Planning for Disability identifies estate planning issues that are peculiar to families whose members include disabled children and adults, and examines, in a very practical way, techniques available to anticipate and address these problems. This Portfolio, written by Ralph J. Moore, Jr., Esq., Morgan, Lewis & Bockius LLP, and Ron M. Landsman, Esq., Ron M. Landsman, P.A., is intended as a “how to” primer on resolving estate planning problems when incompetency or disability is, or may become, a problem.

This Portfolio examines several available tools for financial management, including guardianship, joint property, powers of attorney (both durable and “springing” powers), trusts (both revocable and irrevocable), and testamentary pour-over devices. Living wills and powers of attorney for medical decision-making, which may resolve certain personal issues, are addressed.  As a greater percentage of the population ages and sophisticated medical procedures prolong life, the planner's practice is more likely to include clients who may suffer a period of physical or mental incapacity. Early planning is necessary to establish mechanisms to shift control from the incapacitated individual to an agent who can work toward the individual's personal, medical, financial-management, and asset-conservation goals.

Parents of disabled children may seek to make arrangements for the lifetime financial and personal care that their children will need, but the parents cannot always provide. Although tax issues should not be ignored, non-tax factors, such as maximization of the disabled child's potential, sound financial management, and selection of fiduciaries, often are the primary concerns.

Resource maximization is one of the greatest concerns of clients who fear becoming incompetent themselves or must plan for disabled children or other family members. Many federal and state benefits programs are available to disabled individuals, often on the basis of financial need. Age-based Medicare benefits cover doctor's bills, medication, and hospitalizations but need-based Medicaid continues to pay for nursing home care. Certain state benefits are subject to cost-of-care liability, which requires reimbursement from disabled persons and/or their families. Therefore, this Portfolio presents information on certain useful government benefits programs, their income and resource eligibility requirements, and qualification mechanisms, which should aid the planner in developing a comprehensive estate plan. Planning for Disability also discusses methods for shielding all or a portion of the client's assets from cost-of-care liability.

Planning for Disability allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Estates, Gifts and Trusts Portfolios Library, a comprehensive series containing more than 80 Portfolios, which covers critical transactions in estate, gifts and trusts planning. This highly-regarded resource library offers commentary on a wide range of estate planning topics including: Generation Skipping Tax, Family Limited Partnerships, Charitable Remainder Trusts, Estate Planning for Closely-Held Businesses, Exempt Organizations and Private Foundations, Life Insurance, Valuation, and more.

Detailed Analysis

I. Introduction

II. Managing Assets During Disability: Basic Tools

Introductory Material

A. Not Planning: Guardianship and “Substituted Judgment”

1. Guardianship

a. Disadvantages of Guardianship

b. Modern Guardianship Statutes

c. Guardianship Under the Uniform Probate Code

2. Representative Payee

3. Substituted Judgment

B. Power of Attorney

1. Common Law Power of Attorney

2. Durable Power of Attorney

a. Durable Power of Attorney Act

b. Who May Act

c. Formalities Required

d. Effect of Appointment of Guardian

e. Types of Durable Power

f. Uses of the Durable Power

g. Advantages of the Durable Power

h. Disadvantages of the Durable Power

C. Trusts

1. The Revocable Trust

a. Uses and Advantages

b. Tax Consequences

c. Possible Disadvantages

d. Uses in Connection With Business Interests

e. Types of Revocable Trusts

(1) Fully Funded Trust

(2) Standby Trust

f. Drafting Suggestions

2. The Irrevocable Trust

D. Pour–Over Devices

1. Purpose and Uses

2. Validity of Pour–Over Devices

E. Jointly Owned Property

1. Types of Multiple Ownership

a. Tenancy in Common

b. Joint Tenancy

c. Tenancy by the Entirety

d. Community Property

e. Partnerships

2. Use of Joint Ownership

F. Business Interests

1. Durable Powers and Revocable Trusts

2. Trust Ownership of S Corporation Stock

3. Buy–Sell Agreements and Employment Contracts

4. Retirement Plan Benefits and IRAs

III. Protecting Financial Security During Disability: Private Insurance

Introductory Material

A. Disability Insurance

B. Life Insurance

C. Long Term Care Insurance

1. Introduction

2. Considerations in Choosing an LTC Insurance Policy

3. Tax Treatment of “Qualified” LTC Insurance Contracts

D. Accelerated Death Benefits and Viatical Settlements

IV. Health–Care Decisions

A. The Right to Refuse Life–Sustaining Medical Treatment

B. Exercising the Right to Refuse Treatment: Who Shall Speak for the Patient?

C. The Health–Care Declaration

D. The Durable Power of Attorney for Health Care

E. Family Consent Statutes

F. Guardianship

G. Conclusion

V. Public Insurance and Benefit Programs

A. Introduction

B. Income Programs

1. Employment–Related Program: Social Security

a. Insured Status Requirements for Disability Benefits

b. Coverage for Disabled Spouses and Children

c. Disability

2. Need–Based Program: Supplemental Security Income

a. Categorical and Nonfinancial Eligibility Requirements

b. Financial Eligibility Requirements

(1) Resource Limits

(2) Income Limits

(3) Deeming of Resources and Income

(4) Illustrations

C. Medical Benefits

1. Medicare

2. Medicaid

a. Benefits (Covered Services)

