There are actually two different types of Special Needs Trusts.  The first type, often referred to as a Third Party Special Needs Trust, is created by a friend or relative of the person with special needs to hold gifts or inheritances for that individual.  The funds in the Third Party Special Needs Trust are not considered a resource of the person with special needs, therefore allowing the person to continue to qualify for Medicaid benefits.  The Third Party Special Needs Trust can be established at any time, but usually is created early in a child’s life as a long term means for holding assets to benefit the disabled family member.

The second type, often referred to as a First Party Special Needs Trust or D4A Trust, is frequently used to receive personal injury litigation proceeds on behalf of a disabled person in order to allow the person to continue to qualify for Medicaid benefits.  This Trust can be established at any time before the beneficiary’s 65th birthday. 

The Special Needs Trust must be part of any parent’s estate planning tools when he or she has a child with special needs.  As a part of Estate Planning, the costs of the creation of the Trust are tax deductible.

A Third Party Special Needs Trust that is funded by parents or other third party sources will not be required to pay back Medicaid.  However, a First Party Special Needs Trust, which is funded by a personal injury Settlement or otherwise from the person with special needs own assets, will be required to pay back Medicaid when the child dies.

The only assets within the Trust that are subject to the repayment obligation are those assets which originally belonged to the disabled individual him or herself that are transferred into the Trust (i.e. assets such as earnings from a job, savings, certain Social Security back payments, personal injury recoveries, and the like).  At the individual’s death, the Trust is liable for an amount equal to the Medicaid used during the lifetime of the disabled or chronically ill individual.  It is not uncommon for a Trustee or a disabled individual to ask a court to direct certain assets into the Trust.

The cost for not creating the proper Special Needs Trust is for assets to be used before Medicaid will be accessible by the person with special needs and that the assets will not then be available for those expenditures that are not otherwise covered by Medicaid.  This is a quality of life issue, i.e., how to help someone’s life be better and still receive all appropriate government help.

For more information call 800 MD-TAXES or email shopmaryland@comp.state.md.us.

How does this tie into estate planning?  Well, as a result of the inability of Congress to act, New Yorkers and Yankee fans should not have to worry about any significant changes being made to the operation and management of the Yankees, since his estate does not have to sell any assets to pay for any Federal estate taxes.  Yes, that is correct, even though Steinbrenner’s estate is estimated to be worth over 1 billion dollars, his estate will pass free of estate taxes to his family because of the expiration of the federal estate tax in 2010.  Note:  If Steinbrenner was a Florida resident, there would be no Florida estate tax, but if he was a New York resident or owned New York real estate, then his estate will owe New York estate taxes (which could be as much as or more than 160 million if his entire estate is subject to New York estate tax).

Steinbrenner’s death could prove to be a wake up call for Congress on the huge amount of tax dollars not being collected in 2010 as a result of the one year moratorium on Federal estate taxes.  Just from the death of Steinbrenner and one other multi-billionaire this year, the Federal government has lost approximately 5 billion dollars in Federal estate taxes.  Estimates of lost revenue range as high as 30 billion for the entire 2010 tax year as a result of there being no Federal estate taxes in 2010.

This past June, senators introduced legislation that would implement a progressive estate tax starting at estates valued at 3.5 million and a 10% surcharge on estates larger than $500 million.  These senators would also like to see the 45% tax rate from 2009 retroactively imposed on all estate of individuals dying in 2010.  If Congress retroactively reinstates the estate tax for individuals dying in 2010, it likely that this story and saga will continue for many years, since there are at least a few families who have the resources and means to challenge the constitutionality of a retroactive reinstatement of the estate.  It can be expected that any such challenge will go all the way to the Supreme Court.

This blog does not reflect necessarily my personal views on the estate tax.

