Trust Distribution in Elder Law Planning and Administration: Standards and Challenges

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TUESDAY, AUGUST 17, 2021

Presenting a live 90-minute webinar with interactive Q&A

Karen Dunivan Konvicka, J.D., Director of Client Services and General Counsel,Commonwealth Community Trust, Richmond, VA

Valerie Peterson, J.D., Chief Executive Officer, ElderCounsel, LLC, Evergreen, CO

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Trust Distribution Standards and Challenges in Elder Law Planning and

Administration

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Presented by Karen Dunivan Konvicka, J.D. andValerie Peterson, J.D.

Karen Dunivan Konvicka, J.D.Karen Dunivan Konvicka serves as Director of Client Services and General Counsel for Commonwealth Community Trust (CCT). When in private practice, Ms. Konvicka specialized in public benefits law and estate and trust planning and administration for individuals with special needs. Ms. Konvicka maintains her memberships in the Virginia State Bar, National Academy of Elder Law Attorneys (NAELA), and the Virginia Academy of Elder Law Attorneys (VAELA) and enjoys continuing to educate attorneys and families about special needs planning from the pooled trust perspective.

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Valerie Peterson, J.D.Valerie is the Chief Executive Officer of ElderCounsel, LLC. Before joining ElderCounsel, Valerie practiced law in Miami and Ft. Lauderdale where she was the owner of Peterson Law Office, P.A., and later Fisher & Peterson, P.C., a firm specializing in the areas of elder law and estate planning. Valerie also serves as the Education Director for ElderCounsel, and she has taught elder law and Veteran's benefits courses for numerous national organizations during her tenure at ElderCounsel. Valerie also teaches for a prominent law school. Since 2012, Valerie has served as an adjunct professor for Stetson Law School where she teaches the Veteran’s Benefits Course to Elder Law LL.M. students.

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What We Will Cover

•Trust distribution standards used in elder law and special needs planning

•Pitfalls to avoid•Beneficiaries and administration challenges•Best practices and drafting considerations

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Trusts Used in Elder Law

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Irrevocable Trusts Used in Elder Law

• Used in 2 circumstances• Asset protection in advance of a health care crisis

(proactive planning)• In Medicaid crisis planning to take the place of an

outright gift

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Common Characteristics of an Irrevocable Trust Used in Elder Law• Grantor trust• Incomplete gift for gift tax purposes• Includable in the grantor’s taxable estate (to achieve a step up

in basis)• No access to principal by the grantor and the grantor’s

spouse, either directly or indirectly• Income may be paid to the grantor but generally not

recommended

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Lifetime Beneficiaries

• Not the grantor, unless giving an income right or a right to reside in the home

• Often are the children but do not have to be• Only ones who can access principal during the grantor’s

lifetime • No obligation to use a distribution for the grantor’s

benefit

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Distribution Standards –Irrevocable Trusts in Elder Law

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Purpose

• To provide the Trustee guidance on who can receive trust property during the grantor’s lifetime

• The standard chosen is tied to the type of trustee named• Independent vs. Interested

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Interested Trustee

• The term "Interested Trustee" means a Trustee who (1) is a transferor or beneficiary; (2) is related or subordinate to a transferor or beneficiary; (3) can be removed and replaced by a transferor with either the transferor or a party who is related or subordinate to the transferor; or (4) can be removed and replaced by a beneficiary with either the beneficiary or a party who is related or subordinate to the beneficiary.

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Interested Trustee

• “Related or subordinate party” is defined by IRC 672(c)• Any nonadverse party who is:

(1) the grantor’s spouse if living with the grantor;(2) any one of the following: The grantor’s father, mother, issue, brother or sister; an employee of the grantor; a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control; a subordinate employee of a corporation in which the grantor is an executive.

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Independent Trustee

• Means a Trustee who is not an Interested Trustee• While sometimes hard to find, an Independent Trustee can

provide the most flexibility and protection

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Distribution Trustee

• Bifurcates the trusteeship into a Trustee responsible for all aspects of trust administration except for distributions, and a Distribution Trustee, whose only responsibility is to make wholly discretionary distributions. No trustee other than the Distribution Trustee may make distributions.