b. Eligibility

(1) “Categorical” Eligibility

(2) Medically Needy Eligibility and Eligibility in Income Cap States

(3) Other Nonfinancial Eligibility Requirements

(4) Financial Eligibility Requirements

VI. “Third Party” Planning: Estate Planning for Families with a Disabled Child

A. The Problem

B. Eligibility for Government Benefits and Exposure to Cost–of–Care Liability

1. Eligibility for Government Benefits

2. Cost–of–Care Liability

3. Judicial Approaches to Availability of Third Party Trusts for Benefit Eligibility and Cost–of Care Liability Purposes

C. Initial Estate Planning Considerations

1. Knowledge of the Client

2. Fiduciary and Care Provider Issues

a. Need for Guardianship

b. Selection of Fiduciaries

c. “Letter of Intent”

D. Components of the Estate Plan

1. Gifts

2. Life Insurance

3. Wills, Pour–Over Wills, and Testamentary Trusts

a. Disinheritance and Informal Trusts

b. Token Legacies and Luxury Trusts

c. Outright Inheritance

d. Discretionary Special Needs Trusts

4. Trusts

5. Periodic Review

E. Drafting the Discretionary Special Needs Trust

1. Discretionary Distributions

2. Purposes of Trust

3. Sole and Absolute Character of Trustee's Discretion

4. Spendthrift Provision

5. Limitation of Expenditures

6. Accumulation of Income

7. Expenditures for Other Needs

8. Separate Account

9. Periodic Evaluation

10. Visitation

11. Distributions to Other Beneficiaries

12. Distributions to Guardians

13. Removal of the Trustee

14. Accounting

15. Crummey Powers

16. Early Termination Provisions

17. Remainder Provisions

18. Waiver of Conflicts of Interest

19. Review of Boilerplate Provisions

F. Tax Issues

1. Income Tax Benefits

2. Informal Care Arrangements: Gift Tax Issues

3. Taxation of Trusts

G. Pitfalls and Caveats

1. Failure to Execute a Will

2. Over–Reliance on Joint Tenancies

3. Outright Gifts and Transfers to Custodial Accounts

4. Beneficiary Designations

5. Support Trusts

6. Advising Relatives

H. Summary

VII. Medicaid - Financial Eligibility and State Recovery for Benefits Provided

A. Introduction

B. Income and Resource Rules in General

C. Income Rules

1. Income Standards, “Spend–Down,” and Income Caps

2. Treatment of Income from Trusts

a. Self–Settled Trusts

b. Third–Party Trusts

D. Resource Rules

1. Countable and Exempt Property Rules

2. Treatment of Trust Principal

E. Spousal Protections

1. Introduction

2. Spousal Income Rules

a. Attributing Income Between the Spouses

b. Community Spouse Minimum Monthly Maintenance Needs Allowance

3. Spousal Resource Rules

a. In General

b. Assessment of Countable Resources and Initial Determination of Institutionalized Spouse's Eligibility

c. Community Spouse Resource Allowance

d. Exception to Resource Ineligibility

F. Treatment of Self-Settled Trusts

1. Introduction

2. Pre-OBRA 1993 Trusts: Medicaid Qualifying Trusts and Special Needs Trusts

3. OBRA 1993: Inclusive Treatment of Self–Settled Trusts

a. Arrangements Subject to the OBRA 1993 Trust Rules

b. Consequences of Treatment as a Trust

G. OBRA 1993: Statutory Safe–Harbor Trusts

1. In General

2. Reasons to Establish an OBRA 1993 Trust

3. Trusts for Disabled Individuals Under Age 65: 42 USC 1396p(d)(4)(A) Trusts

4. Pooled Asset Trusts for Disabled Individuals: 42 USC 1396p(d)(4)(C) Trusts

5. Income Trusts for Disabled Individuals: 42 USC 1396p(d)(4)(B) Trusts

H. Nonstatutory Trust Options

1. In General

2. Trusts for the Benefit of a Spouse

3. Income–Only Trusts

4. Ineffective Trusts

I. Ineligibility by Reason of Nonexempt Transfers

1. Introduction

a. Planning Goals

b. A Brief History of the Anti–Transfer Rules

2. Transfer of Asset Rules - Post–OBRA 1993

a. Summary of the OBRA 1993 Amendments

b. Basic Definitions

(1) “Transfers” of “Assets”

