GeriLaw | Robert Fleming, Tucson elder law attorney, and colleagues

Special Needs Alliance in the News

The Autism Perspective magazine recently published an article written by William Whitaker regarding the recent transition of the Special Needs Alliance (SNA) to a nonprofit organization. 

“Ours is the first, and to our knowledge the only, organization of its type for attorneys who practice in the special needs area,” says SNA immediate Past President Edward Wilcenski, a special needs planning attorney in New York State.  Mr. Wilcenski, the brother of a developmentally disabled adult, has helped to transform the alliance from an inconspicuous organization operating largely through word of mouth into what promises to be a significant voice in the fields of estate planning and disability law. He has recently passed the torch to incoming President Andrew Hook, a Certified Elder Law Attorney with Oast & Hook.

Mr. Hook says he became involved in the SNA “to work with other attorneys nationally to assist persons with disabilities and their families with the complex legal issues that confront them,” and for the families of individuals with autism, what a complex maze that can be.

Estate planning for individuals living with autism presents unique problems because of the comparatively high functionality of many of those coping with the disability, according to Mr. Wilcenski. Nevertheless, long-term financial security for individuals with autism can play a significant role in their emotional well-being. Better dietary options, better treatment, and better opportunities for interaction are necessary tools for improvement, and they come at a price.  If estates are structured improperly because of generalizations made by attorneys who are not well-versed in this highly specialized field, then the individual with disabilities could lose Supplemental Security Income (SSI) benefits, or Medicaid, or worse.

Enter the Special Needs Alliance.  Messrs. Wilcenski and Hook say that the most significant feature of the SNA is that the finest disability law attorneys in the United States are networked, which makes for robust and rapid communication of new legislation, new case law, and the forecasting of regional laws that may become important on a national level. And not only are SNA attorneys thus well-informed, but they are also the arguers of these cases.

“Not only do we share information about what’s going on,” Mr. Wilcenski observes, “but many of our members are litigating these issues.  There’s a high likelihood that it’s one of our members behind the effort.”

Beyond the legalese are the emotional difficulties associated with caring for a loved one with autism.  It is not often that an attorney can empathize with a client – which makes the SNA unique in the legal profession.

“Many of our attorneys have personal experience in assisting individuals with disabilities,” Mr. Hook notes.  “This personal experience is invaluable.”

“There’s an expression that goes something like ‘you walk the walk and talk the talk,’ and we have attorneys who can respond to the needs of families that look like their own,” says Mr. Wilcenski.  “There’s no substitute for growing up in an environment with an individual with a disability or raising a child with a disability.  It’s just different.  We can be lawyer and advocate, brother or sister or parent, and there’s something unique about that that you just can’t reproduce.  There’s an intangible benefit that’s brought directly to bear.”

Mr. Wilcenski notes that those member attorneys who do not have familial experience with individuals with disabilities are just as active in the realms of disability and estate planning advocacy.  The SNA considers for membership those attorneys who are on the cutting-edge of the law, and who are active in community organizations that assist individuals with disabilities.

“If an individual has not lived it, they’ve sought it out,” Mr. Wilcenski says.  “There’s just no substitute for credibility in this discipline,” which is evident in the SNA’s highly elective, invitation-only model.

For families, the challenges that autism present are many.  Establishing a routine, developing a strategy to create the best life possible for a loved one living with autism, and working diligently to help the individual succeed on a daily basis and for the long term are difficult challenges.  The Special Needs Alliance understands these issues, and its attorneys are eager to assist with the legal and financial considerations that accompany such a diagnosis.  The passion and empathy of these attorneys are refreshing virtues that speak to the core values of advocacy.

