Hidden Deductions for Special Needs Education

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Over 6 million children in the U.S. have “special needs” and the numbers are growing. Families of these children often pay for a range of therapies and treatments, yet many overlook the tax breaks available for such payments under the Internal Revenue Code. This article in the Wall Street Journal does a nice job of summarizing the issues.

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What Are the Responsibilities of the Trustee of a Special Needs Trust?

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The trustee of a special needs trust (SNT) has all of the duties of any trustee, plus specific added responsibilities due to the special needs of the beneficiary. All trustees are responsible for:

  • Appropriate investment of trust property
  • Bookkeeping and accounting of trust activities
  • Communication with trust beneficiaries
  • Tax reporting for the trust
  • Appropriate distribution of trust property to the beneficiary or beneficiaries, taking into account both current and future needs.

On top of these responsibilities, the trustee of an SNT must also:

  • Inquire into the needs and welfare of the trust beneficiary
  • Make certain that the beneficiary maintains her eligibility for public benefits programs
  • Report to the agency or agencies administering such programs, and
  • Work with the family members, teachers, social workers or others providing support for the trust beneficiary.

Due to these demands, many families find that a professional trustee is better prepared to act as trustee or as co-trustee with a family member. Professional trustees — such as banks, trust companies, and some attorneys — are equipped to handle details like establishing accounts for the management of trust assets, handling trust recordkeeping, hiring and overseeing the activities of any service providers (such as tax reporting), making distribution decisions and investing trust assets.

With regard to taxes, the trustee is responsible for notifying the IRS that the SNT has been signed and requesting an employee identification number (EIN) that will be used on tax returns. The trustee also must prepare and file annual federal and state fiduciary income tax returns, reporting any income the trust earns, whether in the form of interest, dividends or capital gains. Since tax rules vary by state and type of SNT, it is critical for the trustee to know when potential tax reductions may warrant making distributions to or for the beneficiary.

The trustee also has sole responsibility for distribution decisions. To avoid compromising public benefits eligibility, distributions generally should be made directly to providers of goods or services, rather than to the beneficiary. When the beneficiary receives an amount above the allowable monthly limit, it is considered unearned income and SSI benefits are reduced on a dollar-for-dollar basis. Similarly, distributions made for items covered by SSI (i.e., food and shelter) are considered “in-kind” income and reduce monthly SSI benefits. The trustee must fully understand and follow SSI’s distribution guidelines, which vary by state. He or she also must adhere to any distribution guidelines the Grantor outlined in the trust.

One of the most significant abilities of a trustee is often the necessity of saying “no” to a request for trust funds. While trusts may look like they hold a lot of money, often when distributed over the lifetime of the beneficiary it’s not as much as is needed. Even with as much as $1 million invested, it may well be necessary to scrimp and to use the trust funds quite sparingly. It can often be easier for an independent, professional trustee to say “no” than for a family member to do so.

Finally, the trustee has fiduciary responsibility for the management of trust assets, even if he or she chooses to hire professional investment managers to make day-to-day investment decisions. While the appropriate investment strategy depends, in part, on the beneficiary’s age and needs and the amount of assets that can be invested, the trustee generally must comply with the “Prudent Investor Act,” which requires that investment decisions be made responsibly and impartially. When the trust outlines specific investment guidelines, however, those take precedence over Prudent Investor Rules.

Selecting a trustee of a special needs trust is a challenging yet pivotal decision. Please let us help guide you in that process. Contact me at kurt@zimmermanlaw.com or 954-202-7440.

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Things to Look for When Choosing a Guardian for Your Children

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One of the most important decisions parents must make when preparing their estate plan is the choice of a guardian for their child should they be the ones to die first. The choice of guardian can be especially difficult for the parents of a child or children with special needs. Unfortunately, many people don’t put nearly enough thought into their selection, choosing a close relative or friend regardless of that person’s background in dealing with children with special needs. Academy of Special Needs Planners co-founder Diedre Wachbrit Braverman has prepared a checklist of important questions any parent should ask when choosing a guardian for their child. It is a great starting point for parents preparing their estate plan and can help focus the search for the ideal guardian.

  • Does the prospective guardian have the necessary maturity, experience, temperament, patience, and stamina to undertake the responsibilities as guardian of the particular child or children?
  • Does the individual selected have a genuine interest in the minor’s welfare, either through family relationship or personal friendship, and have the confidence of the minor and parent?
  • Does the prospective guardian have some understanding of the emotional needs of children or the willingness and ability to obtain skilled guidance on this subject?
  • Is the prospective guardian a person of integrity and stability?
  • Is the individual physically able to undertake the care of an additional child or children, and have the time necessary to devote to this task?
  • Are the prospective guardian’s personal situation, religion, age, marital status, other children, personality traits, and similar factors acceptable to the parent?
  • Will sufficient funds be available to cover the costs of caring for the child throughout the period of guardianship and, if the child is to live with the guardian, to enable the guardian and family to meet the increased strain on their resources?
  • Does the prospective guardian have any conflicts of interest with the minor?
  • Is the prospective guardian willing to serve?
  • Is the prospective guardian willing and able to give the children an upbringing similar to that which the parent would have provided financially, socially, morally, and in other ways important to the parent?
  • Does the parent want the guardian to adopt the children and, if so, is the nominee willing to do so?
  • Does age of the prospective guardian pose any problems?

