The New Special Needs Trust Fairness Act

The Special Needs Trust Fairness Act, federal legislation that allows people with disabilities to create their own special needs trusts instead of having to rely on others, is now law.  The measure was included in the 21st Century Cures Act, a $6.3 billion package of health-related initiatives signed by President Obama on December 13, 2016. 

The National Academy of Elder Law Attorneys (NAELA)  press release announcing the Fairness Act’s clearing its final legislative hurdle, explains that the measure “corrects a patently false and degrading error in the law that presumed all individuals with disabilities lacked the capacity to handle their own affairs.”  The legislation, which Rep. Glenn Thompson (R-Pa.) introduced in 2013, will finally allow beneficiaries with capacity to create and fund their own special needs trusts with the same treatment and protections available for trusts created by others on behalf of the beneficiaries. 

In addition to Rep. Thompson, NAELA applauded Frank Pallone (D-N.J.) along with Sens. Chuck Grassley (R-Ia.) and Bill Nelson (D-Fl.) “for their bipartisan dedication to ensuring this common sense fix became law.”

The Fairness Act will apply to trusts established on or after the date that the Cures Act was enacted.  

The Social Security Administration has published an emergency memorandum incorporating the change into the Program Operations Manual System (POMS) ( with thanks to Attorney Donald D. Vanarelli, whose blog post can be found here).

The SNT Fairness Act can be found in Title V, Section 5007 (page 440), of the Cures Act.  To read the 21st Century Cures Act, click here.

Understanding "Third Party" Special Needs Trusts

There are three types of special needs trusts: first-party special needs trusts, third-party special needs trusts, and pooled trusts.  All three are designed to manage resources for a person with special needs so that the beneficiary can still qualify for public benefits like Supplemental Security Income (SSI) and Medicaid.  While first-party special needs trusts and pooled trusts hold funds that belong to the person with special needs, third-party special needs trusts, as the name implies, are funded with assets that never belonged to the trust beneficiary, and they provide several advantages over the other two types of trusts.

Third-party special needs trusts are set up by a donor – the person who contributes the funds to the trust.  A typical donor is a parent, grand-parent, or sibling of the special needs beneficiary.  These trusts are typically designed as part of the donor's estate plan to receive gifts that can help a family member with special needs while the donor is still living and to manage an inheritance for the person with special needs when the donor dies.  Third-party special needs trusts can be the beneficiaries of life insurance policies, can own real estate or investments and can even receive benefits from retirement accounts (although this process is very complicated and not typically recommended unless there aren't other assets available to fund the beneficiary's inheritance).  There is no limit to the size of the trust fund and the funds can be used for almost anything a beneficiary needs to supplement her government benefits.  Upon the beneficiary's death, the assets in a third-party special needs trust can pass to the donor's other relatives as the donor directs.

One of the key advantages of a third-party special needs trust is the ability of the donor to direct the assets available upon the beneficiaries death without risk of resource recovery-the right of the state to recover assets to pay the state back for benefits paid during the beneficiary's life.  Because the funds in the trust never belonged to the beneficiary, the government is not entitled to reimbursement for Medicaid payments made on behalf of the beneficiary upon her death, unlike with a first-party or pooled trust.  This allows a careful donor to benefit her family member with special needs while potentially saving funds for other people who don't have the same needs.

Whereas first-party special needs trusts can only be established by the beneficiary's parent, grandparent, guardian or a court, anyone other than the beneficiary can set up a third-party special needs trust.  First-party trusts must be established for the benefit of someone who is younger than 65, but third-party trusts don't have age limits.  In some states, first-party trusts must be monitored by a court, but third-party trusts almost never have to go through this same process, especially while the donor is still alive.  In addition, while the donor is living, funds in the trust usually generate income tax for the donor, not for the beneficiary, avoiding the complication of having to file income tax returns for an otherwise non-taxable beneficiary and then explain them to the Social Security Administration.