Andrew H. Hook
Oast & Hook
www.oasthook.com
Offices in Virginia Beach and Portsmouth, Virginia

STRUCTURED SETTLEMENTS AND SPECIAL NEEDS TRUSTS By Thomas D. Begley, Jr., Esquire

Structured settlements have long been used in connection with special needs trusts for persons with disabilities who receive personal injury settlements. There are less often used in cases involving matrimonial settlements and in cases involving inheritances. A structured settlement is essentially an annuity that pays an injured plaintiff over time, rather than in a single lump sum. The annuity is purchased from a highly-rated insurance company. The defendant, or its insurer, agree to make future payments to the injured party or directly to a special needs trust. Payments are typically made for the life of the injured party with a guarantee of payments for a minimum term of years, usually closely correlated with the actual life expectancy of the injured party. The actual life expectancy of the injured party may differ significantly from that person’s actuarial life expectancy. If the injured person dies prematurely, the guaranteed portion of the settlement is paid to a named beneficiary. The structures offer a number of benefits to all parties. Advantages to the injured plaintiff include the following: • Taxation. The income component of the structured settlement payment is tax-free, as opposed to a lump sum payment where the income component is taxable income. • Creditor Protection. The structured settlement offer is creditor protection. The special needs trust is a self-settled trust, which in most states is exposed to the claims of creditors. However, the income stream under a structured settlement is not subject to creditor’s claims. • Protection from Plaintiff. It is more difficult for the injured plaintiff to squander a structured settlement than it is a lump sum payment. • Investment Risk. The structured settlement eliminates investment risk, because the insurance company is responsible for management of the funds and the periodic payment stream is guaranteed. Essentially, there is a fixed immediate annuity. • Rated Age. Because the actual life expectancy of the injured person is often significantly shorter than the actuarial life expectancy, the insurance company issuing the structure basis the income stream on the higher rated age. This significantly increases the monthly payments during the plaintiff’s lifetime. In determining rated age, the insurance company looks at the injured person’s medical records. Because of the medical condition, the injured person often does not have a normal life expectancy. The insurance company determines how long they expect that person to live given the medical condition and assigns an age to the injured person. The monthly payments are then based on the life expectancy of a person with that rated age. Because of the guarantee period, if the annuity is sizable, provision must be made for federal or state estate taxes. Essentially, the present value of the annuity is includable in the injured plaintiff’s estate, if he dies prematurely. Insurance companies issuing the structured settlement offer a commutation rider. The commutation rider can be for all or part of the annuity. This means that upon the death of the injured plaintiff, the insurance company will pay a discounted lump sum. The obligation of the insurance company to make future payments is, thereby, terminated. If it is anticipated that the disabled plaintiff will have a taxable estate on death, a commutation rider should be considered. There have always been two issues with respect to structured settlements and special needs trusts. One is whether the trust must be named as beneficiary of the structured settlement or whether the beneficiary can be a family member. The second issue is whether there must be a commutation of the entire structured settlement annuity on the death of the trust beneficiary. In a recent letter, the New Jersey Attorney General has answered both questions. It is the position of the Attorney General that the special needs trust must be named as the beneficiary of the structured settlement annuity, so that if the disabled beneficiary dies, the payments are made to the trust rather than to other family members. The same letter from the Deputy Attorney General to Thomas D. Begley, Jr. indicated that there must be a 100% commutation rider on the annuity, so that if the beneficiary dies there is a 100% commutation of the balance of the payments and that lump sum is paid immediately into the special needs trust. Thomas D. Begley, Jr., CELA Begley & Bookbinder, PC ATTORNEYS AT LAW COMMITTED TO EXCELLENCE Specializing in Elder & Disability Law www.begleylawyer.com (800) 533-7227

Virginia Viatical Settlements Act Upheld

The U.S. Supreme Court recently declined to rule on a case that tested whether Virginia can regulate the sale of life insurance by policyholders to investors, otherwise known as viatical settlements.  The Court’s refusal to take the case lets stand the ruling by the U.S. Court of Appeals for the Fourth Circuit that the Virginia Viatical Settlements Act is constitutional.

Viatical settlements permit life insurance policyholders to sell their policies for less than face value to third parties for an immediate cash benefit.  These third parties include investors.  The policyholders often need the funds to pay for healthcare costs for a terminal illness.  Once the policyholder (“viator’) sells the policy to the third party (“provider”), the provider assumes the responsibility for paying the premiums, and designates itself as the beneficiary of the policy.  Upon the viator’s death, the provider collects the face value of the policy, with the provider’s profit being the difference between the face value of the policy and the price paid to the viator, premiums paid to the insurance company, and administrative expenses incurred.  Providers hire independent doctors to examine the viator and the viator’s medical records prior to settlement, and monitor the viator’s health until death. 

