NJ Association of Public Accountants OVERVIEW OF TRUSTS

NJ Association of Public Accountants OVERVIEW OF TRUSTS NOVEMBER 5, 2019 Presented by Donald D. Vanarelli, Esq. __________ Certified Elder Law Attorney Accredited VA Attorney Recipient, Lifetime Achievement Award By New Jersey State Bar Ass’n, Elder and Disability Law Section Named to the NJ “Super Lawyer” list, 2007 - 2020

OVERVIEW OF TRUSTS

WHAT IS A TRUST? § A written instrument executed by a grantor/settlor for the benefit of the beneficiary(ies) § The grantor/settlor transfers property to trustee(s), who own the property as fiduciary(ies). § The trustee(s) must use trust assets only as provided in trust agreement, or as provided by law. § There are many different types of trusts. § Trusts are not “one-size-fits-all” and can be customized to fit the needs of each client. § Trusts in my practice are used for estate planning and/or long-term care planning.

WHAT IS A TRUSTEE? n

REQUIREMENTS FOR CREATION OF A TRUST NEW JERSEY’S UNIFORM TRUST CODE N. J. S. A. 3 B: 31 -19 A trust is created only if: (1) The settlor has capacity to create a trust; (2) The settlor indicates an intention to create the trust;

REQUIREMENTS FOR CREATION OF A TRUST NEW JERSEY’S UNIFORM TRUST CODE N. J. S. A. 3 B: 31 -19 (cont’d) (3) The trust has a definite beneficiary or is: (a) a charitable trust; (b) A trust for the care of an animal (subject to limitations); or (c) A trust for a non-charitable purpose (subject to limitations)

REQUIREMENTS FOR CREATION OF A TRUST NEW JERSEY’S UNIFORM TRUST CODE N. J. S. A. 3 B: 31 -19 (cont’d) (4) The trustee has duties to perform; and, (5) The same person is not the sole trustee and sole beneficiary of all beneficial interests.

INTER VIVOS VS. TESTAMENTARY TRUSTS n

REVOCABLE VS. IRREVOCABLE TRUSTS ocable t n Settlor n Revocable Trust becomes irrevocable upon Settlor’s death or incapacity n Irrevocable Trust cannot be revoked by Settlor

REVOCABLE TRUSTS Revocable Living Trust: A trust created by a competent grantor during his/her lifetime which may be amended or revoked by the grantor at any time.

CREATION AND FUNDING A revocable trust may take several forms: 1. Funded trust with full power to grantor until disability or death, then to successor trustee. 2. Funded trust with power shared between grantor and co-trustee until grantor/s disability or death, then to co-trustee.

CREATION AND FUNDING (cont’d) A revocable trust may take several forms: 3. Funded trust, with grantor reserving no powers except revocation. Trustee may apply income and principal for the benefit of the grantor. 4. Unfunded trust with power of attorney authorizing funding and/or “pour-over” will.

TAX CONSEQUENCES Revocable trusts are disregarded as entities for purposes of the federal income and estate taxes. Income is taxed to the grantor. The grantor is liable for estate tax on the trust’s assets at his/her death.

Benefits of a Living Trust 1. 2. Living Trust is more likely to have detailed provisions for accountability and court review than a POA. Used to avoid probate in another state.

Benefits of a Living Trust (cont’d) 3. 4. 5. For the elderly, a living trust can be a way to have a co-trustee assume asset management. For single people who cannot rely on immediate family, a living trust may be useful. Since the trust is revocable, you can change and fine-tune the provisions before disability.

Drawbacks of a Living Trust 1. 2. Cost – lawyer must prepare the trust agreement. Administrative Hassles: - Property must be retitled and transferred to the trust - To transfer real estate, new deed

Drawbacks of a Living Trust (cont’d) - To transfer personal property, bill of sale needed New bank accounts must be opened Separate tax ID number and tax filings needed Must keep trust business and personal business separate

IRREVOCABLE TRUSTS n (limited exceptions) fers n estate (estate tax savings) ples: n GRITs, GRATs, GRUTs, CRATs, CRUTs, QPRTs

IRREVOCABLE TRUSTS (cont’d) n Limited usefulness as estate-planning device now (other than for estates in excess of $11. 4 M) n Useful for other purposes (Medicaid planning)

MODIFICATION/TERMINATION OF IRREVOCABLE TRUST NEW JERSEY’S UNIFORM TRUST CODE N. J. S. A. 3 B: 31 -27 (a) A noncharitable irrevocable trust may be modified or terminated upon consent of the trustee and all beneficiaries, if the modification or termination is not inconsistent with a material purpose of the trust.

