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DISTRIBUTIONS FROM SELF-SETTLED SPECIAL NEEDS TRUST RELATING TO MEDICAL EXPENSES by Thomas D. Begley, Jr., Esquire

_________________________________________________________________________________

 

 

            One of the most pressing needs for disabled beneficiaries is medical care.

 

Medical Insurance

 

            It is crucial that the disabled beneficiary obtain some form of medical insurance.[1] Options include the following:

 

•           Private Medical Insurance. Typically, the only source of private medical insurance at regular rates is through the parent's coverage with the parent's employer. Parents of such child must make every effort not to lose their jobs.

 

•           COBRA. The Consolidated Omnibus Budget Reconciliation Act of 1996 (COBRA) allows former employees and their dependents to continue the employer's coverage for a limited period of time, commonly 18 months. However, if the employee became disabled within two months of the qualifying event causing him to lose medical insurance coverage, COBRA coverage may be extended for 29 months. If the former employee died, divorced, or became entitled to Medicare, then the employee's dependents are eligible for 36 months of coverage.

 

•           State-Mandated High-Risk Pools. Many states have high-risk pools to cover persons who are uninsurable in the private market. This coverage often tends to be very expensive.

 

•           Medicare. Medicare is only available to persons under 65 if they are disabled and have 20 quarters of coverage. If they receive SSD, then two years after the determination of disability they are entitled to Medicare. Persons receiving Medicare should obtain a Medicare supplement policy. There is usually a very limited open enrollment period to obtain this coverage after which it becomes impossible to obtain because of pre-existing conditions.

 

•           Medicaid. Persons receiving SSI also receive Medicaid. In non-SSI states having a Medically Needy program, persons qualify for Medicaid by spending down their income if income is above a certain amount. Some states have income caps. Other ways of obtaining Medicaid are through state Medicaid waiver programs, including various Kid Care programs available in many states. Eligibility rules vary. A Katie Beckett waiver program is very desirable, because the income and assets of the parent are not deemed to the children. Some states do not call their programs Katie Beckett, which is a specific categorically eligible group of Medicaid recipients, but the effect is the same because those state identify groups of children with disabilities and provide for Medicaid eligibility so the waiver services are available. Slots tend to be extremely limited.

 

Non-Covered Medical Expenses

 

            Typically, Medicaid pays for 100 percent of covered expenses. However, very often, psychological services, certain types of testing and some special therapies are not covered. It is appropriate for a trustee to pay for these non-covered services. It is also appropriate for a trustee to pay for dental care, prescriptions, and podiatrist care.

 

Provider Non-Acceptance

 

            Some providers do not accept Medicaid, because of the low reimbursement rate. It is difficult to find a dentist participating in the program. Some persons with disabilities choose physicians who do not accept Medicaid. It is appropriate for a special needs trust to pay for services from those physicians.

 

Out-of-Pocket

 

            If the person with a disability receives Medicare, rather than Medicaid, there may be copayments, deductibles and payments for services that Medicare does not cover. It is appropriate to pay for those costs from a special needs trust.

 

 

 

 

Thomas D. Begley, Jr., CELA

Begley, 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] Roger M. Bernstein, Health Insurance and COBRA Issues Collateral to SNT's and Settlements,

Stetson

University

College

of Law, Special Needs Trusts IV (Oct. 18, 2002).

WHEN IS A SELF-SETTLED SPECIAL NEEDS TRUST INAPPROPRIATE? by Thomas D. Begley, Jr., Esquire

Self-Settled Special Needs Trusts are often use when a person with disabilities receives a personal injury settlement, an inheritance, equitable distribution, alimony or child support.  However, in many instances a Self-Settled Special Needs Trust is not appropriate.  A disability lawyer must make an analysis on the onset to make this determination. 

Some of the reasons that the trust may be inappropriate are:

•           The beneficiary does not qualify. For example, the beneficiary may not be disabled or may be over age 64.

•           The beneficiary may not be receiving means-tested public benefits, such as SSI and Medicaid, and may never require such benefits in the future. Also, the amount may be so large that benefits may not be necessary.  In those situations a determination should be made whether a special needs trust is appropriate for other reasons. Perhaps a support trust would be adequate.