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Parents of Kids with Special Needs: Avoid These Common IRA and Life Insurance Mistakes

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Private retirement savings plans, like IRAs and 401(k)s, have become the main way for American families to save for retirement. But parents of children with special needs need to be vigilant when signing up for a retirement plan or company life insurance program.

Most retirement accounts allow the owner to choose a designated beneficiary to receive the funds in the account if the owner dies. This beneficiary designation is especially useful because it allows the funds in the retirement account to pass to the owner’s heirs without the cost and hassle of probate. In general, an owner names a so-called “primary” beneficiary who is first in line to receive the benefits, as well as a “secondary” or “contingent” beneficiary who would get the funds if the primary beneficiary has died or refused to accept the account. Account owners can usually name multiple people as beneficiaries, and they can often name a class of people, like “my surviving children” or “my nieces and nephews,” instead of designating people by name.

This ability to name a class of beneficiaries often leads to trouble when a member of the particular class has special needs. Problems also arise when parents name account beneficiaries when they first join a company, often before having a child with special needs. The retirement account grows over time, but the owner never revisits the beneficiary designation she created when she was just starting out. Many years later, when the account owner dies, the old beneficiary designation springs up and creates havoc for the child with special needs. For instance, if an employee fills out her IRA beneficiary designation form to give her $200,000 IRA to “her children” on her death, and she dies with four surviving children, each child will receive a $50,000 retirement account. If one of these children has special needs and is receiving needs-based government benefits, like Supplemental Security Income, Medicaid or Affordable Housing, her receipt of her share of her mother’s IRA could compromise her access to benefits. This is not just a problem for large retirement accounts; given the strict income and asset limits for many government programs, even an inheritance of a few thousand dollars can lead to the loss of health insurance worth a great deal more.

There are several ways to deal with this problem. The easiest way is to avoid class designations by specifically naming the beneficiaries of the retirement account and not including a relative with special needs as a beneficiary. The obvious drawback of this strategy, especially when the retirement account makes up the majority of a family’s net worth, is that the child with special needs loses his inheritance. A better option for families who want to leave a share of a retirement account to a person with special needs is to create a special needs trust and name it as a designated beneficiary. If properly drafted, the special needs trust can receive the retirement funds without negative income tax implications, and the funds will assist the person with special needs without compromising his benefits. If the family has other assets outside of the retirement plan, it may make sense to fund the special needs trust with those assets while leaving the retirement plan to other beneficiaries.

Employer-sponsored life insurance can be essential, especially for younger families. In many cases, companies will provide small policies that pay a death benefit equal to a year or two of salary. Employees usually have the option to purchase additional insurance, often at a discount, through their employer’s benefit program. The same concerns regarding retirement account beneficiaries apply when naming beneficiaries of life insurance policies. However, life insurance can often be a great option for funding a special needs trust, because it provides a relatively low-cost way to provide a much larger benefit to the person with special needs. In some cases, employees who have children with special needs may consider naming a special needs trust as the primary beneficiary of their company life insurance policy, and they will often purchase additional insurance to guarantee that funds will be available for their child with special needs if they were to pass away.

If you’re saving for retirement or if you have life insurance, come see us to make sure you’re maximizing the value of these assets for your family and not inadvertently interfering with public benefits for your child with special needs.

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Funding a Special Needs Trust With Life Insurance

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Funding a special needs trust (SNT) with enough money to pay for the living expenses of a child with special needs can be a daunting task for many families. The costs of providing a home and care, as well as a care manager to take the place of the parents when they are no longer around, exceed the resources of most families. A solution for many parents is to fund a special needs trust with life insurance. In these instances, a parent will take out a life insurance policy on his or her life to ensure that once the parent is gone, monies will be available to care for the child with special needs.

There are many benefits to funding a SNT with life insurance. For example, life insurance proceeds can be paid to a SNT free of taxation. Life insurance also typically pays proceeds in a short time period and so can ensure that the special needs child has the cash needed to provide for his or her long-term care. Further, a paid-up life insurance policy will guarantee future funding of a SNT while keeping the parents’ estate intact for other family members.

The various types of life insurance that can be used to fund a SNT include:

Term Life Insurance: Term life insurance provides coverage for a defined period of time, normally the time in which premiums are paid. After that period ends, the policyholder can choose to continue to pay for the policy or end coverage. A term policy pays a benefit should the policyholder die within the period covered under the policy. The premiums for term policies typically increase each year as the insured gets older or are level for a specified number of years, such as 20, after which the policies are typically dropped due to the steep increase in premiums at the end of the guaranteed term.

Whole Life Insurance: Unlike term insurance, a whole life policy lasts for the policyholder’s entire lifetime and provides both death benefit protection and cash value. Part of the premium paid by the policyholder goes into a cash account which accumulates over time. The cash value tends to accumulate at a higher rate when the policyholder is younger and lessens as she ages. Further, many of these policies pay dividends, which add additional value to the policy. Policyholders may withdraw money from their whole life policy but will be charged a fee or, in the case of a loan, the holder will be obligated to pay back the borrowed amount with interest.

