Special Needs

You may have heard mention of ABLE accounts.  So, what is an ABLE account?  ABLE stands for Achieving a Better Life Experience for persons with disabilities.

ABLE accounts are designed to help people with disabilities and their families save and pay for disability-related expenses. Though contributions are not deductible, distributions, including earnings, are tax-free to the designated beneficiary if used to pay qualified disability expenses. These expenses can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology, personal support services and other disability-related expenses.

Normally, contributions totaling up to the annual gift-tax exclusion amount, currently $15,000, may be made to an ABLE account each year for the benefit of an eligible person with a disability, known as a designated beneficiary. Starting in 2018, if the beneficiary works, the beneficiary can also contribute part, or all, of their income to their ABLE account.

This additional contribution is limited to the poverty-line amount for a one-person household. For 2018, this amount is $12,140 in the continental U.S. The designated beneficiary is not, however, eligible to make this additional contribution if their employer contributes to a workplace retirement plan on their behalf.

ABLE account beneficiaries can qualify for the Saver’s Credit based on contributions they make to their ABLE accounts. Up to $2,000 of these contributions may qualify for this special credit designed to help low- and moderate-income workers. Claimed on Form 8880, Credit for Qualified Retirement Savings Contributions, this credit can reduce the amount of tax a person owes or increase their refund.

Finally, some funds may now be rolled into an ABLE account from the designated beneficiary’s own 529 plan or from the 529 plan of certain family members.

For more information about ABLE accounts visit IRS.gov.     

Abbie Dorn, while delivering triplets in 2006, suffered catastrophic injuries and was left permanently disabled. A medical malpractice action yielded a settlement of $6,730,000. A Special Needs Trust was established, which was funded with an initial contribution of $910,275.20. The balance was funded by a $4,333,105 annuity, which was to provide periodic payments of $31,000 per month to the Trust to be paid for the rest of Abbie’s life. This monthly payment was to increase 3.5% per year.

Abbie was the sole beneficiary of the Trust. The children were the remainder beneficiaries. Her parents, Paul and Susan Cohen, were named as Trustees. Due to the fact that she was unable to secure daily visitation with her children, the Cohens relocated Abbie from California to their home in South Carolina.

In 2008, Abbie’s husband, Daniel, informed the Cohens that he wanted to divorce Abbie. A two part petition was filed. The first part, seeking dissolution of the marriage, was resolved quickly. The second part, involving the custody, support and maintenance of the three children ensued until 2011.

In 2010, Daniel filed an emergent application in the probate court in South Carolina seeking to remove the Cohens as Trustees of Abbie’s trust. He alleged that the Cohens had not obtained prior approval to incur counsel fees ($495,326.75 regarding the visitation proceedings) and that the Trust was to be used solely for medical care. The Cohens filed a petition of their own seeking ratification of their expenditures and reformation of some of the Trust’s terms.

Guardians ad litem were appointed to represent the children, as they were minors. Appearances were filed by a court appointed attorney and a guardian ad litem for Abbie. Disputes arose over the nature and the extent of their involvement in these proceedings. Eventually, the trial court added Abbie as a named party to the action. Daniel objected, stating that he as Plaintiff had the sole authority to name defendants to a lawsuit.

The Court of Appeals of South Carolina affirmed the probate court’s ruling. (See Dorn v. Cohen, 2016 S.C. App. LEXIS 93 (S.C. Ct. App. Aug. 3, 2016)) In essence, the Court noted the ability to have intervening parties in a court action.

What is notable about this case is the assertion that a Special Needs Trust beneficiary should be part of an action about its administration. In order for a Special Needs Trust to be valid, it must meet a variety of criteria established by the federal government. This criteria includes that the beneficiary cannot be a trustee nor be able to make any demand from the trustees for payment. In short, the beneficiary cannot assert any control over the trust.