The viatical settlements industry was an outgrowth of the AIDS crisis in the 1980s, and the market grew to include other terminal illnesses, like cancer, heart disease, and Alzheimer’s disease.  States began to regulate the industry during the early 1990s because of the power imbalance between the viator and provider, with the result that chronically or terminally ill persons may be particularly vulnerable to fraud or low prices.  The National Association of Insurance Commissioners developed the Viatical Settlements Model Act in 1993 and the Viatical Settlements Regulations in 1994, in order to guide states in regulating the viatical settlements industry.  The Virginia Viatical Settlements Act was enacted in 1997.  The core provisions of the Act ensure that providers are reliable, require full disclosures to viators, protect the privacy of viators, establish minimum prices for policies, and prohibit fraud.

The case at issue began when a terminally ill Virginia resident (“Jane Doe”) sold her life insurance policy to Life Partners Inc., a Texas corporation, at a deep discount to provide her with cash she needed for the remainder of her life.  After the transaction was completed, Jane Doe tried to improve the sale price of the policy by invoking the minimum pricing provisions of the Act.  Life Partners offered to rescind the transaction; Jane Doe refused, and filed a complaint with the Virginia Bureau of Insurance (“the Bureau”), which is the relevant agency under the Virginia State Corporation Commission (“SCC”).  After the Bureau’s inquiry, Life Partners commenced the initial action to declare the Act unconstitutional, and to enjoin its enforcement.  The Commonwealth defended the Act as serving a legitimate and important local interest in regulating viatical settlements with its residents.  The Commonwealth also argued that it acted properly pursuant to powers conferred on it by the McCarran-Ferguson Act.  This act authorizes states to enact laws relating to or for the purpose of regulating the business of insurance.  The U.S. District Court for the Eastern District of Virginia entered judgment for the Commonwealth, holding that the Act was constitutional.  The district court concluded that: (1) the Act did not discriminate against interstate commerce, (2) that the Act served a legitimate and important local purpose, and (3) that any burden on commerce was only incidental.  On appeal by Life Partners, the U.S. Court of Appeals for the Fourth Circuit affirmed the judgment of the district court (Life Partners, Inc. v. Morrison, No. 06-1370, 06-1371, April 30, 2007).

The Court of Appeals discussed the passage of the McCarran-Ferguson Act in 1945 when Congress declared “that the continued regulation and taxation by the several States of the business of insurance is in the public interest.”  The Act explicitly protects from a dormant Commerce Clause challenge (1) any state law that “relates to the regulation of the business of insurance,” or (2) any state law “enacted for the purpose of regulating the business of insurance.”  The court said that a viatical settlement fractures the two-part insurance contract between the insurer and insured, and creates a new “tripartite arrangement” among the insurer, the insured, and the insured’s assignee (the provider).  The Virginia Viatical Settlements Act addressed concerns of all three of these parties, as well as the interest of the Commonwealth in ensuring that its residents are not subjected to unscrupulous conduct by the providers.  The court determined that the matters regulated by the Act “relate to” the business of insurance as defined in McCarran-Ferguson, that the Act was enacted for “the purpose of regulating the business of insurance,” and that the Act “regulates directly and substantially the actual business of insurance.”  The court also said that the Act implements the licensing regime that Congress relied upon to confer tax benefits to viators under the Internal Revenue Code.  The court affirmed the judgment of the district court.

Andrew Hook
Oast & Hook
www.oasthook.com
Offices in Virginia Beach and Portsmouth, Virginia

Qualified Disability Trust

Begley & Bookbinder, PC

ATTORNEYS AT LAW

COMMITTED TO EXCELLENCE

Specializing in Elder & Disability Law

(800) 533-7227

Please visit us on the World Wide Web at:  www.begleylawyer.com

Qualified Disability Trust

by Thomas D. Begley, Jr.

Introduction

            A Qualified Disability Trust is a form of Special Needs Trust that allows the trust to take advantage of a personal exemption for income tax purposes.  The trust must meet the requirements set forth in the Internal Revenue Code¹ and the trust must be designed to meet the requirements of 42 U.S.C. §1396p(c)(2)(B)(iv).