Universal Life Insurance: A universal life policy permits the policy holder to adjust death benefits and premium payment to fit any change of circumstances for the holder. Premiums can be credited to an accumulation fund from which premium costs are deducted and to which interest is credited.

Variable Life Insurance: The variable life insurance policy’s cash value is tied to the performance of financial markets.

Survivorship Life Insurance: Also known as a second-to-die life insurance, this policy is taken out on the lives of two people and provides benefits only upon the death of the second insured person.

Some insurance advisors and financial planners recommend survivorship life insurance for funding a SNT trust due to:

  • The lower cost of the policy;
  • The funds become available upon the death of the second insured, when the funds would be most needed;
  • Underwriting (i.e., the process by which an insurance company determines the insurability of the policyholder and rate of premiums) of the policy is less strict since two lives are being insured;
  • Policies are available as either whole or universal life; and
  • Estate taxes can be delayed until both parties die.

Is a Survivorship Policy a Good Idea?

Some insurance advisors and financial planners advise their clients to use care when funding a SNT with survivorship life insurance. For those families that have financial constraints, a survivorship policy could leave the living spouse with significant financial hardship.

Some insurance advisors and financial planners recommend against survivorship insurance. They point out that there is no guarantee that the survivor will provide for the SNT beneficiary. The survivor may dilute the assets, give them to another favored party, and may not have the ability or inclination to set up a SNT.

While funding a SNT with life insurance may be the best bet for many families, it is essential to ensure that all factors are considered by consulting with an insurance advisor, financial planner and attorney, each of whom is experienced in working with individuals with special needs and their families.

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Trust Protector Can Look Out for Beneficiary’s Interests

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One of the most important decisions a special needs trust’s donor (the person who supplies the funds for the trust) makes is the choice of a trustee for the trust. A trustee typically manages the day-to-day operations of the trust, often making distributions to the trust’s beneficiary, investing the trust’s assets, and paying the trust’s bills. But how can the donor make sure that the trustee will properly manage the trust when the donor is no longer around to keep an eye on the trustee, especially if the trust’s beneficiary is not capable of supervising his own trustee? In many cases, a trust protector can ensure that a beneficiary is protected from trustee mismanagement.

Once she assumes office, a trustee almost always serves in a “fiduciary capacity,” meaning that she is in a position of trust and confidence and has a legal duty to properly manage the trust’s assets while keeping in mind the best interests of the trust’s beneficiary. A fiduciary is held to a high standard of conduct, and she owes the trust’s beneficiary a strict duty of loyalty. However, in many cases involving special needs trusts, the beneficiary of the trust is unable to properly enforce this fiduciary duty because of his special needs. This is where a trust protector comes in.

A trust protector is a person chosen by the donor who is responsible for monitoring the trustee’s actions. The trust protector’s duty is to the trust’s beneficiary as an additional pair of eyes, making sure that the trustee is properly performing her job. The trust protector typically has access to the trust’s accounts, and can compel a trustee to produce a summary of what she has done for the beneficiary. If a trust protector believes that the trustee is not properly performing her duties, he can usually fire the trustee. Depending on how the trust is drafted, the donor can even give the trust protector the power to name a new trustee if the donor has not done so himself in the trust document. (Most of the time, however, the trust protector must name an independent trustee as the new trustee, avoiding the scenario where the trust protector fires a trustee only to name himself as the new trustee).

Trust protectors may be useful in a variety of situations. Take the case of Jennifer and her son, Adam. Jennifer is elderly and would like to make sure that her son, who has special needs, is cared for at home for as long a possible when she is gone. So Jennifer decides to establish a special needs trust that will hold her home for Adam’s benefit, and she funds this trust with enough money to make sure that the property is well kept and that the bills are paid. However, Jennifer’s closest relative, her niece Margaret, does not want to serve as trustee of Adam’s trust because she does not want the added responsibility of managing a home. Jennifer decides to name John, a friend of hers who knows Adam and who runs a property management company, as the trustee instead. Although Jennifer trusts John, she decides to name Margaret as a trust protector to review his yearly accounts and make sure that he charges the proper amount for his services and is keeping the property in good shape.

Every special needs trust is different, and in many cases, especially when a donor is serving as trustee, a trust may not initially need a trust protector. The best way to decide if your special needs trust should include one is to speak with your qualified special needs planner.

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Wait, That Special Gift from Grandma Could End Up Costing You Thousands: How a “Sole Benefit Trust” Can Either Hurt or Help a Person With Special Needs

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When helping older clients quickly qualify for Medicaid coverage of long-term care, elder law attorneys often ask right at the outset, “Do you have a relative with special needs?” The reason this question is so important is because under federal Medicaid law, someone applying for Medicaid long-term care (nursing home) benefits can transfer her assets into a trust for the “sole benefit” of a person with disabilities, and that transfer will not disqualify the Medicaid applicant from receiving benefits. In other words, a senior who is willing to give away her assets to a person with special needs, and who meets all the other Medicaid eligibility requirements, can almost always qualify for Medicaid quickly.

