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

Psychiatric Advance Directives by Thomas D. Begley, Jr.

 by Thomas D. Begley, Jr.

 

Psychiatric Advance Directives (PADs) are legal documents similar to advance directives given in connection with end-of-life decision making. However, PADs are used to give instructions with respect to preferences for future mental health care treatment. They can also be used to designate a proxy decision maker. A number of states have enacted PAD legislation.[1] In some states, such as Wisconsin, a Power of Attorney may not be used to authorize mental health treatment. 

Frequently, PADs are used to request or refuse specific treatment, such as any types of medication and other mental health interventions, use of physical and chemical restraints, release of information for treatment, participation in clinical trials of experimental treatments, hospital selection, and other directions to manage the person’s routine responsibilities.

 Advantages of Advance Directives

The advantage of a PAD is that the individual can assume control over future health care treatment decisions. They are useful in communicating preferences to family members and providers. They may also facilitate appropriate and timely treatment interventions before situations deteriorate to emergency status. Utilization of PADs may lead to a reduction in adversarial court proceedings involving involuntary psychiatric treatment. Some states do not allow agents to make decisions in regard to psychiatric care; instead, court proceedings are necessary if the treatment is not voluntary.

 Legal Capacity

There are two points in the PAD process in which legal capacity is an issue:

1,  Execution. At the time the individual drafts and signs an advance directive, the person must be competent. Most states presume that persons are competent at the time the advance directive is executed. Also, most state statutes require that the PAD be signed by two adult witnesses who attest the person’s capacity at the time the instrument is drafted.

2.  Utilization of Document. At the time the document is used for health care or psychiatric decisions, the person must be incompetent to make those decisions for him or her self. Some states require that a court make capacity determinations at the time the PAD is utilized. Other states, such as Oregon, provide that determinations may be made by either a judge or two physicians. Since one of the goals of PADs is to avoid court involvement, the Oregon approach is preferable.

 Refusal of Treatment

There is a controversial issue concerning the use of PADs to refuse all treatment. Most state laws provide that an individual may use a PAD to consent or refuse psychiatric treatment.

Override

Under what circumstances can a PAD be overridden? There have been no court decisions yet on when a PAD may be overridden, but it is likely that a PAD authorizing treatment refusal would be overridden if the individual was determined to be dangerous to him or her self or others.

 Revocation

So long as an individual is competent, he or she clearly reserves the right to revoke a PAD.  If the individual is actively symptomatic and in need of treatment, the issue becomes murky.  A court hearing may be required in individual cases.

The National Alliance for the Mentally Ill (NAMI) suggests that an “Ulysses clause” be considered. Under a Ulysses clause, an Advance Directive instructs treatment providers about specific treatment preferences, and explains that any statements made refusing treatment during periods of incapacity should be ignored.[2]

 Interest in Advance Directives

A recent study of mental health consumers in public health treatment settings (in five states) showed that only 4% to 13% have completed a PAD. However, between 66% and 77% of those consumers say that although they currently do not have a PAD, they would want to complete one if they had the necessary assistance.[3] The study showed that there were likely to be more interest in PADs when the following factors were present:

 •  Past adverse experiences with treatment pressures

 •  Social disempowerment

 •  Degree of insight into their illness and need for treatment

 •  Existence of social resources, including marriage

 Registration

New Jersey is in the process of establishing a registry where PADs can be registered. Vermont and Washington State have established registrations for all advance directives through the US Living Will Registry.[4]

 

 

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

 

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[1] Alaska, Hawaii, Idaho, Illinois, Maine, Minnesota, New Jersey, North Carolina, Oklahoma, Oregon, South Dakota, Texas and Utah.

[2] Advance Directives by Ronald S. Honberg, www.nami.org.

[3] Psychiatric Advance Directives Among Public Mental Health Consumers in Five

U.S.

Cities: Prevalence, Demand, and Correlates.

[4] www.USLivingWillRegistry.com

Designing a Structured Settlement by Thomas D. Begley, Jr.

In designing a structured settlement, there are a number of features that warrant careful consideration.