            A Qualified Disability Trust must be a non-grantor trust.²  A Self-Settled Special Needs Trust is always a grantor trust.  A Qualified Disability Trust must be a third party trust.

Qualified Disability Trust Requirements

            To satisfy the requirements of the Code a Qualified Disability Trust must be an:³

                        •           irrevocable trust

                        •           established “solely for the benefit of”

                        •           an individual under age 65

                        •           who is disabled as defined in the Social Security Act 42 U.S.C. §1382c(a)(3).

            The “sole benefit” requirement is met only if no other person or entity can benefit from the transferred resources at the time of the transfer or for the remainder of that person’s life.⁴ The sole benefit of requirement cannot be met unless the trust is irrevocable. 

            The disability test is met if the beneficiary is disabled for some portion of the tax year for which the exemption is claimed.⁵ However, there must be a determination of disability by SSA.⁶

Personal Exemption

            A Qualified Disability Trust is allowed a deduction equal to the personal exemption.⁷

            A Qualified Disability Trust is defined as any trust if:

                        •           The trust is a disability trust described in 42 U.S.C. §1396p(c)(2)(B)(iv) discussed above⁸ and all of the beneficiaries of the trust as the close of the taxable year are determined by SSA to have been disabled within the meaning of 42 U.S.C. §1382c(e)(3) for some portion of such year.⁹

                                    The trust does not fail to meet the requirement that all beneficiaries must be disabled merely because the corpus of the trust may revert to a person who is not so disabled after the trust ceases to have any beneficiary who is disabled.¹⁰

Effect of a Qualified Disability Trust

            Generally, a trustee must file an income tax return for a trust that has:

                        •           any taxable income for the year;

                        •           gross income of $600 or more; or

                        •           a beneficiary who is a non-resident alien.

            A Qualified Disability Trust is granted a personal exemption by the I.R.S.  Net income retained by the trust up to the amount of the personal exemption is not taxed.  The trust pays income tax on any retained income in excess of the personal exemption amount.  The personal exemption amount is determined as follows:

                        •           If the trust is required to or actually distributes all of its income, the personal exemption is $300.

                        •           If the trust accumulates income, the personal exemption is $100.

                        •           The Qualified Disability Trust receive a personal exemption in the same amount as an individual.  For 2007, that amount is $3,400.¹¹

            The ability of the trust to use the personal exemption is significant because trust marginal income tax bracket rise steeply.  For 2007, a trust pays tax at the marginal federal rate of 35% on net income over $10,450.¹² 

            To the extent that income is distributed from the trust, it is taxable to the beneficiary at the beneficiary’s lower income tax rate.  A Qualified Disability Trust enables the trust to retain some income and have it offset by the trust personal exemption. 

            The ability to retain income in the special needs trust makes it an attractive tax advantaged savings vehicle.  If the accumulated tax-free income is distributed in the later year, it will be a tax-free principal distribution.

            Whether capital gains income is considered income for trust accounting purposes is left to the discretion of the trustee.¹³ The only restriction is that the trustee must be consistent from year to year.¹⁴

---

¹FN-I.R.C. §242(b)(2)(C).

²Instructions for Form 1041 and Schedules A, B, D, G, I, J and K (2006).

³42 U.S.C. §1396p(c)(2)(B)(iv).

⁴POMS S.I. 01150.120.B.8.

⁵I.R.C. §642(b)(C).

⁶Id.

⁷I.R.C. §642(b)(2)(C)(i).

⁸I.R.C. §642(b)(2)(C)(ii)(I).

⁹I.R.C. §642(b)(2)(C)(ii)(II).

¹⁰Id.

¹¹Rev. Proc. 2006-53 §3.18.

¹²Rev. Proc. 2006-53 §3.01 Table 5.

¹³Treas. Reg. 1.643(a)-3 (2004).

¹⁴Id.

Trust Modificiations for Beneficaries with Disabilities

There are times in which traditional estate planning does not achieve the decedent’s goals, particularly when a beneficiary has a disability.  The most common problem occurs when a decedent leaves money in trust for a beneficiary with a disability that would cause the beneficiary to lose eligibility for needs-based government benefits, such as Medicaid and Supplemental Security Income (SSI).  It may be possible to modify the terms of such a trust in order to preserve the beneficiary’s eligibility for these benefits.  A recent New York case serves as an example of a modification that results in a third-party special needs trust, with no Medicaid payback at the death of the beneficiary.

