Supplemental Needs Trust

THE SUPPLEMENTAL NEEDS TRUST

We know that government programs – in the form of Supplemental Security Income (SSI) and Medicaid – are very important for people with disabilities in need, as they provide cash benefits as well as important medical coverage and long- term supports and services. The income level and financial resources of an individual with a disability, or family who is applying on behalf of their child with a disability, must not exceed a certain level in order qualify for these government benefits. Benefit recipients are allowed to retain only a limited amount of assets, with some exceptions. A person with a disability receiving SSI, who accumulates any significant cash resources, may lose SSI and, possibly, Medicaid.

However, government cash benefits provide only for the bare necessities: food, shelter, and clothing. They amount to less than a federal poverty level income. As we all know, there are more things and activities beyond these basics that add quality to life. For a parent planning for the future of their child with special needs, this poses a problem.

When parents are able to care for their child, they provide the extras beyond the bare necessities to make their child’s life comfortable. But who will provide those resources when they are not there to do so?

If parents leave any assets to their child who is receiving government benefits, they run the risk of disqualifying the child from receiving government benefits. If they leave assets to another family member or other person for the care of the child, they open other avenues of risk where the child might not get the benefit of those assets, such as divorce, bankruptcy, lawsuits, and financial mismanagement.

Fortunately, the government established rules allowing assets to be held in trust for a recipient of SSI and Medicaid, as long as certain parameters are met.

These trusts, called Supplemental Needs Trusts or Special Needs Trusts (SNTs), preserve government benefit eligibility and leave assets that will meet the supplemental needs of the person with a disability, those that go beyond food, shelter, and clothing and the medical and long term supports and services of Medicaid. The SNT can fund those additional needs. In fact, the SNT must be designed specifically to supplement, not supplant, government benefits. Money from the trust cannot be distributed directly to the person with a disability. Instead, it must be distributed to third parties to pay for goods and services to be used by the person with a disability.

The SNT can be used for various expenditures such as:

  Out-of-pocket medical and dental expenses
  Eyeglasses
  Annual independent check-ups
  Transportation (including vehicle purchase)
  Maintenance of vehicles
  Insurance (including payment of premiums)
  Rehabilitation
  Essential dietary needs
  Purchase materials for a hobby or recreation activity
  Purchase a computer or electronic equipment
  Pay for trips or vacations, pay for entertainment like going to a movie, a ballgame, concert, etc.
  Purchase of goods and services that add pleasure and quality to life: videos, furniture, or a television
  Athletic training or competitions
  Personal care attendant

When should an SNT be set up?

Parents may consider setting up an SNT when they begin their future planning activities such as drawing up their Wills. If their child with a disability will likely have long-term medical or support needs, the SNT can be a vehicle to supply the funding to provide lifetime quality care. Even if the child’s future prognosis is unclear, it is never too early to put plans in place for contingencies such as the parents’ sudden death or disability.

How is an SNT set up?

The laws governing trusts are complex and are subject to changes in legislation that may vary by state and which could affect a person’s eligibility for the government benefits that they depend upon. New laws have considerably tightened the eligibility criteria for receiving government benefits and thus have affected many aspects of the way SNTs are drawn up. These regulations are complex and require a strong knowledge of the current legislation and how it impacts people planning for their child with special needs in order to preserve eligibility. Setting up a special needs trust requires coordinated planning with an attorney knowledgeable in special needs planning who can draft a will and necessary trust documents.

When a parent or grandparent dies, additional assets can be distributed, under a will, to the SNT. A percentage of shares in an estate can be left to a child’s SNT. Funding can come from discretionary contributions while parents are alive, probate distributions, a living trust, life insurance, pension plan, or other sources. Therefore, the individual with a disability does not have to be left out of a will, but should have their share of inheritance directed to his or her SNT. In the case of a life insurance policy, pension plan, or other source that would go to a beneficiary on death, the child’s SNT should be the beneficiary.

Types of SNTs:

Testamentary SNTs are included in the will and funded as part of the probate process of the Last Will and Testament.

Irrevocable trusts are used in many special needs planning situations. The irrevocable nature of the trust helps protect the money on behalf of the beneficiary who has a disability. Irrevocable trusts can be funded during the life or at the death of the person who is granting the funds.