•  COLA. In designing a structured settlement, consideration should be given to providing a cost of living adjustment (COLA) to provide for future cost of living increases. Historically, inflation has run an average of 3% per year. Financial advisors use something called “the rule of 72's.” To determine how long it will take money to double, divide the rate of return into the number 72. For example, if a person receives a 6% rate of return on an investment, it will take 12 years to double the money. The converse would seem to apply to the structured settlement. It is anticipated that there will be a 3% inflation rate over time. Divide 3 into 72 and it will take 24 years for the monthly payments to lose half of their purchasing power. Therefore, a 3% cost of living increase should be built in to a structured settlement in order to preserve purchasing power. This will reduce the initial payments, but will give the injured party constant purchasing power over the life of the contract.

•  POPs. A structure can also be designed to provide lump-sum payments at appropriate intervals, such as at age 18 when monies may be needed for college education, if appropriate. Anticipated future needs can be met in this manner. A POP is a lump-sum distribution in an amount certain at a previously agreed upon time.

•  Lifetime Payments or Fixed Term. In many situations, the injured plaintiff has a permanent disability and will not be able to work. In those situations, it is important to obtain a structured settlement that will pay the injured person or the special needs trust for the life of the disabled person. Since tomorrow is never guaranteed, it is usually wise to obtain a guarantee period where payments will continue even after the death of the injured person. Plaintiff names a beneficiary on the contract to receive the guaranteed payments. The addition of the guarantee period will reduce the amount of the periodic payment, but elimination of the risk is usually seen as worth the price when discussing the structure with the client.

•  Deferred Payment. In cases involving a minor, the payments from the structured settlement may not be required until at time in the future such as age 18. During the meantime, the parents often provide what support the minor child will need. By deferring payment for a period of time, the funds in the structured settlement annuity can build up and the periodic payments starting at the agreed upon time will be significantly higher. The longer the payments are deferred, the larger the periodic payments will be.

• The Beneficiary. Who should be the beneficiary of the structured settlement on death of the beneficiary of the trust? If the beneficiary of the structure is the trust, the balance of the payments will be used to repay Medicaid. There appears to be no restriction in federal law on naming a family member as contingent beneficiary of the guaranteed portion or a structure upon the death of the primary beneficiary of a structure, however, state law must be consulted. The Supreme Court of New York held that there is no authority to consider any guaranteed payment remaining after the death of the trust beneficiary from the trust assets subject to the State's remainder interest.[1] This would have the effect of avoiding a payback to Medicaid since the structure would then be paid to the family member and not to the trust. Only assets remaining in the trust would be required to be paid to Medicaid. The guaranteed portion of the future payment would be includable in the estate of the deceased beneficiary. Consideration should be given to purchasing a commutation rider form the insurance company to provide for funds to pay the federal estate tax.

Thomas D. Begley, Jr., CELA

Begley & Bookbinder, PC

ATTORNEYS AT LAW

COMMITTED TO EXCELLENCE

 

Specializing in Elder & Disability Law

wwww.begleylawyer.com

(800) 533-7227

 

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[1] IMO Eddie Sanango, Supreme Court of New York, County of Kings, Index No. 41383/94 (Oct. 22, 2002).

What is a "Qualified Disability Trust?"

The “Victims of Terrorism Tax Relief Act of 2001” created a new tax entity: the Qualified Disability Trust. What are these trusts, and what benefits do they offer?

Revisions to section 642 of the Internal Revenue Code spell out what is required. In order to receive the special tax treatment, a trust must have been created for the sole benefit of an individual with a disability as defined by the Commissioner of Social Security. So what does the special treatment get you? A qualified disability trust can claim a personal exemption in the same amount as an individual ($3400 for tax year 2007) rather than the measly $300 permitted for other trusts.

As is so often the case with tax law, however, the code gives no hint about the real advantages or disadvantages. That’s why we’re here.

First, in order to understand the effect of qualified disability trust status one must consider general rules of trust taxation. Trusts pay taxes at the same rates as individuals – except that the graduated tax rates are very sharply compressed. In 2007, for example, a trust with $30,000 of taxable income would pay $9,543.50. An individual with the same $30,000 of taxable income would pay $4,774. In other words, the trust will incur a tax penalty of $4,769.50 just by being a trust.

The Victims of Terrorism Tax Relief Act reduces the disparity, but not by much. If our imaginary trust could meet the definition to be treated as a Qualified Disability Trust, its income tax bill would be reduced by $1,085 – but it would still pay $3,684.50 more than an individual taxpayer.

