Private Social Service Safety Net, Finding the Immortal Trustee for the Special Needs Mentally Disabled Person

Private Social Service Safety Net. In our last blog, we discussed how the need for care for those loved ones with physical or mental disabilities is increasing while the federal and state programs for them are being cut or unable to keep up with growing demand and expenses. No one wants a loved one to be forced to live in an unsanitary and abusive institution. There remain many excellent governmental programs that are only available to those who do not have money. You can’t buy your way into many of the better programs. Instead, parents and planners for those with special needs should realize they will have to set up their own social service safety net for their loved ones. The first step is to recognize these dynamics and to establish a plan to take care of the disabled person using government benefits where available as a floor and their inheritance as a way to elevate their children’s quality of life.

A Special Needs Trust That Works. This type of special needs trust will be crafted to provide the specific treatment and the economic security for the special needs child or loved one. The focus is not on qualifying for government welfare benefits, but on designing a plan which will provide a safe and secure future for the special needs person. Where possible, there may be an attempt to qualify for governmental benefits, but whether governmental benefits are there or not, the special needs trust will provide for the disabled loved one.

People, Not Documents Are the Answer. Stephen Dale is a national expert on designing and drafting special needs trusts. Before becoming a lawyer, Dale had seventeen years of hands on experience as a psychiatric nurse taking care of persons with mental disabilities. He drafted the special needs language used by Wealth Counsel, the largest national organization of estate planners in the country with thousands of members and representation in every state. You should have the best documents. But, even though Dale is the guru of special needs trust documents, Dale’s experience is that even with the best documents, the documents will not come to life, jump off the table and protect your disabled child from abuse, neglect and lack of adequate care. In decades of hands on experience, Dale knows that the key is to find the right care giver advocate for your disabled child or loved one when you are no longer able to be the advocate of your child.

A Professional Care Manager. Most families assign the task of taking care of the disabled loved one to a spouse, sister or brother of the disabled person. In Dale’s experience, this is a usually a huge mistake. The family member is not an expert in this field, doesn’t know what resources are available, does not know which practices will improve or help the condition of the disabled person, does not have the time to spare from their own family and career and often will face care giver burn out. Ask yourself: Is this a fair and wise thing to impose on your child? Dale has seen people with disabilities have their conditions improve when their care is supervised by a professional care manager. Dale says a great source to find a care manager is http://www.caremanager.org/.

Role of the Family, Trustee and Care Manager. Dale recommends that the family serve as the Trust Advisory Committee which can supervise and replace the Trustee and Care Manager, direct distributions and amend the Trust to conform to changing laws where necessary. The Trustee will be a professional Trust Company which will use discretion in making distributions, understand and keep up with public benefit requirements, wisely invest the funds, conform to statutory fiduciary requirements, file taxes, do tax planning, keep perfect books, provide advocacy and be immortal, that is, stay in business longer than the lifetime of the disabled person. There are several national trust companies which have specialized divisions for disabled persons or extensive experience in this field. The Care Manager can supervise the distributions by the Trustee and the care of the disabled person. For additional information, go to http://www.achievingindependence.com/.

Separate Stand Alone Trust. Dale recommends in nearly all cases the creation of a special needs trust as a stand alone trust separate and apart from the estate planning living trust document of the parents. With a stand alone trust, grandparents, siblings and others have the opportunity to contribute funds to this trust. In our experience, stand alone trusts are much more readily accepted by banks, title companies and financial institutions. This facilitates the reduction of future estate taxes of the parents. Properly structured, the funds in the stand alone trust will be very hard to reach by a creditor of the parent or of the special needs child. In the separate trust document, the parent can decide who will receive the funds not used by the special needs child. A down side is that you have to determine whether the fully funded stand alone trust would restrict or deny present governmental benefits.

Change Your Special Needs Plan. If your plan for your special needs person is not set up in the way discussed in this blog or if you want your current plan revised or reviewed, contact us for a review and adoption of a better plan for your special needs child or person.