The Social Security Administration, the federal agency that administers SSI, and the state Medicaid agencies, evaluate trusts that have been set up for individuals with disabilities who are receiving government benefits to determine if they are countable resources for those individuals. If the individual has the legal authority to revoke the trust and use the principle of the trust to meet his or her needs for food, clothing or shelter, it is considered a countable resource. All trusts set up with the assets of the disabled person, or all “self-settled trusts” must be irrevocable and meet the requirements of the law to not be considered countable resources for SSI and Medicaid purposes.

Managing the SNT

Having an SNT requires a trustee to be appointed. A trustee is one who manages another’s property and may be a person or an institution such as a bank. In this case, the trustee
is the manager of the trust and has general unlimited discretion to use trust proceeds provided for the needs of the individual with a disability. The trustee may be given full discretion to manage the money in the trust and to decide how the money is used for the person’s benefit. The SNT should be drafted in such a way as to direct the trustee in how to use the trust’s resources for the individual’s needs.

Trustees should have good money management/financial skills. The SNT will likely exist for a long period of time. Trustees should be chosen with longevity in mind, and the trust itself should be drafted to adjust to changing circumstances, such as to allow trustees to be changed or removed.

After the death of the individual with a disability, the trustee oversees the final arrangements and the SNT usually ends. However, the trustee may terminate the SNT if laws change or the SNT is challenged by the government.

There are many nuances and complex issues involved in setting up a plan for the future of an individual with special needs which must be handled correctly. There is so much at stake for the individual that requires proper planning be put in place.

Updating Your Corporate Records

THINGS TO KNOW ABOUT UPDATING YOUR CORPORATE RECORDS

We regularly prepare numerous corporate updates to many Corporations’ Corporate Minute Books through the corporate updating worksheet for the ease, and convenience of our clients. The worksheet is executed concurrently with the Corporation’s Directors and Shareholders consent in writing in a Record and Memorandum of Action. With both documents there is no need to have formalized meetings.

The importance of the information requested on the corporate worksheet is discussed below.

Importance of Corporate Minute Book Updates to Avoid Liability

Since a corporation speaks through its records, it is prudent for corporations to keep timely and detailed books and records. Corporate books and records affect the future of the Corporation to bring and defend legal actions; effecting possible mergers, sales of stock or assets, or other reorganizations or acquisitions; protecting assets; complying with tax, securities, and other regulatory laws; and resolving disputes with or among shareholder, directors, officers, and employees.

Disregard of the corporate existence by failing to observe corporate formalities, i.e., failing to hold directors’ and shareholders’ meetings, and adopt resolutions authorizing officers to act for the corporation, can cause the corporate “veil” to be pierced, and impose personal liability on shareholders and directors.

The importance of keeping the Corporation’s Corporate Minute Book updated should not be underestimated.

Closely held corporations are not too formal in their day-to-day operations—formality could even interfere with effective functioning of the business. Directors, officers, and shareholders are usually the same few people. They are in contact daily. They might easily agree on a capital expenditure during a chance meeting at the office or shop. But even if the formal procedures of large corporations seem out of place in closely held corporations, holding annual meetings and recording formal corporate minutes offers significant legal and financial protection.

Accurate and complete Corporate Minutes can produce real tax savings.

The IRS keeps a sharp watch on closely held corporations. Corporate minutes can provide an excellent, and sometimes the only, defense against unfavorable tax consequences.

How corporate minutes help: Corporations often enjoy a favorable tax rate compared to their owner’s personal rates. They also benefit from deductions and credits that an individual or unincorporated business cannot get. But to get all the tax benefits due you, make business decisions to show sound business purpose and intent. Your corporate minutes are proof of your good intentions, should the IRS audit you.

The Importance of Updating Information Regarding Capital Acquisitions and Loans That Are Outside the Scope and Course of Ordinary Business

The Record and Memorandum should memorialize all significant capital acquisitions outside your Corporation’s usual course of business, and any loans given by or to the Corporation outside of general credit transactions made regularly to conduct your business. The IRS could view these transactions as taxable compensation or dividends unless properly recorded. Once again, the IRS is less suspicious of tax evasion when corporate actions are properly taken to approve expenditures, especially if such action is taken before the transactions occur. Carefully review your records and include all information on the worksheet.

The Importance of Documenting Loans or Sales to or from Insiders

Insiders of the Corporation include Officers, Directors, and Shareholders. Verify on the worksheet the officers and directors who will serve, or continue to serve, in which capacities. Also designate any newly elected directors or officers on the worksheet.

Corporate minutes verify that loans made to executives are loans, and not taxable compensation or dividends. They also confirm the nature of such corporate largesse as gifts to individuals (such as the surviving spouse of a deceased senior executive). Since the IRS considers intention in business actions, your minutes can show you had sound business motives from the start.