MODIFICATION/TERMINATION OF IRREVOCABLE TRUST NEW JERSEY’S UNIFORM TRUST CODE N. J. S. A. 3 B: 31 -27 (cont’d) (b) A noncharitable irrevocable trust may be terminated upon consent of all of the beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust. A noncharitable irrevocable trust may be modified upon consent of all of the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust.

MODIFICATION/TERMINATION OF IRREVOCABLE TRUST NEW JERSEY’S UNIFORM TRUST CODE N. J. S. A. 3 B: 31 -27 (cont’d) (c) A spendthrift provision in the terms of the trust is not presumed to constitute a material purpose of the trust. (d) Upon termination of a trust under subsection a. or b. of this section the trustee shall distribute the trust property as agreed by the beneficiaries.

MODIFICATION/TERMINATION OF IRREVOCABLE TRUST NEW JERSEY’S UNIFORM TRUST CODE N. J. S. A. 3 B: 31 -27 (cont’d) (e) If not all of the beneficiaries consent to a proposed modification or termination of the trust under subsection a. or b. of this section, the modification or termination may be approved by the court if the court is satisfied that:

MODIFICATION/TERMINATION OF IRREVOCABLE TRUST NEW JERSEY’S UNIFORM TRUST CODE N. J. S. A. 3 B: 31 -27 (cont’d) (e) (1) if all of the beneficiaries had consented, the trust could have been modified or terminated under this section; and, (2) the interests of a beneficiary who does not consent will be adequately protected.

MODIFICATION/TERMINATION BASED ON UNANTICIPATED CIRCUMSTANCES NEW JERSEY’S UNIFORM TRUST CODE N. J. S. A. 3 B: 31 -28 The court may modify/terminate a trust if, because of unanticipated circumstances, modification/termination will further the purpose of the trust. The court may modify a trust if continuation on its existing terms would be impracticable, wasteful, or impair the trust’s administration.

REFORMATION OF A TRUST BASED ON MISTAKE NEW JERSEY’S UNIFORM TRUST CODE N. J. S. A. 3 B: 31 -31 The court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor’s probable intent if it is proven by clear and convincing evidence that there was a mistake of fact or law, whether in expression or inducement.

FIRST-PARTY VS. THIRD PARTY TRUSTS n First-Party (“Self-Settled”): Trust containing the beneficiary’s own assets n Third-Party: Trust containing the assets of a third party (usually a parent or grandparent)

COMMON USES OF TRUSTS Tax planning n Other estate planning goals n Planning for disabled children n Planning for long-term care of parent/s and other loved ones (Medicaid Planning) n

USE OF TRUSTS IN TAX PLANNING AND FOR OTHER ESTATE PLANNING GOALS Tax planning now usually limited to large estates n Federal estate tax exclusion: $11. 4 M (individuals); $22. 8 M (couples) n NJ Estate Tax: Eliminated

USE OF TRUSTS IN TAX PLANNING AND FOR OTHER ESTATE PLANNING GOALS (cont’d) Other estate planning goals n Remarriages: protect remarrying elder from financial exploitation n Protecting against “spendthrift” spouse or children

USE OF TRUSTS TO PLAN FOR DISABLED CHILDREN (DISCUSSED BELOW) n Ensure funds are available for disabled child’s care n Protect disabled child’s eligibility for public benefits based on need

USE OF TRUSTS FOR LONG-TERM CARE (MEDICAID PLANNING) Trusts nvehicles are used that can be to achieve Medicaid eligibility n rules helps to understand these trusts

BACKGROUND: MEDICAID § Joint federal & state program created under Title XIX of the Social Security Act of 1965. § Funding source for long-term care to the aged, blind and disabled. § Eligibility is based upon financial need: – Unmarried applicant’s countable resources cannot exceed $2, 000. 00; monthly income cannot exceed $2, 313. 00 (2019).