• Should be an independent party

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Distribution Trustee

• Purpose• Asset protection for beneficiaries• To avoid interested trustees from fighting or refusing to

honor the purpose of the trust

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Distribution Trustee

• Purpose• Asset protection for beneficiaries• To avoid interested trustees from fighting or refusing to

honor the purpose of the trust• Can make purely discretionary distributions for any purpose

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Distribution Standards

• Health, Education, Maintenance or Support (HEMS)• Mandatory or discretionary

• For any purpose

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Distribution Standards• Example of discretionary HEMS standard (taken from ElderCounsel’s Medicaid

Asset Protection Trust®)

Discretionary ascertainable standardsOur Trustee may distribute to the Lifetime Beneficiaries as much of the income and principal of the common trust as our Trustee determines is necessary or advisable for their health, education, maintenance, and support.

A distribution to or for the benefit of a Lifetime Beneficiary shall be charged to the trust as a whole rather than against the Lifetime Beneficiary's ultimate share. (optional)

Our Trustee shall have no right, power, privilege or authority to invade or distribute income or principal of the trust to or for either of our benefit. (always include)

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Distribution Standards

• A distribution standard that provides the most flexibility and protection when Interested Trustees are named is one that allows for an Independent Trustee to distribute for any purpose, otherwise the Trustee can only make discretionary HEMS distributions

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Any Purpose if Independent, Otherwise Discretionary Ascertainable Standard• Sample language from the ElderCounsel Medicaid Asset Protection Trust®

Our Trustee, other than an Interested Trustee, may distribute to the Lifetime Beneficiaries as much of the income and principal of the trust property as our Trustee may determine advisable for any purpose. If our Trustee is an Interested Trustee, our Trustee may distribute to the Lifetime Beneficiaries as much of the income and principal of the common trust as our Trustee determines is necessary or advisable for their health, education, maintenance, and support.

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Interested Trustee

• Normally you want to limit an Interested Trustee to a discretionary HEMS standard

• Avoids allowing the Trustee to distribute all assets to the Trustee without consequence

• An “any purpose” standard for an Interested Trustee creates a General Power of Appointment over trust assets

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Distribution Standards – Death Beneficiaries

• Same standards as for lifetime beneficiaries• If creditor protection is desired, then a distribution trustee

should be used• Can set withdrawal rights at certain ages

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Managing Beneficiaries and Overcoming Trust Administration Challenges• Managing beneficiaries

• Starts with helping the client make good choices about lifetime beneficiaries

• Clear expectations of the lifetime beneficiaries at the time of drafting

• Beneficiaries as trustees can create a lot of practical challenges when it comes to trust administration

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Managing Beneficiaries and Overcoming Trust Administration Challenges• Trust Administration Challenges - Prevention

• Helping the client make a good choice as to the trustee• Naming a Trust Protector who can remove or replace the

trustee if needed• Clear direction to the trustee

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Overcoming Trust Administration Challenges

• Make sure the Trustee has a legal advisor (could be you if the client consents)

• Have a plan for keeping in touch with the client and the trustee

• What will the process be for when a distribution is being considered?

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Pooled Special Needs Trusts

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What is a Pooled Special Needs Trust (PSNT)?

• Trust arrangement for disabled individuals – often receiving public benefits

• Created by one Master Trust Agreement• Clients “join” by signing the Joinder Agreement

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SNTs: Individual and Pooled

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Individual

• Typically administered by a family member or institutional trustee

• Although most do, beneficiaries are not required to have a specific disability

• Trustee must file taxes and other regulatory filings

• Trustee may not have knowledge of the rules governing Supplemental Security Income (SSI) and/or Medicaid

Pooled

• Administered by a non-profit organization

• All beneficiaries have a disability• Assets are “pooled” to provide lower

administrative fees, opportunity for higher returns on investments and a smaller minimum account requirement

• Trust tax returns and filings completed by nonprofit

• Staff has expertise in public benefits rules

Each has advantages that require careful considerations to determine which optionbest meets your client’s needs.

Two Types of PSNTs:

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Third-Party First-Party

Grantor can be any third-party individual such as a parent, family member or friend.

Grantor must be the individual, the individual’s guardian, parent, grandparent, or Court. The authority granted by a Power of Attorney is accepted.

Typically funded by Estate Plans, Life Insurance Policies, Investments, Retirement Accounts or other assets.