What difference does it make that trusts and individuals are taxed differently? A healthy percentage of trusts for individuals with disabilities are set up with their own money, either from personal injury lawsuits, or inheritances, or accumulated wealth. Those trusts, even though irrevocable, are inevitably taxed as “grantor” trusts, which means that the individuals claim all the income and deductions. Because of that status there is no benefit from the purported tax relief – and if there were, it would be far less than the increase in tax liability from treatment as a trust for the vast majority of them anyway.

If, however, a trust is established and funded by, say, a parent or grandparent, and the funds never belonged to the person with a disability, there may be some value to the Qualified Disability Trust treatment – though it is almost certain to be a very slight benefit. Assuming the trust is being used to pay for items benefiting the person with a disability, those payments are essentially a deduction from the trust’s taxable income. That means that unless the trust is accumulating income it will likely see no benefit from the additional deduction.

The same may not be true for the beneficiary, however. Even though the trust may pay not income tax because of its distributions for the benefit of its beneficiary, that beneficiary will have a tax liability to report. If the beneficiary is paying some tax, the extra deduction for the trust may have the effect of reducing the reportable income on which the beneficiary is taxed – and that might reduce the tax itself by between $510 and $1225. Not exactly a windfall, but better than the proverbial poke in the eye.

So who, exactly, will benefit from this provision of the Victims of Terrorism Tax Relief Act? Not, particularly, victims of terrorism. In order to benefit the following things must be true:

1. The trust cannot be a “grantor” trust – it must hold money that was a gift from someone other than the beneficiary’s estate or a lawsuit on his or her behalf.
2. The trust must have income sufficient to make the beneficiary pay some income tax – that is, its income must exceed its expenses plus the beneficiary’s deductions (including the standard deduction and personal exemptions – about $8500 for a single person with no dependents in 2007).

That all assumes, incidentally, that the law is read broadly. Under one interpretation, the only way any trust would get the modest tax benefit would be if it included a provision directing that the state should be repaid for its Medicaid expenditures on the death of the trust’s beneficiary – a provision that should not be considered, much less included, in any trust not funded with the beneficiary’s own money.

What is the practical result? In our experience, almost no trusts can meet the requirements for treatment as a Qualified Disability Trust, and any benefits are so modest as to hardly make it worth trying. Apparently no one in Washington wanted to find out what might actually amount to tax relief for trust beneficiaries with disabilities.

Robert B. Fleming
Fleming & Curti, PLC
Tucson, Arizona
www.elder-law.com

Children with Disabilities and Social Security

A recent Wall Street Journal article addressed the issue of Social Security benefits for children with disabilities.  These children may be eligible for Supplemental Security Income (SSI), or they may be eligible Social Security Disability Income (SSDI) based on a parent’s work record.

For SSI, a child under the age of 18 years may be eligible if the child has impairments that meet Social Security’s definition of disability for children, but the family’s income may preclude the child from receiving this benefit.  Once the child turns age 18, the family income is no longer a factor, because the benefit is based on the child’s own income and resources.  The child must meet Social Security’s adult disability definition, meaning that the child must be unable to do “substantial work,” or must be unable to earn more than $940 per month. 

A child with a disability may also be eligible for SSDI based on a parent’s work record.  The parent must be receiving retirement or disability benefits or have died in order for the child to receive this benefit.  The child has to meet the Social Security definition of disability for adults, and the disability must have begun prior to the child becoming age 22.  Generally, the child would receive one-half of the worker’s retirement or disability benefit amount.  The actual amount depends on three factors: the worker’s earnings record, the time of the worker’s retirement benefit claim, and the number of dependents.  For example, if the parent starts to collect Social Security retirement benefits prior to the parent’s full retirement age, then the monthly benefit amount is permanently reduced.

If the family includes more than one dependent (for example, spouse and two children with disabilities), then the benefits paid to all dependents would be combined into a “family benefit amount.”  The family could get as much as 180% of the worker’s benefits, but the exact amount is calculated by a complex formula.  Although the worker’s benefit would not be reduced, the dependents’ benefits could be reduced proportionately if the total family amount exceeds the limit.  The maximum benefit amount does not apply when each spouse is collecting benefits based on his or her own work record.  Families should consult with their local Social Security office for information specific to their situation.  There are also several publications on the Social Security website (www.ssa.gov) that may be helpful, including “Benefits for Children” (Publication No. 05-10085), “Benefits for Children With Disabilities” (Publication No. 05-10026), “Supplemental Security Income” (Publication No. 05-11000), and “Disability Benefits” (Publication NO. 05-10029).