LONG-TERM CARE TRUSTS n n Individuals with excess income/resources can become eligible for Medicaid Gifts can be made to disabled loved ones without jeopardizing Medicaid eligibility.

FINANCIAL QUALIFICATIONS: INCOME All income is counted, including wages, SSA, pensions, annuities, interest, in-kind income, dividends, etc. except income from needsbased programs such as VA pension benefits. Countable income is based on the gross amount paid.

FINANCIAL QUALIFICATIONS: INCOME (cont’d) § Income for one person can be equal to or less than $2, 313 per month in 2019.

PLANNING FOR EXCESS INCOME USING A QIT § Under MLTSS, by using a Qualified Income Trust (QIT), those who need home and community-based services but have excess income can become Medicaid eligible. § Excess income placed in a QIT is not countable.

MEDCOM NO. 14 -15 QIT REQUIREMENTS May only be established by applicant, legal guardian, or POA o Must be irrevocable o May only hold income that is received by the Medicaid applicant o Income such as SSA benefits, etc. must be deposited in the month it is received o All income from a single source must be transferred to the QIT o

MEDCOM NO. 14 -15 QIT REQUIREMENTS (cont’d) n Resources (cash, proceeds from real estate sale, savings and investment accounts) cannot be transferred to a QIT n Income in QIT can be used only for certain expenses (applicant’s cost share, RXs, approved medical expenses, PNA, a spousal monthly maintenance allowance, health insurance premiums)

MEDCOM NO. 14 -15 QIT REQUIREMENTS (cont’d) § Trustees commissions up to 6%, if income remains in QIT after expenses are paid § Balance remaining after payment of expenses must remain in the QIT § Medicaid pay-back provision upon death of the Medicaid recipient

QIT INFORMATION / RESOURCES The New Jersey State website contains: § QIT template http: //www. state. nj. us/humanservice s/dmahs/clients/Qualified_Income_Tr ust_Template. pdf § “FAQ” page - http: //www. state. nj. us/humanservice s/dmahs/clients/QIT_FAQs. pdf

PLANNING FOR EXCESS RESOURCES § Outright transfers of assets (gifts) are subject to Medicaid eligibility penalty (based on value of the asset transferred) § “Look-back period: ” Medicaid will “look back” from application date to analyze asset transfers by the applicant

PLANNING FOR EXCESS RESOURCES (cont’d) § Some transfers are exempt: Transfer of the Medicaid applicant’s principal residence to a qualifying “caregiver child”; transfers to an adult disabled child § Current look-back period: 60 months

TRUSTS VS. OUTRIGHTS GIFTS Trusts are preferred method of making Medicaid-planning transfers: § Step-Up in tax basis § Grantor can reserve rights/powers § Outright gifting is riskier

GIFTING OUTRIGHT VS. IN TRUST STEP-UP IN BASIS § Outright transfer of a home results in a carry-over basis § By transferring home into a properlydrafted irrevocable trust, the beneficiaries receive a step-up in basis upon the death of the grantor/s.

GIFTING OUTRIGHT VS. IN TRUST STEP-UP IN BASIS (cont’d) § Example: Parent purchased a home for $100, 000. It is now worth $250, 000. If a parent gifts the home outright, child takes the asset with parent’s tax basis, and if child then sells the home for $250, 000, capital gains tax must be paid on the $150, 000 gain. If parent uses a trust, child takes the property with a stepped-up tax basis of $250, 000, and there will be no capital gains taxation if child sells the home for $250, 000.

GIFTING OUTRIGHT VS. IN TRUST RISKS OF OUTRIGHT GIFTING § Funds gifted are subject to donee’s divorce, death, debts, mismanagement § Example: Parent makes outright gift to only son, who has children himself. Son predeceases parent. Depending on later events, those funds could ultimately be distributed to someone other than parent’s grandchildren

DRAFTING AN IRREVOCABLE TRUST FOR MEDICAID PLANNING § Grantor Trust and Estate Inclusion: They are not the same thing § General Rule. IRC § 674(a) sets forth the general rule: grantor is treated as owner of a trust and taxed on its income if grantor or non-adverse party (or both) have power to affect beneficial enjoyment of the trust corpus or income without approval or consent of adverse party.