Will There Be A Need for Speical Needs? Special Needs Trusts, Budget Deficit and Declining Government Services

Losing Valuable Government Benefits. For families and parents with children with mental or physical conditions which limit the ability of children or loved ones to earn a living, their greatest fear is what happens to their child when the parent dies and is no longer able to care for the special needs child. Often such children receive important government benefits for medicine, care or housing. If the parents leave an inheritance outright or in trust, the existence of such funds may cause the special needs child to lose their government benefits. Parents look to Special Needs Trusts to solve this problem.

Government Program Requirements. Each county, state or federal governmental program can have different eligibility requirements for governmental programs for disabled persons. For social security disability where the person has contributed a long time into the social security system, at the present time, there may be no limits on the assets or income a person may have to qualify for benefits. In contrast, for Medicaid, which has a combination of federal and state eligibility requirements, the single person usually may not have more than $2,000 of countable assets (called “resources”) and nearly all of their income they have will first have to go to pay for the costs of their care. If a person has more than $2,000 in resources, the Medicaid program may require that person to exhaust all of their money for their care in a nursing home until they only have $2,000 left. Or worse, if there were any gifts during the five years prior to applying for Medicaid, they may be disqualified from Medicaid for a time period equal to what the gifts would have paid for their care. Each state and federal program can have complex eligibility rules which rival the US tax code in complexity and difficulty to understand.

Special Needs Trusts. The concept of the Special Needs Trust is to have a trust which can supply limited needs of the special child without losing their governmental benefits. The traditional “Special Needs” often only provides for limited items such as vacation travel which the government would not pay for and often prohibit use of the funds in the trust for the food and housing of the special child. In contrast to this focus on government welfare benefits, a properly drafted Special Needs Trust can be a very flexible document that can give the trustee the ability to pay for almost any need the beneficiary might have. The specific rules vary from state to state. Parents want to help their special child and still have the child qualify for a government program and these may be conflicting goals for many programs.

Preventing Abuse. I recently participated in an eye opening presentation by Stephen W. Dale, a California attorney who specializes in working with families with children who have disabilities and who will require support from others for their entire lives. Stephen Dale was a psychiatric nurse for seventeen years and personally treated persons with psychiatric problems in institutions and elsewhere before becoming a lawyer. Many consider Dale a national expert. His passion is to serve as an advocate in the prevention of abuse and mistreatment of persons with mental health problems.

Growing Needs. Dale points to the increase in needs for services and the decrease in the funding available for those needs. In 2006, there were nearly 225,000 cases of US children with autism ages 6-22. In 2006, there were an estimated 25 million adults aged older in the US with serious psychological distress. About 4.4% of US adults may have some form of bipolar disorder. In 2006, about 9.2% of the US population 12 or older had substance abuse problems.

Declining Funding. State and county budgets are pressed. When I was in the Virginia legislature, there was never enough funding to meet the needs of persons with mental health issues. According to Dale, California counties have nearly eliminated their mental health programs and the state is dismantling its social service systems. Other states are or will follow the lead of California.

Federal Budget Deficits. This year, there was a time when social security payments were less than the program’s income. Entitlement spending (social security, Medicaid and Medicare) will consume the entire federal budget by 2052, with no money available for defense, highways or parks. In 2010, the Heritage Foundation estimates that Medicare, Medicaid and all other health costs will consume 17.2% of the US economy, up from 4.7% 50 years ago. The total national debt is $12.4 trillion, but the unfunded obligations for social security and Medicare are $45.6 trillion, almost four times the national debt. In short, due to budget problems, the federal government will have to eliminate eligibility for government assistance for any person with a disability where that disabled person has any kind of Special Needs or other trust or money set aside for their benefit.

The Grim Future. Our Prediction: A Special Needs Trust that qualifies a child today for continuing government benefits will not qualify for government benefits in the future. This is but one of the fundamental flaws in conventional planning for special needs children. A properly drafted and administered Special Needs Trust in reality is a private social system that should serve as the parent’s alter ego to provide quality of life and life long advocacy. In our next blog, we will provide the solutions that are working.

When Not Having A Tax Creates A Problem for Taxpayers: Insurance Trusts and Generation Skipping Taxes in 2010

No GST Tax. Since January and through the end of December of 2010, there is no Generation Skipping Transfer (GST) Tax, unless Congress changes the law in the meantime. The GST tax was part of the temporary repeal for one year of the estate tax, which automatically expires at the end of 2010. Starting January 1, 2011, the estate tax and the GST tax come back in full fury with up to a 55% rate of tax. Your estate can suffer both an estate tax and a GST tax at 55% each.