Funds belong to the Beneficiary, usually from a personal injury or workers’ compensation award, direct inheritance, the beneficiary’s own funds or Social Security back payment.

Revocable or Irrevocable Irrevocable

NOT subject to Medicaid payback Subject to Medicaid payback

No Age Limitation A transfer of assets penalty may apply if the Beneficiary is 65 years old or older (varies by state and by benefit received). Contact CCT for more information.

Allowable Contributions

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• Some PSNTs accept cash assets only• Others may accept:

• Real estate• Business interests• Inherited IRAs or other qualified plans

• PSNTs may also be named as the beneficiary/payee of:

• Inherited IRAs or other qualified plans• SECURE Act allows stretch for disabled

beneficiaries of trusts

Third-Party Accounts – Usually funded from Estate (probate or established trust or qualified plans and life insurance)

Irrevocable Assignment of Income

• Child Support Payments• Alimony Payments• Other Contractual Obligations due to Beneficiary

Irrevocably Assign to SNT by Court Order to avoid Income Counting

**Cannot Assign SSI payments to SNT

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SECURE ACT –

See-through Accumulation Trusts Maximize Benefits to Disabled Beneficiary

The SECURE Act limited the ability of most non-spouse beneficiaries of inherited IRAs to use life expectancy to calculate the required minimum

distribution.

Exception• Disabled beneficiaries of an inherited IRA are still permitted to “take

the stretch” even when the IRA beneficiary designation is a trust.• *if the trustee has complete discretion over distributions to the

beneficiary• *if the trust is a “see-through” trust• This means that a PSNT can still “take the stretch” on an inherited IRA

for the beneficiary – avoiding heavy income taxation that would be required when the IRA funds are disbursed more quickly while maintaining public benefits eligibility.

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Benefits of Using a PSNT

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Low Fees & Funding Requirements

Knowledgeable & Experienced Staff Members

Trust Administration Expertise

Greater Investment Opportunities

Role and Responsibility of the Trust Administrator

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Utilize the funds for the benefit of the Trust Beneficiary

To not jeopardize SSI and Medicaid, means-tested

government benefits

Follow accepted accounting principles

Invest trust assets prudently

Adhere to the Uniform Prudent

Investor Act

“Sole Benefit Rule” Explained• First-party SNT funds must be used for the sole benefit of the beneficiary. 42 U.S.C.

§ 1396p(d)(4), POMS SI 01120.203.D. • Collateral benefit to a third-party is acceptable. POMS SI 01120.201 F.3.• For example:

• Household purchases such as furniture that others in the home will benefit from are allowable

• Home maintenance, repairs or services in the beneficiary’s household are allowable when others also live there and will benefit

• Beneficiary travel and companion travel expenses are allowable if beneficiary requires assistance

• Travel for third party to visit beneficiary allowed if checking on the beneficiary’s well-being

• Items which can be titled should be titled in the beneficiary’s name to avoid benefiting a third party. POMS SI 01120.201 F. 3.

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Public Benefits Primer

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Means-tested:

• SSI• Medicaid

Earned:

• SSDI• Medicare

What Happens if One is Disabled and Impoverished?

Supplemental Security Income (SSI):• Means-tested monthly monetary allowance that

is intended to pay for food and shelter

Adults are eligible if they are:• Disabled• Have no more than $2,000 in countable

resourcesAND

• Below the Federal Benefit Rate – currently $794

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Medicaid

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• Means-tested federal health insurance program for the aged, blind and disabled

• Administered by the states – some states have different eligibility requirements

• Administered through the local Department of Social Services• For simplicity’s sake – eligibility for Medicaid is the same as SSI− Cap on resources and income

Social Security Disability Insurance (SSDI)

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Adults are eligible if they are disabled before retirement age and have accumulated enough quarters of

withholdings

Government’s version of disability insurance

Monthly benefit from SSA that provides people who have a

medically-determinable disability (physical or mental) that

restricts their ability to be employed

The amount is determined by the person's Social Security withholdings

prior to becoming disabled

Medicare

Federal health insurance program for:

•People who are 65 or olderAND

•The disabled who have received SSDI for 24 months

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Who Qualifies for a PSNT?