In Matter of Longhine (2007 N.Y. Slip Op. 50517(U), February 27, 2007), the Wyoming County Surrogate’s Court reviewed a testamentary trust for the benefit of the decedent’s disabled son, James.  The trust provided for the distribution of income and principal to the beneficiary, but the trust was not a supplemental needs trust (SNT).  James was receiving SSI, but not Medicaid.  James’s guardian ad litem filed a petition seeking construction of the will and reformation of the trust to create an SNT for James.  The Wyoming County Department of Social Services (DSS) filed an answer objecting to the form of the SNT, because it did not contain a clause that required Medicaid payback upon James’s death.  The court found that DSS had standing in the proceedings because of the potential that James could receive Medicaid benefits before the trust was exhausted.

The court addressed two issues.  First, may the testamentary trust be reformed to create an SNT to preserve James’s eligibility for government benefits, and second, must an SNT created by the action of court in reforming the trust contain a “payback clause.”  New York state law authorizes the Surrogate’s Court “to determine the validity, construction or effect of any provision of a will and to take such proof and make such decrees as justice shall require.”

 

Under the terms of the trust as written, the trustee was to pay the income of the trust to James quarterly, and the trustee had the authority to invade the trust principal for James’s “health, support and maintenance.”  The court acknowledged that the terms of the will were clear and unambiguous, and that the trust was a non-SNT trust, but that clear and unambiguous language was not a bar to the reformation of a testamentary trust.  The court also acknowledged that if the trust was not reformed, then James would likely lose his eligibility for SSI, and be denied eligibility should he ever apply for Medicaid.  The attorney-draftsman submitted an affidavit stating that an SNT was not considered at the time of the drafting of the will because of the decedent’s final illness.  The affidavit also stated that “had the testator considered James’s likely disqualification from the benefits being received, he clearly would have intended that the trust be an SNT.”   The court reviewed other Surrogate Court opinions and found that three courts allowed reformation of a testamentary trust and creation of a third-party SNT (one court did so in two separate cases), and one that did not.  Three of the cases the court cited involved wills executed prior to the existence of statutory authority for the creation of SNTs.  The courts in these cases allowed the testators to benefit from a planning device that did not exist at the time the will was executed, and presumed that the planning device would have been used by the testator.  In the fourth case the court found intent in the language of the will to supplement rather than to supplant government benefits being received by the beneficiary.

The court stated that reformation may be allowed upon consideration of relevant factors including: (1) The intention of the testator; (2) Lack of fraud or unjust enrichment; and (3) Non-interference with or disruption of the dispositional plan under the instrument.  The court cited the principle in the Third Restatement of the Law of Property, “A donative document, though unambiguous, may be reformed to conform the text to the donor’s intention if it is established by clear and convincing evidence (1) that a mistake of fact or law, whether in expression or inducement, affected specific terms of the document; and (2) what the donor’s intention was.”

The court acknowledged that in New York, “courts have created a presumptive intent on the part of the testator or donor to take advantage of public benefits or funds available as the primary means of providing for the care of a disabled individual.”  The court said that “this common-sense presumption is similar to the presumption that a testator will desire to reduce taxes to the greatest extent possible.”  The affidavit of the attorney-draftsman stated that the decedent was the sole caregiver for James for James’s entire adult life, James was receiving public benefits at the time of the execution of the will, and the bulk of the estate consisted of several parcels of real property.  The court said that given these facts, the potential loss of James’s government benefits, and the likely need to sell the parcels of real property to replace those benefits, the court had “no difficulty in presuming that the testator would have intended that James’ share pass by way of an SNT had he been presented with that option.”  There was no suggestion of any element of fraud or unjust enrichment, and the creation of the SNT was necessary to preserve the plan established by the will.  The court further found that no Medicaid payback clause was required because the will, as reformed, passes the property of the testator, not James, into the SNT, and the trust is therefore not a “self-settled” trust.

Andrew Hook

Oast & Hook

www.oasthook.com

Offices in Virginia Beach and Portsmouth, Virginia