As I have blogged in the past and continue to monitor Capitol Hill on this issue, Dan Duncan’s death was a big loss in collection of revenues that our country can ill afford at this time.   The one year estate tax lapse was signed into law back in 2001 when President Bush signed the 2001 EGTRA.  Every authority on estate taxes thought the gap would be closed with the 2009 new Democratic Congress.  The current Senate Finance Committee is continuing to work hard towards compromise and reinstating the tax, however it remains unclear whether compromise will be reached and/or a retroactive tax will be instituted.  (Should the issue not make it through the halls of Congress, the estate tax will revert to pre-2001 laws and estates of individuals dying in 2011 and after will be taxed at the $1million level).  The argument exists that President Obama would like to reinstate at that level for wealthy Americans, negating the progress and compromises of the past. 

Mr. Duncan’s surviving wife and descendants will most likely inherit billions that in any other year would have gone to the coffers of the US Treasury.  If he had died in 2009, 45% of the value of his assets in excess of $3.5 million (and not otherwise going to his surviving spouse or charity) would have paid in Federal estate taxes.  While Federal estate tax law has long allowed that assets can be passed untaxed to a surviving spouse (who is a US citizen), Mr. Duncan apparently left a very large part of his estate to his children and grandchildren including his two business entities EPCO and Dan Duncan LLP, the natural gas and pipeline companies he built.  Should his inheritors decide to sell the shares in these entities, they would have to pay capital gain taxes calculated on the difference between the shares original cost and their market value at time of sale.  However, capital gains are capped at 15 percent.  Should Congress decide to pass a retroactive estate tax, many attorneys believe this estate and inheritors have the means and motivation to take their court battle all the way to the Supreme Court to determine constitutionality.

Whether you agree or disagree that the wealthy should pay tax upon death is not the purpose of this blog, but rather I want to point out how the congressional leadership of this country has practiced what I consider to be ‘‘malpractice” and or lack of stewardship at a time when our country’s deficits and spending are soaring.  Furthermore, it is morally unacceptable that our leadership has allowed this issue to persist 6 months into the 2010 year leaving in limbo the planning needs of many wealthy citizens. Also, it would be a safe assumption that Mr. Duncan, whom was known in Texas as one of the greatest philanthropists giving millions away to charity, would want his lasting legacy to be associated with this congressional debacle.

The letter also points out the case of the late Dan L. Duncan, the billionaire Texan who died in March, whose $9.8 billion fortune, because of the now lapsed Federal Estate Tax, will pass to his heirs estate tax free.  The senators write, “At a time when we have a record-breaking $13 trillion national debt and an unsustainable federal deficit, people who inherit multimillion- and billion-dollar estates must pay their fair share in estate taxes.” 

The senators’ proposal would be retroactive to the start of 2010, which would likely face a court challenge from Duncan’s heirs as well as others.

The law, signed this month by Governor Sean Parnell, allows people to “prove” a will in probate and also have trusts declared valid.  The idea is that this will protect against relatives or other persons from challenging their intentions.

Many wills and trusts are challenged each year by beneficiaries or would-be beneficiaries.  Such battles cause huge problems and the person who left the legacy is no longer there to testify that the document actually says what he intended. There are four ways to contest a will; claim the person who made it was incapacitated, under duress, unduly influenced or didn’t follow proper rules.

A full copy of this report is available via link from the Tax Foundation website at http://taxfoundation.org/publications/show/26360.html.

“Studies show that more than 60% of all Americans die without a will, leaving their estates to be divided and taxed according to predetermined federal and state laws, perhaps in ways they didn’t intend.  This is outrageous.  The more venues I have to educate and stress the critical importance of estate planning, the better.  This is why, alongside our estate planning blog, Altman Speaks, we decided to expand our outreach on social media applications.”

Finding Gary Altman/Altman & Associates online:

·     Twitter:  http://twitter.com/garyaltman

·     Facebook:  http://www.facebook.com/GaryAltmanEsq

·     LinkedIn:  http://www.facebook.com/GaryAltmanEsq

·     “Altman Speaks” Blog: www.altmanassociates.net/blog