This sounds like a great deal for both the Medicaid applicant and the person with special needs. But as with most things that sound too good to be true, funding a so-called “Sole Benefit Trust” comes with a big catch in some states — for the person with special needs.

In order for a trust to qualify as a Sole Benefit Trust, and thereby enable the senior to qualify for Medicaid when she transfers her assets into it, the trust must provide a benefit only to the person with special needs. This means that unlike typical special needs trusts, a Sole Benefit Trust cannot have a remainder beneficiary who receives the trust assets once the person with special needs passes away. Instead, at least in some states, the Sole Benefit Trust must pay out all of its assets to the person with special needs over his actuarial life expectancy. So, for example, if the Sole Benefit Trust is funded with $500,000, and the actuarial life expectancy of the trust beneficiary at the time the trust is funded is 25 years, the trust will state that the trustee must pay the beneficiary at least $20,000 a year.

Unfortunately, if a person with special needs who is receiving Supplemental Security Income (SSI) or Medicaid becomes the beneficiary of a Sole Benefit Trust in states that require actuarially sound distributions, there is a very strong likelihood that he will lose his benefits. This is because SSI and Medicaid are “means-based” programs that have very strict income and asset limits and they may count Sole Benefit Trusts as available assets. So even though the senior who transferred her assets into the Sole Benefit Trust may be able to receive her Medicaid benefits, she may have unknowingly disqualified her relative with special needs from receiving his own important government benefits.

Still, there is some good news for people who would like to set up a Sole Benefit Trust for a person with special needs. Social Security Disability Insurance (SSDI), the other main federal benefit program for people with special needs, does not have income and asset restrictions. If a person with special needs is receiving SSDI and is never going to qualify for SSI or Medicaid because his SSDI payments are too high, he can probably be the beneficiary of a Sole Benefit Trust since he is not worried about having extra income or assets. In these cases, everyone wins — the senior can qualify for long-term care, and the person with special needs receives additional income.

Sole Benefit Trusts are often marketed to seniors as a quick-fix Medicaid spend-down tool, and they do accomplish that goal. But uninformed planning could seriously harm the person with special needs at the other end of the trust.

Before creating any trust for the benefit of a person with special needs, or a family member of a person with special needs, contact special needs attorneys Kurt Zimmerman or Sarah Spangler at 954-202-7440, www.ZimmermanLaw.com, kurt@zimmermanlaw.com.

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Questions Answered — What You (and Your Loved Ones) Need to Know About Long-Term Care Insurance

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With nursing home care in some parts of the country costing as much as $10,000 a month, a long-term need for care can deplete even the best-planned estate. As a result, many seniors purchase long-term care insurance to cover this risk. One great advantage of this insurance is that most policies now cover home care and assisted living care as well as nursing home care, causing some insurance agents to describe it as avoid nursing home insurance. Having this insurance can be a lifesaver for a senior needing care, as well as for his or her spouse and children.

The biggest problem with policies now is the cost of the premiums being out-of-reach for most seniors and the refusal of insurance companies to guarantee their rates. Another issue with long-term care insurance is that by the time many people purchase policies, they are uninsurable due to health problems. One solution to this problem, of course, is to purchase policies while you are young and healthy. The other solution is to shop around. Every company has its own underwriting criteria.

What to Look for In a Long-Term Care Insurance Policy

One of the difficulties in shopping for long-term care insurance is that the different policies are almost impossible to compare. The first step is to choose a solid insurance company. Because it is likely you won’t be using the policy for many years, you want to make sure the company will still be around when you need it. Make certain that the insurer is rated in the top two categories by one of the services that rates insurance companies, such as A.M. Best, Moodys, Standard & Poor’s, or Weiss.

Typically, policies provide a daily benefit up to a specified dollar amount for a specified period of time. For instance, a policy may provide a daily benefit level of $150 for three years of coverage, for a total potential benefit of $165,000. On this basis alone, it would seem relatively easy to compare two policies. But then the variables begin:

  • What is covered? You can purchase a policy that only covers nursing home care, or one that will also cover home health and assisted living care. Most policies today cover care no matter where it is provided, while older policies were more restrictive.
  • What is the trigger for qualifying for coverage? Typically, policies base qualification on cognitive impairment or the need for assistance in two or three activities of daily living (dressing, toileting, eating, transferring, bathing and continence).
  • Inflation riders. While $150 with your income may be sufficient to cover your cost of care today, what about 10 or 20 years from now? Buyers are given the option of purchasing an inflation rider with the policy, which typically provide that the daily benefit increases by 5 percent a year, either on a flat or compound basis. Such riders can significantly increase the annual premiums. A rule of thumb some advisors follow is that purchasers under age 70 should purchase an inflation rider and those over age70 should not.
  • Elimination period. The next choice is the length of the elimination period, which is the period of time the insured must wait before the policy will kick in. You will have to pay long-term care expenses while you wait. This waiting period can be between 0 and 90 days, or even longer. The longer the elimination period, the lower the premium.
  • Claims record. The most important variable in choosing between companies has to do with their claims record. Do they honor claims on their policies on a timely basis without too much hassle, or do they put up roadblocks every step of the way? An article in the March 27, 2007, issue of The New York Times describes the practice of some insurance companies setting up bureaucratic barriers to the filing of claims for coverage in order to save money. The article focused on three companies, Conseco, Penn Treaty, and Banker’s Life and Casualty, which appear to purposely create roadblocks to coverage claims. For more info, click here. Keep in mind that if in order to qualify for insurance you fail to tell the insurer about an illness, the company may refuse you coverage at the time benefits are needed. It is better to be denied a policy and to be able to plan knowing that coverage is not available than to believe that coverage will be forthcoming, only to have it denied when it is needed. Likewise, you should make sure that you purchase from an insurance company that evaluates–or in insurance company parlance “underwrites”–the policy from day one. If not, the company could refuse you coverage when they evaluate the application at a later date.

