Planning for Disability (Portfolio 816)

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Tax Management Portfolio, Planning for Disability, No. 816-2nd, addresses planning for disability from two perspectives: when the client is planning for the client's own disability or incapacity, and when the client is planning for the disability or incapacity of a family member.

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Tax Management Portfolio, Planning for Disability, No. 816-2nd, addresses planning for disability from two perspectives: when the client is planning for the client's own disability or incapacity, and when the client is planning for the disability or incapacity of a family member. The Detailed Analysis discusses the various planning options available, based on whether the client is planning for the client's own disability or incapacity or for that of a family member.
The analysis begins with an overview of disability and incapacity, including definitions and types and planning considerations. The analysis then turns to the planning options for situations where a client is planning for the client's own disability or incapacity, examining the requirements for and use of advance health care directives as well as methods of making health care decisions. As well, the analysis examines the use of durable powers of attorney and representative payees, discussing the advantages and disadvantages of using these planning devices, along with some drafting suggestions.
The analysis then turns to the client's planning for disability or incapacity of a family member, discussing topics such as the selection of a suitable trustee, the effect of beneficiary designations, and tax implications of such planning.
Next, the analysis turns to the topic of paying for long term care, examining the cost of long-term care, and tax deductions available for long term care costs and long term care insurance premiums. Some of the applicable government assistance programs are then briefly examined. The analysis divides the discussion of the government programs into health care (Medicare and Medicaid) and income (Social Security and SSI) assistance.
In the final section, special needs trusts are discussed. The analysis covers the issues in establishing and administering these trusts. The types of trusts, the interrelationship between special needs trusts and certain public benefits, the trustee's duties and obligations in administering the trust, and some of the unique issues a trustee will face (and how to resolve them) are discussed in this section. The analysis also covers the issues of taxation when using a special needs trust and concludes with an examination of the use of these trusts in settling personal injury cases.
This portfolio focuses on Uniform Acts and federal laws and regulations There is some analysis of state cases and statutes, but this portfolio does not provide an in depth analysis of various state laws.
The portfolio may be cited as Fleming and Morgan 816-2nd T.M., Planning for Disability.


Robert B. Fleming, Esq.

Robert B. Fleming, B.S. Political Science, Utah State University (1974); J.D. University of Arizona College of Law (1976). Mr. Fleming is a partner in the Tucson law firm of Fleming & Curti, P.L.C., with a practice limited to trust (and special needs trust) administration, guardianship, conservatorship, estate planning, and probate. Mr. Fleming is a co-author (with Lisa Davis) of The Elder Law Answer Book, and (with Prof. Kenney Hegland) of New Times, New Challenges: Law and Advice for Savvy Seniors and Their Families. Mr. Fleming has been selected as a Fellow of both the American College of Trust and Estate Counsel and the National Academy of Elder Law Attorneys. He is a past Chair of both the Mental Health and Elder Law and the Probate and Trust Sections of the State Bar of Arizona, and a past President of the National Elder Law Foundation.
Mr. Fleming is certified as an Estate and Trust specialist by the State Bar of Arizona, and as a Certified Elder Law Attorney by the National Elder Law Foundation. At different times he was President of the Pima County Bar Association and the Young Lawyers Section of the State Bar of Arizona (he no longer qualifies to be a member). Mr. Fleming is a founding member of the Special Needs Alliance, ( Perhaps more importantly, he is a husband, father, scuba diver, pilot, and martial arts practitioner.

Professor Rebecca C. Morgan

Rebecca C. Morgan, B.S. Central Missouri State University (1975); J.D., Stetson University College of Law (1980). Professor Morgan is the Boston Asset Management Chair in Elder Law, the Director of the Center for Excellence in Elder Law at Stetson University College of Law, and the Director of Stetson's on-line LL.M. in Elder Law. Professor Morgan teaches a variety of elder law courses in the J.D. and LL.M. and oversees the Elder Law concentration program for JD students. She is a successor co-author of Matthew Bender's Tax, Estate, and Financial Planning for the Elderly and its companion forms book, and a co-author of Representing the Elderly in Florida. She is a member of the elder law editorial board for Matthew Bender.
Professor Morgan is a Past President of the National Academy of Elder Law Attorneys, Past President of the Board of Directors of the National Senior Citizens Law Center, past chair of the American Association of Law Schools Section on Aging and the Law and of the Florida Bar Elder Law Section, and was on the Faculty of the National Judicial College. She served as the reporter for the Uniform Guardianship and Protective Proceedings Act. Professor Morgan was the recipient of the 2003 Faculty Award on Professionalism from the Florida Supreme Court Commission on Professionalism. She received the NAELA Unaward in November 2004 from President Stu Zimring for her accomplishments in the field of elder law. Professor Morgan, along with Professor Roberta Flowers, received the 2005 Project Award on Professionalism from the Florida Supreme Court Commission on Professionalism for their video series on ethics in an elder law practice. She received the 2006 Rosalie Wolf Memorial Elder Abuse Prevention Award from the National Committee for the Prevention of Elder Abuse. She received the Homer & Dolly Hand Award for Faculty Scholarship in May of 2008, and the NAELA President's Award from NAELA President Mark Shalloway in May of 2008. Professor Morgan received the 2009 Treat Award for Excellence from the National College of Probate Judges.

Table of Contents

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

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



Federal Statutes:

State Statutes and Uniform Laws:

Federal Regulations:

Legislative History:

Treasury Rulings: Page *


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