years.  If a Special Needs Person is reliant on a certain amount of monthly funding, naming a Third Party Supplemental Needs Trust as the owner and beneficiary of any insurance policy can be a tax efficient and quick way to guarantee that money will be available in a manner that will not cause the Special Needs Person to lose his or her government benefits.

NOTE: A stand alone trust is frequently referred to as an Inter Vivos Trust.  There are many types of stand alone trusts, including Revocable Trusts.  So while a Third Party Supplemental Needs Trust can be set up as a Revocable Trust, we usually recommend it be established in the same manner as an irrevocable life insurance trust for tax reasons.   

As you can see, there are many benefits to creating a Third Party Supplemental Needs Trust during your lifetime, rather than having it created under your Will.  If you have any questions regarding the best way to set up a Supplemental Needs Trust or a Special Needs Trust for a loved one, please don't hesitate to contact one of our estate planning attorneys.

Understanding the Differences Between Special Needs Trusts and Supplemental Needs Trusts

"Special Needs Trusts" and "Supplemental Needs Trusts" are terms to describe trusts designed to provide benefits to a person in a way that will preserve the public benefits that he or she is entitled to receive. These types of trusts are most commonly created when a person has some sort of special needs or disability.  The person who benefits from the trust is called the beneficiary.

In New Jersey, Pennsylvania and Florida, the terms "Special Needs Trusts" and "Supplemental Needs Trusts" are often used interchangeably, although they should not be as it often results in serious problems.  I personally try to use the term "Special Needs Trust" as a way to refer to a First Party Special Needs Trust (i.e. the money used to fund the trust belongs to the special needs person). I try to use the term "Supplemental Needs Trust" to refer to a Third Party Special Needs Trust (i.e. the money used to fund the trust belongs to someone other than the Special Needs Person).

Both a First Party Special Needs Trust and a Third Party Supplemental Needs Trust are intended to protect different public benefits. Most disabled individuals and special needs individuals receive Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, subsidized housing and food stamps.  The most important rule for all First Party Special Needs Trusts and Third Party Supplemental Needs Trusts is that the trust may not pay cash to the beneficiary and it may not pay to or for the benefit of the beneficiary for any medical needs covered by Medicaid, food, shelter, or any asset which could be converted into food or shelter.

A First Party Special Needs Trust and a Third Party Supplemental Needs Trust allow the beneficiary to continue to receive government benefits, but also have money for clothing, education, travel, cable and cell service, electronics, furniture, personal care, medical care not covered by Medicaid, and many other items that make life worth living. 

Key features of a Third Party Supplemental Needs Trust:

1.  It is a Discretionary Trust
A Discretionary Trust is a Trust that allows the trustee to give money for the benefit of the Special Needs Person as the trustee sees fit.  If the trustee has complete discretion whether to make distributions for the beneficiary, the trust principal and income will usually not be counted as available to the beneficiary for purposes of obtaining government benefits.

2.  Established using funds of someone other than the Special Needs Person
A Supplemental Needs Trust is most common when a parent, grandparent or other relative wants to leave money for the benefit of a Special Needs Person.  Care must be taken to avoid giving that person money outright, otherwise he or she risks losing public benefits.  The Supplemental Needs Trust is a way for third parties to provide a Special Needs Person access to money in a way that will not cause them to lose their benefits.

3.  No government payback upon the death of beneficiary is required
After the Special Needs beneficiary passes away, Medicaid does not require reimbursement for the funds it expended during the lifetime of the beneficiary if the trust is funded DIRECTLY with the money of someone other than the beneficiary.  Please note that if a parent leaves money to a child and then the child sets up a trust, that will be considered a First Party Special Needs Trust, and not a Third Party Supplemental Needs Trust.  The key difference is that the third party must set up the trust AND fund it to qualify as a Third Party Supplemental Needs Trust.

4.  A Supplemental Needs Trust can have more than one Beneficiary
While there are substantial restrictions on how the Special Needs Person can receive money, because the trust fund is not comprised of funds of the Special Needs Person, there are few guidelines on how the rest of the Supplemental Needs Trust can be administered. Accordingly, the sole benefit rule that applies to First Party Special Needs Trusts does not apply to Third Party Supplemental Needs Trusts.  As government benefits are available only to those with financial need, the most important rule is that the beneficiary should never be entitled to the money in the trust.