Andrew Hook
Oast & Hook
www.oasthook.com

CODE REQUIREMENTS FOR 468b TRUSTS by Thomas D. Begley, Jr.

 

 

The Internal Revenue Code and Treasury Regulations are very detailed with respect to 468b Trusts. A 468b Trust must meet all of the following requirements:[1]

 

 1.  Code Requirements

 

 •  Court Order. Established by a court order that extinguishes completely the taxpayer’s liability.[2]

 

 •  Qualified Payments. No amounts may be transferred other than in the form of qualified payments.[3]

 

 •  Independent Administrator. The QSF must be administered by persons, a majority of whom are independent of the taxpayer.[4]

 

 •  Personal Injury Death or Property Damage Claims. Is established for the principal purpose of resolving and satisfying present and future claims against the taxpayer (or any related person or formerly related person) arising out of personal injury, death, or property damage.[5]

 

 •  No Beneficial Interest. The taxpayer may not hold any beneficial interest in the income or corpus of the fund.[6]

 

 •  Election. An election must be made by the taxpayer.[7]

 

 2.  Treasury Regulations

 

 •  Governmental Authority. The trust must be established by an order of, or be approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law), of any of the foregoing and is subject to continuing jurisdiction of that governmental authority.[8]

 

 •  Types of Claims. The trust is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability–

 

 ◦  under the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA); or

 

 ◦  arising out of a tort, breach of contract, or violation of law; or

 

 ◦  designated by the commissioner in a revenue ruling or a revenue procedure; and the trust is valid under state law.[9]

 

 

 

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

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[1] Id. §468B(d)(2).

[2] Id. §468B(d)(2)(A).

[3] Id. §468B(d)(2)(B).

[4] Id. §468B(d)(2)(C).

[5] Id. §468B(d)(2)(D).

[6] Id. §468B(d)(2)(E).

[7] Id. §468B(d)(2)(F).

[8] Id. 1.468B-1(c)(i).

[9] Id. 1.468B-1(c)(iii).

468 b TRUSTS by Thomas D. Begley, Jr.

 

 

Section 468(b) of the Internal Revenue Code[1][1] authorizes the establishment of Designated Settlement Funds or Qualified Settlement Funds. These funds are usually collectively referred to as Qualified Settlement Funds (QSFs). The purpose of these funds is to permit a defendant in certain types of litigation to deposit funds into a trust and to receive a full and complete release of liability. The defendant is entitled to a current income tax deduction for the amount paid into the fund at the time the funds are deposited into the trust. This is an exception to the general rule under which the tax deduction is not permitted until the funds are actually disbursed to the plaintiff, which is normally the time in which the plaintiff has received the “economic benefit” of the settlement.

 

These QSFs arose out of class action lawsuits. They can be very useful in personal injury actions and other types of cases where there are multiple plaintiffs. Many of these cases also have multiple defendants. The QSF is usually established prior to trial. The parties agree on a maximum amount for a settlement. The defendant pays that amount into the QSF and the parties can then take their time in allocating the settlement among themselves and in dealing with various liens, such as Medicaid, Medicare, and third party subrogation. The QSF could also be established after a jury award, as long as there is an appeal pending.

 

Advantages of 468(b) trusts include the following:

 

•  Defendant Removed from Litigation. Defendants want to be out of the case. By utilizing a QSF a defendant can pay and go. The defendant pays the funds into the QSF and the parties later allocate the settlement between themselves, determine how much should be lump sum and how much to structure, determine whether a special needs trust is required, and wait while a guardian is appointed for an incompetent plaintiff, if required.

 

•  Defendant Removed from Allocation of Settlement. Where 468(b) trusts are used, the defendant leaves to the plaintiff the issue of allocating the settlement among injured parties.

 

•  Plaintiff’s Attorney’s Fees and Costs. When a 468(b) trust is used, the plaintiff’s counsel can be paid fees immediately from the QSF and litigation expenses can also be paid.

 

•  Income to Plaintiff. The plaintiff will immediately begin to receive income from the settlement held by the 468(b) trust. Without the trust, the defendant would be holding the money and the plaintiff would not be receiving the benefit of the income.

 

•  Deduction to Defendant. Defendants and their insurers are able to obtain immediate tax deductions, rather than waiting for “economic performance” to occur.

 

•  Negotiations. Time is no longer a factor in negotiations with Medicare, Medicaid, and third party insurers. Addition time is available to negotiate and satisfy those liens.

