Supplemental Needs Trusts & Related Estate Planning

1. Supplemental Needs Trusts & Related Estate Planning Presentation for National Association for Down Syndrome September 29, 2012

2. Primary Reasons for Planning • Provide for supplemental needs of child with down syndrome, while preserving Medicaid and SSI eligibility, if such eligibility is likely • Designate desired guardians for children • Transfer assets at death to intended recipients and in desired manner • Prepare for incapacity • Simplify transitions • Protect assets from creditors • Defer and reduce taxes National Association for Down Syndrome September 29, 2012

3. Public Benefit Programs To be eligible for any of the programs identified above, individuals under the age of 65 must be unable to engage in substantial gainful activity due to a disability that is expected to last at least one year. National Association for Down Syndrome September 29, 2012

4. Exempt Assets • $2,000 • Homestead property • Personal effects and household goods • Motor vehicle • Life insurance (with restrictions) • Burial funds (with restrictions) and burial space • Property used in a trade or business National Association for Down Syndrome September 29, 2012

5. Historical Choices • Lose benefits • Disinherit child National Association for Down Syndrome September 29, 2012

6. Solution forThird-Party Funded Trusts • Most states have statutes or case law that authorize SNTs for funds outside control of person with disability • Trust assets exempt • No Medicaid reimbursement at death National Association for Down Syndrome September 29, 2012

7. Solution #1 for Self-Funded Trusts • OBRA Payback Trust (d-4-A Trust) • Authorizes SNTs for funds in control of person with disability under age 65 • Created by parent, grandparent, legal guardian, or court • Trust assets exempt during life • Medicaid reimbursement at death National Association for Down Syndrome September 29, 2012

8. Solution #2 for Self-Funded Trusts • Pooled Trust (d-4-C Trust) • Funds pooled for management purposes • In some states, must be funded by age 65 • Created by person with disability, parent, grandparent, legal guardian, or court • Trust assets exempt during life • Medicaid reimbursement at death National Association for Down Syndrome September 29, 2012

9. Primary Terms ofSupplemental Needs Trust • Irrevocable • Grantors’ intent important • Distributions for “supplemental needs” only • Distributions in trustee’s sole discretion(no standards) • Distributions to providers of goods and services, not directly to person with disability (Continued … ) National Association for Down Syndrome September 29, 2012

10. Primary Terms of Supplemental Needs Trust (Continued) • Avoid in-kind support and maintenance(will reduce SSI) • Trustees and successor trustees • Remainder beneficiaries at death(after Medicaid reimbursement ford-4-A trust) National Association for Down Syndrome September 29, 2012

11. Examples of PermissibleSNT Distributions • Dental care • Optical care • Supplemental nursing care • Expenditures for travel, recreation, or educational or cultural experiences • Expenditures for travel of family members to visit person with disability National Association for Down Syndrome September 29, 2012

12. Coordination with OtherEstate Planning Documents • Wills of parents, grandparents, etc. • Insurance and retirement plan beneficiary designations • No assets should pass directly to child with disability • All assets for child with disability should be allocated to SNT • Usefulness of stand-alone SNTs • Importance of life care plan National Association for Down Syndrome September 29, 2012

13. Alternatives to SNT • Trust that provides for child’s health, support, and education needs • Trust that provides generally for the child in the trustee’s discretion, without reference to specific standards like health and support National Association for Down Syndrome September 29, 2012

14. Probate • Six-month court procedure before final distribution of estate • Threshold for small estates ($100,000 in Illinois, for example) • Jointly-held assets, assets with designated beneficiaries, and assets in trust are excluded National Association for Down Syndrome September 29, 2012

15. Advantages of Living Trust • Probate avoidance • Simplify transition upon incapacity • Privacy • Ease of amendment individually-ownedassets Living Trust remaining property at death Heirs Parent During life, parent controls assets.If parent becomes incapacitated, successor trustee assumes control. Note: Living trust is not necessary for tax planning. National Association for Down Syndrome September 29, 2012

16. Transfer Taxes • Three types: • Gift tax (35% federal) • Estate tax – federal (35%) and some states (varying state tax rates), including on insurance proceeds • Generation Skipping Transfer (“GST”) tax (35% federal) • 2012 Exemptions (Coupon Book) • $13,000 per donee annual gifts • Direct tuition and medical payments • Unlimited transfers to U.S. citizen spouse and charities • $5,120,000 federal gift, estate, and GST tax exemptions • Varying state estate tax exemptions National Association for Down Syndrome September 29, 2012

17. Scheduled Federal Estate, Gift, and GST Tax Exemptions and Rates Year Federal Exemption Maximum Amount Federal Rate 2012 $5,120,000* 35% 2013 $1,000,000 (subject, in the case of the GST 55% tax exemption, to inflation adjustment) * For deaths in 2012, the unused federal estate tax exemption of a first spouse to die may be utilized at the surviving spouse’s death. National Association for Down Syndrome September 29, 2012

18. Sample Estate Tax Planning A/B Plan for Illinois Married Couples in 2012 No Tax Planning Tax Planning with Trusts Joint Tenancy $7,000,000 Husband $3,500,000 Wife $3,500,000 (no IL or federal estate taxes) (no IL or federal estate taxes) Husband’s Death Wife $7,000,000 Family Trust$3,500,000 IL estate taxes $565,603 Wife’s Death Children $6,434,397 Children $7,000,000 If the federal estate tax exemption were to revert to $1,000,000, as scheduled, after 2012, the estate tax savings from A/B planning could potentially be much more significant. National Association for Down Syndrome September 29, 2012

19. Sample Estate Tax Planning Disclaimer Alternative for Illinois Married Couples in 2012 No Disclaimer Disclaimer Husband $7,000,000 Wife $7,000,000 Husband $3,500,000 Wife $3,500,000 (Disclaimer;no IL or federal estate taxes) (no IL or federal estate taxes) Husband’s Death IL estate taxes $565,603 Family Trust$3,500,000 Wife’s Death Children $7,000,000 Children $6,434,397 If the federal estate tax exemption were to revert to $1,000,000, as scheduled, after 2012, the estate tax savings from disclaimer planning could potentially be much more significant. National Association for Down Syndrome September 29, 2012

20. Irrevocable Insurance Trust ILIT(owns lifeinsurance) premiums Parent $ to pay premiums InsuranceCompany death benefit withdrawal rights insurance proceeds [Spouseand] Children Benefits: • Exclude insurance proceeds from parents’ taxable estates, subject to 3-year rule. • Provide liquidity to pay estate taxes generated by illiquid assets, such as real estate or a closely-held business interest. • Ensure that proceeds not needed for taxes pass in accordance with parents’ estate plan. National Association for Down Syndrome September 29, 2012

21. Primary Documents • Will • [Living Trust] • Supplemental Needs Trust(s) • Property Power of Attorney • Health Care Power of Attorney • [Irrevocable Insurance Trust] • [Deed] National Association for Down Syndrome September 29, 2012

22. Guardianship for Child with Disability upon Reaching Legal Age • Of the person • Of the estate • Alternatives to guardianship National Association for Down Syndrome September 29, 2012

23. Guardianship Process • Petition and Physician’s Report • Notice • Hearing • Guardian Ad Litem • Annual Reports National Association for Down Syndrome September 29, 2012

24. Our DSNP Program for Illinois residents • For families of modest means with relatively simple planning needs other than supplemental needs trusts • Process National Association for Down Syndrome September 29, 2012