Policies also offer the option of naming a second person to receive notice of any late premium payment. In the past many policyholders stopped paying premiums due to the onset of cognitive impairment, losing the policies just when they needed them. Now, at least, someone else can be given notice and the opportunity to step into the breach and save the policy.

Many potential purchasers of long-term care insurance object to the fact that in the best case scenario they’ll never use the policies and will never reap a benefit from their investment. As a result, some companies are beginning to offer combined long-term care and life insurance products. The buyer will have to determine whether this is a better deal than separate long-term care and life insurance policies.

One of the drawbacks of long-term care insurance is that companies are usually unwilling to guarantee that the premiums will not rise over time. One solution is an option offered by some companies known as 10-pay policies. These policies only require 10 annual premium payments and then the policies are paid up for life. Of course, the premiums are higher over those 10 years, but when done the client’s long-term care funding is complete.

For a list of questions to ask before purchasing long-term care insurance, click here.

For more information on what a long-term care insurance policy should include, click here.

When Should You Purchase Long-Term Care Insurance?

The younger you purchase a policy, the lower the premiums will be. But if you are in your 40s, do you want to purchase insurance that you are unlikely to need for 40 years? Given the changes in the long-term care market place and in long-term care insurance itself over the past 10 to 15 years, it is hard to imagine what the world will look like in 40 years.

But if you wait until you are in your 70s, the premiums will be extremely high and you may be uninsurable due to health reasons. In 2005, a policy offering a $143 per day long-term care benefit for 5.5 years, with an inflation rider, cost a 55-year-old a national average of $1,877 a year, while the same policy had an annual premium of $2,003 for a 65-year-old and $2,604 for a 79-year-old.

So, the ideal time is probably in your 50s and 60s. One approach is to see how the premiums fit into your life and other obligations. If you have children who have not yet graduated from college, they will be your major concern. You should carry enough life insurance to see them through. But after your children, if any, are on their own, you might take the funds you were using to pay for life insurance premiums and use them to long-term care insurance premiums.

How Much Insurance Should You Purchase?

A number of considerations go into how much insurance any consumer should buy. In many areas of the country, nursing homes cost as much as $300 a day and assisted living facilities can cost more than half that amount. Home care can be less or more expensive, depending on the amount and level of care required.

One easy way to calculate a daily benefit is to take the average cost of care where you live or are likely to live when needing care and subtract from that your daily income. If, for instance, nursing homes cost $300 a day and your income is $3,000 a month, or $100 a day, then your daily benefit should be $200 a day.

The next factor is what period of time the policy covers. The shortest period of coverage available is two years. But policies can be purchased for longer periods of time or for the insured’s lifetime. Of course, the longer the policy’s coverage period, the higher the premium.

Most people don’t need lifetime coverage, so a good length of time is usually five years. It is unusual for someone to need care for more than five years. In addition, as explained in the discussion of Medicaid, Medicaid penalizes such transfers by imposing a five year period of ineligibility. If you purchase five years of long-term care insurance coverage, you could transfer most or all of your assets to your children or into trust, pay for your care with your insurance over five years and then, if your assets are spent down, qualify for Medicaid coverage.

A policy paying $200 a day for five years will be expensive, especially if it includes an inflation rider. For those who cannot afford such coverage, you could think of long-term care insurance as “avoid nursing home” insurance. Under this approach, you may purchase enough insurance to pay for home care or assisted living care, which are usually not fully covered by Medicaid.

So, in the example above, if you purchased insurance with a daily benefit of $100 a day, you would have $6,000 a month to cover your living expenses plus home care or assisted living costs. Since the premium for this policy would be half that for one with a daily benefit of $200, it would be much more affordable.

For a further discussion of “How Much Long-Term Care Coverage Is Enough,” click here.

For a more detailed discussion of how to reduce long-term care insurance costs, click here.

Which Spouse Should Get Coverage?

Often, a married couple will be able to afford coverage for only one spouse. Looking at statistics alone, the wife should purchase the policy. In our society women tend to live longer than men and to provide more care than men. The result is that women are much more likely than men to end up in a nursing home for a long period of time. In addition, the Medicaid rules provide some protection for the spouse of a nursing home resident. For these reasons, the best bet for couples who can afford the premiums for one policy only is to purchase it for the wife. Couples should bear in mind, however, that this is playing the odds and is not a sure thing.

On the other hand, some companies offer incentives for both spouses to purchase coverage. The incentive may be either a premium discount or allowing both spouses to share the same coverage.