DRAFTING AN IRREVOCABLE TRUST FOR MEDICAID PLANNING (cont’d) Grantor Trust Powers (IRC 671 -679) § Income Retention IRC § 677 § Power to Substitute Assets of Equivalent Value IRC 675(4)(C) § Power to Add Charitable Beneficiaries IRC 674(b)(5)

DRAFTING AN IRREVOCABLE TRUST FOR MEDICAID PLANNING (cont’d) § Power to Remove and Replace Trustee 674(d) § Testamentary Limited Power of Appointment (IRC 2038(a)(1))

DRAFTING AN IRREVOCABLE TRUST FOR MEDICAID PLANNING (cont’d) While many other powers could be included to achieve grantor trust status, many could render the trust assets as “available” under the Medicaid rules

DRAFTING AN IRREVOCABLE TRUST FOR MEDICAID PLANNING (cont’d) § Estate Inclusion § Trust can be outside grantor’s estate for estate and gift tax purposes if grantor has not retained any powers that would cause estate tax inclusion § Transfer is incomplete for federal gift tax purposes if grantor retains sufficient dominion and control over the property. Treas. Reg. § 25. 2511 -2(b).

DRAFTING AN IRREVOCABLE TRUST FOR MEDICAID PLANNING (cont’d) § Distribution to lifetime beneficiaries § Distribution of trust principal to lifetime beneficiaries (NOT grantor) § Never obligate the lifetime beneficiaries to make distributions for the grantor’s benefit.

FUNDING THE TRUST Transfer as much of your assets at one time that you wish to protect from being considered “available” for Medicaid purposes.

FUNDING THE TRUST (cont’d) § Types of Assets to Transfer § Life Insurance § Stocks § Cash § Real estate § Investment Accounts § Etc.

DRAFTING PROVISIONS AND BEST PRACTICES § § § Absolutely No Right to Principal Termination Provision Payment of Taxes Power to Amend Right to Borrow Real Estate Provisions

TRUSTS ESTABLISHED BY THE DONEE / CHILD Medicaid applicant makes gift to child; child establishes a Donee Trust n n Applicant relinquishes all legal control over the transferred assets n Child establishes the trust and serves as trustee

TRUSTS ESTABLISHED BY THE DONEE / CHILD (cont’d) Trustee has discretion to distribute principal/income to the donee/child and issue n n Parent/applicant not a beneficiary of the trust n Trust assets distributed to the donee/child upon termination of the trust

TRUST ESTABLISHED BY THE APPLICANT/PARENT: AVAILABILITY Medicaid’s “any circumstances” test: 42 U. S. C. § 1396 p (d)(3)(B)(i) provides as follows: In the case of an irrevocable trust--if there any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual…

TRUST ESTABLISHED BY THE APPLICANT/PARENT: AVAILABILITY (CONT’D) Are there any circumstances in which payment of all or a portion of trust income or principal could be made to an applicant? If yes, n Any payment of income from the trust is considered to be the applicant’s income; n Any portion of the principal/corpus that could be paid under any circumstances to the applicant are available assets; n Any income or principal paid to other individuals which could have been paid to the applicant are considered transfers of assets.

TRUST ESTABLISHED BY THE APPLICANT/PARENT: AVAILABILITY (CONT’D) If there are no circumstances in which payment of all or a portion of trust income or principal could be made to an applicant, then analyze the trust for transfers of assets as of “the date the trust was established” or transfer to the applicant was foreclosed.

CHILDREN’S TRUST § Parent transfers assets directly to a Children’s Trust § Transfer to the trust = transfer of assets (Medicaid penalty) § Irrevocable trust for the benefit of the child; parent retains no rights § Child serves as trustee, may make distributions to children § Upon parent’s death, trust assets distributed in accordance with parent’s wishes

CHILDREN’S TRUST (cont’d) § Parent retains no access to income/principal § Funds not “available” § Children’s trust can be structured as Grantor trust: income taxed to parent & assets taxed in parent’s estate for step-up in basis

INCOME ONLY TRUST § Irrevocable; created and funded by Medicaid applicant § Not considered in determining applicant’s Medicaid eligibility § Parent transfers funds directly into Trust § Transfer to the trust = transfer of assets (Medicaid penalty)

INCOME ONLY TRUST (CONT’D) § Grantor/parent receives income from trust during the grantor’s lifetime § Grantor has no access to principal (theory: no right to principle = not “available”) § Income not usually payable to anyone other than applicant until applicant’s death § Design trust to permit trustee to make distributions to third parties

