Chapters 8 and 9

In this exercise, we're dealing with both supplemental needs trusts and trusts that hold real estate (chapters 8 and 9). We're going to start with the SNT. [[Let's do it!|SNT]]

The purpose of a supplemental needs trust is to do what? [[To help avoid income tax]] [[To help protect assets from creditors]] [[To help protect the Medicaid eligibility of elderly people]] [[To help disabled people have some income or assets without ruining their eligibility for government assistance]]

Incorrect. [[try again|SNT]]

Correct! A supplemental needs trust is designed to allow disabled people to have some assets and/or income to enjoy without ruining their eligibility for government assistance. [[continue|SNT2]]

Doesn't that sound a little fraudulent? [[yes; let's not do it]] [[the SNT device has been sanctioned by federal law]] [[the SNT device has been sanctioned by state law]]

That's not very good legal advice. The SNT device has been sanctions by both federal and state law. [[continue|SNT3]]

The SNT device has been sanctions by both federal and state law. [[continue|SNT3]]

Okay. We're representing Joe, who has a disabled teenaged daughter, Jessica. We want to set up a supplemental needs trust. Should it be a [[third party]] trust or a [[self-settled]] trust?

Maybe. What would be the advantage of the third party trust? [[It doesn't need a payback provision]] [[It doesn't count as an available resource for the disabled person]] [[It's not subject to income or gift tax]]

When would we want a self-settled trust? [[when Joe's money will be used to fund the trust]] [[when Jessica's money will be used to fund the trust]] [[if we don't want a payback provision]]

Excellent! [[continue|SNT4]]

Neither does the self-settled trust [[try again|third party]]

Yes, it is. [[try again|third party]]

A "payback" provision? That sounds scary? What is that? [[A provision that requires the grantor to be paid back for his or her contribution to the trust]] [[A provision that requires the disabled beneficiary to not spend any money on things that are not health-related]] [[A provision that requires that the government be paid back for its healthcare spending after the death of the disabled person from the trust assets]]

Incorrect. In this case, we should use a [[third party]] trust. [[try again|self-settled]]

Correct! A self-settled trust means the disabled person is funding the trust. [[continue|SNT6]]

Nope. A self-settled trust MUST have a payback provision to qualify as a supplemental needs trust. [[try again|self-settled]]

What's the downside to a self-settled SNT? [[it doesn't help with Medicaid eligibility]] [[it's a non-grantor trust for income tax purposes]] [[it requires a payback provision]]

Sure it does. [[try again|SNT6]]

Keep your eye on the ball, here. We're dealing with benefits eligibility, not income tax. [[try again|SNT6]]

Correct! [[Continue|SNT4]]

Sorry, that is incorrect. [[try again|SNT4]]

That is exactly what a payback provision is! Very good. [[continue|SNT7]]

We've created the SNY and Joe has transferred $200,000 to the SNT for JEssica's benefit. Does this mean that Joes is not eligible for Medicaid for 5 years? [[No, the SNT helps the beneficiary, it does not protect the grantor]] [[Yes, but only if Jessica is the sole potential beneficiary of the trust]] [[Yes, as long as Jessica is the primary beneficiary of the trust]]

Incorrect. There's a rule to help the grantor as well. [[try again|SNT7]]

Correct! This is the "sole benefit" rule. [[correct|SNT8]]

Incorrect. [[try again|SNT7]]

This time, Joe is our disabled person but Joe received sizable social security payments each month. Must he spend down those social security payments to below the threshold to be eligible for benefits? [[Not necessary. Social security payments are exempt from being an available resource]] [[We can save Joe's income using a qualified income trust]] [[We can save Joe's income using a pooled income trust]] [[Sorry, Joe. Your social security payments are doomed to be spent down to maintain your eligibility]]

That, unfortunately, is incorrect. [[try again|SNT8]]

Yes! In this device, established by a non-profit organization, many disabled beneficiaries “pool” their income in a big trust. Each disabled beneficiary has a separate account. The organization may use assets for the beneficiary’s supplemental needs. What happens after the death of the disabled person? [[the remaining money in the account typically stays with the charitable organization]] [[the remaining money in the account goes to the government]]

Yes! A Miller Trust (or Utah Gap Trust) holds income of a disabled person from pensions or social security that exceeds the limit for Medicaid eligibility. Do you see any problems with this device? [[I don't see any]] [[It's subject to an age 65 limitation]] [[It requires a posthumous payback provision]]