Long-Term Care Insurance and Medicaid Planning

While in large part people who purchase long-term care insurance and those who plan to qualify for Medicaid coverage of long-term care costs fall into separate groups, there are at least two situations where they overlap.

The first group is seniors who cannot afford to purchase lifetime long-term care insurance coverage. These individuals may want to purchase long-term care insurance coverage for five years. They may then transfer assets to family members or to a trust, keeping enough funds so that with the long-term care insurance benefit they can pay for their care for the subsequent five years. After five years have passed, the Medicaid penalty for transferring assets will have expired, permitting them to be eligible for Medicaid coverage if their other assets have been spent down to the appropriate limit.

The second group is seniors who are healthy and wish to transfer assets now, but who don’t have enough funds to cover five years of care if they had a stroke or other adverse medical event soon after the transfer. These seniors could purchase long-term care insurance to cover the five-year period after the transfer. They may not have enough funds or income to pay the premiums indefinitely, but are able to do so for five years, at the end of which they can decide whether to continue the policy, perhaps with the assistance of children.

For example, suppose a senior owns a home that she wants to protect, but little else. She could protect the home by transferring it into an irrevocable trust, causing her to be ineligible for Medicaid coverage for the subsequent five years. She would then purchase long-term care insurance and hold the policy for five years. If, for instance, the premiums on the policy are $5,000 a year and the house is worth $500,000, $25,000 is a very reasonable price to pay to protect $500,000.

For more on Medicaid planning, click here.

Partnership Policies

Many middle-income people have too many assets to qualify for Medicaid but can’t afford a pricey long-term care insurance policy. In an effort to encourage more people to purchase long-term care insurance, the Deficit Reduction Act of 2005 (DRA) created the Qualified State Long Term Care Partnership program. The program expands to all states the partnership programs that were previously available only in four states: California, Connecticut, Indiana and New York.

The program offers special long-term care policies that allow buyers to protect assets and qualify for Medicaid when the long-term care policy runs out. Private companies sell long-term care insurance policies that have been approved by the state and meet certain standards, such as having inflation protection. The program is intended to provide incentives for people to purchase long-term care insurance policies that will cover at least some of their long-term care needs. As of June 1, 2009, 29 states had implemented partnership programs: Arkansas, California, Colorado, Connecticut, Florida, Georgia, Idaho, Indiana, Kansas, Kentucky, Maryland, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, South Carolina, Tennessee, Texas, Virginia, and Wisconsin. For more information on partnership programs and on long-term care insurance in general from the National Clearninghouse for Long-Term Care Information, click here.

Under the new Qualified State Long Term Care Partnership program and California’s and Connecticut’s programs, the asset protection offered by partnership policies is dollar-for-dollar: for every dollar of coverage that your long-term care policy provides, you can keep a dollar in assets that normally would have to be spent down to qualify for Medicaid. So, for example, if you’re single, you would normally be allowed only $2,000 in assets in order to qualify for Medicaid coverage of long-term care. But if you buy a long-term care insurance policy that provides $150,000 in benefits, you would be allowed to retain $152,000 in assets and still qualify for Medicaid. (These states set limits on the assets that can be protected.)

In New York, the partnership policy benefits are even more significant. Once you have exhausted the benefits from your long-term care partnership policy, you can qualify for Medicaid coverage no matter your level of assets. In other words, an unlimited amount of assets can be protected.

Indiana offers either of the above models, depending on when the policy was purchased and the policy’s design.

Bear in mind that currently the Medicaid asset protection will only work if you receive your long-term care in the state where you bought the policy, or in another partnership state that has a reciprocal agreement with the first state.

The purpose of the partnership programs are to reduce Medicaid costs, however a study by the Government Accountability Office indicates that any cost savings will be limited. Click here to read the study.

The Tax Deductibility of Long-Term Care Insurance Premiums

Qualified long-term care insurance policies receive special tax treatment. To be “qualified,” policies must adhere to regulations established by the National Association of Insurance Commissioners. Among the requirements are that the policy must offer the consumer the options of “inflation” and “nonforfeiture” protection, although the consumer can choose not to purchase these features.

The policies must also offer both activities of daily living (ADL) and cognitive impairment triggers, but may not offer a medical necessity trigger. “Triggers” are conditions that must be present for a policy to be activated. Under the ADL trigger, benefits may begin only when the beneficiary needs assistance with at least two of six ADLs. The ADLs are: eating, toileting, transferring, bathing, dressing or continence. In addition, a licensed health care practitioner must certify that the need for assistance with the ADLs is reasonably expected to continue for at least 90 days. Under a cognitive impairment trigger, coverage begins when the individual has been certified to require substantial supervision to protect him or her from threats to health and safety due to cognitive impairment.

Policies purchased before January 1, 1997, are grandfathered and treated as “qualified” as long as they have been approved by the insurance commissioner of the state in which they are sold. Most individual policies must receive approval from the insurance commission in the state in which they are sold, while most group policies do not require this approval. To determine whether a particular policy will be grandfathered, policyholders should check with their insurance broker or with their state’s insurance commission.