Although a third-party special needs trust has many advantages, it is not always a viable option for families of people with special needs.  One of the major drawbacks of a third-party trust is its absolute inability to hold funds belonging to the person with special needs.  So if the trust beneficiary receives an inheritance that wasn't directed into the special needs trust to begin with or if she settles a personal injury case, the funds have to be placed in either a first-party trust or a pooled trust, since even one dollar of a beneficiary's own money could taint an entire third-party trust.  But even with these restrictions, most people trying to help a family member with special needs are going to at least need to strongly consider drafting a third-party special needs trust.  Your attorney can help you understand how these important trusts fit into your other estate planning goals.

IRS issues Proposed Regs for ABLE Accounts

The IRS has issued proposed regulations implementing Sec. 529A, which authorizes states to offer specially designed tax-favored accounts for the disabled (ABLE accounts). Sec. 529A was added by the Achieving a Better Life Experience (ABLE) Act of 2014, which was part of the Tax Increase Prevention Act of 2014.

ABLE accounts were created in recognition of “the special financial burdens borne by families raising children with disabilities and the fact that increased financial needs generally continue throughout the disabled person’s lifetime” (preamble, p. 5). Contributions made to an individual’s ABLE account can be used to meet the individual’s qualified disability expenses.

One account is permitted to be set up per eligible individual and total annual contributions are restricted to the amount excluded under Sec. 2503(b) for gift tax purposes ($14,000 for 2015, but inflation adjusted). Amounts contributed in excess of those limitations must be returned to the contributors on a last-in, first-out basis by the due date of the beneficiary’s tax return (including extensions) for the year in which the contributions were made and are subject to a 6% excise tax if they are not returned.

Sec. 529A allows a state (or agency or instrumentality) to create a qualified ABLE program under which a separate ABLE account may be established for a disabled individual who is the designated beneficiary and owner of that account. Contributions to that account are subject to both an annual and a cumulative limit, and, when made by a person other than the designated beneficiary, are treated as nontaxable gifts to the designated beneficiary.

Distributions made from an ABLE account for qualified disability expenses of the designated beneficiary are not included in the designated beneficiary’s gross income, but the earnings portion of distributions from the account in excess of the qualified disability expenses is includible in the designated beneficiary’s gross income. An ABLE account may be used for the long-term or short-term needs of the beneficiary. One of the most important provisions of these accounts is that they are generally not counted when determining the disabled person’s qualification for needs-based federal programs.

To qualify, the program must be established and maintained by a state or a state’s agency or instrumentality; permit the establishment of an ABLE account only for a designated beneficiary who is a resident of that state, or of a state contracting with that state; permit an ABLE account to be established only for a designated beneficiary who is an eligible individual; limit a designated beneficiary to only one ABLE account, wherever located; permit contributions to an ABLE account established to meet the qualified disability expenses of the account’s designated beneficiary; limit the nature and amount of contributions that can be made to an ABLE account; require a separate accounting of each designated beneficiary’s account; limit the designated beneficiary to no more than two opportunities in any calendar year to provide investment direction; and prohibit pledging an interest in an ABLE account as security for a loan.

Because eligible individuals often will not be able to set up their own accounts, the rules allow a person with power of attorney or the beneficiary’s parent or guardian to set up the account. Each account must be for an eligible individual, which means the individual is entitled to benefits based on blindness or disability under title II or XVI of the Social Security Act and the blindness or disability occurred before the date on which the individual turned 26, or the individual obtains a disability certification meeting requirements specified in the regulations.

To ease the administrative burdens and in recognition that some people may move in or out of disabled status, in years in which an eligible individual is no longer eligible, the plan cannot accept additional contributions and will not be deemed to make a distribution, but the account can remain open. The rules also are flexible in the requirements for annual recertifications of disability.

For more, go here.

Payments from Special Needs Trust Causes Section 8 Ineligibility

Special Needs Trusts (SNT's) are generally designed to prevent beneficiaries from losing their Medicaid and Social Security eligibility.  These trusts are not without challenges and possible disadvantages.  In resolving  Social Security and Medicaid issues, SNTs often sacrifice other opportunities.  HUD's Section 8 housing assistance program, for example, has no language in its rules that expressly recognizes and protects SNTs.  A federal district court recently held that a local housing authority properly counted payments from a SNT as income when it determined that a Section 8 beneficiary was no longer eligible for a housing voucher.  DeCambre v. Brookline Housing Authority (D.Mass., No. 14-13425-WGY, March 25, 2015).