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Adult

• To be disabled within the meaning of the Social Security Act, the individual must have a severe, medically determinable physical or mental impairment which as or is expected to last for one year or to result in death.

• The impairment must make the individual unable to engage in “substantial gainful activity.”

Minor (under 18)

• The child must have a physical or mental condition(s) that very seriously limits his or her activities.

• The condition(s) must have lasted, or be expected to last, at least one year or result in death.

42 U.S.C. § 1382c(a)(3) and 20 C.F.R. § 416

SSA Definition of a Disability:

Public Benefits Over 65 – How Can a PSNT Help?

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MAJOR ROADBLOCK TO PLANNING = THE TRANSFER OF ASSETS PENALTY

• Penalty = amount of money transferred ÷ the area’s monthly average cost of care devisor

• Result = number of months *after otherwise eligible* client is ineligible for benefits

EXAMPLE:

• Individual gives away $120,000 • ÷ $6,000 divisor • = 20 Month Transfer Penalty• Penalty Period begins to run not at

the date of transfer, but at the date individual is otherwise eligible for Medicaid

65 and over to PSNT – Uncompensated Transfer?

Transfer made by individuals 65 and over to PSNT

• Creation allowed by Federal statute • difference between (d)(4)(A) and (d)(4)(C)

• Transfer of assets penalty being imposed• State dependent currently – almost half and half• Litigation surrounding value received for funding a PSNT

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65 and Over – Transfer of Assets Penalty Exceptions

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Transfers to a PSNT for the benefit of a

disabled child of any age

Transfers to a PSNT for the benefit of any individual under the

age of 65

Pooled “Half a Loaf” Process

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Utilize the “Pooled Half a Loaf” Process:

• Step 1 – inter vivos gift to children • Step 2 – remaining assets fund a PSNT at the same time (bringing

the resources of the individual below the resource limit) • Step 3 – individual applies for long term care benefits • Step 4 - individual accepts the penalty, knowing they will have to

wait the requisite time period before receiving benefits • Step 5 – individual uses the funds from the PSNT to cover the

cost of residential care during the penalty period

Guidelines for DisbursementsWhen considering whether to approve a disbursement request, the following best practices can be used as a guide for decision-making:

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For a beneficiary receiving SSI and/or Medicaid, will the request jeopardize

benefits?

Is the request for the sole benefit of the beneficiary?

Are there adequate funds in the trust to cover the

request?

Is the request prudent?

For a Third-Party Trust, is the request consistent with the intent of the

Grantor(s)?

Is the request consistent with the beneficiary’s

budget and objectives?

The Advocate• Is who the PSNT relates to

• Has access to financial and confidential information

• Makes requests for disbursements from the trust

• Can be:

• Beneficiary

• Relative or Friend

• Guardian or Power of Attorney

• Caseworker or Other Stakeholder

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Decision-Making Process

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A Board of Directors Disbursement Committee can be consulted as needed.

An in-house Disbursement Committee is recommended to review requests of a complex nature.

The request is reviewed by staff.

Advocate(s) submits a disbursement request with supporting documentation.

Request Process

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Approved Disbursement

Request -

*Checks mailed typically within two

weeks.

Questions or Concerns -

*Every effort should be made to contact

the Advocate(s) quickly.

Denied Requests -

*Should be communicated to the Advocate(s) verbally

and/or in writing.

*Some organizations have a website that allows the advocate to submit requests securely through a portal.

Appeals

• A written grievance policy should be in place to ensure that clients have an easy and accessible way to provide feedback.

• It is recommended that written complaints be filed within 30 days of the denied request.

• Written description of the complaint and subsequent related events should be maintained in the beneficiary’s case record.

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*It is important to welcome all client comments, complaints, and suggestions that will improve the client experience.

Examples of How Funds Can Be Spent

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Medication and DevicesMedical ServicesAssistive TechnologyEducationVehicleHome ModificationsHome Repairs and Upkeep

Case ManagerCaregiver ServicesClothingCare ProvidersVacationsMileagePre-Need Burial and Funeral Expenses

Who Can Receive Funds?

• Vendor or service provider• Retail merchant• Reimburse the Advocate(s) for expenses paid on behalf of the Beneficiary

• Trust Administrator-managed prepaid visa card

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Cash Paid Directly to the BeneficiaryAny distribution of cash to the beneficiary is unearned income and will reduce SSI payments dollar for dollar. If over the Federal Benefit Rate,

then the monthly benefit could be lost entirely.