Remember, however, that loans from the corporation to employee-shareholders must meet other criteria. Nothing in writing, including the minutes, will likely win the day if your loans appear to be dividends. If you fail to repay them, pay interest on them, provide collateral, etc., the IRS will likely rule the advances are dividends.

The Importance of Documenting Raises and Bonuses of Officers who are Also Shareholders

Because of tax law changes and judicial decisions on these matters, corporate minutes, with receipts, invoices, and correspondence, serve as evidence in several important areas. Your minutes should show that any salary increase or bonus for an executive or officer has been formally approved and ratified by the board or directors. The basis for a raise, bonus, or other compensation should be noted. Minutes should include factors that justify a raise or bonus such as expanded job duties and/or time, contributions to company growth, and the need to match competitors’ salaries. The minutes should also describe the job and what the salary increase will be.

The IRS must be satisfied that salary increases, bonuses, and loans are not really dividends in disguise. Dividends cannot be deducted from corporate income as expenses like salaries, although bonuses and loans can. Ideally, we also recommend that if you determine a raise or bonus should be given to an officer, the Record and Memorandum be approved before granting it.

Such information satisfies the IRS and the courts to show that the compensation is reasonable, and the increase is legitimate. With this information, the IRS is less likely to suspect you are using a raise to disguise a dividend. Both dividends and compensation are taxable to the recipient. But dividends, unlike compensation, cannot be deducted by the corporation.

Whenever bonuses are paid to officers, provide us with the amount, nature of the bonuses paid, and when and to whom the bonuses were paid so we may disclose the information in the Record and Memorandum of Action. Indicate a reason for the bonuses. Please remember this for future reference and complete the worksheet confirming this information. Also, please verify whether the Corporation gave any raises.

 

Remember, it is better to have your Corporate Minutes drafted to authorize raises or bonuses before they are given, rather than after, and it is better to have your corporate minutes drafted for such authorization after the fact, rather than never.

The Importance of Trying to Predict Future Bonuses Before Distribution

When you determine bonuses and raises prior to implementing them and prior to the end of the fiscal year, the IRS is less likely to view the distributions as dividends in disguise. Dates of the minutes supporting the increase can be extra protection. The minutes can show the decision was made and implemented well before year-end earnings could be accurately projected. Large raises or across-the-board increases granted close to year-end when earnings are high often appear to the IRS to be dividends in disguise.

This is why we recommend you approve the total bonuses for this year in advance. By approving the total cash allocated for bonuses in advance, the IRS will be less inclined to view year-end bonuses as disguised dividends. If you would like to memorialize the payment of future bonuses to officers , please contact us to discuss how we may do this to best fit your needs.

The Importance of Identifying all Shareholders and Outstanding Stock

Often when updating records, we learn that stock transfers have occurred without mention in the Corporate Records. By verifying outstanding stock matches what your accountant has reported to the IRS and what your records indicate, we can better protect your Corporation if an IRS audit occurs, better facilitate any future asset sales or acquisitions which the Corporation may contemplate, and better prevent shareholder litigation and disputes due to inaccurate or poorly kept stock ledgers. If stock has been issued by the Corporation, repurchased by the Corporation, or if any other change in stock ownership has occurred, we must know of it so the Records may accurately reflect such transfers.

The Importance of Documenting Declared Distributions

Your corporate minutes also play a part in determining the taxable nature of dividends. A dividend paid out in stock isn’t taxable to the shareholder until the stock is sold. Dividends paid in cash or property are taxable income in the year they are paid. But if shareholders can choose taking a dividend in stock or in cash or property, the dividend is taxable to them no matter which method they elect to use.

To settle such tax questions (and get the best tax results for you), your corporate minutes should reflect the form of dividend being offered to stockholders. The worksheet asks you to declare all distributions and the form of distribution to update the records to achieve this end.

The Importance of Discussing Any Other Non-routine Corporate Matters With Us

Please also advise whether any additional corporate resolutions should be in the Corporate Minutes. Corporate resolutions set forth non-routine corporate actions, and shareholder and director ratification or approval.

Any non-routine or extraordinary actions taken by the Corporation should be included in the Corporate Minutes.

In Sum

Upon completing the corporate worksheet and our receipt, we will review and supplement the corporate minute book so it will be current. The Corporation will be placed in our annual corporate minute book update program, and we will provide the Corporation with annual updates on or near the date specified in the bylaws each year, unless the Corporation directs us otherwise.
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