•           The amount of the net settlement may be too small. For net amounts under $100,000 it is usually better to seek an alternative to a standalone Self-Settled Special Needs Trust, because of the expense associated with establishing and maintaining the trust. If the net settlement is between $100,000 and $200,000, then a trust may or may not be appropriate. If an individual trustee is available then the trust cost may not be prohibitive. A pooled or community trust may be a good option.

•           It is difficult to find a professional trustee if the amount of liquid assets to be placed in the trust is less than $500,000 - $1,000,000. If a substantial percentage of the settlement is in the form of a structured settlement annuity, there will be insufficient liquid assets to interest a financial institution in serving as trustee.

 A Quick Screen should be developed to screen those cases where a Self-Settled Special Needs Trust is not appropriate.

 

Thomas D. Begley, Jr., CELA

Begley, Begley & Bookbinder, PC

ATTORNEYS AT LAW

 

COMMITTED TO EXCELLENCE

Specializing in Elder & Disability Law

    

www.begleylawyer.com

 

(800) 533-7227

 

Amended Special Needs Trust Still Exempt

The Kansas Court of Appeals recently considered the case of a special needs trust (SNT) that was later amended to comply with a change in Kansas law.  The Court held that the state Medicaid agency erred in counting the SNT as a resource.

The settlors established an SNT for their son with disabilities.  The trust was fully discretionary, and the trustee had complete discretion regarding distributions of income and principal from the trust for the beneficiary’s benefit.  The settlors’ intent that the trust supplement other benefits was clearly expressed in the trust document, “It is the express purpose of Settlors that the Trust Estate herein provided for Charles L. White be used only to supplement other benefits received by said Charles L. White.”

The mother died in 1998, the father died in 2005, and it appears that the trust was funded in December 2005 from the father’s estate.  The successor trustee (the settlors’ daughter) obtained a modification in the local district court.  The modification was made to comply with a 2004 statute requiring trust documents to make specific reference to Medicaid, medical assistance, or Title XIX of the Social Security Act, in order for the trust to be exempt for Medicaid eligibility purposes.

In 2006, the beneficiary was receiving food stamps and Home Community Based Service.  A worker in the local Social & Rehabilitation Services (SRS) office reviewed the benefits and discovered the trust.  She contacted the Kansas Health Policy Authority (KHPA) to determine whether the trust impacted the beneficiary’s eligibility for benefits.  The KHPA determined that the trust was an available resource because “the amendment to the trust was not sufficient to meet the requirement of the trust to contain specific contemporaneous language.”  The local SRS then counted the trust resources and determined that the beneficiary was ineligible for benefits.

The settlors’ daughter, who was also the guardian and conservator for her brother, the trust beneficiary, filed a demand for a fair hearing with SRS regarding the termination of benefits.  The hearing officer agreed with the guardian’s argument that the trust “had been properly modified to include the necessary language referring to Medicaid benefits.”  The hearing officer reversed the SRS ineligibility determination, and SRS filed a request for review with the KHPA State Appeals Committee.  The Appeals Committee agreed with SRS that the trust failed to comply with the statutory requirements because the new language in the trust was not contemporaneous with the creation of the trust.  The Appeals Committee reversed the hearing officer’s order and determined that the beneficiary was ineligible for benefits.  The guardian filed a petition for judicial review in the district court.

The district court adopted the hearing officer’s findings, and concluded that the trust had been properly modified, and that the modification satisfied the 2004 statutory amendment.  The court also concluded that “the legislature either did not intend to apply the statute retroactively or else intended to allow existing trust instruments to be modified to conform to the statute.”  The court alternatively concluded that “because the trust was not funded until December 2005, the trust modification qualified as “specific contemporaneous language” as required by the statute.”  The district court reversed the Appeals Committee’s final order and determined that the beneficiary was eligible for benefits.  KHPA appealed to the Kansas Court of Appeals.

