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Information for the Lawyer
DISCLAIMER: The information contained below is general in nature and is not intended to be legal advice with regard to any specific situation. Anyone who is interested in establishing a special need trust or an account in a pooled special needs trust should seek the advice of an attorney.
Attorneys who wish to have additional general legal information appear on this page should email their questions, recommendations or suggested explains to the Maine Trust for People with Disabilities.
Why should my client be interested in establishing a Special Needs Trust for a disabled family member?
People with disabilities have many needs beyond basic medical care, food, clothing and shelter, including recreation, transportation, dental care, telephone and television services, hair and nail care, differentials in cost of housing and shelter, supplemental nursing care, private case management, and mobility aids including electric wheel chairs.
To provide for the payment of these needs, federal law permits a person to establish a special needs trust (or "SNT") to benefit the individual with disabilities. If properly structured, the SNT's assets will not be considered assets of the disabled beneficiary and therefore will not disqualify him or her from SSI or Medicaid benefits. 42 U.S.C. §1382b, §1396p(d)(4). Typically, parents of a disabled child are the settlers who fund the SNT.
Does the MTPD qualify as an SNT?
The Maine Trust for People with Disabilities ("MTPD") is a third-party SNT. This means that an account in the MTPD is created and funded with the assets of a person other than the disabled beneficiary. The disabled beneficiary's own assets cannot be the source of the funding of the account in the MTPD. Since the disabled beneficiary does not have the legal authority to revoke the trust or direct the use of the trust for his or her own support, the beneficiary's account assets in the MTPD are not assets counted for Medicaid or SSI eligibility purposes. It is for this reason the MTPD does not require the trustee to use the assets for the support and maintenance of the disabled beneficiary, but rather all distributions are discretionary. See Social Security Administration POMS SI 01120.200.
Parents and grandparents of disabled individuals frequently create and fund third-party SNTs for the benefit of a family member who has a disability. The MTPD offers parents, grandparents and other family members an affordable opportunity to establish an SNT that preserves the disabled beneficiary's public benefits while supplementing those benefits with the trust's assets. In addition, the MTPD provides for the proper management of the gift to the disabled beneficiary's MTPD account for possibly as long as the beneficiary's entire lifetime. At the disabled beneficiary's death, the remaining property (called the "residue") can pass to any family member or other individual, or to a charity, as designated in the Joinder Agreement by the family member who sets up the MTPD account.
What is the duty of a Maine attorney with respect to establishing an SNT for a client who has a disabled family member?
A recent Maine law case suggests it may be malpractice for an attorney to allow a client's disabled family member to be disqualified from Medicaid (i.e., MaineCare) or SSI as the result of drafting an estate plan that leaves assets directly to the disabled family member. In 2000, an attorney was retained to draft a Last Will and Testament that left a significant sum to the testatrix's sister who resided in a nursing home. Medicaid was paying for the sister's care. After the testatrix's death, the sister was disqualified for Medicaid assistance, had to spend down the inheritance, and re-apply for Medicaid assistance. The Maine Supreme Court held that the attorney "could and should have drafted a 'Supplemental Needs Trust' for [the sister], thereby avoiding the Medicaid spend down . . .." On October 25, 2002, the court suspended the drafting attorney's license to practice law due to his failure, inter-alia, to create the supplemental needs trust. Board of Overseers of the Bar v. Ralph W. Brown, Esq., 2002 Me. LEXIS190 (Me. October 25, 2002).
What are the key legal issues to for legal counsel to consider when reviewing a client's MTPD's documents, including the Joinder Agreement application to open an account with the MTPD?
- Consider the estate tax consequences if your client retains the right to change the residuary beneficiary of the MTPD account.
A person who opens and funds an MTPD account for a disabled beneficiary is called a "Sponsor" in the MTPD Joinder Agreement. Under the Joinder Agreement, the Sponsor can elect to fund the account during his or her lifetime or at death. The Joinder Agreement also allows the Sponsor to name a residuary beneficiary (including family members) who will receive the residue of any MTPD account assets that remain following the death of the disabled primary beneficiary. If the Sponsor completes the Joinder Agreement to indicate that he or she retains the right to change the residuary beneficiary and if the sponsor dies while still holding such right, then the Sponsor will be seen as having a retained power over the MTPD account assets, which will result in the value of those assets that remain in the MTPD account as of the date of death of the Sponsor being included in his or her taxable estate under IRC Section 2038. If, on the other hand, the Sponsor irrevocably names a residuary beneficiary of the MTPD which he or she cannot change, then the assets in the MTPD account should not be included in the Sponsor's taxable estate.
- Consider the gift tax consequences of funding an MTPD account during the lifetime of the Sponsor.
The MTPD does not contain a so-called "Crummey" power of withdrawal exercisable by the disabled beneficiary or any other person. The presence of a Crummey power would likely result in the amounts donated to the disabled beneficiary's MTPD account being viewed as the beneficiary's countable asset for Medicaid and SSI eligibility purposes. The absence of a Crummey power in the MTPD results in all amounts given to an MTPD account failing to qualify as a so-called present interest gift under IRC Section 2503(b). Therefore, all amounts given to an MTPD will result in the donor having made a taxable gift, which will reduce any remaining federal credit shelter amount available to the donor.
- Consider the income tax aspects of funding an MTPD account.
The MTPD is taxed as a complex trust. Any taxable income not distributed to the beneficiary in the year the income is realized will be taxable to the MTPD, which will pay the applicable income taxes from assets in the beneficiary's account. To the extent that taxable income is annually distributed to the beneficiary or his or her legal representative, a Form K-1 will be issued to the beneficiary who will be responsible for including such income in his or her taxable income reported to the IRS and other taxing authorities.
- Consider how to fund an MTPD account.
Parents who establish an MTPD account for a disabled child often decide to fund the account after the death of both parents under the Last Will and Testament of the last to survive. While this approach works in many instances, it poses the risk that one or both parents may incur large health and nursing home bills at the end of life, leaving little or nothing to pass to the MTPD account after death. If it is important to parents to assure the MTPD account for their child will be funded regardless of what their own medical and other expenses may be, parents can use a number of funding strategies. First, parents can make lifetime gifts to the MTPD account. Second, parents can obtain a paid-up life insurance policy that either names the MTPD account as the beneficiary or that is owned by the MTPD and funded by the parents. Parents often find that a second-to-die policy insuring the lives of both parents is an affordable means to fund an account.
- Consider the charitable gift aspects of the MTPD.
An MTPD account does not qualify as a charity. Therefore, the amount that a parent or other relative contributes to an MTPD account will not qualify for a charitable income tax deduction.
The donor may irrevocably designate in the Joinder Agreement that a charity will receive some or all of the residue of the MTPD account following the death of the disabled beneficiary. Possible charitable recipients include, among others, the sponsor of the MTPD (being the Maine Trust for People with Disabilities, Inc.) and any nonprofit social service agency that provides services to the disabled beneficiary. If the donor irrevocably names a charity as the residuary beneficiary, the donor will not qualify for an income tax charitable deduction by claiming the MTPD as a charitable remainder trust under IRC Section 664 since distributions from the MTPD account to the disabled beneficiary do not comply with the requirements of IRC Section 664. If the donor wishes to obtain an income tax charitable deduction for the residue that will be payable to a charity, then in connection with funding an MTPD account during his or her lifetime, the donor may wish to also establish a separate charitable remainder trust that pays an annuity to the MTPD account. This techniques is described in Revenue Ruling 2002-20. See also http://www.abanet.org/rppt/meetings_cle/spring2004/pt/charitabletrusts/speakers.pdf. |