(2) Look–Back Period

(3) Special Rules for Trust Transfers

c. Computing the Penalty Period

d. Transfers by the Applicant's Spouse

e. Exempt Transfers

f. Nontransfer Transactions

g. The Remaining Use of Transfers

3. Transfer of Asset Rules - Post–2005 DRA

a. Summary of the 2005 DRA Amendments

b. The Look-Back Period

c. Computing the Penalty Period

d. Undue Hardship

e. Home Equity Limitation

f. Restrictions on Annuities

g. Purchases of Notes, Loans or Mortgages

h. Purchase of Life Estates

J. Liens, Estate Recoveries, and Claims - Planning to Avoid Their Impact

1. In General

2. Liens

3. Estate Recoveries

4. Claims Against Safe-Harbor Payback Trusts

VIII. Medicaid Long-Term Care Planning Considerations

A. Introduction

B. Planning for a Distant Horizon

1. An Unmarried Individual

2. A Married Couple

C. Planning for the Near-Term

1. An Unmarried Individual over Age 65

a. Maximize Exempt Resources

b. Transfer the Assets and Wait for the Shorter of the Look-Back or Penalty Period to Run Before Applying for Benefits

c. Utilize Other Exempt Transfers, Including Transfers for the Disabled Under 42 USC 1396p(c)(2)(B)

2. Married Individual over Age 65

a. In General

b. Increasing the CSRA

c. Reducing Resources to the CSRA While Maximizing Resources for the Community Spouse

3. Nonelderly Disabled Child or Adult in Need of Lifetime Benefits

a. Fund Statutory Safe-Harbor Trust with the Individual's Assets

b. Purchase Exempt Resources

c. Establish Discretionary, Nonsupport Inter Vivos and Testamentary Trusts

D. Criminalization of Advice

Working Papers

Table of Worksheets

Other Sources

Worksheet 1 Durable Power of Attorney.

Worksheet 2 Additional Power of Attorney Clauses.

Worksheet 3 Revocable Trust for Married Grantor.

Worksheet 4 Pour–Over Will Provision.

Worksheet 5 Discretionary Trust Clause for Coordination with Public Benefits.

Worksheet 6 Advance Medical Directive

Worksheet 7 New York Supplemental Needs Trust Clauses Appearing in NY EPTL Section 7–1.12(e).

Worksheet 8 Sample Supplemental Needs Trust

Worksheet 9 [Reserved.]

Worksheet 10 Omnibus Budget Reconciliation Act of 1993, Sections 13611–13612.

Worksheet 11 Social Security Act Section 1128B, Criminal Penalties for Acts Involving Federal Health Care Programs.

Worksheet 12 Social Security Act Section 1924, Treatment of Income and Resources for Certain Institutionalized Spouses.

Worksheet 13 Social Security Act Section 1917, Liens, Adjustments and Recoveries, and Transfers of Assets.

Worksheet 14 P.L. 106–169, Foster Care Independence Act of 1999, Sections 205–206, Effect of Asset Transfers on Eligibility for SSI.

Worksheet 15 HCFA State Medicaid Manual, Part 3 - Eligibility, Section 3259, Treatment of Trusts.

Worksheet 16 HCFA State Medicaid Manual, Part 3 - Eligibility, Section 3258, Actuarial Tables.

Worksheet 17 HCFA State Medicaid Manual, Part 3 - Eligibility, Section 3257, Transfers of Assets and Treatment of Trusts.

Worksheet 18 HCFA State Medicaid Manual, Part 3 - Eligibility, Section 3260, Income and Resource Eligibility Rules.

Worksheet 19 HCFA State Medicaid Manual, Part 3 - Post–Eligibility, Section 3700.

Worksheet 20 Letter from Sally K. Richardson, Director, Medicaid Bureau, Dated Dec. 23, 1993.

Worksheet 21 Letter from Sally K. Richardson, Director, Medicaid Bureau, Dated June 5, 1996.

Worksheet 22 Table of Annual Adjustments of Spousal Allowances, SSI Benefits, and Income–Cap State Maximum Allowances

Worksheet 23 Sample Certification of Chronically Ill Individual Pursuant to Sections 213(d)(1)(C) and 7702B for Long–Term Care Medical Expense Deduction.

Worksheet 24 Notice 97–31, 1997–1 C.B. 417, Interim Guidance on Long–Term Care Services and Insurance Contracts

Bibliography

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Federal Statutes:

State Statutes and Uniform Laws:

Federal Regulations:

Legislative History:

Treasury Rulings: Page *

Cases:

Books and Treatises:

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