The Court of Appeals reviewed the language of the statute at issue: “Any such discretionary trust shall be considered an available resource unless: . . . (2) the trust contains specific contemporaneous language that states an intent that the trust be supplemental to public assistance and the trust makes specific reference to Medicaid, medical assistance or title XIX of the social security act.” (Emphasis added by the Court of Appeals).  The court determined that under a plain reading of the statute, the word “contemporaneous” only modifies “language that states an intent that the trust be supplemental to public assistance” and not “specific reference to Medicaid, medical assistance, or title XIX of the social security act.”  The court said that KHPA’s interpretation of the statute would mean that no trust created prior to the legislative change in 2004 could ever be modified to comply with the change in the law.  The court cited the Kansas Uniform Trust Code pertaining to trust modifications: “(a) The court may modify the administrative or dispositive terms of a trust or terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust.  To the extent practicable, the modification must be made in accordance with the settlor’s probable intention.”  (Editor’s note; this language is identical to the language in Virginia Code § 55-544-12 (A)).  The court found that the settlors clearly intended that the trust be a supplemental needs trust, and that the change in the statute was a circumstance not anticipated by the settlors.  The trust was then modified to conform to the new law.  The court determined that the legislature could have included language in the statute to make it clear that it applied retroactively to trusts created prior to 2004, and that such earlier trusts could not be modified to comply with the change in the law, but the legislature did not do so.  The court concluded that the district court properly applied the plain language of the statute, and the trust did not disqualify the beneficiary from receiving benefits.  The court also noted that the legislature enacted a Senate Bill in 2008 that eliminated the specific language requirements of the statute at issue in this case, although the court did not need to use this change to resolve this case.

Andrew Hook
Oast & Hook
www.oasthook.com

Pooled Trusts

What is a Pooled Trust?

A pooled trust is a trust established and administered by a non-profit organization.  A separate account is established for each beneficiary of the trust, but for the purposes of investment and management of funds, the trust pools these accounts.  For self-settled, or (d)(4)(C) pooled trusts, each subaccount is established by the person with a disability, a parent, grandparent, guardian, or a court, and the trust is funded with the assets of the person with a disability.  The trust provides that, upon the death of the disabled beneficiary, if there are funds remaining in the beneficiary’s subaccount, the trust must pay to the state an amount up to the total amount of Medicaid assistance provided to the beneficiary, to the extent that the funds are not retained by the trust.  The pooled trust should be irrevocable to avoid being treated as a resource.

Third party pooled trust subaccounts can also be established by family members who want to leave inheritances for persons with disabilities.  Because these accounts are not funded with the assets of the person with a disability, they do not include a Medicaid payback provision.  The remainder of this article will discuss the self-settled (d)(4)(C) pooled trust.

When is a (d)(4)(C) Pooled Trust used?

Elder law attorneys often assist persons with disabilities who receive public benefits, including Supplemental Security Income (SSI) and Medicaid, and then receive a modest inheritance, divorce settlement, or personal injury settlement or award.  The receipt of these funds may make this disabled person ineligible for public benefits.  The disabled person could purchase exempt resources, and then reapply for benefits; however, in many cases, there are no appropriate exempt resources for the disabled person to purchase.  This person would then be ineligible for public benefits until these funds are spent down.  The disabled person could give the funds away, however, the gifts would result in a period of ineligibility for SSI and Medicaid long-term care benefits.  If under 65 years of age, the disabled person could transfer the funds to a d(4)(A) Special Needs Trust (SNT); however, it is frequently difficult to find an appropriate trustee for this type of trust, and the administrative expenses may be high for a trust funded with $100,000 or less.  A fourth alternative is to transfer the funds to a d(4)(C) (“Pooled Trust”) subaccount.

What are the advantages of a (d)(4)(C) Pooled Trust subaccount compared to a d(4)(A) SNT?

The person with a disability under age 65 may create his or her own pooled trust subaccount. Because the pooled trust is managed by a non-profit organization, it is not necessary to find a trustee who is willing to manage the trust.  Additionally, because the trust funds are pooled for investment and management purposes, the administrative expenses of these trusts are frequently lower than those of a d(4)(A) SNT.

What are the disadvantages of a (d)(4)(C) Pooled Trust compared to a d(4)(A) SNT?

The d(4)(A) SNT is a trust managed by a trustee for the sole benefit of the disabled beneficiary. A family member or friend of the disabled person may serve as the trustee, or a corporate or professional trustee might serve.  The d(4)(A) SNT permits the trustee to customize the management and investment of the trust to meet the unique needs of the beneficiary.