Kimberly DeCambre is the beneficiary of a court-established first-party special needs trust that was funded with the proceeds from a $330,000 personal injury settlement.  Ms. DeCambre receives Supplemental Security Income (SSI) and Medicaid due to a variety of serious medical conditions, and she also received a Section 8 housing voucher.  In fall 2013, the Brookline Housing Authority (BHA), the local agency that administers Ms. DeCambre's housing voucher, informed Ms. DeCambre that she was no longer eligible for Section 8 because the trust had disbursed more than $60,000 during the year for her car, phone, Internet, veterinary care for her pets and travel expenses.   A hearing officer upheld the BHA's decision.

Ms. DeCambre filed suit against the BHA in state court and her claims were removed to federal court.  Ms. DeCambre claimed that the BHA violated her civil rights by counting the payments from the trust as income and by discriminating against her due to her disability.  She also raised several due process claims.  Instead of hearing arguments on Ms. DeCambre's request for a preliminary injunction, the parties agreed to a case stated hearing to resolve Ms. DeCambre's underlying claims. At this hearing, Ms. DeCambre posited that it was improper to treat the distributions from the trust as income when, according to Department of Housing and Urban Development (HUD) rules,  the same payments would not be considered income had she simply taken the settlement as a lump sum outside of a trust.   

The U.S. District Court for the District of Massachusetts reversed, ruling that the BHA properly terminated Ms. DeCambre's Section 8 benefits.  Although sympathizing with trust beneficiaries who have difficulty  retaining Section 8 benefits, the court determined that it is "unable to find any regulatory support for DeCambre's argument that her Trust expenditures must be excluded from annual income and that her Trust corpus remained a lump-sum settlement.  To the extent BHA treated DeCambre's expenditures as spending from an irrevocable trust, rather than from a personal settlement fund, the Court holds that their determination was a reasonable one." The court also ruled that Ms. DeCambre's due process claims failed because she did not have a property interest in Section 8 benefits and was afforded ample hearings.  The court concluded that Ms. DeCambre was not discriminated against due to her disability because HUD treats special needs trust and non-special needs trust beneficiaries equally when it comes to income attribution.

To read the full text of the court's decision in this case, click here. 

To read a previous article regarding the complexities involved in crafting SNTs, click here and here.

Achieving a Better Life Experience (ABLE) Act Would Create Tax-free Accounts for the Disabled

Sara Wolff (center) is calling on Congress to allow disabled
 Americans to save and still receive benefits like
 Social Security Disability Insurance payments and Medicaid.

Many families struggle with planning for the future of a child with severe disabilities. While they are able to save for the educational needs of their other children through “529” college tuition plans, these plans do not fit well the needs of a child with severe disabilities.  The disabled child may, now, or in adulthood, need the long term services and supports of the Medicaid program and/or the income assistance of the Supplemental Security Income (SSI) program.  Since the child may live for many decades beyond the ability of the parents to supplement the services they receive through Medicaid, most parents recognize the need for saving and securing funds for the child.  Others want to ensure the financial security of a disabled child who has a level of disability required for Medicaid eligibility, but for now, is managing to function without the use of those benefits. Still others want to ensure that their family member can exercise control over the funds in the account without endangering the Medicaid and SSI benefits on which they may rely.

Although Supplemental Needs Trusts and/or Wholly Discretionary Trusts for Special Needs offer a savings solution, many families have found it too expensive to establish a trust which meets the requirements of the Medicaid and SSI programs.  While many attorneys will prepare these for reduced fees for those in need, it is not uncommon to pay five to ten thousand dollars for these solutions.  The ABLE Act (S.313 / H.R.647) would give individuals with disabilities and their families access to accounts that would allow individual choice and control while protecting eligibility for Medicaid, SSI, and other important federal benefits for people with disabilities.