Premiums for “qualified” long-term care policies will be treated as a medical expense and will be deductible to the extent that they, along with other unreimbursed medical expenses (including “Medigap” insurance premiums), exceed 7.5 percent of the insured’s adjusted gross income. If you are self-employed, the rules are a little different. You can take the amount of the premium as a deduction as long as you made a net profit–your medical expenses do not have to exceed 7.5 percent of your income.

The deductibility of premiums is limited by the age of the taxpayer at the end of the year, as follows (the limits will be adjusted annually with inflation):

Age attained before the end of the taxable year Amount allowed as a medical expense in

40 or under
71 or older

2008 2009
$ 310
$ 580
$ 1,150
$ 3,080
$ 3,850
$ 320
$ 600
$ 1,190
$ 3,180
$ 3,980

The Taxation of Benefits

Benefits from reimbursement policies, which pay for the actual services a beneficiary receives, are not included in income. Benefits from per diem or indemnity policies, which pay a predetermined amount each day, are not included in income except amounts that exceed the beneficiary’s total qualified long-term care expenses or $280 per day (in 2009), whichever is greater.

Consult With a Qualified Agent

If you are considering long-term care insurance, you need to consult with a qualified professional to determine whether you can afford this type of coverage and whether the policy you are considering meets necessary standards.

Long-term care insurance has attracted much media attention, and many insurance agents are now selling it. However, long-term care insurance is a complex product that should be approached with caution. ElderLawAnswers believes that insurance agents and brokers selling long-term care insurance should be highly trained and know how to recommend the right coverage based on a client’s finances and objectives.

One factor to consider is whether the agent has a professional designation in providing advice about long-term care. However, recommendations from friends and other advisors are also very important because they will have personal knowledge of the experience and integrity of the people they recommend.

One professional designation is that offered by the Corporation for Long-Term Care Certification, Certified in Long-Term Care (CLTC). The Corporation for Long-Term Care was established by a founding member of the National Academy of Elder Law Attorneys, the country’s premier legal organization addressing elder law issues, and is dedicated to training agents to solve clients’ long-term care needs.

Moreover, the Corporation for Long-Term Care Certification’s program is third party, meaning that it is not affiliated with any insurance company or supported financially by the long-term care insurance industry. This is important because you will want an agent who represents a number of insurance carriers so you can choose from a variety of policies. The Corporation for Long-Term Care Certification also has received the support of your state insurance regulator by the granting of continuing education credits.

You can visit the CLTC Web site at www.ltc-cltc.com, where you will find:

  • A directory of CLTC graduates in your area
  • The CLTC mission statement
  • Course material

Books on Long-Term Care Insurance

Choosing the Right Long-Term Care Insurance. A consumer advocate and insurance industry veteran delivers the straight stuff on whether you need long-term care insurance and how to make an intelligent purchasing decision.

Long-Term Care Insurance: The Essentials. This free booklet provides information on long-term care insurance.

Long-Term Care: Your Financial Planning Guide. If you have ever wondered whether you need long-term care insurance, this book is a must-read. The author argues that if you have assets of between $50,000 and $2 million (excluding home and car), you should seriously consider purchasing such coverage.

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What’s So Special About “Special Needs” Trusts?

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A special needs trust is set up for a person with special needs to supplement any benefits the person with special needs may receive from government programs. A properly drafted special needs trust will allow the beneficiary to receive government benefits while still receiving funds from the trust. There are three main types of special needs trusts, but first it is important to understand how a typical trust works.

A trust is really a relationship between three parties — a donor, who supplies the funds for the trust; a trustee, who agrees to hold and administer the funds according to the donor’s wishes; and a beneficiary or beneficiaries who receive the benefit of the funds. Often, but not always, the donor’s wishes are spelled out in a document that gives the trustee instructions about how she should use the trust assets. Trusts have been used for estate planning for a long time, and are highly useful tools for ensuring that a donor’s property is administered as he sees fit. One of the reasons trusts are so popular is that they usually survive the death of the donor, providing a low-cost way to manage the donor’s assets for others when the donor is gone.

A special needs trust is a trust tailored to a person with special needs that is designed to manage assets for that person’s benefit while not compromising access to important government benefits. There are three main types of special needs trusts: the first-party trust, the third-party trust, and the pooled trust. All three name the person with special needs as the beneficiary. A “first-party” special needs trust holds assets that belong to the person with special needs, such as an inheritance or an accident settlement. A “third-party” special needs trust holds funds belonging to other people who want to help the person with special needs. A pooled trust holds funds from many different beneficiaries with special needs.

The reason there are several different types of trusts has to do with regulations regarding Supplemental Security Income (SSI). SSI is a government program that assists people with low incomes who have special needs. In order to qualify for SSI, an applicant or beneficiary can have only $2,000 in his own name. If the person has more than $2,000 in his own name, (typically because of excess savings, an inheritance or an accident settlement), the government allows him to qualify for SSI so long as he places his assets into a first-party special needs trust. The trust must be created by the beneficiary’s parent or grandparent, or by a court, but it cannot be created by the beneficiary, even though his assets are going to fund the trust. While the beneficiary is living, the funds in the trust are used for his benefit, and when he dies, any assets remaining in the trust are used to reimburse the government for the cost of his medical care. These trusts are especially useful for beneficiaries who are receiving SSI and come into large amounts of money, because the trust allows the beneficiary to retain his benefits while still being able to use his own funds when necessary.

