New Special Needs Trust Law

President Obama signed into law an amendment to the special needs trust that permits a competent disabled individual to establish his own special needs trust.  The National Academy of Elder Law Attorneys (NAELA) lobbied very hard for this amendment to the law.

A special needs trust is an irrevocable discretionary trust that permits a disabled individual to receive needs-based government benefits, such as Medicaid or Supplemental Security Income, while still having the benefit of his money that is being held in the trust.  A federal statute that is part of the federal Medicaid Act authorizes the creation of special needs trusts.

As with many issues affecting an individual’s Medicaid eligibility, I like to explain how a special needs trust works by way of example.  Assume that Mr. Smith, aged forty-five, is involved in a car accident.  As a result of the accident, Mr. Smith is rendered totally and permanently disabled.  His medical bills exceed his health insurance limits (assuming he has health insurance) and his assets are depleted paying for his medical expenses.

Eventually, Mr. Smith qualifies for Medicaid benefits.  Medicaid is a federal-state health payment program for needy individuals.  Because Mr. Smith is now destitute and in need of medical assistance on a regular basis, Mr. Smith qualifies for Medicaid benefits.

Several years after his accident, Mr. Smith receives an award from a personal injury lawsuit.  Mr. Smith sued the driver who caused the car accident that caused his injuries, and he settles the lawsuit several years after the accident.

In the settlement, Mr. Smith receives compensation for his injuries of $400,000, after paying all of the costs and expenses associated with the lawsuit.  Since Medicaid has an asset limit of $2,000, Mr. Smith’s award of $400,000 puts him significantly over the asset limit for Medicaid eligibility.

If Mr. Smith were simply to retain the $400,000, he would be disqualified for Medicaid benefits.  Since Mr. Smith is totally and permanently disabled and has many, continuing medical expenses associated with his injuries, the $400,000 he received from the lawsuit would—absent planning—be consumed by medical expenses.  After Mr. Smith spent the $400,000, he could re-qualify for Medicaid benefits.

From a practical standpoint, this would mean that Mr. Smith received no benefit whatsoever from the lawsuit settlement.  The settlement would be used to pay for the medical care and services that the Medicaid program would have paid absent the award from the lawsuit.

In 1993, the special needs trust statute was specifically put in place to avoid such a result.  A special needs trust permits Mr. Smith to transfer his $400,000 into an irrevocable trust, to continue to receive the benefits of the money in the trust for his use, and to continue to receive Medicaid benefits.  Mr. Smith has the best of both worlds—the use of his money from the lawsuit for his needs and the benefits of the Medicaid program.

In order to establish a special needs trust, Mr. Smith must be under age sixty-five.  In my example, let’s assume he’s forty-eight at the time he receives the settlement of $400,000.  Mr. Smith must also be disabled; in my example he is.

The special needs trust must contain a payback provision. What this means is that if Mr. Smith dies and if any of the $400,000 remains in the trust at the time of his death, then the money that remains will go to the State in order to reimburse the State for any Medicaid benefits the State paid on Mr. Smith’s behalf during Mr. Smith’s life.  Assuming the State were reimbursed in full and money still remained in the Trust, the excess money could pass to Mr. Smith’s family.

And, until a few days ago, the Trust had to be established by a parent of Mr. Smith, a grandparent of Mr. Smith, Mr. Smith’s court-appointed guardians, or a court. Note that Mr. Smith could not establish his own trust.  What the change in the law permits is Mr. Smith to establish his own trust, if Mr. Smith is competent to establish his own trust.  If Mr. Smith is not competent, then the trust must be established by Mr. Smith’s parent, grandparent, guardian (if any), or a court.

New Medicaid Figures

The new Medicaid spousal impoverishment figures have been published, so I thought I’d take this opportunity to review the meaning of the figures.  Many people would be surprised by the generosity of the Medicaid program when dealing with a married couple.

Medicaid is a health payment plan for needy individuals. If a person qualifies for Medicaid, Medicaid will pay for a person’s long-term care needs, such as care in a nursing home or an assisted living residence.

In order to qualify for Medicaid, a person must have a limited amount of resources and insufficient income to pay for his care.  When an applicant for Medicaid is married, his spouse—called the Community Spouse in Medicaid parlance—can retain a certain amount of assets.

The Community Spouse can retain the home irrespective of the value of the home.  So, theoretically, a spouse could live in a million-dollar home and the home would be exempt.  I have applied for Medicaid for thousands of people, and I can tell you that I have never had a couple with a million-dollar home.  But, theoretically, the Community Spouse could retain such a home.

In addition, the Community Spouse could retain a car irrespective of value when there is a Community Spouse.  Finally, she can retain all of the household goods and effects in the home.

The home, a car, and the personal goods are all non-countable resources.  The Community Spouse can retain the non-countable resources without question.