The Senate Finance subcommittee on taxation and IRS oversight may have never heard testimony from someone quite like Sara Wolff.  Ms. Wolff, 31, was born with Down syndrome, but that hasn’t stopped her from becoming involved in politics. She testified before the subcommittee on the Achieving a Better Life Experience (ABLE) Act, which would create tax-free savings accounts for those with disabilities. Earlier this year, she wrote a change.org petition calling on Congress to pass the ABLE Act. The petition garnered more than 250,000 online signatures.

“Just because I have Down syndrome, that shouldn’t hold me back from achieving my full potential in life,” Ms. Wolff of Moscow, Pa., said in a statement. “I can work a full-time job, be a productive member of society, and pay taxes – but because of outdated laws placed on individuals with disabilities, we hold people like me back in life.”

Ms Wolf is also a board member of the National Down Syndrome Society (NDSS), which is championing the bipartisan legislation. The Senate bill is sponsored by Sen. Robert Casey, Pennsylvania Democrat, and Sen. Richard Burr, North Carolina Republican.  Support for the House bill is being led by Rep. Ander Crenshaw, Florida Republican; Rep. Cathy McMorris Rodgers, Washington Republican; Rep. Pete Sessions, Texas Republican; and Rep. Chris Van Hollen, Maryland Democrat.

“The bill aims to ease financial strains faced by individuals with disabilities by making tax-free savings accounts available to cover qualified expenses such as education, housing and transportation,” said an NDSS statement.

Ms. McMorris Rodgers, whose seven-year-old son Cole has Down syndrome, called on Congress to “advance this crucial legislation.”  “As the mom of a son with Down syndrome, I see firsthand how federal policies limit—not expand— opportunities for those with disabilities.  And the ABLE Act will change that,” said Ms. McMorris Rodgers in a statement. “It will make sure that Cole — and the millions like him who have special needs — will be able to save for their futures and reach their full potential.”

The ABLE Act  has 74 Senate co-sponsors, including Senate Majority Leader Harry Reid and GOP Minority Leader Mitch McConnell.  “Passing this landmark legislation will go a long way to help people with Down syndrome and other disabilities realize and achieve their own hopes, dreams and aspirations,” NDSS Vice President of Advocacy and Affiliate Relations Sara Hart Weir said in a statement.

Members of the U.S. Senate said Friday, September 26th, that they have an agreement that will allow the Achieving a Better Life Experience, or ABLE, Act to proceed to the full Congress.  The bill’s chief sponsors and leaders of the Senate’s Committee on Finance said in a joint statement that they expect the legislation to be considered when Congress returns to Washington in November.

Under the measure, people with disabilities would be able to create special accounts at any financial institution where they could deposit up to $14,000 annually. The ABLE accounts could accrue up to $100,000 in savings without risking an individual’s eligibility for government benefits like Social Security. What’s more, Medicaid coverage could be retained no matter how much money is deposited in the proposed accounts.

Modeled after the popular 529 college savings plans, funds deposited in ABLE accounts could be used to pay for education, health care, transportation, housing and other expenses. Interest earned on savings within the accounts would be tax-free.

The ABLE Act has been under consideration in Congress since 2006.  It is time that this proposal was enacted into law.

If you want to follow this legislation, Autism Speaks will do that for you by clicking here.  

The National Disability Institute has useful information here.

You can sign Sara's petition here.

Read more: http://www.washingtontimes.com/news/2014/jul/22/act-would-create-tax-free-savings-accounts-disable/#ixzz38RqDdzBf

and http://www.disabilityscoop.com/2014/09/19/deal-savings-accounts/19689/

Albert Pujols is a Champion for Kids with Special Needs

Los Angeles Angels of Anaheim designated hitter Albert Pujols is one of the greatest sluggers in baseball. In April, he hit home run number 500, putting him in some elite company. And as the 2014 season has progressed, Pujols has kept hitting home runs — climbing the all-time list (he’s currently at number 21 with 515 dingers) and helping his team reach the top of the American League West.

But Pujols’ accomplishments on the field are nothing compared to what he has done off it. His daughter Isabella has Down syndrome, and since his days as a St. Louis Cardinal Pujols has been an active advocate for kids and adults with special needs. He has partnered with the Down Syndrome Association since 2001, and in 2005 he founded his own non-profit organization, the Pujols Family Foundation, with his wife, Deidre. The foundation promotes awareness of special needs issues and helps kids and families living with Down syndrome both in the US and his native Dominican Republic. 