5.  Taxation of Third Party Supplemental Needs Trusts
A Third Party Supplemental Needs Trust can be established as a Grantor Trust while the Grantor is alive, a Qualified Disability Trust or a complex trust.  If the trust is set up as a Grantor Trust, income generated by the trust will be allocated to the Grantor (or Creator) of the Trust during his or her lifetime.   If the trust is taxed as a complex trust, the trust will pick up most of the tax consequences in these types of trusts. Designing the trust as a Qualified Disability Trust may offer a small tax break, but it offers less privacy.  Often privacy is better than saving a few dollars in taxes as it can reduce confusion by government officials looking into the benefits and income of the Special Needs Person.  When fewer people question the validity of the trust, that saves legal fees and aggravation.

Key features of a First Party Special Needs Trust:

1.  It is a Discretionary Trust
A Discretionary Trust is a Trust that allows the trustee to give money for the benefit of the special needs person as the trustee sees fit.  However, payments to any one person or entity in excess of $5,000 during a single calendar year requires government approval.

2.  Established using funds of the Special Needs Person
A First Person Special Needs Trust is most commonly created when a person inherits money outside of trust or is awarded money in a personal injury settlement.  Prior to actually receiving the money, the Special Needs Person can create this type of trust to avoid losing their public benefits.

3.  There is a government payback at the death of the Special Needs Person
After the Special Needs beneficiary passes away, the government requires that the First Party Special Needs Trust reimburse Medicaid for expenses it has incurred.  For this reason many trust specialists semi-jokingly recommend that the trustee of a First Party Special Needs Trust try to spend the last dollar of the Trust on the day the Special Needs Person dies.

4.  A First Party Special Needs Trust must be for the sole benefit of the Special Needs Person
The sole benefit rule of a Special Needs Trust is very tricky and many states, including New Jersey, have changed their definition of this term many times over the years.  For example, can payments be made for the care of a pet for a Special Needs Person?  Many New Jersey officials say no, but most will also say yes, if it is a therapy animal. The biggest issue comes up over incidental benefits.  For example, a First Party Special Needs Trust can pay for a Special Needs Person to go to an amusement park, but it shouldn't pay for the ticket of a family member caretaker even that caretaker has no interest in going to the park and is only going to assist the Special Needs Person.

5.  Establishing a First Party Special Needs Trust.
Creation of a First Party Special Needs Trusts is much more complicated than the creation of a Third Party Supplemental Needs Trust. Usually (but not always), a First Party Special Needs Trust must comply with a federal law enacted in 1993. That law requires that most First Party Special Needs Trusts be established by a judge, a court-appointed guardian or the parents or grandparents of the beneficiary with notification being given to the government so that they can appropriately monitor it.(In some cases Social Security regulations may also require a judge to sign off on the creation of trusts).  In addition, the trust must generally be created before the beneficiary turns 65 years of age.

6.  Alternate names of a First Party Special Needs Trust
First Party Special Needs Trusts are frequently referred to as d(4)(A) Trusts because that is the section of the government statute that allows for these trusts.  They are also frequently called self settled special needs trusts.

7.  Taxation of First Party Special Needs Trusts
Because this is a grantor trust for IRS tax purposes, all income earned by the trust is taxable to the Special Needs beneficiary. There is no option to tax the trust itself.  The trust is also includible in the gross estate of the Special Needs Person for estate tax purposes.  However, the trust still need its own separate EIN and must file a federal Form 1041.  (Note: This can be a very simplified form merely advising the IRS that the Grantor/beneficiary will be picking up all the taxable income on their personal income tax return.)

8.  Other Issues with First Party Special Needs Trusts
Income generated inside a properly created 1st Party Special Needs Trust should not affect the beneficiary’s eligibility for government programs.  However, while taxable income is not “countable” income for purposes of Medicaid or other government benefits, government agencies often get a “tracer” report from the IRS about the beneficiary's income, and may issue a notice that benefits will be terminated unless they receive proof that the beneficiary did not have countable income. The trustee must be prepared to explain that although the income was reportable to the IRS as the beneficiary’s income for tax purposes, the beneficiary only received "in-kind” distributions that should not be counted as income for purposes of SSI, Medicaid, or other programs.  In other words, the Trustee will likely have to explain to many different people that the Special Needs Person is being taxed on income that the beneficiary never receives.