That, thankfully, is incorrect. [[try again|SNT8]]

Look harder. [[try again|We can save Joe's income using a pooled income trust]]

Unlike a self-settled SNT, there is no age 65 limit on a Miller trust. [[try again|We can save Joe's income using a pooled income trust]]

Correct! A Miller trust does require a payback provision. [[continue|SNT9]]

Correct! Unlike a Miller trust, a pooled trust does not require a payback provision. The money can remain with the non-profit organization. [[continue|SNT9]]

Nope. Unlike a Miller trust, a pooled trust does not require a payback provision. [[continue|SNT9]]

That's all for Chapter 9. Now, on to Chapter 9 and trusts that hold real estate! [[continue|real]]

Jurisdiction over real estate held by trusts is virtually always available where? [[the grantor's state]] [[the trustee's state]] [[the beneficiaries' state]] [[the state in which the property sits]] [[any of the above]]

Nope, there's a better answer. [[try again|real]]

Correct! [[continue|real1]]

Nope, there's a better answer. [[try again|real]]

Debbie bought a house in 1974 for $70,000. It's now worth $300,000. She has lived in the house since she bought it. If she sells it for $300,000 in 2016, she will... [[not have to pay any capital gains tax]] [[not have to pay any capital gains tax if and only if she's married and her husband lives in the house]] [[have to pay at least some capital gains tax]]

Correct! $250,000 is exempt under Section 121. [[continue|real2]]

Incorrect. A husband would extension the Section 121 exemption to $500,000, but that is not necessary in this case, since the gain is only $230,000. [[try again|real1]]

That is incorrect. [[try again|real1]]

If Debbie wants to give her house away to become eligible for Medicaid, she... [[should give the house outright to her children]] [[should give it outright to her husband]] [[can give it to a trust and still protect her interests]] [[cannot give it away without losing the capital gains tax exemption]]

Ouch! When the children sell it, they will have to pay a big fat capital gains tax and they might sue you for malpractice! [[try again|real2]]

That won't help much from a Medicaid eligibility perspective. [[try again|real2]]

Yes! This can work. [[continue|real3]]

Yes, she can. [[try again|real2]]

How can she keep the Section 121 exemption? [[state in the trust that the Section 121 exemption should be retained]] [[make sure the trust assets are in Debbie's taxable estate]] [[make sure the trust is a grantor trust]]

Wouldn't it be nice if it were that simple? Just tell the IRS what you want and behold, you shall receive. [[try again|real3]]

Nope; that won't do it. [[try again|real3]]

Correct! This will preserve the 121 exemption because a grantor trust is considered as being owned by the grantor for income tax purposes. [[continue|real4]]

If Debbie dies while the property is in the trust... [[she gets a step up in cost basis if the trust is in her taxable estate]] [[she gets a step up in cost basis automatically]] [[she does not get a step up in cost basis]]

Correct! [[continue|real5]]

Sorry, that is incorrect. [[try again|real4]]

Aside from preserving the Section 121 exemption and preserving the step-up in cost basis, is there anything else you should be careful about before putting the property in trust? [[let's try to preserve the owner occupied residence property tax exemption]] [[let's make sure to avoid gift tax on the transfer]] [[let's make sure the trust is not subject to income tax based on the transfer]]

Very good! [[continue|real6]]

The house is not worth enough to have to worry about gift tax. [[try again|real5]]

There's no reason it would be. [[try again|real5]]

If transferring the house causes all these problems, then why bother transferring the house at all? [[the equity in the house is considered an available resource for Medicaid purposes]] [[to avoid a federal lien on the house]] [[to save on estate tax]]

Equity in a person residence is not considered an available resource until it's over $500,000 or $750,000 in many states. [[try again|real6]]

Yes! Even if it's not an available resource, the state is required by federal law to put a lien on the property to secure re-payment after death. [[continue|real7]]

You haven't yet noticed that all the answers in this exercise that relate to estate tax are wrong? Oh, well. [[try again|real6]]

If there any way to live in a house and still get it out of your taxable estate? [[not really]] [[Sure, use a qualified personal residence trust]]

[[Sure, use a qualified personal residence trust]]

Correct. A QPRT allows the client to keep living in the house; but allows the house to be removed from the taxable estate of the client if the grantor survives the term of the QPRT. [[continue|end]]

Congratulations! You've reached the end of another exercise. The code word for interaction credit is: myopia