The third-party special needs trust is most often used by parents and other family members to assist a person with special needs. These trusts can hold any kind of asset imaginable belonging to the family member or other individual, including a house, stocks and bonds, and other types of investments. The third-party trust functions like a first-party special needs trust in that the assets held in the trust do not affect an SSI beneficiary’s access to benefits and the funds can be used to pay for the beneficiary’s supplemental needs beyond those covered by government benefits. But a third-party special needs trust does not contain the “payback” provision found in first-party trusts. This means that when the beneficiary with special needs dies, any funds remaining in her trust can pass to other family members, or to charity, without having to be used to reimburse the government.

A pooled trust is an alternative to the first-party special needs trust, and is discussed in greater detail here. Essentially, a charity sets up these trusts that allow beneficiaries to pool their resources for investment purposes, while still maintaining separate accounts for each beneficiary’s needs. When the beneficiary dies, the funds remaining in her account reimburse the government for her care, but a portion also goes towards the non-profit organization responsible for managing the trust.

Anyone can establish a special needs trust and, if the trust is properly drafted to account for tax planning, in certain situations gifts into the trust could very well reduce the size of the donor’s taxable estate. As if these are not enough reasons to create a trust, elderly people who are attempting to qualify for long-term care coverage through Medicaid can transfer their assets into a properly drafted third-party special needs trust for the sole benefit of a person with disabilities without incurring a transfer-of-assets penalty, allowing the elder to qualify for Medicaid and making sure that the person with disabilities is taken care of in the future.

Of course, every person with special needs is different, which means that every special needs trust is going to be different as well. The only way to determine which special needs trust is right for your family is to meet with a qualified special needs planner to discuss your needs. For assistance, contact special needs attorneys Kurt Zimmerman or Sarah Spangler at 954-202-7440, www.ZimmermanLaw.com, kurt@zimmermanlaw.com.

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Representative Payee – Not a Job to be Taken Lightly

 Estate Planning, Special Needs Planning No Comments


The Social Security Administration (SSA) manages the two largest government benefit programs for people with special needs, Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). Many of the people with special needs who receive these benefits are qualified to manage their own money and can make other financial decisions for themselves. The SSA sends these people their own benefit check each month.

However, when a person with special needs cannot make important financial decisions, either because of her disability or because she has not reached the age of majority, the SSA sends the benefits directly to a third party, known as a representative payee, who is charged with managing the funds for the beneficiary. When a parent or caregiver signs up to be a representative payee, they often do not take the time to truly explore what they are getting into, which could lead to trouble down the road. Here are a few key things to remember about being a representative payee.

It’s Not Your Money

The funds you receive are the beneficiary’s funds, not yours. When you agree to be a representative payee, you are responsible for managing the beneficiary’s money for their benefit, not yours. In almost all cases, this means that you are not allowed to charge a fee to be a representative payee. It’s easy to lose track of the beneficiary’s funds, especially when family finances are mixed together. As a representative payee, you must ensure that the monthly payments get to, and are used for, the beneficiary and no one else.

Don’t Commingle

The best way to ensure that the beneficiary’s funds are used for their benefit is to segregate the funds in a separate bank account. This account should reflect the beneficiary’s ownership of the funds, and should not be a joint account with the representative payee as the other owner. Instead, the bank account should be titled in the name of the beneficiary, with the representative payee noted on the account, i.e., “Your name, as representative payee for your child’s name.” Obviously, this can be difficult when you are serving as the representative payee for a minor child who lives with you. In these cases, the SSA says that the child should have his own savings account, even if most of his benefits are being spent out of the family’s checking account.

File Your Representative Payee Report

The SSA requires that a representative payee file an annual accounting called the Representative Payee Report. This report details what you, as the representative payee, have done with the beneficiary’s funds during the previous year. If you have kept accurate records of the beneficiary’s funds over the course of the year, the report will be very easy to fill out. Commingling funds, or not keeping accurate records of expenditures, can lead to an incredible headache when it comes time to file the report. Not filing the report, on the other hand, could lead to your removal as representative payee.

Know the SSI Rules

If you are serving as a representative payee for a person receiving SSI benefits, your job is made even more difficult by the SSI program’s stringent income and asset rules. For instance, SSI beneficiaries can have only $2,000 in their name in order to be eligible for benefits. As representative payee, you must make sure that you know the rules regarding asset accumulation and their effect on the beneficiary. You must also deal with any lump-sum payments that the beneficiary may receive as “past due” SSI benefits, which have their own set of rules. In a worse-case scenario, not knowing the rules can lead to loss of benefits and the possibility of overpayments that the beneficiary must repay from her own funds.

Get Help

As you can see, being a representative payee is a difficult job that should not be undertaken lightly. The SSA offers information for representative payees here, but the best way to make sure that you have a handle on your duties is to speak with Kurt Zimmerman or Sarah Spangler, both of whom are qualified special needs planners at our firm who can explain the intricacies of the system and give you tips that fit your particular family member.

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