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Example:Individual receives a check from the trust for her to spend on a medical expense not covered by Medicaid. Even though this distribution is for a service, is not food, shelter, or an item that would be a countable resource the following month, it is considered income because the check was payable directly to the beneficiary.

See POMS SI 01120.200 E.1.a., SI 01120.201 I.1.a. Disbursements for gift card or gift certificates are income as well. See POMS SI 01120.201 I.f.

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Trust Administrator-Managed Visa CardPOMS SI 01120.201 I.e.

• Funded by the trust account• Must be owned and managed by

trustee• Helpful option to purchase smaller

necessities• Purchases with card must still meet

sole benefit requirements and not be for food or shelter for recipients of SSI/Medicaid

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In-Kind Support and Maintenance: Food & ShelterPOMS SI 01120.200E.1.b.00835.310

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ISM=Beneficiary’s food or shelter expense when paid by a

third party.

Causes a reduction in SSI –presumed maximum value = 1/3

monthly payment plus $20 (approximate monthly payment reduced to $530 for individual

receiving full benefit)

ABLE Account –Qualified Disability Expenses

• Payments from an ABLE account for Qualified Disability Expenses (QDEs) do not cause a reduction in benefits or tax consequences.

• Shelter Expenses are considered QDEs.

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Solution:

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Distributions from trust to

ABLE

Payments from ABLE for shelter

NOTE: payments from the ABLE account must be spent within the calendar month or the funds become a countable resource.

Allowable Administrative Expenses

For First-Party trusts…

Upon the death of the trust beneficiary, the trust may pay the following types of administrative expenses from the trust prior to reimbursement of the State(s) for medical assistance:• Taxes due from the trust to the State(s) or Federal government because of the death

of the beneficiary;• Reasonable fees for administration of the trust estate, such as an accounting of the

trust to a court, completion and filing of documents, or other required actions associated with termination and wrapping up of the trust.

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Remainder Policies – Third-Party PSNT

To the extent funds are not retained…

• Funds are distributed to the successor or contingent Beneficiary(ies) named on the Joinder Agreement after administrative fees are paid.

• Some PSNTs keep the entire remainder for charitable purposes, some keep a percentage, some keep none.

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Remainder Policies – First-Party PSNT

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Medicaid Recipients

• 42 USC 1396p(d)(4)(C)(iv) states: “To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this title.”

• Federal Statute allow the non-profit to retain the remaining funds• Each state interprets this differently• Some states allow PSNT to retain all and some a percentage• Each PSNT has different policies• Some retain a percentage, some retain all, some allow choice at the time of joining• Some only retain if the beneficiaries would receive no funds after Medicaid

repayment.

Consider This Remainder Policy as an Example:

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*In this scenario, the PSNT never retains funds that would otherwise be paid to the Successor Beneficiaries.

If repayment is LESS than the remainder, it is disbursed to Successor Beneficiaries after the Medicaid repayment.

If repayment is GREATERthan the remainder, funds are retained by the nonprofit for its charitable purposes.

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A Drafting Tip:“Decanting” Power to Avoid Decanting

Your clients may often name family members as the trustee for special needs trusts created in their estate plans.

Does the family member want the job?

Corporate fiduciaries may have minimum account balances.

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A COMMON PROBLEM:

• Family members are not always as enthusiastic or capable after they begin to serve as trustee. It can be overwhelming and can cause strain on the relationship with the beneficiary.

• Financial Institutions want to transfer administration after account falls below minimum account balances.

A SIMPLE SOLUTION:

• Include language in the SNT that grants the trustee the authority to distribute the assets of the SNT to a PSNT at any time during the administration of the SNT. “The Trapdoor”

• This allows siblings to simply be siblings and financial institutions to transfer the administration without the notice requirements or court intervention of the Uniform Trust Decanting Act.

Thank You!

Please reach out to us directly with any questions.

Karen Dunivan Konvicka, J.D.Director of Client Services and General Counsel, CCT

KKonvicka@trustCCT.org

Valerie Peterson, J.D.President/CEO, ElderCounsel

Valerie.Peterson@eldercounsel.com

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