 

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

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Biological father entitled to half of assets in daughter's SNT by Thomas D. Begley, Jr., Esquire

Jennifer Rogiers was born on September 30, 1983, severely handicapped as a result of a cervical cord injury doctors inflicted upon her at birth. Her mother, Rosa Rogiers, filed a malpractice claim and recovered $2.6 million, which was placed in a special needs trust for Jennifer’s benefit. On September 2, 2005, Jennifer died intestate and without children. The Superior Court of New Jersey, Appellate Division,[1] made a careful analysis of the law and determined that Jennifer’s biological father was entitled to a share of the assets remaining in the trust, even if he did not support his daughter during her lifetime. The court also held that the custodial parent, Jennifer’s mother, Rosa, was not entitled to back child support.

While Jennifer was in Rosa’s custody, Rosa received funds from the trust to attend to Jennifer’s needs. After Jennifer died, her father, Ruben Martinez, sought half of the balance remaining in the trust as his intestate share under New Jersey intestacy laws. Rosa challenged his entitlement and claimed that she was entitled to retroactive child support, though she made no claim for child support while Jennifer was alive. On appeal, Rosa asserted that Martinez did not contribute to Jennifer’s support during her lifetime and does not qualify as a parent under the New Jersey intestacy laws and, as a result, he is not entitled to any portion of Jennifer’s estate. The court pointed out that order establishing the special needs trust provided that any portion of the principal and undistributed income of the trust that Jennifer shall not have validly appointed by her Last Will and Testament shall be paid over and distributed to the persons who would be entitled to receive the property under the laws of the State of New Jersey then in force and in the proportions prescribed by such laws as if the primary beneficiary had died intestate and a resident of the State of New Jersey. Martinez claimed he was entitled to one-half of Jennifer’s intestate estate and that the probate code does not require a parent to fulfill any affirmative obligation of support or care to inherit from the child. The intestate estate of a decedent not survived by a spouse or a domestic partner, or by any descendants, passes to the surviving parents in equal shares. N.J.S.A. 3B:1-2 defines “parent” as “any person entitled to take or who would be entitled to take if the child, natural or adopted, died without a will by intestate succession from the child whose relationship in question and excludes any person who is a stepparent, resource family parent, or grandparent.” The New Jersey Parentage Act,[2] defines the parent/child relationship as “the legal relationship existing between a child and a child’s natural or adoptive parents, incident to which the law confers or imposes rights, privileges, duties, and obligations. It includes the mother and child relationship and the father and child relationship.

Previously, no appellate court in the State of New Jersey addressed the issue as to whether a parent’s right to take from a child’s estate is conditioned on the parent having supported the child during her lifetime. A 1985 trial court opinion[3] concluded that it is not necessary that a parent support a child to inherit from the child under the intestacy laws. The trial judge, Judge Connor, found that while the mother’s arguments that the father had waived his right to any portion of the estate because he abandoned the child was compelling, the plain language of the statute does not prohibit the abandoning parent from taking under the intestate laws.

With respect to the issue of retroactive child support, the court held that Rosa was able to care for Jennifer’s needs with trust funds and that there was no further need to financially aid the child.

Unfortunately, this is a significant case because in many situations where a child has severe disabilities, one parent, often the father, abandons the child. In some cases, the identity of the father is not even known. In New Jersey, it is not possible to draft a special needs trust with testamentary provisions for a minor or an incapacitated adult beneficiary. In situations where there is a minor, the trust document can provide the beneficiary with right to exercise a testamentary power of appointment. Upon the minor’s attaining majority, this can be done and that would be a solution to the problem. If the minor dies prior to obtaining majority or without exercising the power of appointment, or if there is an incompetent beneficiary, an unwanted and unfair result is often achieved. In some cases, adoption may be a solution. The legislature should be encouraged to revisit the probate code to provide that an abandoning parent should not be entitled to inherit through intestacy.

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[1] In the Matter of Jennifer Rogiers, Deceased, 396 N.J.Super. 317, 933 A.2d 971 (Oct. 23, 2007).

[2] N.J.S.A. 9:17-39

[3] In re Estate of Rozet, 207 N.J.Super. 321 (Law Div. 1985).

Thomas D. Begley, Jr., Esquire

Begley & Bookbnder, P.C.

www.begleylawyer.cm

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

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

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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