Andrew H. Hook
Oast & Hook
www.oasthook.com

Choosing Colleges for Students with Learning Disabilities

A recent Wall Street Journal article described the challenges and opportunities facing students with learning disabilities.  According to George Jesien of the Association of University Centers on Disabilities, only recently have colleges and universities made much progress in providing level playing fields for qualified students with attention-deficit hyperactivity disorder and other learning disabilities.

Colleges exhibit a wide range of attitudes and programs for students with special needs.  One parent described her first-hand view of these differences when she toured campuses.  Her son needs accommodations for a learning disability; some campuses described fine-tuned supports in place for her son.  Other campuses said they didn’t have much of a need for such accommodations; that response raised red flags to the parent.

Parents normally are more used to the standardized approach that the law requires in public schools.  The public schools must provide instruction tailored to fulfill the student’s right to public education.  Colleges, on the other hand, are required to make only “reasonable accommodations” for qualified students with disabilities.  These accommodations are categorized by various terms, and they are not universal among colleges.  The lowest level of support is “basic” support; they can also be called decentralized, limited, or self-directed programs.  They provide the accommodations required by law, such as note-taking help or untimed testing.  The “basic” level can also mean that the schools are doing nothing; this is one reason that retention rates among students with learning disabilities are lower than overall retention rates by as much as 10%.

“Coordinated services” go beyond the required minimums.  They have at least one trained staffer, offer tutors, study-skills classes and other services.  They also may have input on admission decisions.  “Structured” or “proactive” programs provide the highest level of support; they charge fees from $2,000 to $8,000 per year and some require a contract.  Trained staffers monitor progress, and they may offer modified coursework.  Fewer that 100 schools are in this category.

Students should visit colleges in which they are interested, interview staff at the disabilities office about the services available, and see if they feel comfortable in working with the people on staff.  Campus officials say that if a student reveals that the student has a disability, it is not likely at most colleges that the student jeopardizes the chance of admission.  Students may first want to make their initial list of colleges based on general factors, then narrow the list based on the disability supports available.  Students should also be as concerned about their chances for graduation as much as their chances for admission.  They should make sure that the graduation requirements can be met, and that course substitutions or remedial classes are available.

Andrew H. Hook
Oast & Hook
www.oasthook.com

COMMUTATION OF A STRUCTURED SETTLEMENT By Thomas D. Begley, Jr.

                Unfortunately, claimants receiving the periodic payments under a structured settlement often face unforeseen events, such as unexpected medical bills, housing needs, school tuition, etc.  One solution would be to have the plaintiff commute the structured settlement.  A structured settlement can be commuted in whole or in part.  When the structure is commuted, the payee receives a discounted lump sum.  Typically, the payee receives the currently discounted value of the remaining periodic payments, commonly known as the present value.  The obligation of the insurance company to make future payments is thereby terminated. 

                                •              Commutation and I.R.C. §130.  There may be an issue as to whether a non-automatic commutation of a structured settlement violates the “no acceleration” provisions of §130.  If the transaction is viewed from the perspective of the qualified assignee, the assignee is the legal owner of the annuity and has the right and power to change its terms.  From that perspective, a non-automatic commutation is arguably an acceleration.[1]

                                •              Automatic Commutation Provisions.  Many structured settlements are written with a commutation rider that provides that the contract may be commuted at the payee’s option upon certain events outside the payee’s control and outside the control of the annuity issuer.  For example, a structured settlement may permit a partial commutation of the contract upon the death of the injured person so that monies are available to pay death taxes, or the structure may provide that the contract can be commuted in its entirety and that the remaining payments be made in a lump sum to named beneficiaries.  It is not likely that the I.R.S. would view these types of commutations as violating the provisions of I.R.C. §130 prohibiting acceleration of payments.

                                                If the payee of a structured settlement dies before the end of the guarantee period, the present value of the unpaid payments as of the date of death are includable in the estate of the decedent.[2] The gross estate includes the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement if, under such contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive such annuity or payment, either alone or in conjunction with another for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death.[3] In cases involving large structured settlements, estate taxes must be considered unless the annuity is payable to a trust having sufficient cash to pay the anticipated tax, a commutation rider should be considered at the time the structure is established.

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] I.R.C. §2033.

[2] Structured Settlements: Factor vs. Commute?, Robert W. Wood, Tax Notes, Dec. 25, 2006.

[3] I.R.C. §2039(a).

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