Summary

The administration of First Party Special Needs Trusts and Third Party Supplemental Needs Trusts can be somewhat difficult. A special needs trust attorney, familiar with public benefits programs and special needs trust provisions, should always be involved in the preparation of a Special Needs Trust or a Supplemental Needs Trust. While many legal matters can be undertaken without a lawyer, or with a lawyer with a general background, special needs planning is complicated enough to require the services of a specialized practitioner.

Can the Trustee of a New Jersey Special Needs Trust Buy Clothing?

Although the federal government clearly changed the rules in 2005 to allow a Trustee of a First Party Special Needs Trust to buy an unlimited amount of clothing for person receiving Medicaid and SSI, there is still a lot of confusion regarding this issue in New Jersey.

New Jersey Administrative Code Section 10:71-4.11, which was enacted in 2001, states that if a Trustee of a Special Needs Trust purchases clothing for someone who has qualified for Medicaid or SSI, it will be considered income to the beneficiary and could reduce the beneficiary's government benefits.  Moreover, if the trust allowed distribution for purchase of clothing, it had the possibility of having the entire trust counted as an asset that may disqualify the beneficiary from benefits.  THIS IS OLD LAW.

To quote from the new law, POMS S.I. 01130.430: "A change in the regulations, effective March 9, 2005, establishes that the resource exclusion for household goods and personal effects no longer has a dollar limit. As a result, beginning with resource determinations for April 2005, SSA no longer counts household goods and personal effects as resources to decide a person’s eligibility to receive Supplemental Security Income (SSI) benefits."  The 2005 law goes on to define "personal effects" to include clothing.

There are several reasons why things are still so confusing:

1. New Jersey has not updated the Administrative Code to reflect the change of law on the federal level by POMS S.I. 01130.430.  The Social Security Regulations clearly override any state rules with respect to eligibility for Medicaid and SSI benefits.  So when Social Security updated its rules in 2005, the NJ rules were automatically updated as well.
2. When looking up the NJ rule online, there is a lot of bad, old information on many websites.
3. When looking up the NJ Administrative Code, which is free on Lexis-Nexis (thank you by the way), unfortunately it has the most recent year next to the Code.  That has the unfortunate side effect of making it look like a new and current law, even if it is not.

So, to be clear - a Trustee of a Special Needs Trust (regardless if it is a first party trust or a third party trust) can buy clothes for the beneficiary and not be concerned that such expenditures will be counted as income or that the beneficiary will lose his or her government benefits.  That being said, if you are spending an excessive amount on clothes, you should probably expect extra scrutiny from the government and potential problems because they could make the argument that the person is just taking the clothes back in exchange for cash, and the fight wouldn't be worth it.

Self Settled Special Needs Trusts

There are generally two types of private special needs trusts:

1. 1) Third Part Special Needs Trusts; and
2. 2) Self Settled Special Needs Trusts (also known as First Party Special Needs Trusts or D-4A Trusts).

A person who is receiving (or about to receive) Medicaid and Supplemental Security Income (SSI) may wish to consider establishing a Special Needs Trust just before he or she is about receive a substantial gift, inheritance or personal injury award. By receiving money outright, the person will no longer be eligible to receive SSI and Medicaid.

The Social Security Act (Section 1396p(d)(4)(A)) specifically allows a Special Needs Trust to be created for a person so that the person can continue to qualify for Medicaid and SSI. This particular trust is called a Self Settled Special Needs Trust because it is being funded with the person's own money (as opposed to money given to a trust by a third party).

The prime difference between the terms of a Self Settled Special Needs Trust and a Third Party Special Needs Trust is that when the beneficiary of a Self Settled Special Needs Trusts dies (or the trust terminates), the balance in the trust must pay off any Medicaid liens that have been built up. If there money left in the trust after that, the balance can be paid to the beneficiary's relatives. With a Third Party Special Needs Trust, there is no payback provision necessary.

The reason why a beneficiary of either a Self Settled Special Needs Trust or a Third Party Special Needs Trust can qualify for SSI and Medicaid is because those trusts are limited in what they can pay for. In general, the trust may not pay for food, shelter, electricity, gas or water and it may not pay for anything that can be converted into food, shelter, electricity, gas or water. So cash should almost never be distributed to a beneficiary from the trust. (Note: there are special rules about a trust owning a home)

A Self Settled Special Needs Trust can be created on behalf of the individual who receives the money by the person's guardian, the person's parent or grandparent, or by a court (as often happens in personal injury settlements). The beneficiary must be under the age of 65 when the trust is created and funded and the trust must be for the sole use of the beneficiary.