The Community Spouse can also retain a certain amount of the countable resources, such as cash, stocks, bonds, annuities, IRAs, etc.  The countable assets that either spouse owns are countable resources, so it doesn’t matter if the countable resource is titled in the name of the husband or the wife.  All countable resources count against the husband’s eligibility for Medicaid.

This is where the “spousal impoverishment figures” come into play. The spousal impoverishment figures typically change every year with inflation.  These figures determine how much of the couple’s countable resources the Community Spouse can retain.

In 2017, the Community Spouse can retain a maximum of $120,900 of the couple’s countable resources.  The Community Spouse can retain a minimum of $24,180 of the couple’s countable resources.

What this means is best illustrated by way of example.  Assume that Mr. Smith and Mrs. Smith own a home, a car, and $300,000 of cash/stocks/bonds.  Mr. Smith enters a nursing home.  Mrs. Smith can retain the home, a car, and $120,900 of the cash/stocks/bonds.  Since the Smiths own more than twice the maximum amount of countable resources ($120,900 * 2 = $241,800), Mrs. Smith can retain the maximum amount of countable resources that a Community Spouse can retain, or $120,900.

If the Smiths owned $200,000 of cash/stocks/bonds, then Mrs. Smith could retain $100,000 of countable resources, plus the home and car.  Since the Smith’s total countable resources ($200,000) are less than two times the maximum amount of countable resources ($241,800), Mrs. Smith can only retain $100,000.

If the Smiths owned $100,000, then Mrs. Smith could retain $50,000.  If the Smiths owned $50,000, then Mrs. Smith could retain $25,000.  If the Smiths owned $25,000, then Mrs. Smith could retain the minimum amount of countable resources, or $24,180.

As stated, Mrs. Smith can always retain the non-countable resources—the home, the car, and the household goods.  So, when dealing with a married couple, Medicaid, which many people call a “welfare program,” can be quite generous.  With additional planning, Mrs. Smith could retain far more assets than many people would ever believe, often all of the couple’s assets.

The State of Estate and Gift Tax

With recent changes to the federal and state estate tax laws, the impact of estate taxes, as well as federal gift tax laws, have been greatly reduced.  In fact, the impact of these laws on the vast (vast) majority of individuals is non-existent.

The federal government imposes a tax on estates with a value in excess of $5,450,000.  A married couple can shelter twice that amount by simply checking a box on a filed federal estate tax return.

The federal government also imposes a gift tax on gifts in excess of $5,450,000.  A married couple can make gifts of twice that amount before paying tax.  There is no state gift tax.

Many people believe that they can only gift $14,000 a year without paying gift tax.  The $14,000 amount is called the annual exclusion amount.  The full rule is that a person can gift $5,450,000 in his lifetime without paying gift tax; in addition, he can gift $14,000 each and every year to an unlimited number of people without reducing his $5,450,000 lifetime credit against gift tax.

To give an example, Mr. Smith could gift $14,000 each and every year to every member of his family without reducing his $5,450,000 lifetime credit against gift tax.  If Mr. Smith were to gift $15,000 to one family member, then his lifetime exclusion would be reduced from $5,450,000 to $5,449,000.  Stated more pragmatically, unless you are worth more than $5,450,000, there is no chance whatsoever that you will ever pay gift tax no matter how much money you give away.

It is the person making the gift, not the person receiving the gift, who pays the gift tax.  So, if Mr. Smith were to gift $6,000,000 to his son, his son would never pay gift tax as a result of the gift.  Mr. Smith would pay gift tax on approximately $550,000, the amount by which his gift of $6,000,000 exceeds his lifetime credit against gift tax of $5,450,000.

But, once again, if you aren’t planning on giving away more than $5,450,000, then do not worry about gift tax.

The state of New Jersey imposes an estate tax.  Currently, the credit against New Jersey estate tax is equivalent to $675,000.  If Mr. Smith dies and his estate is worth more than $675,000, then his estate might pay New Jersey estate tax.

In January 2017, the credit against New Jersey estate tax increases to $2,000,000.  In January 2018, the New Jersey estate tax is eliminated.

What does all of this mean to you?  What this means is, by January 2018, unless you own assets worth more than $5,450,000 (and by the way, the credit against federal estate tax and federal gift tax increases every year) or gift more than $5,450,000, then you never have to worry about estate tax (federal or state) or gift tax ever again.

Furthermore—and what I am about to say is speculation—we just elected Donald Trump as president.  Mr. Trump is known to be a very wealthy man who is very interested in having his children run his businesses.  He has stated that he intends to eliminate the federal estate tax (and the concomitant federal gift tax).

Based upon these facts, I would speculate that the federal government will eliminate the federal estate and gift taxes in the near future.  So, in all likelihood, by January 2018, you will not pay estate tax (federal or state) or gift tax no matter what the value of your estate is and no matter how much money you gift away.

But since most of us do not have assets worth $5,450,000 and never will, from a practical standpoint, estate tax and gift tax are already dead or soon will be.