Yet the Court, I believe, properly asserted nevertheless that the voice of a beneficiary should be heard to the extent practical. Although the Cohens apparently had not benefitted personally from the Trust and had provided excellent care to Abbie, the Court felt that what the Cohens thought was in Abbie’s best interest may not be the same as what Abbie or an independent guardian ad litem would determine. The Court rebutted the position of Daniel that Abbie did not need to be named as a party to the action, as the dispute was over the use of the trust funds. The Court asserted that the beneficiary of a trust, even if not in control, should be a party, as said beneficiary is the object and reason for the trust. Thus, in the event one needs to file an action over the administration of a Special Needs Trust, it appears that it would be prudent to name the trust beneficiary as an interested party to insure that he or she has a reasonable voice as to how the trust is administered.

Parents who care for children with disabilities almost invariably incur additional financial challenges than others. They often pay for additional medical bills while their children are growing up. Upon attaining the age of 18, many children with disabilities are eligible for Supplemental Security Income (SSI) and Medicaid. Although these benefits are helpful, SSI payments often do not meet the financial needs for these children and their parents continue to supplement their living and medical expenses throughout their adult years.

One little known provision to assist these families comes in the form of early Social Security benefits for the spouses of retirees. Specifically, if a child has manifested a disability before attaining the age of 22, both of his or her parents may be eligible for Social Security benefits – even if one has not reached retirement age. The Social Security Administration provides that when one parent begins receiving social security benefits, his or her spouse may be able to receive their own social security benefits even if they have not attained retirement age if that spouse is providing care for that disabled child at home.

Here’s an example: John and Jane have been married for 30 years. They have a daughter, Molly, who is 25 years old who was diagnosed with Down’s syndrome at birth. After a long career in the construction industry, John retires at the age of 66 and begins receiving his Social Security benefits. Jane, who has been caring for Molly at home for the past four years, had worked beforehand for a number of years for the local school district. She is currently 58.

Because Jane is not yet 62, she is not yet eligible for Social Security. However, because she is caring for Molly at home, she can receive this benefit. Care is recognized by the Social Security Administration in two situations. For a child with mental disabilities, it is defined as exercising control and responsibility over the child. For a child with physical disabilities, it is defined as performing services for the child.

There is a catch to this provision however. The amount of Social Security benefits received by a family has a cap and there can be a reduction in any SSI payment received by the child. However, in many instances, the additional payment received by the spouse will offset this reduction.

Last month, a New Hampshire Court set an irrevocable trust and declared the assets therein available resources which should have been spent on long term care prior to Medicaid eligibility by the individual who established the trust. Specifically, in the Petition of Estate of Thea Braiterman No. 2015-0395 (N.H. July 12, 2016), the New Hampshire Supreme Court ruled that a Medicaid applicant’s irrevocable trust is an available asset even though the applicant was not a beneficiary of the trust because the applicant retained a degree of discretionary authority over the trust assets.

In 1994, Thea Braiterman established an irrevocable trust. The beneficiaries were her three children. Although she was not named as a beneficiary, she retained control over the trust as a Co-Trustee. Although she resigned as Trustee in 2008, she retained the right to appoint additional trustees and successor trustees including herself. The terms of the trust also gave her the ability to appoint any part of the income of the trust to any of the beneficiaries and did not limit her ability to impose conditions on the appointment of principal to the beneficiaries.

Thea entered into long term care at a nursing home in January 2014 and stayed there until her death in March 2014. In February 2014, an application for Medicaid benefits was made on her behalf. The application was denied as the Medicaid agency saw the trust as an available resource. In upholding the denial, the New Hampshire court held that an irrevocable trust is a countable asset even when the applicant is not a beneficiary if there are any circumstances in which payment can be made to the applicant. In doing so, the court ruled that there was nothing in the trust “to preclude [Ms. Braiterman] from requiring her children, as a condition of their receipt of the Trust principal, to use those funds for her benefit.”

The importance of this case cannot be overemphasized as it follows two earlier cases from other state courts this year which busted two Medicaid trusts (specifically special needs trusts). In those cases, the courts set aside such trusts due to improper expenditures. This case set aside the trust on the issue of control by the individual who established it. In light of the foregoing, it is clear that state Medicaid agencies are evaluating irrevocable trusts with increasing scrutiny. Thus, it is imperative that any trust created to establish or maintain Medicaid benefits must be conservatively drafted to insure the protection of the individual who sets them up and the beneficiaries to whom the use of the trust assets are directed.