The costs of creating a Special Needs Trust vary from attorney to attorney, however, hundreds of thousands can be saved by setting up one properly.

Special Needs Planning in NJ - Part 4 of 4

Special Needs Trusts and Supplemental Needs Trusts

In Part IV of this Series, I want to discuss the role of Special Needs Trusts and Supplemental Needs Trusts in estate planning.

"Special Needs Trusts" and "Supplemental Needs Trusts" are terms to describe trusts designed to provide benefits to a person in a way that will preserve the public benefits that he or she is entitled to receive. The person who benefits from the trust is called the beneficiary.

Each special needs trust can be intended to protect different public benefits. Most commonly, special needs trusts are intended to permit Supplemental Security Income (SSI) and Medicaid recipients to receive some additional services or goods. Other common benefits include vocational rehabilitation, subsidized housing and food stamps. The trusts are always created as discretionary trusts, which means that money can only be paid out in the discretion of the trustee. The trustee can NEVER be the special needs person.

There are actually few rules governing Supplemental Needs Trusts (also commonly known as third-party special needs trusts). Since government benefits are available only to those with financial need, the most important rule is that the beneficiary should never be entitled to the money in the trust. If the trustee has complete discretion whether to make distributions for the beneficiary, the trust principal and income will usually not be counted as available to the beneficiary for purposes of obtaining government benefits.

The most important rule for special needs trusts is that the trust may not provide food, shelter, any asset which could be converted into food or shelter (including cash), or any items or services that are available from public benefit programs, to the beneficiary. In other words, the trust can provide for physical therapy, medical treatment, education, entertainment, travel, companionship, clothing, furniture and furnishings (such as a television or computer), and some utilities (like cable television and a telephone, but not electricity, gas or water). Distributions of cash to the special needs person outright are almost never permitted.

There are dozens of different ways to draft a Supplemental Needs Trust. In addition, the administration of a special needs trust can be extremely difficult. A seasoned lawyer, familiar with public benefits programs and special needs trust provisions, should always be involved in preparation of a third-party special needs trust. While many legal matters can be undertaken without a lawyer, or with a lawyer with general background, special needs trusts are complicated enough to require the services of a specialized practitioner.

Sometimes a person may be entitled to public benefits, but he or she has too many assets to qualify for those benefits. This is common for people like accident victims or disabled children who inherit money. In such cases, it is often possible and advisable to place assets into a special needs trust to gain, regain or continue eligibility for government benefits. Because the person is using their own money to fund the trust, there are numerous restrictions regarding how the money can be used.

Self-settled special needs trusts are much more complicated than their third-party equivalents. Usually (but not always), a self-settled special needs trust must comply with a federal law first enacted in 1993. That law requires that most self-settled special needs trusts actually be established by a judge, a court-appointed guardian or the parents or grandparents of the beneficiary (Social Security regulations may limit creation of trusts to the first two categories in most circumstances). In addition most self-settled special needs trusts will have to include a provision repaying state Medicaid agencies for any benefits, payable upon the death of the beneficiary.

In summary, Special Needs Trusts and Supplemental Needs Trusts are both Discretionary Trusts. A Special Needs Trust is established using funds of Special Needs Person. A Supplemental is established using funds of someone other than Special Needs Person. A Special Needs Trust requires that the government be paid back for Medicaid liens upon death of the Special Needs Person There is no government payback upon the death of Special Needs Person in a Supplemental Needs Trust.

Special Needs Trusts and/or Supplemental Needs Trusts are all part of a larger strategy to make sure a special needs person's financial and personal needs are met. For individuals who cannot afford these types of trusts, many charities, like Plan NJ, do have pooled funds to which you can contribute. These pooled funds offer you less control, but it does provide for a means of taking care of your loved one.

Special Needs Planning in NJ - Part 3 of 4

ESTATE PLANNING FOR A SPECIAL NEEDS CHILD

In Part III of this Series, I want to discuss estate planning issues for parents of a special needs child.

A typical estate plan for parents without a special needs child includes:

1. Will;
2. Financial Power Of Attorney;
3. Health Care Power of Attorney;
4. Advanced Health Care Directive; and
5. Naming Beneficiaries of Retirement Plans.

The parent of a special needs child must also do everything possible to avoid giving money outright to the Special Needs Child. This includes arranging for care and financial resources for the Special Needs Child.