Pujols’ is also helping raise awareness by being the cover model for Toys “R” Us’ 20th annual Toy Guide for Differently-Abled Kids. The guide launched today, and it’s a resource for anyone looking for a great toy for the special needs kid in their life.

To read the full article posted on SIKids.com, go here. 

SSA's Guide for Evaluating Special Needs Trusts Problematic

The Social Security Administration (SSA) recently instituted a nationally uniform procedure for review of special needs trusts for Supplemental Security Income (SSI) eligibility, routing all applications that feature trusts through Regional Trust Reviewer Teams (RTRTs) staffed with specialists who will review the trusts for compliance with SSI regulations. 

The SSA has also released its Trust Training Fact Guide, which will be used by the RTRTs and field offices when they evaluate special needs trusts.  In an article in the July/August 2014 issue of The ElderLaw Report, New Jersey attorney Thomas D. Begley, Jr., and Massachusetts attorney Neal A. Winston, both CELAs, discuss the 31-page guide in detail and caution that while it is a significant step forward in trust review consistency, it contains “a few notable omissions or terminology that might cause review problems.”  Following is the authors’ discussion of the problematic areas:  

• Structured Settlements. The guide states that additions/augmentations to a trust at/after age 65 would violate the rule that requires assets to be transferred to the trust prior to the individual attaining age 65. It does not mention that the POMS specifically authorizes such payments after age 65, so long as the structure was in place prior to age 65. [POMS SI 01120.203.B.1.c].

• First-/Third-Party Trust Distinction. Throughout the guide, there are numerous references to first-party trust terms or lack of terms that would make the trust defective and thus countable. These references do not distinguish between the substantial differences in requirements for first-party and third-party trusts.

• Court-Established Trusts/Petitions. This issue is more a reflection of an absurd SSA policy that is reflected accurately as agency policy in the guide, rather than an error or omission in the guide itself. This section, F.1.E.3, is titled “Who can establish the trust?” The guide states that creation of the trust may be required by a court order. This is consistent with the POMS. It would appear from the POMS that the court should simply order the trust to be created based upon a petition from an interested party. The potential pitfall described by the guide highlights is who may or may not petition the court to create a trust for the beneficiary. It states that if an “appointed representative” petitions the court to create a trust for the beneficiary, the trust would be improperly created and, thus, countable. Since the representative would be considered as acting as an agent of the beneficiary, the beneficiary would have improperly established the trust himself.

In order for a court to properly create a trust according to the guide, the court should order creation of a trust totally on its own motion and without request or prompting by any party related to the beneficiary. If so, who else could petition the court for approval? The plaintiff’s personal injury attorney or trustee would be considered an “appointed representative.” Would a guardian ad litem meet the test under the guardian creation authority? How about the attorney for the defendant, or is there any other person? If an unrelated homeless person was offered $100 to petition the court, would that make the homeless person an “appointed representative” and render the trust invalid? The authors have requested clarification from the SSA and are awaiting a response.

Until this issue is resolved, it might be prudent to try to have self-settled special needs trusts established by a parent, grandparent, or guardian whenever possible.

• Medicaid Payback/Administrative Fees and Costs. Another area of omission involves Medicaid reimbursement. The guide states that “the only items that may be paid prior to the Medicaid repayment on the death of the beneficiary of the trust are taxes due from the trust at the time of death and court filing fees associated with the trust. The POMS, [POMS SI 01120.203.B.1.h. and 203B.3.a], specifically states that upon the death of the trust beneficiary, the trust may pay prior to Medicaid reimbursement taxes due from the trust to the state or federal government because of the death of the beneficiary and reasonable fees for administration of the trust estate such as an accounting of the trust to a court, completion and filing of documents, or other required actions associated with the termination and wrapping up of the trust.

While noting that the guide, in coordination with training, “is a marked improvement for program consistency for trust review,” Begley and Winston caution advocates that “the guide should be considered as a summarized desk reference and training manual and not a definitive statement of SSA policy if inconsistent with the POMS.”