Insurance Trusts. Trusts which own life insurance are one of the most efficient ways to avoid estate and GST taxes. Over the lifetime of the life insurance policy, the taxpayer may pay $300,000 in premiums, but the taxpayer’s heirs receive $1,000,000 of the death benefit of the life insurance tax free if the insurance is owned by an Irrevocable Life Insurance Trust. If the taxpayer still owns or controls the life insurance (not owned by an independent trust), then the taxpayer may have to pay estate and GST taxes at rates up to 55% on the $1,000,000 in 2011 and thereafter. People are often confused by this because there is no capital gain tax on the difference between the $300,000 paid for the policy and the $1,000,000 death benefit to the heirs. But, there is an estate tax on life insurance proceeds you own which is not in a trust even though there is no capital gains tax on the “profit”.

Creating the Insurance Trust. Fred creates a life insurance trust, transfers the initial premium payments to the trustee of the trust (his CPA) and the CPA as trustee purchases the life insurance policy on behalf of the trust. The result is that when Fred dies, the $1,000,000 death benefit is available to Fred’s heirs with no estate taxes. If the life insurance trust creates lifetime trusts for Fred’s two children, Ellen and Paul, then Ellen and Paul split the $1,000,000 in their lifetime trusts and Ellen and Paul pay no estate taxes in their estates on the life insurance proceeds. Fred loves his grandchildren and sets up this life insurance trust to say that when Ellen and Paul die, then the grandchildren can also receive the remaining money in the insurance trust without any estate taxes. This can go on for generations and create a “Dynasty Trust”.

Annual Gifts of Premiums. Each year Fred sends the annual premium of $20,000 to Fred’s CPA and the CPA pays the $20,000 for the annual premium payments for the insurance owned by the trust. Each year, the CPA sends a notice to Ellen of her right to take out $10,000 each year for 30 days and sends the same notice to Paul for his $10,000. Each year, Ellen and Paul do not ask for their respective $10,000. As a result, if proper procedures are followed, the $20,000 paid each year is exempt from gift taxes (which could be due from Fred) and if Fred’s total gifts per year are less than the annual exemption per person, $13,000 this year, then there is no gift tax paid on the $20,000 and no decrease in the $1,000,000 gift tax exemption of Fred.

GST Gifts. If Ellen has the ability to unilaterally decide when she dies who gets her accumulated annual $10,000 gifts to the insurance trust, then all of the $10,000 gifts are part of her taxable estate as well as her $500,000, her 50% share of the $1,000,000 life insurance death benefit. We want the benefit of excluding this $500,000 from the estate of Fred and also from the estate of Ellen. So, we do not give Ellen the right unilaterally to decide who may get her accumulated $10,000 annual premium payments. When we do this, two things occur: (1) It is not part of Ellen’s taxable estate and (2) the $10,000 annual gift for the benefit of Ellen to the insurance trust does not qualify as a gift exempt from GST taxes. Unless we do something, the $1,000,000 death benefit could be subject to the 55% GST tax. What normally is done is that the CPA files a gift tax return each year using $20,000 of Fred’s exemption from the GST tax. This is a highly leveraged beneficial use of the GST tax exemption. Many insurance trusts are set up this way.

No Tax, No Exemption. In 2010, there is no GST tax and therefore no exemption from GST tax. In 2010, the CPA can not file a paper with the IRS claiming a $20,000 exemption from GST tax. Does this mean that part or all of the death benefits are in the taxable estate of Ellen or Paul or is subject to GST tax in the estate of Fred? For all of those who have such insurance trusts, it is necessary that you take action quickly to solve this problem.

Loan the Premium. The solution that many advisors are recommending is that instead of gifting the $20,000 in 2010, Fred should loan the $20,000 to the CPA in 2010 to avoid this problem. The insurance trust, not the CPA, is the borrower. In future years, the loan can be paid back to Fred either from additional gifts by Fred to the trust or a loan from the insurance policy.

Action Necessary if You Have an Insurance Trust. If you have an insurance trust, call us to analyze whether your trust has this problem in 2010 and we will work out a solution for you.