In order to do everything possible to avoid giving money outright to the Special Needs Child, there are certain steps that can be taken:

1) Setting up a special trust for the Special Needs Child that will not be counted against the child's income for purposes of eligibility for government programs;
2) Redoing beneficiary designation notices on life insurance contracts and retirement plans; and
3) Telling family members to either leave money to a special needs trust for the child or specifically exclude the Special Needs Child from their Wills.

There are also specific arrangements that need to be made to ensure that your special needs child is cared for after your passing. This includes:

1) Arranging for a guardian to be named for the Special Needs Child;
2) Arranging for government services (SSI, SSDI, Medicaid, etc.); and
3) Arranging for living arrangements for the child.

Parents of special needs children always have a lot to deal with, but much of this planning should be done shortly after you find out that you have a child with special needs. Most importantly, life insurance planning should be done as soon as possible. If you wait too long, you may no longer qualify for insurance - and special needs parents, more than most, need to guarantee that money will be there after they pass.

Special Needs Planning in NJ - Part 1 of 4

PART I - GOVERNMENT BENEFITS

Many parents of a special needs child have an overwhelming concern: How (and by whom) will their child be taken care of when I die? In this series, I would like to explore the options that exist to ensure that your child will be provided for.

In order to understand the planning options available to your child, you first need to understand the government benefits that might be available to your child. There are 5 types of government benefits commonly available:

1. Supplemental Security Income (SSI) – provides money for low-income individuals who are disabled, blind or elderly and have few assets. SSI eligibility rules form the basis for most other government program rules, and so become the central focus for much special needs trust planning and administration. You must live in the United States or the Northern Mariana Islands to get SSI. Non-citizen residents may be able to get SSI. Once a person qualifies for SSI, he or she is automatically eligible for Medicaid in New Jersey and most other states.

To qualify you must have little or no income and few resources - the value of the things you own must be less than $2,000 if you are single or less than $3,000 if you are married. The value of your home does not count. Usually, the value of your car does not count. And the value of certain other resources, such as a burial plot, may not count either.

To get SSI, you also must apply for any other cash benefits you may be able to get.

The amount a person is entitled to receive in 2009 is:

Person living alone or with others in own household $ 705.25
Person living with spouse who is not eligible for SSI $ 1,018.36
Person living in someone else's household and receiving
support and maintenance $ 493.65
Person living in licensed residential health care facility $ 884.05
Person living in public general hospital or Medicaid
approved long-term health facility $ 40.00
Couple living alone or with others in own household $ 1,036.36
Couple living in someone else's household and receiving
support and maintenance $ 767.09
Couple living in licensed residential health care facility $ 1,730.36

The above includes both federal and state payments.
The benefit is reduced dollar for dollar for any other income the beneficiary may receive. This means that once an SSI beneficiary's income reaches a certain level, his or her SSI benefit will terminate.

2. Social Security Disability Income (SSDI) - provides money for individuals with a disability who qualify for Social Security based upon their own work history or the work history of such person's parents.

The SSDI program pays benefits to adults who have a disability that began before they became 22 years old. The government considers this SSDI benefit as a “child’s” benefit because it is paid on a parent’s Social Security earnings record. For a disabled adult to be entitled to this “child” benefit, one of his or her parents:

• Must be receiving Social Security retirement or disability benefits; or
• Must have died and have worked long enough under Social Security.

SSI v. SSDI

a. SSI is a needs based program and SSDI is an entitlement program. There is no “means” test for SSDI eligibility.

b. SSDI can be a much higher income level than SSI, and with no payback.

c. Under both SSI and SSDI, the child must not be doing any "substantial" work, and must have a medical condition that has lasted or is expected either to last for at least 12 months or to result in death.

d. In order to qualify for SSI, individuals must first apply for SSDI if eligible as SSI is a last benefit of last resort. A person switching to SSDI from SSI can still qualify for Medicaid.

3. Medicaid - is a benefit program available to low-income individuals which makes payments directly to health care providers for medical needs over and above what Medicare will pay. The largest health and long term care program operated and funded by the government – in this case, the federal government. The fixed monthly income cap for Medicaid in 2009 is $2,022.

4. Medicare - is a federal program that makes payments directly to hospitals, doctors and drug companies. People can qualify for benefits if they are 65 and over (and are entitled to receive Social Security benefits, whether or not they have actually retired) and those who have been receiving SSDI for at least two years.

Part A - Covers most medically necessary hospital, skilled nursing facility, home health and hospice care.