“SOLE BENEFIT OF” TRUST; DISABILITY ANNUITY TRUST § N. J. A. C. 10: 71 -4. 10: no penalty when individual transfers assets for sole benefit of individual’s spouse, disabled child, or to any other disabled person under age 65 § Assets can be transferred to an irrevocable “sole benefit of” annuity trust

“SOLE BENEFIT OF” TRUST; DISABILITY ANNUITY TRUST (cont’d) § DAT assets payable for sole benefit of beneficiary on actuarially sound basis § DAT must include Medicaid payback provision § Useful in “crisis” situations if beneficiary receives SSD & Medicare (if receives SSI/Medicaid, a Disability Annuity Special Needs Trust is appropriate)

RETAINED INTEREST TRUST Created and funded by Medicaid applicant Irrevocable Beneficiaries are children or heirs Applicant retains interest in trust property, e. g. special power of appointment § Trust corpus receives step-up in basis to current market value § §

SPECIAL NEEDS TRUSTS OVERVIEW n n Purpose: To preserve the disabled person’s eligibility for needs-based governmental benefits (SSI, Medicaid, DDD) while providing a vehicle to hold assets The assets may be funds owned by the disabled person (“first-party”), or funds contributed by the parents or other third parties (“third-party”), to supplement public benefits.

FIRST PARTY SPECIAL NEEDS TRUSTS SELF-SETTLED SPECIAL NEEDS (“(d)(4)(A)”) Trusts n Referred to as “First Party Special Needs Trusts” or “(d)(4)(A) Trusts” (for the federal statute that provides for it) n The transfer the of disabled individual’s own assets into a selfsettled special needs trust does not render that individual ineligible for public benefits.

FIRST PARTY SPECIAL NEEDS TRUSTS SELF-SETTLED SPECIAL NEEDS (“(d)(4)(A)”) Trusts (cont’d) n Once transferred, the assets contained in that trust are exempt from being counted as a “resource, ” for purposes of determining eligibility for public benefits. n There are strict state and federal guidelines for establishing a qualifying (d)(4)(A) trust. Care must be taken in drafting a (d)(4)(A) trust.

FIRST PARTY SPECIAL NEEDS TRUSTS SELF-SETTLED SPECIAL NEEDS (“(d)(4)(A)”) Trusts (cont’d)

THIRD PARTY SPECIAL NEEDS (“SUPPLEMENTAL BENEFITS”) TRUSTS n Trust” or “Supplemental Needs Trust” or “Supplemental Benefits Trust” Established do that funds nusing the individual seeking public benefits n regulation to which self-settled trusts are subject

THIRD PARTY SPECIAL NEEDS (“SUPPLEMENTAL BENEFITS”) TRUSTS (cont’d) POMS § SI 01120. 200. D. 2: “if an individual does not have the legal authority [1] to revoke or terminate the trust or [2] to direct his/her own support and maintenance, the

THIRD PARTY SPECIAL NEEDS (“SUPPLEMENTAL BENEFITS”) TRUSTS (cont’d)

“PAYBACK PROVISION”

“PAYBACK PROVISION” (cont’d)

POOLED TRUST § Exception to general rule that assets in a trust are countable by Medicaid § Established/administered by non-profit association § Contains “pooled” assets of many individuals (each in separate account with separate beneficiary)

POOLED TRUST (cont’d) Must meet the following requirements: § Established and managed by a nonprofit association; § Separate account maintained for each beneficiary (but assets pooled for investing/management);

POOLED TRUST (cont’d) Established solely for benefit of disabled individual by individual, parent, grandparent, legal guardian, or court; and § The trust must contain a Medicaid payback provision If beneficiary is aged 65 or older, funds transferred to pooled trust are subject to transfer penalty. §

SPECIAL NEEDS TRUSTS: COMMON DRAFTING / ADMINISTRATION ERROR Mistake: Confusing the type of SNT being administered § 1 st party (d 4 a) Special Needs Trust must include a payback provision: assets remaining upon beneficiary’s death must reimburse Medicaid for medical assistance paid on the beneficiary’s behalf during lifetime. § 3 rd Party Special Needs Trust: no payback provision required.

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