Part B - Covers most medically necessary doctors' services, preventative care, durable medical equipment, hospital outpatient services, laboratory tests, x-rays, mental health care, home health care and ambulance services. (There is a monthly premium for Part B based upon a person's income.)

Part D - Covers prescription drugs.

Medicaid v. Medicare

Medicaid differs from Medicare in three important ways:

1) Medicaid is run by state governments (though partially funded by federal payments);

2) it is available to those who meet financial eligibility requirements rather than being based on the age of the recipient, and

3) it covers all necessary medical care (though it is easy to argue that Medicaid’s definition of “necessary” care is too narrow).

Because Medicaid is a “means tested” health care program and Medicare covers a smaller portion of long-term care costs, maintaining continuous Medicaid availability is often the central focus of special needs trust administration.

5. SCHIP - State Children's Health Insurance Program. This program has higher income eligibility limits and provides health insurance for many who earn too much to qualify for other programs.

Benefits of a Second to Die Life Insurance Trust

I. General Benefits

A. Tax savings
B. Control of assets after death
C. Second to die policies typically provide guaranteed money for your heirs which is cheaper to obtain than single life premium policies.

II. Reasons to establish a Second to Die Life Insurance Trust

A. Pay taxes upon death for assets outside of trust
B. Provide guaranteed funding for disabled child
C. Guarantee liquidity (so sentimental assets are not forced to be sold in a fire-sale)

III. How does a Second to Die Life Insurance Trust Work?

A. The trust should be created prior to the purchase of the policy (otherwise there is a 3 year lookback for tax purposes).
B. The trustee of the trust then purchases the life insurance on the joint life expectancy of you and your spouse.
C. A bank account must be set up for the trust.
D. The premium should be paid into the trust’s bank account at least 45 days prior to the premium due date.
E. Immediately after the trust’s bank account is funded, a beneficiary designation notice must be sent out. (In order to make gifts to the trust tax free, the beneficiaries of the trust must be allowed a window in which to withdraw the money. This is known as a Crummey trust.)
F. Thirty days later (this time frame various depending upon the trust document), the trustee can pay the premium.
G. Upon the death of the survivor of you and your spouse, the insurance is paid to the trust.
H. The trustee then pays out the money according to the terms of the trust.

IV. Putting the Tax Savings into Real Dollars

A. Let’s assume Harry and Winny have $7,000,000 in assets. They have two kids, one of whom has autism and needs permanent care. Even with proper planning, if Harry & Winny passed now, they would have a potential tax liability of about $1,500,000.
B. By setting up a life insurance trust, 100% of the money in trust can pass free of federal estate taxes as well as state estate and inheritance taxes. Additionally, the trust can be established to benefit Harry & Winny’s autistic child in a way that he remains eligible for government benefits.
C. To revise the example above, if we properly move $1,000,000 of assets into this life insurance trust, leaving a taxable estate of $6,000,000, the potential tax liability is reduced to about $1,000,000. This a savings of about $500,000.

Irrevocable Trusts

There are many different types of irrevocable trusts. The most popular irrevocable trusts include:

1. life insurance trusts;
2. asset protection trusts;
3. charitable trusts;
4. trusts created upon death (such as QTIP trusts and bypass trusts); and
5. special needs trusts.

Generally, an irrevocable trust is designed to prevent its terms from being modified in the future. As a practical matter, what this means is that a person (the Grantor) creates a document (the Irrevocable Trust) outlining how his or her beneficiaries should receive any assets that are placed into the trust.

The Irrevocable Trust document itself has provisions which state that the Grantor may not make changes or modifications to the trust. Unlike a Revocable Trust, the Grantor of an Irrevocable Trust gives up all control once the trust is created. There are times when such trusts can be later modified, whether by court or by consent of all the beneficiaries, but never by the grantor alone.

Frequently people also create an Irrevocable Trust because once assets are transferred to such trust they will receive favorable estate and inheritance tax treatment. Assets in Irrevocable Trusts receive favorable tax treatment because they are excluded from the gross estate of the grantor at the time of the grantor’s death.

Another reason people also create irrevocable trusts is to provide as a means of protecting the assets in the trusts. By giving up control of the assets (in a non fraudulent way), a potential creditor may not sue the Grantor and try to claim against the assets in the trust.

In most states, including New Jersey, a Grantor may not be a beneficiary of an asset protection trust. However, a few states do allow self settled spendthrift trusts.